Opinion ID: 1386714
Heading Depth: 2
Heading Rank: 2

Heading: The Regulatory Setting

Text: In the idiom of banking law, petitioner is a HOLA institution, meaning it holds a charter granted by the Federal Home Loan Bank Board under the federal Home Owners' Loan Act of 1933 (12 U.S.C. § 1461 et seq.). Although headquartered in Los Angeles, petitioner maintains 135 branch offices throughout the state as well as a smaller number of full service branches in Nevada, Florida, and Georgia. Together with other commercial and savings banks, petitioner participates in a network that operates several thousand automatic teller machines across North America. Many of petitioner's borrowers and depositors reside outside of both Los Angeles and California. Much of the real property securing loans made by petitioner lies outside of Los Angeles, and some lies outside of the state. California-chartered counterparts to federal HOLA institutions such as petitioner are known as Division Two institutions, a term derived from the regulatory locus of state savings banks in division 2 of the California Financial Code. In statutory origin, state and federally chartered savings banks are distinct from the two major types of commercial banks operating in California: national banks established under the federal National Bank Act (12 U.S.C. § 21 et seq.), and state commercial banks chartered and regulated under division 1 of the California Financial Code. For over 60 years, both state and federally chartered commercial banks operating in California have been subject to a single state tax levied on their net income and imposed in lieu of all other taxes, whether state, county, or municipal. The Legislature's exclusive power to tax commercial banks is conferred by article XIII, section 27, of our Constitution, a provision first adopted by the voters in 1928 following a series of decisions by the United States Supreme Court requiring in effect a single state tax on national banks in lieu of all other state taxes and one no higher than the highest tax rate levied on nonfinancial corporations. [3] Although not included within the class of banks subject to the exclusive state tax required by article XIII, section 27 of the Constitution, state and federal savings banks also became indirectly entitled in 1928 to substantially equivalent tax treatment through a so-called offset system effected by statute. Under the offset system, both state and federal savings banks could claim a credit against their net state tax liability for taxes paid to municipalities. In effect, the offset system promoted a rough albeit indirect equality between the aggregate California tax burden on commercial banks  whether state or federal  and on their state and federal savings bank counterparts. [4] The offset arrangement continued in effect until 1979. In that year, the Legislature passed Assembly Bill No. 66 (1979-1980 Reg. Sess.; enacted as Stats. 1979, ch. 1150), an omnibus tax measure that included the statute at issue in this case. (1)(See fn. 6.) Section 14 of Assembly Bill No. 66, set out in the margin, [5] amended Revenue and Taxation Code section 23182 (further unspecified statutory references are to this code) to abolish the offset system by declaring that the in lieu feature of the net income tax, formerly applicable only to commercial banks, extended to financial corporations. [6] Effective January 1, 1981, except for taxes on their real property and miscellaneous imposts, section 23182 subjected both commercial and savings banks  whether national banks or federal HOLA savings banks, state division 1 commercial banks or division 2 savings banks  to a single state-imposed net income tax and to no others. At the same time that it placed commercial and savings banks under a unitary income tax regime, the Legislature moved to mitigate the anticipated revenue loss to local governments resulting from the elimination of municipal taxes on financial corporations. [7] The net effect of the 1979 amendment to section 23182 was to place savings banks and other financial corporations on an equal footing with commercial banks as far as their California income tax burden was concerned by, among other changes in tax treatment, eliminating municipal taxes on their activities. As part of Assembly Bill No. 66, the Legislature made the express findings in support of the amendment to section 23182 set out in the margin. [8] In brief, the Legislature explained that the amendment sought to insur[e] competitive parity between banks and financial corporations by imposing on both an equivalent tax burden. Tax equality, it went on to find, would promote the continued existence of both types of institutions as well as ensure that the tax burden on both remained comparable to that on nonfinancial corporations. In addition, the legislative findings in support of the amendment asserted that local taxes on financial corporations were divergent and competing and impair[ed] the uniform statewide regulation of banks and financial corporations. For these reasons, the Legislature declared, it had preempted the local taxation of financial corporations to the same extent as the state has heretofore preempted local taxation of banks. (Stats. 1979, ch. 1150, § 20, p. 4220.) [9]
Los Angeles is a charter city within the meaning of article XI, section 5, of the California Constitution. For more than 40 years the City has assessed the annual business license tax under the provisions of its municipal code on financial corporations (L.A. Mun. Code, § 21.00 et seq.), including savings banks such as petitioner. The tax is a gross receipts tax calculated as a percentage of the total dollar value of the taxpayer's entire annual business activity, payable even in the absence of net income to the taxpayer in a given tax year. Evidence before the trial court disclosed that for the 1985-1986 budget year, City revenues derived from the business license tax amounted to $186 million, or just under 9 percent of the City's $2.1 billion in total revenues. Of this sum, less than 10 percent or approximately $17 million in revenues was derived from business license taxes paid by savings banks and other financial corporations, a figure amounting to roughly 0.8 percent of the City's total 1985-1986 budget. Following enactment of Assembly Bill No. 66, the City did not attempt to collect the business license tax from financial corporations within its jurisdiction for the 1981 tax year. But beginning with the 1982 tax year, after the Legislature failed to renew the FALA allocation established by Assembly Bill No. 66, the City again assessed the tax against petitioner. As we have noted, petitioner paid the taxes due under protest, brought this suit seeking a refund, and prevailed in the trial court before that judgment was reversed by the Court of Appeal.