(San Francisco County Super. Ct. No. 483632). Trial Judge: Honorable Charlotte W. Woolard.
The opinion of the court was delivered by: Richman, J.
CERTIFIED FOR PUBLICATION
This court has repeatedly recognized that "money is the lifeblood of modern government. Money comes primarily from taxes, and, as the importance of a predictable income stream from taxes has grown, governments at all levels have established procedures to minimize disruptions" that would interfere with essential public operations. (Batt v. City and County of San Francisco (2007) 155 Cal.App.4th 65, 71 (Batt); Flying Dutchman Park, Inc. v. City and County of San Francisco (2001) 93 Cal.App.4th 1129, 1135-1136 (Flying Dutchman); Helms Bakeries v. St. Bd. Equalization (1942) 53 Cal.App.2d 417, 421.) This principle is of sufficient magnitude to warrant a constitutional prohibition on any "legal or equitable process . . . to prevent or enjoin the collection of any tax" (Cal. Const., art. XIII, § 32 (article XIII, section 32)), reinforced by numerous statutes to the same effect. In Daar v. Alvord (1980) 101 Cal.App.3d 480, the Court of Appeal held that an action aimed at challenging and halting the collection of a local property tax would not evade these prohibitions by being framed as one intended to prevent governmental waste under Code of Civil Procedure section 526a (section 526a).
In 2008, the voters of San Francisco amended the existing municipal payroll tax in a manner one taxpayer--who, not incidentally, was not subject to the tax--believed unlawful for a number of reasons. He filed a complaint for declaratory relief that the amending measure was invalid, and sought an injunction "preventing the expenditure of taxpayer monies in implementing, applying or enforcing" the measure. Following Daar, the trial court concluded that the taxpayer lacked standing to challenge the measure, and dismissed the complaint.
Although we do not agree that Daar is controlling, we do agree with the trial court's ultimate conclusion. The crucial point distinguishing Daar is the existence of a state statute expressly prohibiting interference with the collection of a real property tax in language virtually identical to article XIII, section 32. There is no state statute immunizing a municipal payroll tax from challenge, so Daar is not dispositive. On the other hand, we conclude that a number of authorities purportedly holding that a taxpayer action under section 526a may be used to challenge the validity of a taxing statute do not actually decide that point.
After a full and fresh reexamination of the issue, we believe there are weighty policy reasons why no California taxpayer plaintiff has ever been permitted to halt implementation of a local tax. The hostility to the interruption of local tax revenues--of which article XIII, section 32 is but one example--traces back to the 19th Century. There are legitimate concerns for limiting the ability of persons not required to pay a tax themselves to challenge the validity of that tax, particularly when they would enjoy a more advantageous position than given to persons actually required to pay the it. And the most obvious negative consequence of allowing legal challenges by persons lacking a direct financial interest in the operation of a tax is the unacceptable risk of paralyzing the financial stability of local governments with a flood of lawsuits. In light of our analysis, we agree with the trial court's ultimate conclusion that plaintiff lacked standing. We thus affirm the judgment of dismissal.
In 1970, the City and County of San Francisco (City) enacted a Payroll Expense Tax Ordinance (Payroll Tax). (S.F. Bus. & Tax Regs. Code, §901 et seq.) It imposed a tax one and one-half percent "upon every person engaging in business within the City." (Id., §§ 903, 903.1.) The scope of the tax on "payroll expense" applied to "compensation paid to, on behalf of, or for the benefit of an individual, including salaries, wages, bonuses, commissions, property issued or transferred in exchange for the performance of services . . . and any other form of compensation, who, during any tax year, performs or renders services, in whole or in part in the City." (Id., § 902.1(a).)
In 2004, the City's voters enacted Proposition K, which extended the Payroll Tax to "pass-through" entities, which were defined as including "a trust, partnership, corporation described in Subchapter S of the Internal Revenue Code of 1986, . . . limited liability company, limited liability partnership, professional corporation, and any other person or entity which is not subject to the income tax imposed by Subtitle A, Chapter 1 of the Internal Revenue Code of 1986, . . . or which is allowed a deduction in computing such tax for distributions to the owners or beneficiaries of such person or entity." (S.F. Bus. & Tax Regs. Code, §§ 902.1, 902.2.)
Although the details are not entirely clear from the record, it appears that questions as to the correct scope of Proposition K's application led the City's Board of Supervisors in 2008 to propose another ballot proposition--designated Proposition Q--intended to clarify the reach of the Payroll Tax. Although the primary purpose of the measure appears to have been to raise the small business exemption to the Payroll Tax, another goal was to settle the question of the scope of the "pass-through" coverage. Purporting to amend two provisions (i.e., S.F. Bus. & Tax Regs. Code, §§ 902.1 and 902.2), the import of Proposition Q was explained to voters by the City Controller as follows: "Some types of corporations compensate their partners by paying them a share of the firm's annual profits in addition to any salary paid for services rendered. Currently, the City's payroll tax is not paid on these profits. The proposed ordinance would require the payroll tax to be paid on all partner compensation, excluding returns on investment, and would result in additional gross annual tax revenue of $17 million. The businesses that would be affected are typically law, accounting, medical, and other types of professional corporations."*fn1 Proposition Q was adopted by the voters on November 4, 2008.
On December 30, 2008, plaintiff John Chiatello filed a verified complaint challenging the Proposition Q change to the Payroll Tax as applied to "pass-through" entities. Identifying himself as "a resident of the City who owns real property located within the City and pays property taxes," plaintiff stated the aim of his complaint as follows: "Enforcement by the City of the invalid and illegal provisions of Proposition Q will result in wasteful expenditures of taxpayer monies. Code of Civil Procedure Section 526a provides a cause of action to taxpayers such as plaintiff to prevent wasteful expenditures of taxes in this manner. Thus, by this action, plaintiff seeks a declaration that the City may not enforce Proposition Q to tax distributions of profits to owners of pass-through entities."
In his single cause of action--styled for "Taxpayer Action to Prevent Waste--CCP § 526a Declaratory Relief--CCP § 1060"--plaintiff alleged that "Proposition Q's Amendments were not effective" because "the City misled the electorate in its description of Proposition Q" in that Proposition Q "did not amend a key provision governing the tax base for Associations," to wit: "[San Francisco Business and Tax Regulations Code] Section 903.1 continues to provide explicitly that 'distribution of ownership profit or loss' is not included within a Partnership's payroll expense tax base."
Plaintiff had additional reasons for assailing the pass-through taxation provisions of Proposition Q. As he alleged at length, "distributions of profits by a Partnership are not compensation for services." "Taxation of Profit Distributions" was also invalid because it was prohibited by Revenue and Taxation Code section 17041.5, which forbids local government from imposing an income tax. Finally, plaintiff alleged that Proposition Q was invalid because it "violates the Single Subject Rule . . . in the City's Charter."
Plaintiff alleged that declaratory relief "declaring the invalidity of Proposition Q is necessary to prevent the actual and threatened expenditure of taxpayer monies in implementing and applying these invalid and unlawful provisions, including but not limited to the development of new forms and procedures for submitting and processing such returns, the creation of website materials addressing the changes to the Payroll Expense Tax, the training of staff to handle returns and issues under these new provisions, and the costs of enforcement as taxpayers attempt to comply with the law. The expenditure of these funds is a waste of taxpayer monies and requires immediate adjudication of the legality of Proposition Q." Plaintiff prayed for a declaratory judgment "pursuant to Code of Civil Procedure Section 526a" determining that "any expenditure of taxpayer monies to implement, apply or enforce . . . Proposition Q to be a waste of taxpayer monies," prohibited by state law, and enacted in violation of the City's single subject rule; in addition, plaintiff also prayed for issuance "of a judgment pursuant to Code of Civil Procedure Section 526a restraining and preventing the expenditure of taxpayer monies in implementing, applying or enforcing . . . Proposition Q."
The City interposed a general demurrer to the complaint. In addition to arguing that Proposition Q was validly drafted and adopted, the City maintained that "plaintiff lacks standing to challenge San Francisco's Payroll Expense Tax." Citing Daar v. Alvord, supra, 101 Cal.App.3d 480, the City explained that "in tax disputes, the rule is 'Pay First, Litigate Later,' precluding injunctive or declaratory relief," and "plaintiff may not invoke section 526a to subvert the 'pay first' rule."
In his opposition to the demurrer, plaintiff cited a number of decisions as authority that he did have standing to press his claim based on section 526a. Plaintiff argued that the "pay first" principle did not apply to him because he "is not subject to the Payroll Expense Tax," and thus had no obligation to pay anything, so it would be a logical absurdity to require him to comply with refund procedures before being allowed to challenge Proposition Q. Plaintiff further argued that Proposition Q "is void for lack of voter approval" as required by state Proposition 218 (Cal. Const., art. XIIIC, § 2(b)). Plaintiff acknowledged in a footnote that "The City may point out that [plaintiff's] complaint does not include an explicit cause of action under Proposition 218. However, the underlying facts are all encompassed within the complaint, and the demurrer cannot be sustained on that basis. Rather, [plaintiff] must be allowed to amend the complaint to provide greater clarity regarding this valid claim."*fn2
The trial court conducted two hearings. The first was largely devoted to the issue of whether plaintiff had standing to prosecute the action. However, the court continued the matter for a week so that it could "take a harder look at the [Proposition] 218 aspect." After hearing additional argument on that issue, the trial court issued this order: "Plaintiff lacks standing to sue. This Court may not grant injunctive relief to prevent tax collection. (See Daar v. Alvord (1980) 101 Cal.App.3d 480.) Plaintiff fails to allege he is injured or will be injured by Proposition Q. Any party who may be injured by Proposition Q has an adequate remedy to challenge its validity by paying the tax first and then bringing a claim for refund before seeking judicial relief. [¶] Leave to amend is denied. The text of the amendments to [San Francisco Business and Taxation Regulations Code] section 902.1(d) was included in the voter pamphlet, and the effect of Proposition Q was adequately explained to voters. There is no reasonable likelihood that plaintiff will be able to state a valid cause of action."
Plaintiff perfected this timely appeal from the judgment of dismissal entered in due course.
The Standard Of Our Review
"Because this case comes to us on a demurrer for failure to state a cause of action, we accept as true the well-pleaded allegations in ...