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

Citations: 542 P.2d 625; 15 Cal. 3d 566; 125 Cal. Rptr. 465; 1975 Cal. LEXIS 254Docket: S.F. 23275

Court: California Supreme Court; November 26, 1975; California; State Supreme Court

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The Supreme Court of California addressed the validity of a San Francisco ordinance imposing a 1 percent payroll expense tax on employers with workers in the city. Plaintiffs, who are wholesale liquor and beer distributors, argued that the ordinance could not apply to them due to constitutional provisions reserving tax authority for alcoholic beverages to the Department of Alcoholic Beverage Control, state law stating that taxes under the Alcoholic Beverage Tax Law replace local taxes on alcohol sales, and further state law prohibiting municipal income taxes. The court concluded that the payroll expense tax does not qualify as a license, occupation, or income tax under these provisions, allowing it to stand as a legitimate means of generating general revenue. The plaintiffs sought declaratory relief against the enforcement of the tax, which the trial court initially ruled as void regarding their wholesale alcoholic beverage business. However, the ordinance does not impose regulatory measures or penalties for non-payment; it simply mandates a tax on payroll expenses for work performed within San Francisco. The tax specifically applies only to that portion of payroll attributed to the city and does not require any business licenses for compliance. The City and County of San Francisco subsequently appealed the trial court's decision.

The tax established in the ordinance is designed for general revenue, requiring the business community to contribute fairly to local government costs in exchange for benefits provided by the City and County of San Francisco. The ordinance clarifies that individuals liable for tax under Ordinance No. 245-68 (Business Tax Ordinance) are exempt from this tax if their liability under this ordinance is lower. 

Plaintiffs challenge the ordinance on constitutional and statutory grounds, primarily arguing that the payroll expense tax constitutes a license or occupation tax, which should be exclusively collected by the Department of Alcoholic Beverage Control for those involved in alcoholic beverages. They reference Article XX, section 22 of the California Constitution, which grants the Department exclusive licensing and tax collection powers in this area.

The court previously addressed a similar constitutional challenge in Ainsworth v. Bryant (1949), where it determined that an excise tax on retail purchases, including intoxicating liquors, was a revenue measure rather than a regulatory one. It upheld that municipal corporations have the constitutional authority to impose taxes for revenue purposes, subject to state constitutional limitations. The court concluded that Article XX, section 22 did not extend exclusive taxation powers beyond its specific provisions concerning intoxicating liquors, affirming that the power to impose taxes for general revenue remained intact for chartered municipalities. Thus, the ordinance's tax on consumers could not be classified as a license tax.

The San Francisco tax in question is identified as an excise tax on the transaction of sale rather than an occupation tax, as it does not target an individual’s occupation. The consumer is the taxpayer, with retailers merely acting as tax collectors. The tax, which applies to all retail businesses, including those selling intoxicating liquors, is not specifically levied on liquor retailers nor is it a personal property tax. Immunity from such a general tax must be clearly established, and liquor retailers are treated the same as other retailers under the ordinance.

The payroll expense tax, while distinct from a consumer tax, similarly does not resemble a license or occupation tax as it is not contingent on a business license and does not specifically affect a particular occupation. This tax is uniformly applied to all businesses with employees within the city and does not single out those involved in alcohol sales. Plaintiffs argue that the payroll expense tax functions as a special occupation tax, noting that liquor wholesalers are exempt from a gross receipts tax while being subject to the payroll tax. They suggest this exemption targets those in the alcoholic beverage industry.

However, for the plaintiffs' claims to hold, they would need to prove that the payroll expense tax was enacted with discriminatory intent against liquor-related businesses. The burden of proof lies with the plaintiffs, who have only shown that the ordinance exempts those with higher gross receipts tax liabilities. The assumption that only liquor businesses are affected is speculative. The defendant has countered this assumption by providing evidence that a minimal amount of payroll tax was collected from the alcoholic beverage industry, which the plaintiffs did not dispute.

The payroll expense tax in question is not classified as a license or occupation tax related to the manufacture, importation, or sale of alcoholic beverages under Article XX, Section 22, of the California Constitution or Section 32010 of the Revenue and Taxation Code. Plaintiffs argue that the tax is imposed on the sale of alcoholic beverages, thereby falling under state jurisdiction as outlined in Section 32010, which states that taxes under the Alcoholic Beverage Tax Law replace all local taxes on alcoholic sales. However, it has been established that the plaintiffs are subject to the payroll expense tax due to employing individuals within the city, rather than for selling alcoholic beverages. This aligns with the precedent set in Ainsworth, where a general tax applied to all retail businesses, including those selling liquor, was deemed acceptable. 

The plaintiffs reference Century Plaza Hotel Co. v. City of Los Angeles, which invalidated a 'tipplers' tax on alcoholic beverages as it was considered a local tax on sales, conflicting with Section 32010. Century Plaza acknowledged that while taxation is typically a municipal affair, state laws can preempt local regulations. However, the 'tipplers' tax specifically targeted the liquor industry, unlike San Francisco's payroll expense tax, which applies broadly to all businesses with payrolls in the city and is not linked to the sale of alcoholic beverages or measured by their gross receipts.

The payroll expense tax, applicable to plaintiffs, will likely be funded by revenues from alcoholic beverage sales. However, this indirect financial impact does not invalidate the tax, as established in Rivera v. City of Fresno, which affirms that municipalities can impose taxes distinct from state sales and use taxes. Plaintiffs argue that the payroll expense tax constitutes an income tax, which they claim is solely within the state's authority to levy, as stated in Revenue and Taxation Code Section 17041.5 and California Constitution Article XIII, Section 26. This section prohibits local entities from taxing income. The court counters that the payroll expense tax is not based on income but rather on the costs associated with employing labor within the city. Although the tax is calculated from wages, it is classified as an excise tax on employers, not an income tax. The court concludes that the payroll expense tax is a legitimate measure under the home rule provisions of the state Constitution, allowing local governments to impose taxes for general revenue purposes. The judgment was reversed, with concurrence from several justices, and a petition for rehearing was denied on December 24, 1975.