City of Glendale v. Crescenta Mutual Water Co.

Plaintiff city of Glendale appeals from a judgment denying it recovery of an amount alleged to be due from defendant Crescenta Mutual Water Company as an excise tax upon the use of water distributed within city territory. The judgment rests primarily upon a holding that the application of the city ordinance to defendant and its shareholders works an unlawful discrimination and denial of constitutional rights.

Defendant is a mutual water company engaged in distributing water both within and outside of the city of Glendale. It has about 1,500 users within the city and 1,700 outside the city limits. The territory which it serves inside the city was brought in by annexation on January 28, 1952. The ordinance in question, number 2559, was passed on June 19, 1952, imposing an excise tax of five cents per 100 cubic feet of water upon the use in the city of water purchased from any water distributing agency for use therein. Section 24 provides that all monies collected thereunder shall be paid into the Metropolitan Water District Fund of the city and be used by it in the payment of the tax of the Metropolitan

The said Metropolitan Water District of Southern California was organized under the Metropolitan Water District Act (Deering’s Gen. Laws, Act 9129), now found in 1 Water Code (1954), page 1108 et seq. City of Glendale, a charter city, has been a member of the district since December 29, 1928. Said Act 9129 empowers and requires the district to levy annual ad valorem taxes upon all lands within its limits (§ 8(b)); the amount to be derived from the territory within each member city is fixed separately (§ 8(e)); and each city after making declaration of intention so to do and performing certain other antecedent acts, “may elect to pay out of the municipal funds of such city all, or the stated percentage, as the case may be, of the amount of tax which would otherwise be levied upon property within such city” (§ 8(d)), and thereupon the ad valorem tax is not levied or collected (§ 8.1). Section 8(h) also provides in part: “Cities, the areas of which, in whole or in part, are included within metropolitan water districts incorporated hereunder, are hereby authorized to pay to such district, out of funds derived from the sale of water or other funds not appropriated to some other use, such amounts as may be determined upon by the governing bodies, or other bodies, boards, commissions or officers having control of such funds, thereof, respectively. Such payments may be made in avoidance of taxes as herein provided, or otherwise, and shall not be deemed gratuitous or in the nature of gifts, but shall be deemed payments for water or services in connection with the distribution of water. Any city making any such payment to any district incorporated hereunder, whether in avoidance of taxes or otherwise, shall receive credit therefor and the amount of the payment so made by any city shall be deducted from the amount of taxes which would otherwise be levied against property lying therein as herein provided.” For all fiscal years since 1929-1930, including that of 1951-1952, the district has levied taxes and the city has made payments pursuant to said statutory pro

So far as pertinent the internal fiscal management of the city is as follows. Its public service department operates the city-owned waterworks and electric works. Receipts therefrom in excess of requirements for operating expenses, depreciation and bond service charges, go into a waterworks revenue fund and an electric works revenue fund respectively. And any amounts in excess of the requirements of those funds are transferred to a public service surplus fund (Charter, Art. XI, §§20, 21, 22). Disbursements from this fund may be made only on special appropriation by the city council, “for waterworks Or electric works purposes only, which shall include payment of all or any portion of the tax of the Metropolitan Water District of Southern California, or its successors in interest, which the Council may elect to pay out of the funds of the City of Glendale.” (§22.) To facilitate such payments to the district the city created a fund known first as Metropolitan Water District Aqueduct Fund, later changed to Metropolitan Water District Fund, for which appropriations are made periodically and from which the “in lieu” payments have been made to the district over the years. That fund also includes excise tax moneys collected under said ordinance 2559. Net revenues of the city waterworks which went into the public service surplus fund exceeded the amount withdrawn from it for the purpose of paying the district tax for the year 1952-1953 and prior fiscal years. Obviously the water rates were enough to carry that tax as well as all expenses of the waterworks.

Prior to January 28, 1952, none of the area served by defendant was within the city and hence it was not concerned with the district tax or any payments in lieu of same. When part of that area was annexed the city had already made its declaration of intention “to make payment from that part of the Public Service Surplus Fund of the City known as the Metropolitan Water District Fund in lieu of and in avoidance of taxes which otherwise would be levied upon taxable property in the City for the fiscal year 1952-1953” (quoting stipulation of facts). The district tax that year “was based in part upon the assessed value of taxable property in said annexed area, ’ ’ being enlarged accordingly. Neither defendant nor its shareholders purchased water from the city—not then or now. And

“No constitutional rights are violated if the burden of the license tax falls equally upon all members of a class, though other classes have lighter burdens or are wholly exempt, provided that the classification is reasonable, based on substantial differences between the pursuits separately grouped, and is not arbitrary.”

Carmichael v. Southern Coal & Coke Co., 301 U.S. 495 , 509 [ 57 S.Ct. 868 , 81 L.Ed. 1245 , 109 A.L.R. 1327 ] : “It is inherent in the exercise of the power to tax that a state be free to select the subjects of taxation and to grant exemptions. Neither due process nor equal protection imposes upon a state any rigid rule of equality of taxation. [Citing cases.] This Court has repeatedly held that inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation. [Citing eases.]” Respondent has failed to show that there is any arbitrary or unreasonable classification in the Glendale excise tax ordinance.

The attack upon it from the standpoint of exemptions must also fail. “Whether the tax statute may make a valid exemption presents the same problem as that of classification; if the exempted persons or businesses may be included in a distinct class then the equal protection of the laws is not denied to those taxed. (33 Am.Jur. 363.)” (Fox etc. Corp. v. City of Bakersfield, supra, 36 Cal.2d 136 , 144.) “Like considerations govern exemptions from the operation of a tax imposed on the members of a class. A legislature is not bound to tax every member of a class or none. It may make distinctions of degree having a rational basis, and when subjected to judicial scrutiny they must be presumed to rest on that basis if there is any conceivable state of facts which would support it.” (Carmichael v. Southern Coal & Coke Co., supra, 301 U.S. 495 , 509.)

A twofold claim is made to the effect that the city’s own water users have not in fact borne the burden of the in lieu payments. First it is asserted that the use of the various funds above described is but bookkeeping and manipulation. However, a “division of the moneys belonging to the

Next it is said that the in lieu payment is a municipal obligation which falls ultimately upon all taxpayers and that defendant’s shareholders thus bear their portion of same because general funds belonging partially to them are used for the purpose. This is answered by the fact, previously discussed, that the special fund arising from water charges has borne the burden. Also by the further consideration that citizens or taxpayers do not own any part of city funds or other properties. Their rights are limited to preventing misapplication of same. Their interest in municipal property “is that of citizens and taxpayers, not that of proprietors” (38 Am.Jur. § 707, p. 411; Farmers & M. Sav. Bank v. Minnesota, 232 U.S. 516 , 524 [ 34 S.Ct. 354 , 58 L.Ed. 706 ]).

The claim that the tax is imposed for an unlawful purpose—the making of a gift of public funds—cannot prevail. The Metropolitan Act expressly provides in section 8(h) that such avoidance payments “shall not be deemed gratuitous or in the nature of gifts, but shall be deemed payments for water or services in connection with the distribution of water.” And section 22, article XI, of the charter specifically provides that water revenue funds may be used in payment of the Metropolitan tax. Regardless of the legislative declaration that such a payment by a city does not constitute a gift it remains a fact that- it is not a gratuity. The payment is supported by ample consideration, availability of plentiful water for use of the city’s inhabitants—a vital municipal objective in Southern California. For that standby service the city or its inhabitants must pay whether they use the water or not (a separate charge is made for water; Act 9129, §§5(10) and 5½). And it is immaterial whether the city raises the funds through an excise tax or a sales tax or

Denial of due process and equal protection of law is said to inhere in the requirement that defendant, a mutual water company, collect the tax from its shareholders or pay the same itself. That one in defendant’s situation may be made the government’s tax collector nolens nolens, under penalty of personal liability for failure to act, is now well established. (Pierce Oil Corp. v. Hopkins, 264 U.S. 137 , 139 [ 44 S.Ct. 251 , 68 L.Ed. 593 ]; Felt & Tarrant Mfg. Co. v. Gallagher, 306 U.S. 62 [ 59 S.Ct. 376 , 83 L.Ed. 488 ]; Abney v. Campbell, (5 Cir.) 206 F.2d 836 , 841; 346 U.S. 924 [ 74 S.Ct. 311 , 98 L.Ed. 417 ].) A charter city has all the power of the sovereign state in this matter of exacting taxes for revenue, except as it is limited by constitution or charter. (Ainsworth v. Bryant, 34 Cal.2d 465 , 569 [ 211 P.2d 564 ].)

The argument that defendant is obligated to deliver water to its shareholders at cost, that this tax is not a part of its cost, and therefore it impairs the existing contract with its shareholders comes rather late as a constitutional problem. The contrary has been settled for many years. See National Ice etc. Co. v. Pacific Fruit Express Co., 11 Cal.2d 283 , 293-294 [ 79 P.2d 380 ]; 16 C.J.S. § 283, p. 708. Moreover, the tax if paid by defendant, becomes one of the costs of distribution (see Saulsbury Oil Co. v. Phillips Petroleum Co., (10 Cir.) 142 F.2d 27 , 39).

The fact stipulation says: “The water produced by the defendant is delivered to its shareholder-users through a system of underground pipes to meters at the property line of the shareholder-users and thereafter flows through pipes on the land of the shareholder-users. The water is used by them on said land for household uses and for irrigation of lawns, trees and shrubbery and for commercial uses.” The argument that the shareholder may not be the user but merely the landlord of a tenant-user deserves little discussion. The water is delivered and metered at the property line, that is the basis of billing by the company, and it is the logical point for billing and collecting the tax. Once the validity of the exaction is established it follows inevitably that the company can refuse delivery unless it is paid (cf. Fuller v. Azusa Irrigating Co., 138 Cal. 204 , 215-216 [ 71 P. 98 ] ; Curtin v. Arroyo Bitch etc. Co., 147 Cal. 337 , 341-342 [ 81 P. 982 ]),

Other specifications of alleged charter violations relate to matters concerning which the trial judge found against defendant. Ordinarily a respondent cannot assert error. (4 Cal.Jur.2d § 552, p. 413.) Unless it may do so in this instance, the judgment must be reversed with directions. But that should not be done without consideration of other claims made in support of the alleged correctness of the judgment. In other words this is one of those occasions in which a respondent may be heard to allege error in aid of affirmance. (Mott v. Horstmann, 36 Cal.2d 388 , 393 [ 224 P.2d 11 ] ; Southall v. Security Title Ins. etc. Co., 112 Cal.App.2d 321 , 323 [ 246 P.2d 74 ].)

Respondent asserts a violation of section 12, article XI of the charter, claiming this is a special tax which is invalid for failure to submit to the electors. That section must be construed in the light of related provisions. Section 11 says: ' “The total tax rate for any one year shall not exceed one per cent of the assessed valuation, unless a special tax be authorized, as provided in this chapter; ...” And section 12: “Whenever the Council shall determine that the public interest demands an expenditure for municipal purposes, which cannot be provided for out of the ordinary revenue of the City, it may submit to the qualified voters at a regular or special election, a proposition to provide for such expenditure, either by levying a special tax, or by issuing bonds, but no such special tax shall be levied nor any such bonds issued, unless authorized by the affirmative votes of

Next it is said that if ordinance 2559 does not exact a special tax it contravenes section 14 of article XI. It creates a general budget fund and provides that all “receipts from the general tax levy, licenses, fines, permits, . . . and all other receipts except those from the Public Service Department,” and except “those which are collected for a specific purpose” shall be credited to and disbursed from the general budget fund. The ordinance specifies that the excise tax shall be deposited and paid into the Metropolitan Water District Fund. Hence the alleged violation of the charter. Counsel for respondent argue that if this is not a special tax then it is not collected for a special purpose. It is further said that

Lastly it is argued that Ordinance No. 2559 does not apply to respondent or its shareholders, because it is a mutual water company and the terms “customers,” “purchased” and “sold” can have no application to the defendant’s producing and distributing water at cost to its shareholders whose shares of stock are appurtenant to the land from which the water is produced. First, as to the terms of the ordinance. The heart of it is found in section 6: “An excise tax at the rate of five (5) cents per one hundred cubic feet of water is hereby imposed on the use of water in the City of Glendale purchased from any water distributing agency for use therein.” And the incidence is use of water distributed and used within the city. “Every person using in this City water purchased from a water distributing agency is liable for the tax.” (§ 7.) It is water “purchased” from “any water distributing agency” for use therein. (§6.) And “Water Distributing Agency” means “any person . . . which distributes water through a system of water pipes to persons who are the ultimate customers for such water. ” (§5.) The trial judge found that the water distributed by defendant is its own property and is sold to its shareholders within the meaning of the term “sold” as used in the ordinance; that shareholder-users are purchasers and customers and defendant a water distributing agency within the ordinance. There is no question but that defendant answers the description of “person” in section 2; the claim is that, because of its mutual character, defendant’s shareholder who receives and uses the water takes what already belongs to him, makes no purchase and is not a customer. Section 8 requires every distributing agency “at the time of collecting charges for water sold to such customers” to collect the tax from the customer. Anent this the company says there is no sale and hence no customer. The word customer does not imply a buyer, though it may do so. “Customer. A person with whom a business house, or a business man, has regular or repeated dealings” (17 C.J. p. 443). But the words sale and purchase ordinarily, though not necessarily, imply rendition of a consideration, a price (see People v. Cockrill, 62 Cal.App. 22 , 33 [ 216 P. 78 ]; Anderson v. Badger, 84 Cal.App.2d 736 , 744

Respondent’s counsel assert that the water belongs to the shareholders, that they pay nothing for it when delivered, that the only charge paid is for production and distribution, and hence there is no purchase or sale. Reliance is placed upon Stratton v. Railroad Com., 186 Cal. 119 [ 198 P. 1051 ] ; Frasee v. Railroad Com., 185 Cal. 690 [ 201 P. 921 ] ; Hildreth v. Montecito Creek Co., 139 Cal. 22 [ 72 P. 395 ]. Those decisions hold that in the ease of shareholders who own and pool water rights their mutual water company becomes merely their agent in producing and delivering to them their own water. But that is not true of water which is owned by the mutual company and delivered by it to its shareholders even though their stock is appurtenant to their respective lands. (See Consolidated People’s Ditch Co. v. Foothill Ditch Co., 205 Cal. 54 , 63-64 [ 269 P. 915 ].) The trial court found that no shareholder had ever transferred any water rights to defendant and that “water produced by defendant and delivered to its shareholder-users in the City of Glendale is the property of defendant; is not the property of any of its

The judgment is reversed with instructions to make and enter judgment as prayed.

Wood, acting P. J., and Vallée, J., concurred.

A petition for a rehearing was denied October 26, 1955, and respondent’s petition for a hearing by the Supreme Court was denied November 23, 1955. Edmonds, J., and Schauer, J., were of the opinion that the petition should be granted.