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The Morning Star Company v. Board of Equalization et al

December 7, 2011

THE MORNING STAR COMPANY, PLAINTIFF AND APPELLANT,
v.
BOARD OF EQUALIZATION ET AL., DEFENDANTS AND RESPONDENTS.



APPEAL from a judgment of the Superior Court of Sacramento County, Lloyd G. Connelly, Judge. Affirmed. (Super. Ct. No. 34-2008-00005600-CU-MC-GDS)

The opinion of the court was delivered by: Butz , J.

CERTIFIED FOR PUBLICATION

OPINION ON REMAND

In this appeal, we uphold the validity of a regulation adopted by defendant Department of Toxic Substances Control (the Department)--California Code of Regulations, title 22, section 66269.1 (the Regulation)--which interprets its underlying statute, Health and Safety Code section 25205.6.*fn1 [1] We also conclude that section 25205.6 imposes a constitutionally valid tax. Section 25205.6 imposes an annual charge on those types of businesses, with at least 50 employees, which use, generate, store, or conduct activities in California related to hazardous materials. (§ 25205.6, subds. (b), (c).)

We have seen this matter before; in fact, twice before. So too has the state Supreme Court. Contrary to our first opinion,*fn2 [2] the Supreme Court subsequently concluded in Morning Star Co. v. State Bd. of Equalization (2006) 38 Cal.4th 324 (Morning Star) that the Department's broad interpretation of former section 25205.6--as applicable to essentially all corporations with at least 50 employees, given that most modern office equipment contains hazardous materials--constituted a "regulation" subject to the formal rulemaking procedures of the Administrative Procedure Act (APA) (Gov. Code, § 11340 et seq.). (Morning Star, at pp. 332, 334, 342 [when Morning Star was decided, former § 25205.6 applied only to corporations; the statute was amended in 2006 to apply essentially to all business organizations, not just corporations (Stats. 2006, ch. 77, § 13, eff. July 18, 2006; Stats. 2006, ch. 344, §§ 1, 2, eff. Sept. 20, 2006)].) The Regulation was the result of Morning Star. (Cal. Code Regs., tit. 22, § 66269.1, Register 2007, No. 45 (Nov. 7, 2007).)

Our second opinion*fn3 [3] in this matter concerned two questions left open in Morning Star, plus the issue of the Regulation's consistency with section 25205.6. (Morning Star, supra, 38 Cal.4th at pp. 332, 342.) In that second opinion, we concluded that (1) the Regulation is consistent with section 25205.6; (2) section 25205.6 imposes a tax rather than a regulatory fee; and (3) this tax does not violate equal protection or substantive due process.

This case is now before us for the third time. The Supreme Court granted review of our second opinion (see fn. 3, ante), and directed us to vacate that decision and "reconsider the cause in light of California Farm Bureau Federation v. State Water Resources Control Bd. (2011) 51 Cal.4th 421, 437-440" (California Farm Bureau), which as relevant here concerned whether the statute at issue there imposed a fee or a tax. We have now reconsidered the matter in light of California Farm Bureau, and reach the same three conclusions that we did in our second opinion.

Consequently, we shall once again affirm the judgment, which concluded likewise.

FACTUAL AND PROCEDURAL BACKGROUND

Instead of reinventing the wheel, we will draw much of our background from that provided in Morning Star, supra, 38 Cal.4th 324, with references to the current version of section 25205.6 (Stats. 2006, ch. 77, § 13, eff. July 18, 2006).

This case concerns an annual charge imposed on businesses that was enacted in 1989 as part of a comprehensive overhaul of state law concerning hazardous materials. (Morning Star, supra, 38 Cal.4th at p. 328.)

The charge works as follows. Pursuant to section 25205.6, subdivision (b), each year the Department must provide California's Board of Equalization (the Board) with a schedule (i.e., a list) of business classification codes that identifies the "'types of [businesses] that use, generate, store, or conduct activities in this state related to hazardous materials.'"*fn4 [4] (Morning Star, supra, 38 Cal.4th at p. 327.) If a business has 50 or more employees in this state and falls within one of the listed codes, it must pay a graduated annual charge based on how many employees it has. The charge, which ranges from the hundreds to the thousands of dollars, is deposited in the state's Toxic Substances Control Account, to be disbursed to various programs relating to the control of hazardous materials. (§ 25205.6, subd. (d); see also § 25173.6, subd. (b) [identifying programs funded by this account].) (Morning Star, supra, 38 Cal.4th at pp. 327, 329.)

In the Regulation, the Department finds that "every" nonexempted "business in California with fifty or more employees uses, generates, stores, or conducts activities in this state related to hazardous materials." (Cal. Code Regs., tit. 22, § 66269.1; see Health & Saf. Code, § 25205.6, subd. (b); Morning Star, supra, 38 Cal.4th at p. 327.) The Department reasons that materials it regards as inherent in everyday business activity, such as fluorescent lightbulbs, batteries, inks, correction fluid, and toner used in printers and fax machines, constitute "hazardous materials," and that all qualifying companies "'use, generate, store, or conduct activities'" related to these items. (Morning Star, at p. 327.) Thus, each year the list submitted by the Department has included the codes for all businesses, except for one type of business that section 25205.6 specifically exempts from the charge--nonprofit residential care facilities (§ 25205.6, subd. (h)). (Morning Star, at p. 327.) This means that virtually all businesses with 50 or more employees in this state must pay the hazardous materials charge. (Morning Star, at p. 328.)

Plaintiff The Morning Star Company (the Company) is a California corporation that offers labor services to companies involved in the tomato processing business. (Morning Star, supra, 38 Cal.4th at p. 328.) The Company believes that it should not have to pay the hazardous materials charge. (Ibid.) The Company acknowledges that it uses computers, printers, fluorescent lights, and other items that the Department classifies as (or regards as containing) "hazardous materials." (Ibid.) But the Company asserts that the Legislature did not consider companies in its position as "'us[ing], generat[ing], stor[ing], or conduct[ing] activities . . . related to hazardous materials,'" and that the Department, therefore, has promulgated overly expansive lists of codes in the Regulation. (38 Cal.4th at p. 528.)

Consistent with this position, the Company paid its section 25205.6 charges for the years 1993 through 1996 and 2003 through 2005 under protest, and sought refunds from the Board. (Morning Star, supra, 38 Cal.4th at p. 328.) The Company instituted this action when the Board rejected its demand. The Company seeks a refund, an injunction preventing collection of the charge, a declaration that the Regulation conflicts with section 25205.6, and a declaration that section 25205.6 is a regulatory fee that violates equal protection and substantive due process. (See Morning Star, at p. 328.)

In a bench trial, the trial court rejected the Company's position and denied it relief. So do we.

DISCUSSION

I. The Regulation Is Consistent and Not in Conflict with Section 25205.6

A. Legal Background

"Government Code section 11342.2 provides the general standard of review for determining the validity of administrative regulations. That section states that '[w]henever by the express or implied terms of any statute a state agency has authority to adopt regulations to implement, interpret, make specific or otherwise carry out the provisions of the statute, no regulation adopted is valid or effective unless [1] consistent and not in conflict with the statute and [2] reasonably necessary to effectuate the purpose of the statute.'

"Under the first prong of this standard, the judiciary independently reviews the administrative regulation for consistency with controlling law. The question is whether the regulation alters or amends the governing statute or case law, or enlarges or impairs its scope. In short, the question is whether the regulation is within the scope of the authority conferred; if it is not, it is void. This is a question particularly suited for the judiciary as the final arbiter of the law, and does not invade the technical expertise of the agency.

"By contrast, the second prong of this standard, reasonable necessity, generally does implicate the agency's expertise; therefore, it receives a much more deferential standard of review. The question is whether the agency's action was arbitrary, capricious, or without reasonable or rational basis." (Communities for a Better Environment v. California Resources Agency (2002) 103 Cal.App.4th 98, 108-109, fns. omitted; see Yamaha Corp. of America v. State Bd. of Equalization (1998) 19 Cal.4th 1, 11 & fn. 4.) A regulation which interprets a statute may be declared invalid if the agency's determination that the regulation is reasonably necessary to effectuate the statutory purpose is not supported by substantial evidence. (Gov. Code, § 11350, subd. (b)(1).)

The Regulation interprets section 25205.6, which currently provides in pertinent part:

"(a) For purposes of this section, 'organization' means a corporation, limited liability company, limited partnership, limited liability partnership, general partnership, and sole proprietorship.

"(b) On or before November 1 of each year, the [D]department shall provide the [B]oard with a schedule of codes, that consists of the types of organizations that use, generate, store, or conduct activities in this state related to hazardous materials, as defined in Section 25501, including, but not limited to, hazardous waste. The schedule shall consist of identification codes from one of the following classification systems, as deemed suitable by the [D]department:

"(1) The Standard Industrial Classification (SIC) system established by the United States Department of Commerce.

"(2) The North American Industry Classification System (NAICS) adopted by the United States Census Bureau.

"(c) Each organization of a type identified in the schedule adopted pursuant to subdivision [(b)] shall pay an annual fee, which shall be set in the following amounts: [¶] . . . [¶] [ranging, for example, from $200 for business organizations with 50 to 74 employees, to $1,500 for 250 to 499 employees, up to $9,500 if there are at least 1,000 employees].

"(d) The fee imposed pursuant to this section shall be paid by each organization . . . in accordance with . . . the Revenue and Taxation Code and shall be deposited in the Toxic Substances Control Account. The revenues shall be available, upon appropriation by the Legislature, for the purposes specified in subdivision (b) of Section 25173.6 [primarily, for hazardous material remediation, cleanup and disposal, including California's share of the cost of the federal Superfund program]."

As quoted above, section 25205.6, subdivision (b) "expressly incorporates the definition of 'hazardous material' [set forth] in section 25501. Section 25501, [former] subdivision (o) [(now (p))] states, '"Hazardous material" means any material that, because of its quantity, concentration, or physical or chemical characteristics, poses a significant present or potential hazard to human health and safety or to the environment if released into the workplace or the environment. "Hazardous materials" include, but are not limited to, hazardous substances, hazardous waste, and any material that a handler or the administering agency has a reasonable basis for believing that it would be injurious to the health and safety of persons or harmful to the environment if released into the workplace or the environment.' The terms 'hazardous substance' and 'hazardous waste,' both subsumed within the definition of 'hazardous materials,' are themselves also defined within section 25501 (see § 25501, subds. (p), (q)); these definitions incorporate numerous schedules and descriptions of substances and items deemed hazardous in particular contexts or concentrations under state law, federal law, or both (ibid.). Several of these schedules and definitions, in turn, refer to other schedules and definitions found elsewhere in the law, and so forth." (Morning Star, supra, 38 Cal.4th at p. 337, fn. 5.)

The Regulation in pertinent part "finds that every business in California with fifty or more employees [(except for nonprofit residential care facilities, exempted by section 25205.6, subdivision (h))] uses, generates, stores, or conducts activities in this state related to hazardous materials, as defined in section 25501 of the ...


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