Hu v. City and
Francisco
Filed 6/17/13 Hu v. City and County of San Francisco CA1/4
California Rules of Court, rule 8.1115(a), prohibits courts
and parties from citing or relying on opinions not certified for publication or
ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115
IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST
APPELLATE DISTRICT
DIVISION
FOUR
HERMAN HU,
Plaintiff and Appellant,
v.
CITY AND COUNTY
OF SAN FRANCISCO,
Defendant and Respondent.
A136188
(San
Francisco City
& County
Super. Ct.
No. CGC-11-510077)
I.
Introduction
The issue
presented by this appeal is whether San Francisco’s
payroll expense tax, which is assessed on all compensation paid by a business
to individuals performing services for the business within the city, applies to
wages and nonemployee compensation paid to the sole shareholder and principal
employee of a professional corporation.
The trial court ruled that the payroll expense tax applies by its terms
to these types of compensation, and rejected appellant’s arguments that the
city is estopped or constitutionally barred from applying that
interpretation. We affirm.
II.
Facts and Procedural background
Herman Hu
(Hu), a dentist, owns a professional corporation, Herman Hu, D.D.S., A
Professional Corporation (Hu Corporation), of which Hu is the sole shareholder,
and in which he holds all the corporate offices. Hu Corporation has an office in
Francisco. During the years 2004,
2005, and 2006 (the relevant tax years), Hu Corporation paid Hu an amount
characterized as wages or salary for federal income tax purposes, plus
additional amounts characterized as nonemployee compensation for federal income
tax purposes. During the relevant tax
years, Hu Corporation chose not to characterize Hu as an employee for workers’
compensation purposes, as permitted by Labor Code sections 3351,
subdivision (c), and 4151, subdivision (a).
The City
assesses a payroll expense tax (the payroll tax) on compensation paid to
individuals (that is, natural persons) for work done or services performed for,
or on behalf of, a business. The payroll
tax is calculated on the total compensation paid by the business for services
rendered within the City, subject to exceptions not relevant here, and with an
exemption for small businesses, i.e., those whose payroll tax liability falls
below $2,500 in any given year.
Hu
Corporation filed payroll tax returns with the City during the relevant tax
years, but those tax returns reported only the compensation that Hu Corporation
paid to individuals other than Hu. The
resulting putative tax liability fell below $2,500, so Hu Corporation claimed
the small business exemption, and paid no payroll tax.
In 2007,
the City audited Hu Corporation’s payroll tax returns. The City issued a notice of tax audit
deficiency indicating that Hu Corporation had underpaid its payroll tax for the
relevant tax years. Specifically, the
City calculated that during the relevant tax years, Hu Corporation incurred a
total of $1,863,700.50 in payroll expense, rather than the total of $446,300.50
reflected on Hu Corporation’s payroll tax returns. The City’s position was that the compensation
paid to Hu during those years should have been reported on Hu Corporation’s
payroll tax returns, and should have been included in the amount on which Hu
Corporation’s payroll tax liability was calculated. Based on the City’s calculations, Hu
Corporation’s outstanding payroll tax liability for the relevant tax years was
$27,955.51, plus an underpayment penalty and interest, for a total of
$38,312.66.
Hu
Corporation disputed the audit unsuccessfully; paid the disputed amount; and
filed a claim with the City for a refund, which was denied. Hu Corporation then filed the action from
which this appeal arose, seeking a refund of the amount it had paid.
The parties
stipulated to most of the relevant facts, and the City filed a motion for
summary judgment.
title="">[1] The trial court granted the motion, and
entered judgment in favor of the City.
This timely appeal ensued.
III.
Discussion
A. Standard of Review and Legal Background
This is an
appeal from a summary judgment based on the trial court’s interpretation of a
contends that there are any disputed issues of material fact. Thus, the appeal presents pure questions of
law, which we review independently. (See
California Society of Anesthesiologists
v. Brown (2012) 204 Cal.App.4th 390, 399; Zavala v. Arce (1997) 58 Cal.App.4th 915, 920.)
The City
first adopted the payroll tax in 1970.
Five years later, our Supreme Court rejected challenges to the City’s
payroll tax brought by alcoholic beverage distributors, concluding that the tax
was not preempted by state laws governing the licensing and taxation of alcohol
sales, and was not a constitutionally barred municipal income tax. (A.B.C.
Distributing Co. v. City and County of San Francisco (1975) 15 Cal.3d 566 (
payroll tax, the court quoted the ordinance itself, which provided that
“ ‘This tax is imposed for general revenue purposes and in order to
require commerce and the business community to carry a fair share of the costs
of local government in return for the benefits, opportunities and protections
afforded by the City and County of San Francisco.’ †(Id.
at p. 570.) The court thus upheld
the payroll tax as “a proper exercise of the constitutional power to levy taxes
for general revenue purposes.†(
The tax was
later upheld against preemption challenges brought by maritime commerce
businesses and by a nonprofit credit card charge clearinghouse. (Blue
Star Line, Inc. v. City and County of San Francisco (1978) 77 Cal.App.3d
429; Western States Bankcard Assn. v.
City and County of San Francisco (1977) 19 Cal.3d 208.)
None of
these prior cases regarding the payroll tax addressed the question presented
here, which is whether the City’s payroll tax properly could be assessed on
compensation, including non-salary compensation, that a professional
corporation paid to its sole shareholder, who was not characterized as the
corporation’s employee for workers’ compensation purposes. In deciding this question, we begin with the
language of the ordinances establishing the payroll tax, as that language read
during the relevant tax years.
name="_ftnref2" title="">[2] (See Britton
v. Dallas Airmotive, Inc. (2007) 153 Cal.App.4th 127, 131-132 [“Our primary
objective in interpreting a statute is to determine and give effect to the
underlying legislative intent. [Citation.] We begin by examining the statutory language,
giving the words their usual, ordinary meanings and giving each word and phrase
significance. [Citation.]
. . . ‘If the terms of the statute are unambiguous, we presume the
lawmakers meant what they said, and the plain meaning of the language
governs.’ [Citation.]â€].)
B. Analysis
Ordinance
section 902 provides that “[e]xcept where the context otherwise requires, terms
not defined in [the payroll tax ordinances] that are defined in Article 6 [of
the San Francisco Business and Tax Regulations Code] shall have the same
meaning as given to them in Article 6.â€
The definition of the term “employee†for payroll tax purposes is thus
the one set forth in ordinance section 6.2‑9, which is part of Article 6.
Ordinance
section 6.2‑9 extends the definition of “employee†to include “any
individual[
the service of an employer . . . and includes but is not limited to,
all of the enumerated categories in Subsections (a) through (f) of
California Labor Code Section 3351, regardless
of whether Workers’ Compensation Benefits, pursuant to [Labor Code
sections] 3200, et seq. . . . are
required to be paid.â€
name="_ftnref4" title="">[4] (Italics added.) One of the “enumerated categories†of
employee in Labor Code section 3351 is “[a]ll officers and members of
boards of directors of quasi-public or private corporations while rendering
actual service for the corporations for pay.â€
(Lab. Code, § 3351, subd. (c).)
Thus,
ordinance section 6.2‑9 explicitly provides that for the purposes of
San Francisco’s payroll tax, an officer or director of an incorporated business
remains an “employee†of the corporation “while rendering actual service
. . . for pay†to the corporation, even if the individual is a sole
shareholder to whom the corporation has elected not to provide workers’
compensation benefits. In addition, the
language makes clear that the compensation subject to payroll tax liability is
broader than wages and salary alone.
payroll tax ordinance includes more than just traditional wages paid to
traditional employees.
Despite
this language, Hu Corporation argues that the payroll tax covers only wages
paid to employees. Hu Corporation cites
no authority for that proposition other than language from ABC Distributing, supra,
15 Cal.3d 566 describing the payroll tax in general terms as being “measured by
wages paid to . . . employees.â€
(Id. at p. 576.)
Distributing involved the payroll tax as it stood in or prior to 1975, not
as it stood after the 2004 amendments.
The provisions of the original 1970 version of the payroll tax
ordinance, as quoted in ABC Distributing,
did not include the broad definitions of “employee†and “payroll expense†set
forth in the 2004 version.
Moreover,
constitutionality of the payroll tax as applied to alcoholic beverage
distributors. The language from
relies is taken from a passage in which the court distinguished the payroll tax
from an income tax. (
this case. The court was not called upon
in ABC Distributing to determine
whether the payroll tax applied to persons other than traditional employees. “ ‘It is axiomatic that cases are not
authority for propositions not considered.’
[Citation.]†(
Cal.4th 381, 388, fn. omitted; accord, People
v. Johnson (2012) 53 Cal.4th 519, 528.)
Changing
tacks, Hu Corporation argues that the City itself interprets the payroll tax
ordinance more narrowly than its broad language appears to allow, and that we
should give weight to this administrative interpretation of the law by the
entity charged with its enforcement. We
acknowledge that the meaning and scope of a local ordinance is committed to the
local agency in the first instance, and we ordinarily give great weight to the
agency’s interpretation. (See, e.g.,
Cal.App.4th 1506, 1516.) There are
limits to this doctrine, however.
A local
agency’s interpretation of an ordinance does not merit our deference if it is
clearly erroneous or unauthorized. (
83 Cal.App.4th 1004, 1015; Santa Clarita Organization
for Planning the Environment v. City of Santa Clarita (2011) 197
Cal.App.4th 1042, 1062.) “ ‘An
erroneous administrative construction does not become decisive of the law no
matter how long it is continued.
[Citations.]’ [Citation.]†(Santa
Monica Mun. Employees Assn. v. City of Santa Monica (1987) 191 Cal.App.3d
1538, 1545.) Also, an informal agency
interpretation does not warrant the degree of deference that we accord to an
interpretive regulation that has been adopted through a formal rulemaking
process. (See Yamaha Corp. of America v. State Bd. of Equalization (1998) 19
Cal.4th 1, 7; Western States Petroleum
Assn. v. Superior Court (1995) 9 Cal.4th 559, 576 [“informal actions do not
merit such deferenceâ€].) And ultimately,
even when agency construction of an ordinance is entitled to consideration and
respect, it is not binding on the judiciary.
(Yamaha Corp. of America v. State
Bd. of Equalization, supra, 19
Cal.4th at pp. 7-8.)
As an
example of what it argues is the City’s interpretation, Hu Corporation points
out that ordinance section 904(a), which deals with the apportionment of an
individual’s compensation for payroll tax purposes as between activities within
the City and activities outside the City, uses the term “total number of
working hours employed.†Hu Corporation
argues that the use of the term “employed†in this context means that the City
interprets the payroll tax only to apply to individuals who are “employees†in
the narrow sense of that term.
As Hu
Corporation itself acknowledges, however, our task in interpreting a
part or section . . . in connection with every other part or section
so as to produce a harmonious whole.
[Citation.]†(
696.) For that very reason, we cannot
base our interpretation of the scope of the term “employee†as used in the
payroll tax ordinances on the fact that the term “employed†is used in the section
regarding apportionment of the payroll tax based on the location at which
services are rendered. To do so would
require us to disregard the provision in the payroll tax ordinance that
expressly adopts a much broader definition of “employee.†A statute should not be interpreted so as to
render one part of it a nullity. (
(2012) 55 Cal.4th 707, 724 [“ ‘Where reasonably possible, we avoid
statutory constructions that render particular provisions superfluous or
unnecessary’ â€]; Teachers’
Retirement Bd. v. Genest (2007) 154 Cal.App.4th 1012, 1028 [courts give
significance to every word, phrase, sentence, and part of a statute, and avoid
an interpretation that renders any portion of it superfluous, unnecessary, or a
nullity].)
Hu
Corporation also bases its argument about the City’s interpretation of the
payroll tax ordinance on brochures setting forth instructions for completing
the payroll tax forms for the 2004 and 2006 tax years. The brochures were prepared by the City’s
Office of the Treasurer and Tax Collector for distribution to employers. The brochures themselves indicate that they
only “briefly summarize[]†the payroll tax ordinances, and that “[f]or a more
precise understanding of these ordinances, reference should be made to the ordinances
themselves.†Thus, to the extent the
brochures interpret the payroll tax ordinances, they constitute only an
informal interpretation, which, as noted ante,
does not warrant the deference accorded formal rulemaking, and is not binding
on us.
Under the
heading “Definitions,†the brochures state that “employee†means “any
individual in the service of an employer, including an individual who qualifies
as an employee within the meaning of section 3551 of the California Labor
Code.†(Original capitalization
omitted.) As already noted, under that
statute, officers and directors of a corporation qualify as its employees
“while rendering actual service for the corporation[] for pay.†(Lab. Code, § 3351,
subd. (c).) Moreover, while the
brochures state that individuals who qualify as employees under the statute are
included in the definition of
“employee†for payroll tax purposes, the brochures do not state that the definition is limited to those individuals.
Rather, the brochures make clear that the definition extends more
broadly to include “any individual in the service of an employer.†Hu Corporation essentially concedes that it
is an employer, nor does it dispute that Hu acted “in the service of†Hu
Corporation when he performed the work for which Hu Corporation compensated
him. Thus, we are not persuaded that the
quoted language in the brochures is in any way inconsistent with the City’s
position that the compensation Hu Corporation paid to Hu was subject to the
payroll tax.
Hu
Corporation also relies on a different section of the brochures, entitled
“Payroll Expense Apportionment,†which differentiates between “[e]mployees who
perform work or render services exclusively in [the City],†as opposed to
“[e]mployees who perform work or render services partly within and partly
outside [the City].†(Original
capitalization omitted.) This use of the
term “employee†does nothing to limit or modify the broad definition of that
term adopted in the “Definitions†section of the brochures. Thus, it provides no support for Hu
Corporation’s contention that Hu’s compensation was not subject to the payroll
tax because he was not its “employee.â€
Hu
Corporation also relies on the “ordinary and popular meaning†of the term
“payroll†to refer to a list of employees and the amount of pay due to
them. The brochures include an express
definition of the term “payroll expense,†however, which is clearly broader
than the “ordinary and popular meaning†of the term “payroll.†The brochures define “payroll expense†to include
“the total compensation paid, including salaries, wages, commissions and other
compensation to all individuals who . . . perform work or render
services,†including payments to deferred compensation plans.
Finally, Hu
Corporation refers us to a document dated January 29, 2010, which (like the
brochures) was prepared by the City’s Office of the Treasurer and Tax
Collector. This document gives the same
broad definition of “payroll expense†as the brochures, but goes on to state
that “[i]ndependent contractors and other ‘1099’ employees are
taxable San Francisco payroll.†Hu
Corporation points to no evidence in the record that this statement was made or
endorsed by the City prior to January 2010.
Thus, it has little, if any, relevance to the interpretation of “payroll
expense†for the purpose of the 2004, 2005, and 2006 tax years. In addition, it is an informal statement that
appears to be at odds with the broad language of ordinance section 902.1. Accordingly, it does not carry sufficient
weight to persuade us to interpret the terms of the payroll tax ordinance in
the narrow fashion urged by Hu Corporation.
C. Constitutionality
As already
noted, the California Supreme Court upheld the constitutionality of the payroll
tax in 1975 in ABC Distributing,
is construed to apply to all compensation, as opposed to wages and salary
alone, it “effectively become[s] an income tax.†Hu Corporation does not explain, however, how
basing the computation of a business’s payroll tax liability on all forms of
compensation it pays for services within the City either removes the nexus with
the City, or transforms the payroll tax imposed on business into a tax on
individual income. Accordingly, we are
not persuaded that the City’s interpretation of the payroll tax ordinances
permits this court to disregard the ruling in ABC Distributing. (See
(1962) 57 Cal.2d 450.)
D. Estoppel to Assess Penalties and Interest
Finally, Hu
Corporation argues that even if it owes the underlying payroll tax, the City is
estopped from assessing penalties and interest against it, because its original
failure to pay the amount due was induced by its reliance on the City’s
official interpretation of the payroll tax ordinance. Hu Corporation does not identify the specific
representations by the City on which it claims to have relied. The only evidence in the record of any such
representations is the summaries of the payroll tax ordinances included in the
brochures prepared for the 2004 and 2006 tax years.
If there
were any “misrepresentations†involved in these summaries, they were
misrepresentations of law, not of fact, and thus do not give rise to an estoppel. (See Jordan
v. City of Sacramento (2007) 148 Cal.App.4th 1487, 1496-1498.) Moreover, Hu Corporation’s reliance on the
summaries was not reasonable, as a matter of law, inasmuch as the brochures
themselves indicated that “[f]or a more precise understanding of these
ordinances, reference should be made to the ordinances themselves.â€
For related
reasons, the case on which Hu Corporation relies for its estoppel argument is
distinguishable. In that case,
Equalization (1981) 117 Cal.App.3d 627, the plaintiff taxpayers relied on
formal opinions by the State Board of Equalization and the California Attorney
General to the effect that materials used in constructing a power line for a
federal agency were exempt from sales tax.
(Id. at
pp. 629-630.) The position taken in
those opinions was later repudiated by the courts. (Id.
at p. 630.) The court held that the
plaintiffs were liable for the unpaid sales tax, but not for penalties and
interest, because they had “acted in reliance on a specific declaration by the
board that no tax would be payable.†(
required at its peril to know that a state’s administrative rulings are
erroneous.†(Ibid.)
Here, Hu
Corporation did not rely on any formal administrative ruling, much less one
that expressly addressed the specific issue of the application of the payroll
tax to compensation paid to the sole shareholder of a professional corporation. Rather, Hu Corporation chose to interpret to
its own advantage the terms “employees†and “payroll,†as used in City
brochures, even though Hu Corporation’s interpretations were at odds with the
terms of the payroll tax ordinance itself.
Hu Corporation does not point to any evidence in the record that it
sought clarification from the City, or relied on any advice it received from
any City source other than the brochures.
Accordingly, we are not persuaded that the City was estopped from collecting
penalties and interest on the unpaid payroll tax.
IV.
Disposition
The
judgment is AFFIRMED. The City shall
recover its costs on appeal.
_________________________
RUVOLO,
P. J.
We concur:
_________________________
RIVERA, J.
_________________________
HUMES, J.
summary judgment, but it was taken off calendar as moot.
amended effective February 19, 2004.
Neither party disputes that the payroll tax law applicable to the
relevant tax years is the version that became effective on that date. All further references to ordinance sections
are to sections of the San Francisco Business and Tax Regulations Code, as
amended effective February 19, 2004.
