Western States Bankcard Assn. v. City and County of San Francisco

• Decision Date: 23 March 1977
• Docket Number: No. S,S
• Citation: 561 P.2d 273,19 Cal.3d 208,137 Cal.Rptr. 183
• Parties: , 561 P.2d 273 WESTERN STATES BANKCARD ASSOCIATION, Plaintiff and Respondent, v. CITY AND COUNTY OF SAN FRANCISCO et al., Defendants and Appellants. F. 23563.
• Court: California Supreme Court

Page 183

137 Cal.Rptr. 183

19 Cal.3d 208, 561 P.2d 273

WESTERN STATES BANKCARD ASSOCIATION, Plaintiff and Respondent, v. CITY AND COUNTY OF SAN FRANCISCO et al., Defendants and Appellants.

No. S.F. 23563.

Supreme Court of California, In Bank.

March 23, 1977.

Thomas M. O'Connor, City Atty., and John J. Doherty, Deputy City Atty., for defendants and appellants.

Morrison & Foerster, Franklin C. Latcham, Prentiss Willson, Jr., and Laura Stern, San Francisco, for plaintiff and respondent.

RICHARDSON, Justice.

This is an action for declaratory relief and for the recovery of gross receipts and payroll expense taxes which were assessed against plaintiff Western States Bankcard Association (WSBA) by the City and County of San Francisco and paid under protest for the years 1970 through 1972. The issue is whether WSBA, a nonstock, nonprofit California corporation formed by various state and national banks to administer the Mastercharge credit card system, is entitled to the benefit of constitutional and statutory provisions which grant to 'banks' an 'in lieu' exemption from local personal property and privilege taxes. (Cal.Const., art. XIII, § 27 (former § 16); Rev. & Tax.Code, §§ 23181, 23182.)

WSBA claims its operations are so closely intertwined with those of its member banks located in California that subjecting it to municipal payroll or gross receipts tax amounts to impermissible local taxation of the member banks. Alternatively, it argues that a nonprofit organization which is wholly owned by banks and which performs traditional banking functions exclusively for banks is entitled to the same in lieu exemption that is available to banks.

The questions presented are those of first impression. We will conclude that the incidence of San Francisco's gross receipts and payroll expense taxes falls upon an independent entity, WSBA, rather than upon its member banks, and that the relationship between WSBA and its members is not such as to justify disregarding its corporate status for tax purposes.

The case was submitted to the trial court on stipulated facts which we summarize. WSBA, a California corporation headquartered in San Francisco, was organized by independent national and state banks to administer their Mastercharge accounts. The Mastercharge cards are issued by individual banks which compete among themselves for card customers. WSBA acts as a clearinghouse, performing data processing and promotional functions for all member banks. It neither issues cards nor extends credit. The system is intended to afford smaller banks a realistic, economically feasible means of competing with its principal competitor Bank Americard.

Basically, the credit card network administered by WSBA involves four parties: (1) the cardholder bank, which has issued a Mastercharge card (and thereby extended a line of credit) to a customer; (2) the cardholding customer; (3) the retailer who has accepted Mastercharge cards; and (4) the merchant bank that has agreed to purchase Mastercharge transaction slips from the retailer. Routinely, the customer makes a credit card purchase from the retailer, who deposits the transaction slip in his account with the merchant bank. The merchant bank credits the retailer's account with the cash value of the transaction less a stated discount, and sends the slip to WSBA along with a processing fee. WSBA retains the processing fee, credits the merchant bank's account, debits the cardholder bank's account, and forwards the slip to the cardholder bank which, in turn, bills the customer. At regular intervals WSBA also collects from the merchant bank and credits to the cardholder bank a 'cost of money factor' intended to compensate the latter for use of its money during the period between the transaction date and the date the customer's payment is due. Each bank involved in the system must be either a member of WSBA, or a member of one of the regional bankcard associations with which WSBA has a cooperative agreement.

WSBA is managed by 13 elected directors, all but one of whom must be an officer of a member bank. It hires its own employees, and purchases or leases equipment necessary to perform its functions; in dealing with third parties, it acts in its own name and for its own account. Moreover, as an independent corporation it is entitled to benefits not available to banks, such as the right to hold and deal with real property, free of the restrictions imposed upon the banks themselves. (See Fin.Code, §§ 750--753.)

WSBA has 'interchange' agreements with a network of similarly organized bankcard associations throughout the nation, and the fees it charges member and nonmember banks for its processing and promotional services are its only source of revenue. The bulk of its income, approximately 90 percent, is derived from clearing services performed for member banks located in California. Because it was intended to operate on a nonprofit basis, WSBA's operating rules provide for periodic adjustment of its fee structure to equalize income and expenditures. The equalization effort has been successful for the most part, although rapid growth of the Mastercharge system did result in unexpectedly large revenues and small net operating profits for the fiscal years 1971 through 1973.

In 1968 and 1970, respectively, the Board of Supervisors of the City and County of San Francisco enacted a 'business tax' ordinance (gross receipts tax) and a 'payroll expense tax' ordinance applicable to persons engaging in business activities in San Francisco. The taxes are alternative, the taxpayer being liable under that ordinance which results in the higher tax liability for any given year. Both ordinances, however, expressly exempt any business which the city is prohibited from taxing under the federal or state Constitutions. WSBA claims to be such a business.

Article XIII, section 27, of the California Constitution provides that the Legislature shall levy a tax on the net income of state and national banks which 'shall be in lieu of all other taxes and license fees upon banks or their shares, except taxes upon real property and vehicle registration and license fees.' To implement the constitutional directive while maintaining approximate tax parity between exempt and nonexempt institutions, the Revenue and Taxation Code distinguishes among three types of taxable corporations: general corporations, banks, and financial institutions other than banks, each of the three being subject to a different tax scheme. At the times pertinent herein, section 23151 provided for a general corporate franchise tax of 7 percent measured on net income. The tax rate for banks and financial corporations was 11 percent. (Rev. & Tax.Code, § 23186.) In conformity with the constitutional provision cited above, the 11 percent tax on bank income was In lieu of all other state and local personal property and privilege taxes. General corporations and financial institutions Other than banks, however, are not exempt from local taxation. Thus, in the years at issue, general corporations paid a 7 percent franchise tax, plus local excise and license fees; banks paid an 11 percent tax on net income, but no local taxes; and financial corporations paid the 11 percent income tax And all applicable local taxes, but set off the total local taxes paid against their state franchise tax liability. (Rev. & Tax.Code, § 23184.)

WSBA's member banks located in California all paid and continue to pay the higher in lieu tax. Unquestionably, they were, and are, exempt from most local taxation, including the gross receipts and payroll expense taxes at issue herein. To date, WSBA itself has been treated as a general corporation, paying taxes during its profit-making years at the lower general franchise rate. (Rev. & Tax.Code, § 23151.) It now contends that it is entitled to in lieu treatment with respect to the municipal taxes sought to be imposed by the City of San Francisco.

The trial court found that although WSBA is not a bank, the constitutional exemption created by imposition of the in lieu tax on its member banks extends beyond the banks themselves to encompass WSBA, the independent legal entity which administers the members' cooperative credit card system. Consequently, the court held exempt from municipal taxation that portion of WSBA's gross receipts or payroll expense generated by California banks paying the in lieu tax.

Since all of the pertinent facts were stipulated and the sole question presented to the trial court was the applicability of the statutes to those facts, the issue essentially is one of law for de novo determination by the appellate court. (See City of Los Angeles v. Security Systems, Inc. (1975) 46 Cal.App.3d 950, 952--953, 120 Cal.Rptr. 600; Bank of America v. State Bd. of Equal. (1962) 209 Cal.App.2d 780, 793, 26 Cal.Rptr. 348; 6 Witkin, Cal.Procedure (2d ed. 1971) Appeal, § 256, pp. 4247--4248.) We conclude that the determination of the trial court is in error and that its judgment must be reversed.

I. The 'Banking Functions' Theory

We consider first the less convincing of WSBA's two arguments: that nonprofit organizations performing 'traditional banking functions' exclusively for banks may themselves obtain in lieu benefits even though they are not and do not purport to be banks. In support of this proposition WSBA cites numerous cases interpreting constitutional and statutory 'welfare' and 'educational purposes' property tax ememption provisions. For the most part, these cases conclude that property used for activities incidental to, and reasonably necessary for, the accomplishment of a religious, charitable or educational purpose is entitled to the appropriate exemption. (Cedars of Lebanon Hosp. v. County of L.A. (1950) 35 Cal.2d 729, 221 P.2d 31 (student nurses' residence; staff recreational facilities); Y.M.C.A. v. County of L.A. (1950) 35 Cal.2d 760, 221 P.2d 47 (rental dormitory); House of Rest v. County of Los Angeles...