The City and County of San Francisco (the City) appeals a judgment that awarded Macy's Department Stores, Inc. and four related corporations (Macy's) a multi-year tax refund. The City argues that (1) Macy's 1995 and 1996 refund claims were untimely, (2) the trial court erred by refunding all local business taxes paid by Macy's during the contested period instead of the amount sufficient to negate the discriminatory effect of the tax, and (3) the rate of prejudgment interest should have been derived from a local ordinance rather than state law. We conclude Macy's tax refund must be limited to an amount sufficient to cure the discriminatory effect of the tax. So, we reverse.
FACTUAL AND PROCEDURAL BACKGROUND
Pursuant to City ordinances in effect between 1995 and 1999, a business that operated in San Francisco was required to calculate its tax liability separately under payroll expense and gross receipts taxes, and to pay the greater of the two amounts. (S.F. Mun. Code, pt. III, former arts. 12-A & 12-B.) In April 2001, the City repealed the gross receipts tax, effective January 1, 2000.
On January 28, 1999, Macy's filed claims with the City for refunds of all taxes paid since 1995. Later Macy's filed refund claims for all taxes paid through the year 2000.
Three experts testified in the one-day court trial. Direct testimony was provided by their written reports, and each expert was subject to cross-examination. The experts agreed the City's pre-2000 "tandem tax" could hypothetically discriminate against intercity taxpayers, who might be subject to tax under a payroll expense measure in one jurisdiction and under a gross receipts measure in another, unlike a local taxpayer, who would pay tax only to San Francisco under only one measure.
Economist Steven M. Sheffrin, Ph.D., was retained by the City and described a method for quantifying the extra amount
The trial court found the City's tandem tax scheme violated the federal and state Constitutions because it failed the internal consistency test. The court also concluded that General Motors Corp. v. City and County of San Francisco (1999) 69 Cal.App.4th 448, 81 Cal.Rptr.2d 544 compelled a full refund of all taxes paid by Macy's from 1995 through 1999, that Macy's refund claims for tax years 1995 and 1996 were timely, and that pre-judgment interest should be set at seven percent, accruing from the date of each tax payment.
A. Measure of Refund
In Container Corp. v. Franchise Tax Bd. (1983) 463 U.S. 159, 169-170, 103 S.Ct. 2933, 77 L.Ed.2d 545, the United States Supreme Court first articulated what has become known as the "internal consistency" test that measures the validity of a state or local tax argued to have a negative impact upon interstate commerce and thereby violate the dormant Commerce Clause. "Internal consistency is preserved when the imposition of a tax identical to the one in question by every other State would add no burden to interstate commerce that intrastate commerce would not also bear. This test asks nothing about the degree of economic reality reflected by the tax, but simply looks to the structure of the tax at issue to see whether its identical application by every State in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate. A failure of internal consistency shows as a matter of law that a State is attempting to take more
The internal consistency test has since been applied by California courts to determine the validity of local tax measures challenged as discriminatory in violation of the Commerce Clause of the United States Constitution and "the equivalent proscriptions derived from provisions of the California Constitution."
When a tax fails because it is not internally consistent, the United States Supreme Court has generally left it up to the states to determine the exact remedy they must provide to aggrieved taxpayers. (See, e.g., Tyler Pipe Industries v. Dept. of Revenue (1987) 483 U.S. 232, 252-253, 107 S.Ct. 2810, 97 L.Ed.2d 199.) The parameters of state-afforded relief were made clear in McKesson Corp. v. Florida Alcohol & Tobacco Div. (1990) 496 U.S. 18, 110 S.Ct. 2238, 110 L.Ed.2d 17 (McKesson), where the Supreme Court held: "To satisfy the requirements of the Due Process Clause, ... the State must provide taxpayers with, not only a fair opportunity to challenge the accuracy and legal validity of their tax obligation, but also a `clear and certain remedy,' [citation], for any erroneous or unlawful tax collection to ensure that the opportunity to contest the tax is a meaningful one." (Id. at p. 39, 110 S.Ct. 2238, fn. omitted.) The court concluded that when a tax scheme is found unconstitutional "only insofar as it operated in a manner that discriminated against interstate commerce," the taxing authority "retains flexibility in responding to this determination," and may "reformulate and enforce the [tax] during the contested tax period in any way that treats [the taxpayer] and its competitors in a manner consistent with the dictates of the Commerce Clause. Having done so, the [taxing authority] may retain the tax appropriately levied upon [the taxpayer] pursuant to this reformulated scheme because this retention would deprive [the taxpayer] of its property pursuant to a tax scheme that is valid under the Commerce Clause." (Id. at pp. 39-40, 110 S.Ct. 2238.) "More specifically, the [taxing authority] may cure the invalidity of the [tax] by refunding to [the taxpayer] the difference between the tax it paid and the tax it would have been assessed were it extended the same [preferential treatment] that its competitors actually received."
Here, the City does not appeal the trial court's determination that the tandem payroll and gross receipts tax scheme fails the internal consistency test, and is therefore unconstitutional. Instead, the City appeals the award to Macy's of a full refund of all business taxes paid from 1995 through 1999, rather than a partial refund in an amount sufficient to remedy any hypothetical discrimination. The trial court found that the measure of refund was definitively stated in General Motors Corp. v. City and County of San Francisco, to be a full refund of all taxes paid. We disagree.
Before the internal consistency test was applied to determine whether a state or local tax was legal, the rule was that a taxpayer was required to "show more than the possibility of erratic or unconstitutional application. `One who attacks a formula of apportionment carries a distinct burden of showing by "clear and cogent evidence" that it results in extraterritorial values being taxed.' [Citations.]" (City of Los Angeles v. Shell Oil Co., supra, 4 Cal.3d at p. 126, 93 Cal.Rptr. 1, 480 P.2d 953.) The taxpayer thus had the burden of showing the taxing authority actually taxed business activity outside its jurisdiction. (Ibid.) But the taxpayer no longer has to "show more than the possibility of erratic or unconstitutional application" to prove a tax is illegal. As the internal consistency test "asks nothing about the degree of economic reality reflected by the tax," (Oklahoma Tax Comm'n v. Jefferson Lines, Inc., supra, 514 U.S. at p. 185, 115 S.Ct. 1331), McKesson makes clear that due process does not compel a full refund in all cases.
Neither does General Motors Corp. v. City and County of San Francisco, relied upon by the trial court. In General Motors, the court reviewed a facially invalid tax enacted by a taxing authority that placed the burden upon the taxpayer to demonstrate double taxation in order to secure a refund. (69 Cal.App.4th at pp. 453, 455, 81 Cal.Rptr.2d 544.) This case is very different. It is only the tandem interaction of the City's payroll and gross receipts taxes that violates the commerce clause under the internal consistency test. In isolation, each of the taxes is valid.
Unlike General Motors Corp. v. City and County of San Francisco, there is no claim here that the City's proposed remedy is deficient because it is uncertain or would not eliminate the discriminatory effect of the tandem tax scheme. Instead, Macy's relies on its expert's testimony criticizing a partial refund as bad public policy. Macy's argues that hypothetical future cases might require complex factual analysis in order to quantify the appropriate refund, and that the partial refund
This is also not a case where a full tax refund is required because the tax "was beyond the State's power to impose, as was the unapportioned tax in [Atchison & C. Ry. Co. v. O'Connor (1912) 223 U.S. 280, 32 S.Ct. 216, 56 L.Ed. 436], or because the taxpayers were absolutely immune from the tax, as were the Indian Tribes in Ward [v. Love County (1920) 253 U.S. 17, 40 S.Ct. 419, 64 L.Ed. 751] and Carpenter [v. Shaw (1930) 280 U.S. 363, 50 S.Ct. 121, 74 L.Ed. 478]...." (McKesson, supra, 496 U.S. at p. 39, 110 S.Ct. 2238.) Macy's relies on those earlier cases to argue that a full refund is required here, but does not acknowledge their limiting treatment by the Supreme Court of the United States in McKesson. The more recent federal cases cited by Macy's do not address this issue, but merely reaffirm a taxpayer's general right to a postdeprivation refund of illegally-collected taxes, a proposition not under dispute in this case. (Newsweek, Inc. v. Florida Dept. of Revenue (1998) 522 U.S. 442, 118 S.Ct. 904, 139 L.Ed.2d 888; Reich v. Collins (1994) 513 U.S. 106, 115 S.Ct. 547, 130 L.Ed.2d 454.)
This court has followed McKesson to determine the options available to a taxing authority to remedy a discriminatory tax. (Ceridian Corp. v. Franchise Tax Bd., supra, 85 Cal.App.4th at pp. 888-889, 102 Cal.Rptr.2d 611.) Under McKesson's guidelines, we concluded the state Franchise Tax Board could "refund to [the taxpayer] the difference between the tax it paid and the tax it would have been assessed were it allowed the same deductions its competitors actually received," and affirmed the award of a stipulated refund. (Ibid.) While the parties here have not stipulated to the amount of the refund, Macy's does not challenge the City's calculation of the amount necessary to remedy any hypothetical excess it could have paid under the tandem tax. (See also Haman v. County of Humboldt (1972) 8 Cal.3d 922, 928, 106 Cal.Rptr. 617, 506 P.2d 993 [court may eliminate effects of discriminatory tax by granting a refund based on the difference between the rates in question]; City of Modesto v. National Med, Inc. (2005) 128 Cal.App.4th 518, 525, 27 Cal.Rptr.3d 215
While the states are free "to provide broader relief as a matter of state law than is required by the Federal Constitution" (McKesson, supra, 496 U.S. at p. 52, fn. 36, 110 S.Ct. 2238), General Motors Corp. v. City and County of San Francisco does not hold that broader relief is required under California law, nor does it even consider the question. The court there relied on McKesson, but concluded the remedy proposed by the taxing authority would not eliminate the discrimination suffered by the taxpayer, nor would it provide a clear and certain remedy under the circumstances of that case. (General Motors Corp. v. City and County of San Francisco, supra, 69 Cal.App.4th at pp. 454-455, 81 Cal.Rptr.2d 544.) Neither does Macy's argue that it is entitled to broader relief under the due process requirements of the California Constitution than under the federal Constitution, nor has it cited any authority to support such a claim.
Instead, Macy's says a full refund is compelled by article XIII, section 32 of the California Constitution, which provides: "No legal or equitable process shall issue in any proceeding in any court against this State or any officer thereof to prevent or enjoin the collection of any tax. After payment of a tax claimed to be illegal, an action may be maintained to recover the tax paid, with interest, in such manner as may be provided by the Legislature." Article XIII, section 32 recognizes the taxpayer's right to refund of an illegal tax, as a corollary to the prohibition against enjoining the collection of any tax, but it does not address the proper measure of refund. Nor do the cases cited by Macy's discuss the issue. (Todd Shipyards Corp. v. City of Los Angeles (1982) 130 Cal.App.3d 222, 224-225, 181 Cal.Rptr. 652 [taxpayer entitled to recover prejudgment interest on taxes voluntarily refunded by municipality]; Flying Dutchman Park, Inc. v. City and County of San Francisco (2001) 93 Cal.App.4th 1129, 1136-1139, 113 Cal.Rptr.2d 690 [rejecting taxpayer's claim for prepayment injunctive relief from City's parking tax because City ordinance authorizing refund of taxes illegally collected provided adequate remedy at law].)
Macy's also says a full refund is required by the City ordinance in effect from 1995 through 1999 that governed payroll tax refunds. (Former § 911 of the Payroll Expense Tax Ordinance, S.F. Mun. Code, pt. III, art. 12-A.)
Macy's is entitled to be placed in a position equivalent to that occupied by local taxpaying businesses so it will have paid a valid measure of taxes. (See McKesson, supra, 496 U.S. at pp. 42-43, 110 S.Ct. 2238.) In this way, the City may limit Macy's tax refund to the amount necessary to remedy any discrimination from the City's former tandem tax. (Id. at pp. 39-41, 110 S.Ct. 2238.) Macy's is not entitled to a full refund of all business taxes paid between 1995 and 1999. Such a refund would place Macy's in a more favorable position than a local taxpayer during the same period. (See Haman v. County of Humboldt, supra, 8 Cal.3d at p. 928, 106 Cal.Rptr. 617, 506 P.2d 993 ["In determining the proper remedy, we must adopt the one which will best further the legislative intent without increasing discrimination among other taxpayers."].)
B. Timeliness of Macy's 1995 and 1996 Claims
The City argues that Macy's 1995 and 1996 claims were not timely filed, because a local ordinance effective January 1, 1998, shortened the limitations period for filing tax refund claims from three years to ninety days.
But the language of the City's Ordinance 18-98 does not support the City. It expressly provides: "This ordinance shall take effect on January 1, 1998, and shall apply to tax obligations and penalties that accrue after that date. All provisions of Part III of the Municipal Code [the City's Business and Tax Regulations Code] not expressly or necessarily changed by this ordinance shall remain in full force and effect...." (Ord. 18-98, § 2.) Ordinance 24-98, which includes the repeal of section 911 and other procedural provisions of the Payroll Expense Tax Ordinance, and was enacted at the same time as Ordinance 18-98, similarly states: "The changes made in this ordinance shall take effect on January 1, 1998, and shall apply to tax obligations and penalties that accrue after that date. All provisions of this Article not expressly or necessarily changed by this ordinance shall remain in full force and effect...." (Ord. 24-98, § 31.)
The City argues that "it is the statute of limitations amendment and the other provisions of the ordinance that are governed by the effective date language, not the refund claims themselves."
C. Prejudgment Interest Rate
The City and amicus curiae argue that the rate of prejudgment interest payable on Macy's tax refund should be determined according to a local ordinance that provides for interest at a variable rate, computed from the date the claim for refund is made.
Article XIII, section 32 of the California Constitution states: "No legal or equitable process shall issue in any proceeding in any court against this State or any officer thereof to prevent or enjoin the collection of any tax. After payment of a tax claimed to be illegal, an action may be maintained to recover the tax paid, with interest, in such manner as may be provided by the Legislature."
While Civil Code section 3287 does not specify the rate of interest to be paid, article XV, section 1 of the California Constitution provides: "The rate of interest upon a judgment rendered in any court of this state shall be set by the Legislature at not more than 10 percent per annum. Such rate may be variable and based upon interest rates charged by federal agencies or economic indicators, or both. [¶] In the absence of the setting of such rate by the Legislature, the rate of interest on any judgment rendered in any court of the state shall be 7 percent per annum." Thus the courts have applied an interest rate of
The courts have also rejected the argument that a charter city is exempt from the operation of Civil Code section 3287 under the home rule doctrine, and have awarded interest on local tax refunds pursuant to that statute, accruing from the date the taxes were paid. (See Todd Shipyards Corp. v. City of Los Angeles, supra, 130 Cal.App.3d at pp. 225-228, 181 Cal.Rptr. 652; ITT Gilfillan, Inc. v. City of Los Angeles (1982) 136 Cal.App.3d 581, 584-585, 185 Cal.Rptr. 848; see also May Dept. Stores Co. v. City of Los Angeles (1988) 204 Cal.App.3d 1368, 1378, 251 Cal.Rptr. 873.) The City claims those cases are distinguishable, because the Los Angeles ordinance there in question did not provide for the payment of any interest.
The City maintains that there are no cases that apply Civil Code section 3287 when a local ordinance provides for interest on local tax refunds, and that a local ordinance governing municipal affairs should prevail unless it conflicts with state law. But here section 3287 and applicable provisions of the California Constitution operate together to require the payment of interest on tax refunds at a rate of seven percent, from the time the right to recover is vested in the taxpayer. The provisions of the City's ordinance purporting to apply a different rate of interest, which begins to accrue at a different time, thus conflict with state law that occupies the field on a matter of statewide concern. (See Todd Shipyards Corp. v. City of Los Angeles, supra, 130 Cal.App.3d at pp. 225-226, 181 Cal.Rptr. 652.)
The City also claims its ordinance provides for the calculation of interest in a manner similar to Revenue and Taxation Code section 5151, which governs refunds of state property taxes.
Finally, the City argues that even under Civil Code section 3287, interest should run from the date of the claim for refund, not from the date of payment, because the taxpayer's right to recover does not vest until the refund claim is filed. But the case on which the City relies, State of California v. Superior Court (2004) 32 Cal.4th 1234, 13 Cal.Rptr.3d 534, 90 P.3d 116, addressed a different issue. There the court held that a prison inmate who sued the state for failure to provide adequate medical care was required to allege facts sufficient to demonstrate or excuse compliance with the claim presentation requirement of the Tort Claims Act in order to survive a demurrer, and reiterated the principle that compliance with the claim presentation requirement was an element of a cause of action against a public entity. (Id. at pp. 1243-1244, 13 Cal.Rptr.3d 534, 90 P.3d 116.) The court did not consider the issue presented here, namely when the right to recover damages vests for purposes of section 3287. In Todd Shipyards Corp. v. City of Los Angeles, by contrast, the court concluded "that debt was due, in each instance, on the day the respective payments were wrongfully collected, and in each instance the right to recover vested on the same day on which the money was paid." (130 Cal.App.3d at p. 226, 181 Cal.Rptr. 652; accord, ITT Gilfillan Inc. v. City of Los Angeles, supra, 136 Cal.App.3d at p. 585, 185 Cal.Rptr. 848.) This comports with the purpose of prejudgment interest, to compensate plaintiffs for loss of use of their property. (See Lewis C. Nelson & Sons, Inc. v. Clovis Unified School Dist. (2001) 90 Cal.App.4th 64, 71-72, 108 Cal.Rptr.2d 715.)
The judgment awarding a refund of all taxes paid by Macy's is reversed, and the case is remanded with directions to enter judgment in an amount sufficient to remedy any potential discriminatory burden imposed by the City's prior tandem tax from 1995 through 1999. The case is also remanded for reconsideration of the award of costs in the trial court. Each party shall bear its own costs on appeal.
PARRILLI, Acting P.J., and POLLAK, J., concur.