Opinion ID: 1412641
Heading Depth: 1
Heading Rank: 6

Heading: Municipal Income Taxes

Text: The city alludes to the fact that gross income under state law (Rev. & Tax. Code, § 17071) and the federal income tax statute, (Int. Rev. Code, § 61) includes interest, rents, royalties, and other sources which the Oakland tax does not reach. Further, the city asserts that the normal income tax is based on net income after deduction of business expenses and costs of production of income, whereas the Oakland tax is a gross levy. Thus, it argues, the gross receipts feature of Oakland's levy, like some license taxes, together with credit for duplicative license fees, evidences a coordinated business tax system. Let us examine these assertions. First, section 17041.5 prohibits cities from imposing a tax not only upon income per se, but upon any part thereof'; thus, the fact that Oakland seeks to tax only compensation for services, and not other sources, does not mean that the Oakland tax is any less a prohibited tax. Second, Revenue and Taxation Code, section 17071 lists compensation for services as one category of income, and gross income derived from business as another, illustrating that under California tax statutes, for tax purposes, there is a distinction between business receipts and employee compensation. The city would blur and thus obliterate this distinction. Third, while the subject tax is distinct in structure and operation from complex state and federal income tax measures, it is very like the typical municipal income tax. City income taxes, as they exist in jurisdictions which permit them, tend to be: (1) flat-rate (i.e., not graduated); (2) levied upon earned income; (3) without deductions, other than perhaps an initial exclusion of a designated amount; (4) collected by employer withholding; and (5) at the rate of either 1/2 or 1 percent. Oakland's tax has the exact profile of a typical municipal income tax. ( Legislative Developments, supra, 7 Harv.J.Legis. at p. 273; Januta, supra, 56 Cal.L.Rev. at p. 1555 & fn. 151.) Finally, the giving of a credit for duplicative license fees, rather than evidencing a coordinated business tax system, became a necessary credit when the city sought collection twice from the same source. The majority, while concurring that city income taxes generally resemble the Oakland tax, points to the typical municipal income tax as being one imposed upon ... all earned income of city residents, whether for services rendered inside or outside the taxing jurisdiction as demonstrating that the Oakland tax is significantly different from the conventional municipal income tax. ( Ante, p. 393.) However, one reason the typical ordinance is so structured is that in ... most ordinances a credit is allowed to a resident whose income is being taxed by another municipality up to the amount of the local tax.... ( Legislative Developments, supra, 7 Harv.J.Legis., at p. 273.) Furthermore, census figures indicate that, at least as of 1970, the Oakland tax was structured to reach 13,263 more taxpayers by taxing nonresidents and residents who work in Oakland than by taxing Oakland residents who worked in and out of Oakland. (U.S. Census, supra, p. 198.) The deviation in form appears to have rendered Oakland a substantial financial benefit. Finally, since Oakland labeled its tax a license tax and attempts to exempt it from the first paragraph of section 17041.5, as a license tax upon a business measured by or according to gross receipts, Oakland was faced with the California license tax cases holding that such license tax could not be based on income derived outside the taxing jurisdiction. ( City of Los Angeles v. Belridge Oil Co. (1954) 42 Cal.2d 823, 831-833 [271 P.2d 5], app. dism. 348 U.S. 907 [99 L.Ed. 711, 75 S.Ct. 292]; Ferran v. City of Palo Alto (1942) 50 Cal. App.2d 374 [122 P.2d 965].) By taxing only residents who work in Oakland, and commuters, Oakland gained more taxpayers and at the same time avoided the extraterritorial problem to which the label adopted subjected the tax. The majority examined business or occupation tax cases and gross receipts occupation tax cases at length ( ante, p. 394); concluding that the Oakland tax differs materially from other license taxes in that: (1) it covers all trades, and professions; and (2) it reaches the individual employee; both characteristics of an income tax and reviewed earlier in this dissent. However, the majority uses this observation as a springboard to conclude that the city not only has the power to tax a part, but also has the power to tax the whole. In other words, the majority asserts that there is no serious question but what a municipality may tax every single occupation (i.e., each worker's job) within the city. ( Ante, p. 395.) Thus concluding, the majority then asserts that such tax is not converted to an income tax simply because measured by employee compensation. That is, the measure or mode of ascertaining a tax is not conclusive as to its nature. ( Ante, pp. 396-397.) The majority next observes that Oakland's tax is exacted only from persons exercising the privilege of selling services in the city and only to the extent they do so. ( Ante, pp. 396-397.) Finally, the majority gives deference to its label, and finds it is the privilege and not the income generated which is taxed, citing City of Louisville v. Sebree (1948) 308 Ky. 420 [214 S.W.2d 248, 253-254]. ( Ante, p. 397.) In summary, in order to avoid conflict with section 17041.5, the majority reasons: (1) a city may tax every job in the city; (2) though the tax be measured by compensation, that is not conclusive as to its nature; (3) just those exercising the privilege of selling services are taxed, and to the extent services are sold; (4) the label is entitled to deference; (5) it is the privilege and not the income generated by its exercise which is taxed; and (6) hence the Oakland tax is an excise or license tax. Let us review this reasoning. Section 17041.5 is in two parts. The first part states what the city may not do. It may not levy any tax upon the income, or any part thereof, of any person, resident or nonresident. The second part states what the city may do. It may levy a license tax upon a business measured by gross receipts. The majority reasons that the city may levy a license tax upon every job in the city. This may be true; however, the city has measured that tax by the gross income of each employee. In its next step in reasoning the majority asserts that the measure (here admittedly employee compensation) is not conclusive as to its nature. That is a correct statement, as far as it goes; but it does not answer the challenge of the first part of section 17041.5. The Oakland tax is on income, or a part thereof. In order to avoid the proscription of section 17041.5, the tax must be brought under the second paragraph of that section. This the majority seeks to do by its last three steps in reasoning: (3) just those exercising the privilege of selling services are taxed; (4) the label is entitled to deference; and (5) it is the privilege and not the income taxed. Further confirmation that this is what the majority is asserting is found in its statement that Oakland's license fee is ... expressly authorized by the final paragraph of section 17041.5. ( Ante, p. 391.) How has the majority reached the conclusion that the tax is authorized by the last paragraph of section 17041.5? There is nothing in steps (3), (4) and (5) above which leads to that conclusion, except perhaps deference to label. In fact, the last paragraph of section 17041.5 is not discussed by the majority at any point in the reasoning cited. ( Ante, pp. 395-397.) Yet, this is the heart of the issue posed. Is the Oakland tax a ... license tax upon a business measured by or according to gross receipts? Let us address that question. Whether the Oakland tax is a license tax or an income tax has been treated at length above. That discussion applies to the use of the term license tax in section 17041.5. Next, section 17041.5 says upon a business. Here lies a second stumbling block. The Oakland tax is not upon a business. It is upon persons holding jobs in Oakland measured by their gross compensation. Why did the Legislature use the words business measured by or according to gross receipts in section 17041.5? The most logical explanation is that the Legislature used that language to exempt the traditional municipal business license taxes measured by gross receipts. These were familiar to legislators at the time of the enactment. Such taxes represent excise taxing practice employed by cities over many years. To sustain the majority conclusion, the Legislature would have had to intend, by the last paragraph of section 17041.5, that a license tax upon a business measured by or according to gross receipts meant a percentage levy on the gross income of every employee. Yet, that is the very tax prohibited in the first paragraph of section 17041.5. It would seem clear that the Legislature had no such intention. Employee compensation (i.e., gross income) may not be taxed under the first paragraph of section 17041.5. To avoid this prohibition the city has labeled its tax on gross income one on gross receipts. This is done to qualify employee compensation for the exception of the second paragraph of section 17041.5. When it comes to fitting a tax on gross income of employees into the term gross receipts in the second paragraph of section 17041.5, the city is faced with the qualifying language tax upon a business measured by or upon gross receipts. A tax on employee compensation could be upon a business or it could not, depending on who is taxed and for what. Lastly, the majority concluded this portion of its discussion with a citation to the Sebree case. ( Ante, p. 397.) The Sebree case involved interpretation of a Louisville, Kentucky, occupation tax measured by earnings or profits. The court held that such tax was not an income tax within the meaning of the Kentucky Constitution. Actually, the United States Supreme Court, interpreting the very same Louisville occupation tax held that it was an income tax for purposes of the Buck Act. ( Howard v. Commissioners of Louisville (1953) 344 U.S. 624, 629 [97 L.Ed. 617, 622, 73 S.Ct. 465]); see also, Dole v. City of Philadelphia (1940) 337 Pa. 375 [11 A.2d 163], similar measure held to be an income tax.) Also, the opinion in Sebree acknowledged that a similar tax in Missouri had been found to be an income tax. ( Carter Carburetor Corp. v. St. Louis (1947) 356 Mo. 646, 653 [203 S.W.2d 438, 440].) The Carter tax was labeled an earning tax and was imposed on residents and nonresidents earning income in St. Louis.
This brings us to the majority discussion of Government Code, section 50026. ( Ante, pp. 397-398, 412-413, quoting the text of § 50026 in full.) As observed above, when San Francisco was about to adopt its commuter tax on gross income (the sister tax to the Oakland tax), the Legislature reacted by quickly enacting section 50026 invalidating that kind of levy. The majority asserts that section 50026 is pointless and redundant if section 17041.5 is construed as enjoining all municipal occupation taxes measured by employee compensation.... ( Ante, p. 397.) It is neither pointless nor redundant when viewed in the context of events as they were transpiring in 1968. San Francisco was about to enact a tax on commuters measured by gross income; a tax which was worded like a license tax. The Legislature desired to invalidate such tax. Therefore, the Legislature in section 50026 referred to any chartered city authorized to impose ... any tax on the privilege of earning a livelihood by an employee ... (the typical occupational license tax language that the San Francisco tax was written to resemble); then, went on to provide ... or any other tax, fee, or charge on or measured by the earnings, or any part thereof, of any employee ... (the actual tax measure adopted in the San Francisco tax). Having identified the kind of tax prohibited, section 50026 then went on to outlaw the levying of such a tax upon commuters unless the same tax were levied on residents. Realizing that by specifically invalidating the discriminatory feature of the San Francisco tax, section 50026 could be interpreted to imply that non discriminatory employee taxes measured by gross income were valid, the Legislature added a second paragraph directing that section 50026 ... shall not be construed  as authorizing any tax prohibited by section 17041.5. (Italics added.) Now the majority is doing exactly what the Legislature stated that it should not do. It is construing section 50026 so as to authorize a tax prohibited by section 17041.5. ( Ante, pp. 397-398.) For all of these reasons it is respectfully concluded that the Oakland tax, having the incidence and natural and legal effect of an income tax, is actually an income tax labeled and drafted to appear as a license tax. Having so concluded, it now becomes necessary to determine whether a chartered city may, in the exercise of powers conferred by the home rule provisions of the Constitution, levy such a tax.