Weekes v. City of Oakland

579 P.2d 449, 21 Cal. 3d 386, 146 Cal. Rptr. 558, 1978 Cal. LEXIS 237

• Court: California Supreme Court
• Decided: May 30, 1978
• Docket: S.F. 23598
• Status: Published

Opinions

Opinion

THE COURT.

May a chartered city, in the exercise of powers conferred by the home rule provision of the California Constitution (art. XI, § 5, subd. (a)), levy upon all persons employed within the city a tax measured by the compensation received from employers, notwithstanding. an express statutory prohibition against municipal taxes “upon income”? (Rev. & Tax. Code, § 17041.5; all statutory references are to that code, unless otherwise cited.) This is the issue presented to us following the City of Oakland’s adoption in June 1974 of Municipal Code section 5-1.65, which provides for an “employee license fee” upon the “privilege of engaging in or following any business, trade, occupation or profession as an employee.” The fee is measured by the employee’s “gross receipts” for services performed in Oakland and consists generally of 1 percent of Oakland-derived earnings. (Oakland Mun. Code, § 5-1.65.) Thus, we examine the interplay of a state constitutional authorization, a statutory prohibition, and a municipal ordinance enacted by a chartered city.

Plaintiffs and interveners, all subject to the ordinance and potential taxpayers, assert that the levy, although denominated a “license fee,” is essentially a municipal income tax, which has been imposed in contravention of the following express legislative prohibition of section 17041.5: “Notwithstanding any statute, ordinance, regulation, rule or decision to the contrary, no city, county, city and county, governmental subdivision, district, public and quasi-pubhc corporation, municipal corporation, whether incorporated or not or whether chartered or not, shall levy or collect or cause to be levied or collected any tax upon the income, or any part thereof, of any person, resident or nonresident, [f] This section shall not be construed so as to prohibit... any otherwise authorized license tax upon a business measured by or according to gross receipts.”

The city offers in support of the ordinance essentially two arguments, the ultimate validity of which is pivotal herein: first, that the license fee is not a tax upon income but a business or occupation tax measured by gross receipts; and second, that even if it is an income tax the levy is a legitimate exercise of a chartered city’s revenue-raising power which the Legislature is without authority to prohibit.

We conclude that the fee is what it purports to be, namely, an occupation tax substantially resembling the type of municipal license fee long approved by us and expressly authorized by the final paragraph of section 17041.5. In view of our conclusion in this regard, we need not, and do not, reach the further question whether the Legislature is prevented by the home rule provision of the California Constitution from imposing an absolute ban upon revenue-raising measures of this nature enacted by chartered cities.

We briefly examine certain characteristics of the subject ordinance, and observe that it exacts an employee license fee for the privilege of engaging, within the city, in any business, trade, occupation or profession (other than that of domestic servant in a private home) as an employee. The fee is measured by the employee’s “gross receipts” in excess of $1,625 per quarter. The ordinance defines “gross receipts” as “compensation,” which includes “the total gross amount of all salaries, wages, commissions, bonuses, or other money payments of any kind or any other considerations having monetary value, which a person receives from or is entitled to receive from or be given credit for by his employer” for services rendered within the City of Oakland (Oakland Mun. Code, § 5-1.65(g).) Travel and business-expense allowances or reimbursements are excluded from gross receipts, but there is no deduction for business-related expenses. If an “employee” has an ownership interest in a business and is thereby liable for a portion of the city business license fee already imposed upon owners and operators of businesses, he is entitled to an appropriate credit against the employee license fee. Provision is made for an apportionment between compensation earned in Oakland, which is subject to tax, and compensation attributable to activities outside Oakland, which is tax exempt.

Although the employee is the actual taxpayer, the ordinance requires employers to collect the license fee by withholding tax from each employee’s paycheck. The employer must remit payments to the city treasurer on a quarterly basis, but if he fails to do so, or if the license fee liability of a particular employee is not completely accounted for by withholding, the employee himself is obliged to file an annual return. The ordinance does not provide for the actual issuance of any certificate of compliance or “license,” although it makes payment of the license fee a condition precedent to continued employment in the city.

It will thus be seen that any person employed in Oakland, whether a resident or nonresident, owes the city 1 percent of his Oakland-generated compensation for the privilege of earning a living there. Residents of Oakland who are employed elsewhere are not subject to the license fee.

In reviewing the applicable law we acknowledge, preliminarily, the long standing principle that the power to raise revenue for local purposes is not only appropriate but, indeed, absolutely vital for a municipality. (United States v. New Orleans (1878) 98 U.S. 381, 393 [25 L.Ed. 225, 226]; Ex Parte Braun (1903) 141 Cal. 204, 209 [74 P. 780].) Moreover, the power to tax for local purposes clearly is one of the privileges accorded chartered cities by the home rule provision of the California Constitution (Cal. Const., art. XI, § 5, subd. (a); West Coast Adver. Co. v. San Francisco (1939) 14 Cal.2d 516, 524, 526 [95 P.2d 138]; Ex Parte Braun, supra, 141 Cal. at pp. 211-212; Franklin v. Peterson (1948) 87 Cal.App.2d 727, 732 [197 P.2d 788].)

Thus, Oakland’s right to enact a revenue-raising tax is not at issue unless the city’s own charter imposes restrictions upon its taxing power (which the parties concede it does not), or the city ordinance is in direct and immediate conflict with a state statute or statutory scheme. (Bishop v. City of San Jose (1969) 1 Cal.3d 56, 62 [81 Cal.Rptr. 465, 460 P.2d 137]; Pipoly v. Benson (1942) 20 Cal.2d 366, 370 [125 P.2d 482, 147 A.L.R. 515].) Since section 17041.5 by its terms bars only a municipal tax “upon income,” there exists no conflict between statute and ordinance if the license fee under examination is not a tax upon income. (Cf., Rivera v. City of Fresno (1971) 6 Cal.3d 132 [98 Cal.Rptr. 281, 490 P.2d 793].)

In the ordinance itself, the levy at issue is described as a “license fee,” and the city refers to it as an “occupation” or “business” tax. We have said, of course, that the legislative designation of a particular tax, though persuasive, is not determinative as to its nature. (Ex Parte Braun, supra, 141 Cal. 204, 206; In re Johnson (1920) 47 Cal.App. 465, 466 [190 P. 852]; see Beamer v. Franchise Tax Board (1977) 19 Cal.3d 467, 475 [138 Cal.Rptr. 199, 563 P.2d 238].) The character of a tax is ascertained from its incidents, not its label. (Ainsworth v. Bryant (1949) 34 Cal.2d 465, 473 [211 P.2d 564]; Ingels v. Riley (1936) 5 Cal.2d 154, 159 [53 P.2d 939, 103 A.L.R. 1].)

Approaching the difficult task of classification of the particular levy before us, we note first numerous differences between the license fee and the typical income tax. For example, the provision which defines “gross income” for state income tax purposes (§ 17071, substantially identical to its federal counterpart, Int. Rev. Code, § 61), includes not only “compensation for services” and “gross income derived from business” but “interest,” “rents,” “royalties,” “annuities,” “income from discharge of indebtedness,” “income from an interest in an estate or trust,” and other items and sources of revenue which the Oakland tax does not purport to reach. Moreover, the traditional assessment commonly recognized as an income tax is ordinarily a tax upon net income—that is, gross income reduced by other taxes, business expenses, and costs incurred in the production of the income. The Oakland ordinance, in contrast, expressly includes, as compensation subject to the levy, sums deducted “before ‘take home’ pay is received” (Oakland Mun. Code, § 5-1.65(g)) and forbids deduction of business-related expenses, except that the taxpayer may claim a credit for any other business license tax paid to the city. The city contends, accordingly, that the “gross receipts” characteristic of the license tax, together with the availability of a credit for license fees exacted from persons with ownership interests in the business, sufficiently distinguishes the Oakland levy from an “income” assessment and evidences a distinctive, comprehensive, and coordinated business tax system.

Moreover, this tax differs in significant respects even from a conventional municipal income tax, which ordinarily is much simpler both in structure and operation than its state and federal counterparts. City income taxes, as they exist in jurisdictions which permit direct municipal taxation of income, tend to be nongraduated, proportional levies upon earned income only, generally resembling the Oakland tax. (Legislative Developments, The Limits of Municipal Income Taxation: The Response in Ohio (1970) 7 Harv.J.Leg. 271, 273; Januta, The Municipal Revenue Crisis: California Problems and Possibilities (1968) 56 Cal.L.Rev. 1525, 1555 & fn. 151; 4 Assem. Interim Com. Rep. (1964) No. 13, Financing Local Government in Cal., p. 52.) Typically, however, cities imposing income taxes seek to tax all earned income of city residents, whether for services rendered inside or outside the taxing jurisdiction. (See Legislative Developments, supra; Januta, supra, at pp. 1554-1555, fns. 149-150.) The ordinance before us, in contrast, measures the applicable tax only by Oakland-derived earnings. A traveling salesman, for example, whose income is generated by activities both inside and outside the city, will pay a license fee measured solely by income from his intracity activities, and an Oakland resident who is employed elsewhere escapes the license tax entirely. Further, the Oakland tax measured by employee earnings is correlated, by means of a tax credit, with the city’s general gross receipts business tax upon owners and employers, whereas city income tax schemes generally contain a provision for taxing the net earnings of business entities. (Legislative Developments, supra; Januta, supra, 56 Cal.L.Rev. at p. 1555, fn. 151; Financing Local Government, supra, at pp. 54-55.)

It appears, accordingly, that Oakland’s license fee, though closely tied to “income or [a] part thereof’ in terms of the designated measure of tax liability, bears no immediate, compelling resemblance to the more familiar income taxation models which section 17041.5 unquestionably purports to bar. Since the city has labeled the fee an “occupation license tax,” a brief comparison of its provisions with those characteristic of the traditional business tax is instructive.

A business or occupation tax is usually defined as a revenue-raising levy upon the privilege of doing business within the taxing jurisdiction. (In re Groves (1960) 54 Cal.2d 154, 157 [4 Cal.Rptr. 844, 351 P.2d 1028]; Ainsworth v. Bryant, supra, 34 Cal.2d 465, 474; In re Galusha (1921) 184 Cal. 697, 699 [195 P. 406].) The tax or “license fee” is often measured by gross receipts (see Franklin v. Peterson, supra, 87 Cal.App.2d 727; Estes v. City of Gadsden (1957) 266 Ala. 166 [94 So.2d 744]; cf. § 17041.5), and payment is ordinarily a condition precedent to continued exercise of the privilege made subject to tax. (Ingels v. Riley, supra, 5 Cal.2d 154, 159.)

The gross receipts occupation tax has a venerable history as a revenue-raising measure for California cities. (See, e.g., General Motors Corp. v. City of Los Angeles (1971) 5 Cal.3d 229, 235, fn. 4 [95 Cal.Rptr. 635, 486 P.2d 163] [privilege of manufacturing and selling]; City of Los Angeles v. Belridge Oil Co. (1954) 42 Cal.2d 823, 831 [271 P.2d 5] [privilege of engaging in the activity of selling]; In re Nowak (1921) 184 Cal. 701, 703 [195 P. 402] [conducting, managing and carrying on the business of retail grocer]; In re Galusha, supra, 184 Cal. 697, 699, and Franklin v. Peterson, supra, 87 Cal.App.2d 727, 730 [the practice of law]; Ex Parte Braun, supra, 141 Cal. 204, 205 [numerous professions and occupations]; Marsh & McLennan of Cal., Inc. v. City of Los Angeles (1976) 62 Cal.App.3d 108, 111, 112 [132 Cal.Rptr. 796] [any trade, calling, occupation, vocation, profession or other means of livelihood conducted or engaged in as an independent contractor].)

The Oakland tax challenged herein differs materially from most other occupation taxes heretofore reviewed and approved by us in only two. respects: (1) it is not made applicable merely to enumerated or genetically identified businesses (e.g., “retail sales”), but purports to encompass all trades and professions; and (2) it reaches the individual employee, in contrast to the more typical occupation or license tax which burdens only owners and independent contractors. Seizing upon the novel features of the Oakland scheme, plaintiffs argue that a tax fastened upon the owners and sole proprietors of particular businesses, and measured by the gross receipts of those businesses, is a legitimate occupation tax; but a tax upon those persons who follow their trades or callings as employees, and measured by compensation, can be nothing but an income tax. We are not convinced that this conclusion is either necessary or logical.

The Oakland license fee, it is true, does apply to all trades, professions and callings practiced within the city, without specification or distinction. Yet the power of a governmental entity to tax the privilege of engaging in any and all types of trade or business within its jurisdiction is not open to serious question. Indeed, the power to impose a reasonable privilege tax extends even to those activities which the city can neither forbid (City of Glendale v. Trondsen (1957) 48 Cal.2d 93, 104 [308 P.2d 1]; see Steward Machine Co. v. Davis (1937) 301 U.S. 548, 578-581 [81 L.Ed. 1279, 1286-1288, 57 S.Ct. 883, 109 A.L.R. 1293]), nor regulate (In re Groves, supra, 54 Cal.2d 154, 156; In re Galusha, supra, 184 Cal. 697, 699). As expressed by the United States Supreme Court, “An excise is not limited to vocations or activities that may be prohibited altogether. It is not limited to those that are the outcome of a franchise. It extends to vocations or activities pursued as of common right.” (Steward Machine Co. v. Davis, supra, at pp. 580-581 [81 L.Ed. at p. 1287].) Clearly, a single tax broad enough to include all businesses, callings and trades within its ambit is a perfectly proper business tax, and in fact the typical municipal business license tax scheme is so comprehensive that virtually all businesses are covered. (See, e.g., Marsh & McLennan of Cal., Inc. v. City of Los Angeles, supra, 62 Cal.App.3d 108, 111-112.) It does not, by virtue of its encompassing character, become an income tax.

We perceive no reason why a different principle should apply if a tax of this nature is levied upon the privilege of engaging in an occupation as an employee rather than as a proprietor or independent contractor. The traditional business tax differentiation between owners and independent contractors, on the one hand, and employees, on the other, may be, and indeed is, a reasonable distinction for tax purposes, but it is by no means a mandatory one. A taxing entity may choose to impose an excise tax only upon attorneys, electricians and stenographers who own their businesses or operate independently, but it cannot be said that it lacks the power also to require the license fee of attorneys, electricians and stenographers who sell their services to employers. The license fee is no less a tax on the privilege of doing business in the second case than in the first. “In statutes relating to license taxes, the word ‘business’ means that which occupies the time, attention and labor of men for the purposes of livelihood or for profit.” (Long v. City of Anaheim (1967) 255 Cal.App.2d 191, 197 [63 Cal.Rptr. 56].) Moreover, as has been said on the highest authority, “Employment is a business relation, if not itself a business.... The power to tax the activities and relations that constitute a calling considered as a unit is the power to tax any of them. The whole includes the parts.” (Steward Machine Co. v. Davis, supra, 301 U.S. at p. 581 [81 L.Ed. at pp. 1287-1288].)

As the city’s right to tax the privilege of employment is virtually beyond dispute, the sole remaining issue is whether an otherwise legitimate excise tax upon that privilege is necessarily converted to an income tax simply because the tax liability is measured by employee compensation. We think not.

It has long been established that the measure, or mode of ascertaining a particular tax is not conclusive as to its type or nature. (Rosemary Properties, Inc. v. McColgan (1947) 29 Cal.2d 677, 681 [177 P.2d 757] [a franchise tax measured by net income is not an income tax]; Franklin v. Peterson, supra, 87 Cal.App.2d 727, 733 [a gross receipts occupation tax is not an income tax]; Estes v. City of Gadsden, supra, 94 So.2d 744, 750 [occupation tax levied upon employees and measured by compensation is not an income or property tax]; City of Louisville v. Sebree (1948) 308 Ky. 420 [214 S.W.2d 248, 253-254] [occupation tax measured by employee compensation, as to individuals, and by net profits as to businesses, is an excise, not an income tax].) In Ingels v. Riley, supra, 5 Cal.2d 154, the petitioner asserted that a vehicle license tax measured by the value of the vehicle was in effect a property tax, entitling him to a veteran’s exemption. We held that “if a tax [is] in its nature a privilege tax, it does not become a property tax simply because it is proportioned in amount to the value of the property used in connection with the privilege which is taxed.” (Id., at p. 160.) Since the license tax was payable only if the vehicle was operated upon the public highways, we concluded that it was essentially a privilege tax. Similarly, Oakland’s license fee is exacted only from persons who in fact exercise the privilege of selling their skills and services within the City of Oakland, and only to the extent that they do so. Using compensation as the measure of the tax liability is a proper means of meeting constitutional requirements by scaling the tax to “the quantum of business actually done in the taxing jurisdiction.” (City of Los Angeles v. Shell Oil Co. (1971) 4 Cal.3d 108, 124 [94 Cal.Rptr. 1, 480 P.2d 953]; General Motors Corp. v. City of Los Angeles, supra, 5 Cal.3d 229, 238-239.)

A close examination of both the purpose and the operation of the challenged ordinance does not persuade us that the license fee either in logic or necessity must be considered an income tax. Therefore, the deference due to the city’s own description of its revenue-raising measure (Ainsworth v. Bryant, supra, 34 Cal.2d 465, 469; Ingels v. Riley, supra, 5 Cal.2d 154, 160) may properly be treated as an element of some weight favoring the conclusion that the levy is indeed an excise tax legitimately measured by employee compensation. As we have recently observed in A.B.C. Distributing Co. v. City and County of San Francisco (1975) 15 Cal.3d 566, 576 [125 Cal.Rptr. 465, 542 P.2d 625], “[A]ll taxes necessarily involve some reduction of and relationship to available revenues.” This particular privilege tax is related, and properly so, to the compensation derived from exercise of the burdened privilege, and that compensation will of course be reduced by payment of the tax. But the essential fact, for our present purpose, is that it is the privilege, not the income generated by its exercise, that is the direct and immediate subject of the tax. (See City of Louisville v. Sebree, supra, 214 S.W.2d 248, 253-254.)

We note finally that any remaining doubt as to the compatibility of Oakland City Ordinance No. 9021 with section 17041.5 is resolved by a brief perusal of Government Code section 50026. This latter provision, enacted five years after the statute barring municipal income taxes, prohibits any local entity otherwise entitled to enact a tax “on the privilege of earning a livelihood by an employee ... on or measured by the earnings, or any part thereof,” from imposing such a tax upon employees who are not residents of the taxing jurisdiction, “unless exactly the same tax ... with the same credits and deductions, is imposed on the earnings of all residents of the taxing jurisdiction who are employed therein.” The Government Code section expressly cautions that it is “not [to] be construed as authorizing any tax prohibited by Section 17041.5 of the Revenue and Taxation Code.” Nevertheless, Government Code section 50026, which plainly bars discriminatory municipal occupation taxes measured by employee compensation, is pointless and redundant if section 17041.5 is construed as enjoining all municipal occupation taxes measured by employee compensation, on the theory that they are necessarily income taxes. We have traditionally been reluctant to interpret a statute in such a way as to render it, or another existing provision, unnecessary. (Bowland v. Municipal Court (1976) 18 Cal.3d 479, 489 [134 Cal.Rptr. 630, 556 P.2d 1081]; People v. Gilbert (1969) 1 Cal.3d 475, 480 [82 Cal.Rptr. 724, 462 P.2d 580]; Select Base Materials v. Board of Equal. (1959) 51 Cal.2d 640, 647 [335 P.2d 672].) We see no reason either to avoid or to ignore application of that principle here.

For all of the foregoing reasons, we hold that section 17041.5 prohibiting municipal taxes “upon income” is not in conflict with, and does not bar the operation of, Oakland’s employee license fee.

We also conclude that the City of Oakland is not barred from imposing its license tax upon state employees who work within the city (cf. Graves v. N. Y. ex rel. O'Keefe (1939) 306 U.S. 466, 486-487 [83 L.Ed. 927, 936-937, 59 S.Ct. 595, 120 A.L.R. 1466]); nor does the tax discriminate unreasonably against Oakland residents who are employed in the city, merely because residents employed elsewhere are exempt. A governmental entity has broad power to classify for tax purposes (Fox etc. Corp. v. City of Bakersfield (1950) 36 Cal.2d 136, 141 [222 P.2d 879]; see Lehnhausen v. Lake Shore Auto Parts Co. (1973) 410 U.S. 356, 359 [35 L.Ed.2d 351, 354-355, 93 S.Ct. 1001]), and in matters of taxation, the “.. . test is ... whether the taxing power exerted ... bears fiscal relation to protection, opportunities and benefits given ....” (Wisconsin v. J. C. Penney Co. (1940) 311 U.S. 435, 444 [85 L.Ed. 267, 270, 61 S.Ct. 246, 130 A.L.R. 1229].) The privilege of engaging in a trade, employment, or calling within a municipality is a nexus with the city sufficiently distinct from residence therein to justify separate tax treatment in this instance.

The judgment is reversed.