Blue Star Line, Inc. v. City & County of San Francisco

Citations: 77 Cal. App. 3d 429; 143 Cal. Rptr. 647; 1978 Cal. App. LEXIS 1227Docket: Civ. No. 39195

Court: California Court of Appeal; February 8, 1978; California; State Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

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The City and County of San Francisco imposes a payroll tax on employers operating within its jurisdiction. In two consolidated legal actions, the appellants challenged the tax's constitutionality, arguing that it was invalid under various provisions of the U.S. Constitution due to their engagement in maritime foreign commerce at San Francisco's ocean port. The appeal concerns a declaratory judgment that rejected the appellants' constitutional claims. The case was evaluated based on pleadings, a detailed written statement of stipulated facts, depositions, and documentary evidence. 

The payroll tax is governed by a 1970 'Payroll Expense Tax Ordinance,' which has been upheld in previous rulings, including A.B.C. Distributing Co. v. City and County of San Francisco and Western States Bankcard Assn. v. City and County of San Francisco. The appellants, all corporations, are categorized into three classes. 

The first class, 'Steamship Lines,' consists of ten corporations owning oceangoing vessels that operate in international commerce. These corporations are incorporated under foreign laws, have principal offices outside the U.S., and their vessels are registered under foreign maritime laws. While their ships occasionally dock at San Francisco, they utilize local agents for representation. 

The second class, 'Steamship Agents,' includes 22 corporations organized under U.S. laws, each maintaining a San Francisco office. These agents provide various contracted services for the steamship lines, including operational support for visiting ships, cargo coordination, and stevedoring arrangements, often acting as 'husbanding agents' compensated on a per-vessel fee basis. 

The detailed account illustrates the operational structure of international maritime commerce as it relates to the payroll tax levied by San Francisco and the appellants' challenge to its validity.

General agents or port agents receive commissions based on cargo and passenger revenues while performing services primarily through salaried employees. These employees operate in San Francisco and other locations, handling traffic that often originates outside the city. Their activities involve personal property ownership and utilization within San Francisco, maintaining records, bank accounts, and vehicle operations. 

The stevedore firms, comprising four corporations regulated under California or other state laws, maintain offices in San Francisco and provide services to steamship lines and shipowners, including loading and unloading cargo at the docks. Longshoremen, hired per job and paid hourly, perform the physical labor under the supervision of full-time stevedore employees. Some firms offer terminal services for cargo handling but not directly on the docks and may also rent or sell cargo-handling equipment in the city.

Respondent seeks to levy a tax on the payrolls of the appellant classes, based on wages for work performed in San Francisco. Appellants argue that this tax is prohibited by specific treaties and violates several constitutional provisions, including the import-export clause and the commerce clause related to foreign commerce. The trial court upheld the tax on steamship lines and stevedore firms, affirming its validity and that it should be apportioned based on work conducted in San Francisco. The appeal focuses on the four-point challenge to the tax, requiring detailed analysis of each point.

The steamship lines argue that the payroll tax imposed on them is invalid due to international treaties concerning reciprocal taxation or tax avoidance, suggesting that these treaties immunize them from the tax under the supremacy clause of the Constitution. They reference treaties with Japan and France but do not provide specific citations. They claim that the U.S. has tax treaty commitments with a broader list of countries, including Australia, Germany, and the United Kingdom, without substantiating these assertions with evidence in the record. An examination of existing treaties reveals at least 25 potential tax treaties with some of these countries, but none support the steamship lines' claims due to a lack of adequate records and explicit treaty citations, leading to the conclusion that this argument fails.

Regarding the Fifth and Sixth Clauses of Section 9 of Article I, the term "articles exported" is interpreted the same as "exports" in the import-export clause, rendering any effect of the fifth clause irrelevant as it overlaps with the import-export clause discussion. The sixth clause is similarly disregarded due to its lack of relevance to the case and minimal citation by the appellants.

The import-export clause has historically barred any local tax affecting articles in the flow of importation or exportation. However, the U.S. Supreme Court has since clarified that local taxes can be levied on dockside handling of these articles, as long as they do not directly tax the articles themselves. The payroll tax in question applies only to the handling of goods at the dock by stevedore employees and further extends to activities related to steamship lines’ representatives, thus not infringing on the import-export clause.

The import-export clause does not invalidate the payroll tax levied on the appellants, as it does not directly affect the articles involved in foreign commerce. The appellants argue that the payroll tax imposes a 'direct burden' on their foreign commerce activities, which would violate the Commerce Clause. Historically, the Supreme Court invalidated taxes that imposed direct burdens on importation or exportation but upheld those that imposed indirect or remote burdens. Under the modern test, a tax is valid if it is fairly apportioned to local activities, does not discriminate against interstate commerce, and is related to the services provided by the state. 

The assessment of the tax's validity must consider the local activity it targets. A tax may be invalidated if it is an integral part of the interstate process, whereas it is acceptable if the activity is of an 'essentially local character.' Although no clear precedent directly applies these standards to foreign commerce, a recent Supreme Court decision suggested their applicability. In that case, the Court upheld property taxes on imported goods, distinguishing them from imposts and duties.

In this situation, the interstate commerce standards apply to the foreign commerce context, particularly as all three appellant classes operate and pay employees in San Francisco, establishing a taxable nexus. The payroll tax is fairly apportioned based on work hours in the city and does not discriminate against foreign commerce employers, as it applies uniformly to all San Francisco employers. Additionally, the tax is justified by the services provided by San Francisco, such as police and fire protection, thus fulfilling the requirement of a quid pro quo for the benefits received.

The payroll tax is deemed to meet constitutional standards, except potentially regarding stevedore firms' dockside activities involving loading and unloading ships. These activities, essential to the flow of foreign commerce, could be protected from the tax because they are integral to maritime operations. The U.S. Supreme Court has previously ruled that stevedores' loading and unloading functions are exempt from local business taxes, highlighting the inseparability of these tasks from interstate and foreign commerce. In a recent case, the Washington Supreme Court invalidated a state stevedoring tax based on similar reasoning, leading to the U.S. Supreme Court's review of that decision. The conclusion supports the validity of the payroll tax on stevedores for their loading and unloading activities in San Francisco. Consequently, the tax is upheld without exceptions. The ordinance defines "Payroll Expense" as compensation paid for work within the City, applies a 1% tax on payroll expenses related to business activities in the City, and clarifies that payment of this tax does not require a business license. The judgment affirming the payroll tax is upheld, with concurring opinions and subsequent denials for rehearing and Supreme Court review.

The tax imposed is aimed at generating general revenue and ensuring that the business community contributes fairly to local government costs, reflecting the benefits received from the City and County. Payroll expenses incurred by employees working both within and outside the jurisdiction are apportioned based on business volume or working hours, depending on the nature of the payroll expense. Constitutional references include provisions from Article I regarding taxation of exports, commerce regulation, and state duties, emphasizing the limitations on states regarding commerce and taxation without Congressional consent. The judgment states that the payroll tax cannot be levied on specific plaintiffs, including certain steamship lines and an agent, who do not conduct business in San Francisco, and excludes crew wages from the taxable payroll expenses. The judgment lacks findings of fact and conclusions of law, leading to reliance on a memorandum decision for clarification. The trial court mentioned treaties but did not specify any nations involved, and the omission of the home or flag nations of the steamship lines was noted as uncorrected due to the waiver of formal findings.

A single response to interrogatories identified Japan as the home and flag nation for one steamship line, necessitating a review of the superior court's full file for similar information on the other nine lines. Information was found for four additional lines, but none for the remaining five. The absence of national identities does not warrant mandatory judicial notice, and no discretionary notice has been requested. Complications arise as the steamship lines list 12 countries claiming representation, yet there are only 10 lines among the appellants. Consequently, the record lacks sufficient evidence to substantiate any tax treaty claims with specific foreign nations. Relevant tax documents are referenced in "Treaties in Force," indicating bilateral treaties under each nation and taxation, while multilateral treaties do not include taxation as a subject.