A.B.C. Distributing Co. v. City & County of San Francisco

Opinion

In these two consolidated appeals we consider the validity of a San Francisco ordinance which imposes a 1 percent payroll expense tax upon persons engaging one or more employees to perform services in San Francisco. Plaintiffs, wholesale liquor and beer distributors doing business in San Francisco, contend that the payroll expense tax ordinance may not validly apply to them since (1) article XX, section 22, of the California Constitution has reserved to the Department of

Plaintiffs filed two separate declaratory relief actions against defendant seeking a judgment declaring that defendant’s payroll expense tax ordinance was invalid as applied to them and enjoining enforcement of the ordinance. These actions were consolidated for trial and were tried upon the written stipulation jointly prepared by the parties. According to the stipulated facts, plaintiffs do business within the City and County of San Francisco and, in connection therewith, hire and employ one or more individuals as employees to perform work or render services within the city and county. The Department of Alcoholic Beverage Control requires a license for certain of plaintiffs’ activities, including the sale, at wholesale, of beer, wine or distilled spirits, and related services such as warehousing, truck delivery, etc., which are incidental to the wholesale sale of alcoholic beverages. In addition, some plaintiffs engage. in substantial business activities in the city and county which do not require a license.

The trial court ruled that defendant’s ordinance was void and unenforceable against plaintiffs as it relates to their business as wholesalers of alcoholic beverages and entered judgment accordingly. Defendant appeals.

The ordinance at issue purports to be a revenue collecting measure; it contains no regulatory provisions, and no criminal penalties are imposed for failure to pay the tax. As related to our present inquiry, the ordinance reads: “A tax for general revenue purposes is hereby imposed upon eveiy person who, in connection with his business, engages, hires, employs or contracts with one or more individuals as Commission Merchant or Employee, to perform work or render services in whole or

We consider plaintiffs’ respective constitutional and statutory challenges to the ordinance.

1. Article XX, section 22, of the California Constitution

Plaintiffs’ primary contention is that the payroll expense tax is a license or occupation tax and that only the Department of Alcoholic Beverage Control has the power to collect such taxes from a person engaged in the manufacture, importation or sale of alcoholic beverages in this state. Plaintiffs rely upon article XX, section 22, of the state Constitution, which provides in pertinent part: “The Department of Alcoholic Beverage Control shall have the exclusive power ... to license the manufacture, importation and sale of alcoholic beverages in this State, and to collect license fees or occupation taxes on account thereof. [¶] • . • The Legislature shall provide for apportioning the amounts collected for license fees or occupation taxes under the provisions hereof between the State and the cities, counties and cities and counties of the State, in such manner as the Legislature may deem proper.”

We have had occasion to consider a similar constitutional attack in Ainsworth v. Bryant (1949) 34 Cal.2d 465 [ 211 P.2d 564 ], involving the validity of a San Francisco ordinance which levied an excise tax, collected by the retailer, on the retail purchase, use or consumption of

We explained in Ainsworth that the power of municipal corporations operating under a freeholder’s charter to impose taxes for revenue purposes is strictly a municipal activity authorized by the state Constitution and subject only to those limitations appearing in the Constitution or the charter itself. (Ibid.) We noted that section 22 of article XX, being special in nature and adopted at a later date than the original constitutional grant of taxing power to local government, “must be held to control in the express field that it covers [citation] but its effect upon the plenary power of taxation possessed by a chartered municipality . . . should not be extended beyond the express terms of the constitutional reservation on the subject of ‘intoxicating liquors.’ [Citation.]” (P. 472; see also Hospital Service of California v. City of Oakland (1972) 25 Cal.App.3d 402 , 405-407 [ 101 Cal.Rptr. 800 ] [doubts regarding tax exemptions are resolved against the taxpayer].) Thus, in Ainsworth we concluded that “no further exclusive power of taxation was intended” by article XX, section 22, other than the power to collect license fees or occupation taxes on account of the manufacture, importation and sale of intoxicating liquors. (P. 473.)

Next, we turned in Ainsworth to the challenged ordinance which imposed a tax upon the consumer of tangible personal property. We determined that such a tax could not be considered a license tax for the privilege of doing business, since such taxes are imposed upon the retailer, not the consumer, of goods. (P. 473.) With reference to the claim that the ordinance imposed an occupation tax, we said: “The San Francisco tax is not upon anyone’s occupation; therefore it is not an occupation tax. Rather the subject of tax under the ordinance is the transaction of sale; the purchaser or consumer is made the taxpayer, and the retailer acts only as the tax collector .... The buyer’s occupation is not taxed, for it is not a pursuit or occupation to buy at retail for use or

Finally, we pointed out that under the San Francisco ordinance liquor retailers were treated no differently than any other retailer in the city and county; no attempt was made to single out liquor retailers for special regulatory treatment. (Pp. 475-477.)

The Ainsworth principles are controlling here. Although the payroll expense tax is not a “consumer’s tax” as in Ainsworth, the challenged tax bears little resemblance to a license or occupation tax, for as the ordinance itself recites, the tax is not paid in consideration of the issuance of a license granting the privilege to engage in business, and no particular occupation is affected by the uniform tax levy. (See generally 16 McQuillin, Municipal Corporations (1972) §§ 44.190-44.191.) The tax applies generally to all businesses with employees who perform services within the city and county. As in Ainsworth, the payroll expense tax is a general revenue measure which does not single out for special treatment persons engaged in the business of manufacturing or selling alcoholic beverages.

Plaintiffs argue, however, that in effect the payroll expense tax is a special occupation tax. They note that San Francisco has also enacted a gross receipts tax for which plaintiffs and other liquor wholesalers are exempt (see Rev. & Tax. Code, § 32010, discussed below), and that the payroll expense tax ordinance (§ 17.1, supra) expressly exempts from the payroll tax any person whose gross receipts tax liability exceeds his payroll tax liability. Plaintiffs suggest that by reason of this exemption, the only persons subject to a payroll expense tax are persons engaged in the business of manufacturing or selling alcoholic beverages. Thus, plaintiffs assert that the payroll expense tax ordinance was enacted as a subterfuge to tax monies which otherwise would have properly avoided taxation.

Plaintiffs’ proof was limited to the fact that the payroll expense tax ordinance exempts taxpayers whose gross receipt tax liability exceeds payroll tax liability. The assumption that only persons engaged in the liquor business must pay a payroll expense tax is speculation. Indeed, defendant has flatly denied the discriminatoiy character of its payroll expense tax, stating that it is a matter of public record “that Payroll Expense Tax collections during the last fiscal year [evidently, 1972-1973] were $20,521,498. Very little, if any, of this was collected from the alcoholic beverage industry.” Plaintiffs have not contradicted defendant in this regard.

We conclude that the payroll expense tax at issue is not a license or occupation tax “on account of’ the manufacture, importation or sale of alcoholic beverages within the meaning of article XX, section 22, of the California Constitution.

2. Section 32010 of the Revenue and Taxation Code

Plaintiffs’ second contention is that the payroll expense tax, as applied to them, is a tax “on the sale” of alcoholic beverages and its imposition is, accordingly, within the exclusive power of the state under section 32010 of the Revenue and Taxation Code. That section relevant to our discussion provides: “The taxes imposed by this part [the Alcoholic Beverage Tax Law, Rev. & Tax. Code, §§ 32001-32556] are in lieu of all county, municipal, or district taxes on the sale of beer, wine or distilled spirits.”

In support of their statutory attack plaintiffs rely primarily upon Century Plaza Hotel Co. v. City of Los Angeles (1970) 7 Cal.App.3d 616 [ 87 Cal.Rptr. 166 ], which invalidated a so-called “tipplers’ tax” imposed by Los Angeles upon the purchase price of alcoholic beverages sold by a retailer for on-premises consumption. The appellate court left open the question whether the tax constituted an improper attempt to regulate the sale of alcoholic beverages, which matter is vested exclusively in the state under article XX, section 22, of the California Constitution. Instead, the court in Century Plaza held the tax invalid under section 32010 of the Revenue and Taxation Code as a local tax “on the sale” of alcoholic beverages.

Century Plaza acknowledged the power reserved to charter cities and counties to enact and enforce laws on the subject of municipal affairs, and noted that “There is no doubt that taxation for revenue for municipal purposes ordinarily is a ‘municipal affair.’ [Citations.]” (7 Cal.App.3d at p. 622.) However, the court further explained that as to matters of statewide concern, even charter municipalities remain subject to and controlled by applicable general state laws, if the Legislature’s intent was to occupy the field to the exclusion of municipal regulation. (Id. p. 621; see Bishop v. City of San Jose (1969) 1 Cal.3d 56 , 61-63 [ 81 Cal.Rptr. 465 , 460 P.2d 137 ].)

In analyzing the “tipplers’ tax” the Century Plaza court determined that although the tax was purportedly levied on the “purchase” of alcoholic beverages, “it undoubtedly imposes a tax on a ‘sale,’ as that term is defined in Revenue and Taxation Code section 32010, of ‘distilled

Century Plaza is distinguishable from the instant case, in that the Los Angeles “tipplers’ tax” quite clearly singled out the liquor industry in imposing a tax upon the purchase (and, necessarily, the sale) of alcoholic beverages. In contrast, as we have seen, San Francisco’s payroll expense tax is applicable to all businesses having payrolls within the city and county, and is neither imposed upon the sale of alcoholic beverages nor measured by the gross receipts from such sales.

It is true that, as applied to plaintiffs, the payroll expense tax probably will be paid from revenues derived at least in part from the sale of alcoholic beverages. To a degree every tax and expense of this type necessarily results in a reduction of available revenues, yet this indirect burden has never been held sufficient to nullify such taxation. (See e.g. Ainsworth v. Bryant, supra, 34 Cal.2d 465 ; Three G Distill. Corp. v. County of L. A. (1941) 46 Cal.App.2d 498 , 502 [ 116 P.2d 143 ] [upholding local personal property tax].)

As we observed in Rivera v. City of Fresno (1971) 6 Cal.3d 132 , 136-137 [ 98 Cal.Rptr. 281 , 490 P.2d 793 ], although the state has preempted the field of sales and use taxation, nothing prevents a municipality from levying a “substantially different” tax otherwise authorized by law. (See also Rev. & Tax. Code, § 7203.5.)

3. Section 17041.5 of the Revenue and Taxation Code

Plaintiffs’ final contention is that the payroll expense tax is an income tax, and that the power to levy and to collect such taxes lies exclusively with the state. (Rev. & Tax. Code, § 17041.5; see Cal. Const., art. XIII, § 26 [“Taxes on or measured by income may be imposed ... as prescribed by law.”].) Section 17041.5 provides that “Notwithstanding any statute, ordinance, regulation, rule or decision to the contrary, no city, county, city and county . . . whether chartered or not, shall levy or

The short answer to plaintiffs’ contention is that the payroll expense tax is not a tax on or measured by their income. Instead, the tax is imposed upon plaintiffs by reason of their employment of labor within the city and county, measured by the expense incurred by plaintiffs in conducting this aspect of their business. The fact that the tax is measured by wages paid to the employees would not convert the tax to an income tax. As this court explained in Gillum v. Johnson (1936) 7 Cal.2d 744 , 763 [ 62 P.2d 1037 , 63 P.2d 810 , 108 A.L.R. 595 ], involving a federal social security payroll tax, such a tax may be an income tax to the employee, but “As affecting employers it is an excise tax, or a tax on the right to do certain things ....” (Italics added.)

Plaintiffs appear to assume that the payroll expense tax herein is an “income” tax because it will be paid from plaintiffs’ income. Yet, as we have previously explained, all taxes necessarily involve some reduction of and relationship to available revenues.

We conclude that the payroll expense tax is a valid tax measure authorized by the “home rule” provisions of the state Constitution (art. XI, §§ 5, 7) which impliedly empower local governmental agencies to levy taxes for general revenue purposes.

The judgment is reversed.

Wright, C. J., McComb, J., Tobriner, J., Mosk, X, Sullivan, X, and Clark, X, concurred.

Respondents’ petition for a rehearing was denied December 24, 1975.