Computer Service Tax Cases

Filed 12/10/07 Computer Service Tax Cases CA1/4

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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

Several consumers brought actions contesting imposition of sales and use taxes on optional service contracts sold with computers. At issue on this appeal is a petition for writ of mandate and declaratory relief by consumers seeking, among other things, a declaration of the unlawfulness of the tax and an order stopping collection of the tax. The trial court sustained a demurrer to the petition and dismissed the action. The court found the action barred by constitutional and statutory provisions that preclude lawsuits to prevent tax collection. (Cal. Const., art. XIII,  32; Rev. & Tax. Code,  6931.) Tax disputes may be resolved by a postpayment refund action but the consumers here declined the courts invitation to pursue that remedy. (Cal. Const., art. XIII,  32; Rev. & Tax. Code,  6933.) This appeal concerns the narrow procedural issue of whether constitutional and statutory anti-injunction provisions bar this action, as the trial court found. We conclude that the action is barred, and affirm the judgment of dismissal.

facts

Appellants Jonathan A. Bloom, DDS, Inc. (Bloom) and Rosenfeld Law Corporation (Rosenfeld) are California corporations and taxpayers. Respondent California State Board of Equalization (SBE) is the state agency charged with collecting sales and use taxes.[1] Real parties in interest Dell, Inc., Dell Catalog Sales L.P., and Dell Marketing L.P. (collectively, Dell) are Texas-based corporations that sell and market computer systems and related service contracts.

On November 16, 2005, appellants filed a petition for writ of mandate in San Francisco Superior Court. Appellants alleged that they purchased Dell products with optional service contracts for a  lump sum charge  and paid use tax on the entire purchase amount. Appellants maintained that the tax collected on the service contract component of the purchase was unlawful because service contracts are not tangible personal property subject to tax. Appellants sued on their own behalf and on behalf of a class of other California taxpayers similarly situated. Appellants sought a writ ordering SBE to investigate Dells tax collection practices; ordering SBE and Dell to stop collecting use tax on optional service contracts; ordering Dell to disclose its past collection of use or sales tax on service contracts and henceforth to state separately the amount of the service contract on customer invoices; and ordering SBE and Dell to provide restitution to Dell customers charged a use tax on optional service contracts.

Appellants writ petition was filed after other consumer actions challenging Dells tax practices had been instituted and coordinated for resolution. (Cal. Rules of Court, rule 3.521.) Appellants petition was added to the coordinated proceeding, Computer Service Tax Cases.

SBE demurred to appellants writ of mandate petition on the ground that the imposition of a tax may not be challenged in a mandate action. Under Californias pay now, sue later laws, petitioners sole remedy is a refund action. SBE advocated that the petition be denied with leave to amend to allege a refund action. Appellants, in response, insisted that a writ of mandate is the proper remedy. In April 2006, the trial court sustained the demurrer with leave to amend.

Appellants filed an amended petition for writ of mandate and declaratory relief, which is the pleading at issue on this appeal. Appellants reasserted many of the same allegations but added allegations that appellant Rosenfeld filed a postpayment administrative refund claim that SBE denied, and appellant Bloom paid the tax but did not file an administrative refund claim because it was futile. Appellants sought the same relief as in the original petition, with an additional claim for declaratory relief as to the unlawfulness of the challenged tax.

SBE demurred to the amended petition on the same ground as it demurred to the original petition: tax disputes must be resolved by refund actions. SBE asked that its demurrer be sustained and that appellants, if granted leave to amend, be limited to claiming a tax refund for Rosenfeld. Appellants replied that they were not interested in a refund and wanted to challenge the legality of the tax by mandate and declaratory relief proceedings. At the hearing on the demurrer, appellants counsel declined the courts invitation to file a second amended petition eliminating the mandate and declaratory relief claims and asserting a refund claim only. The court sustained the demurrer without leave to amend upon concluding that the action for mandate and declaratory relief were barred by constitutional and statutory anti-injunction provisions because the remedies appellants sought would interfere with SBEs collection of the [disputed] tax. (Cal. Const., art. XIII,  32; Rev. & Tax. Code,  6931.) Judgment of dismissal was filed on September 28, 2006.

Following dismissal of appellants amended petition, the coordinated proceeding challenging Dells tax collection practices continued. In June 2007, the trial court issued a decision finding that Dells service contracts were not subject to sales or use taxes. That decision is under separate review. (Computer Service Tax Cases (A118657).) Here, we are concerned solely with the procedural question of whether appellants amended petition for mandate and declaratory relief was barred by provisions that preclude lawsuits seeking to enjoin tax collection. We now turn to that question.

discussion

The California Constitution provides: No legal or equitable process shall issue in any proceeding in any court against this State or any officer thereof to prevent or enjoin the collection of any tax. After payment of a tax claimed to be illegal, an action may be maintained to recover the tax paid, with interest, in such manner as may be provided by the Legislature. (Cal. Const., art. XIII,  32.) The manner provided by the Legislature for recovery of use taxes is to file an administrative claim for a refund. (Rev. & Tax. Code,  6901.) Both individual and class claims may be filed. (Rev. & Tax. Code,  6901, 6904.) If a taxpayers administrative refund claim is denied, the taxpayer may file a judicial tax refund action against the SBE. (Rev. & Tax. Code,  6933.) In the context of use taxes, the Legislature has repeated, in somewhat different language, the constitutional ban on lawsuits preventing tax collection: No injunction or writ of mandate or other legal or equitable process shall issue in any suit, action, or proceeding in any court against this State or against any officer of the State to prevent or enjoin the collection under this part [of the code] of any tax or any amount of tax required to be collected. (Rev. & Tax. Code,  6931.)

The California Supreme Court has stated that the constitutional anti-injunction provision establishes that the sole legal avenue for resolving tax disputes is a postpayment refund action. A taxpayer may not go into court and obtain adjudication of the validity of a tax which is due but not yet paid. (State Bd. of Equalization v. Superior Court (1985) 39 Cal.3d 633, 638.) Our high court has explained that [t]he important public policy behind this constitutional provision is to allow revenue collection to continue during litigation so that essential public services dependent on the funds are not unnecessarily interrupted.  (Ibid.) It is also well-settled that [t]he constitutional provision has been construed broadly to bar not only injunctions but also a variety of prepayment judicial declarations or findings which would impede the prompt collection of a tax. (Id. at p. 639.) In addition to injunctions, actions for a writ of mandate or declaratory relief that would prevent tax collection are barred. (Id. at pp. 639-640.)

The trial court properly found that appellants petition for a writ of mandate and declaratory relief are constitutionally barred. Appellants asked the court to command Respondent SBE and its agent, Real Party DELL to cease the imposition, collection, and payment of use tax and sales tax on DELLs optional extended service warranty contracts. Plainly, such an order would impede tax collection in violation of the constitution. (Cal. Const., art. XIII,  32.)

Appellants have shifted the focus of their efforts on appeal, and now emphasize their petitions request for declaratory relief as to the unlawfulness of the challenged tax. Appellants argue that, [w]hether or not [they] are entitled to any other relief, they can bring an action for declaratory judgment challenging the validity of the SBEs underground regulation that service contracts are taxable if they are sold bundled with tangible property.

Appellants rely upon Government Code section 11350, which authorizes an action for declaratory relief to determine the validity of an administrative regulation. But the California Supreme Court has cautioned that this statute is strictly construed in tax cases and may not be used to prevent the state from collecting taxes. . . . (Woolsey v. State of California (1992) 3 Cal.4th 758, 785, fn. 20.) This District Court of Appeal has similarly warned that [c]are must be taken in judicial proceedings that any relief in tax cases be limited to a  declaration as to the validity of a questioned regulation. (Pacific Motor Transport Co. v. State Bd. of Equalization (1972) 28 Cal.App.3d 230, 236 (Pacific Motor).) The relief afforded may not prevent or enjoin or otherwise hamper present or future tax assessment or collection effort against the plaintiff or anyone . . . . (Ibid.) In Pacific Motor, the court allowed an action for a declaration that a tax regulation was invalid and void, while disallowing a declaration on plaintiffs particular tax liability under the regulation. (Id. at pp. 234-236.) The court recognized that adjudications on the validity of tax regulations affect future tax collections but found no harm to the public policy underlying provisions against tax injunctions. Rather than an impediment [to the tax collection process], such decisions [adjudicating the validity of tax regulations] must be considered as an aid of tax collection, for they tend to add certainty and conclusive legality to the process. (Id. at p. 236.)

Appellants effort to refashion its petition as one seeking a narrow declaration on the validity of an administrative regulation is unavailing. As a preliminary matter, it is far from clear that SBEs collection of use taxes on computer service contracts constitutes a regulation subject to challenge in a declaratory relief action under Government Code section 11350. Indisputably, there is no formal administrative regulation at issue here, as there was in Pacific Motor. (Pacific Motor, supra, 28 Cal.App.3d at p. 233.) Appellants argue that SBEs imposition of use taxes on service contracts is an underground regulation, meaning an agency rule of general application in noncompliance with

the Administrative Procedure Act (APA, Gov. Code,  11340 et seq.), which requires that regulations satisfy procedural guidelines like public notice and hearing. The courts have recognized that informal policies may constitute regulations within the meaning of the APA, which broadly defines regulation to include every rule, regulation, order, or standard of general application. (Gov. Code,  11342.600; Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557, 571-572.)

SBE and Dell respond that appellants do not challenge a regulation, but SBEs interpretation of tax statutes. [I]nterpretations that arise in the course of case-specific adjudication are not regulations. (Tidewater Marine Western, Inc. v. Bradshaw, supra, 14 Cal.4th at p. 571.) Appellants insist that SBEs position on the taxation of service contracts sold with computers is not a case-specific adjudication but a long-standing regulation of general application. In support of their claim, appellants note that SBE staff sent an advice letter to Dell in 1992 opining that service contracts sold with computers are taxable, unless the value of the contract is separately stated. But advice letters represent nothing more than a case-specific opinion and are excluded from the APA definition of a regulation. (Ibid.)

In any event, appellants petition was properly dismissed even if we accept their claim that SBEs taxation of service contracts constitutes a regulation. While a declaratory relief action seeking to invalidate a tax regulation is permitted (Pacific Motor, supra, 28 Cal.App.3d at pp. 235-236), such relief may be denied when a taxpayer has an adequate remedy at law, like a claim for refund followed by a suit for refund. (Star-Kist Foods, Inc. v. Quinn (1960) 54 Cal.2d 507, 511; Schoderbeck v. Carlson (1980) 113 Cal.App.3d 1029, 1037-1038, disapproved on another point in Woolsey v. State of California, supra, 3 Cal.4th at p. 792; Honeywell, Inc. v. State Bd. of Equalization (1975) 48 Cal.App.3d 907, 911-914 (Honeywell).) As the Honeywell court observed, the statute authorizing declaratory relief actions challenging the validity of a regulation was  intended to permit persons affected by an administrative regulation to test its validity without having to enter into contracts with third persons in violation of its terms or to subject themselves to prosecution or disciplinary proceedings. [Citation.] But that reason no longer exists after a taxpayer has entered into a transaction which the taxing authorities claim is taxable. When the taxpayer has completed a transaction, resort to declaratory relief is no longer necessary or appropriate since the tax liability, if any, has accrued and therefore normal administrative processes, subject to judicial review, are adequate and accomplish the same result. (Honeywell, supra, at p. 912, italics omitted.)

Appellants had an adequate remedy at law. Both Bloom and Rosenfeld paid the disputed tax and therefore could bring an administrative claim for a refund. Rosenfeld did file a claim, and SBEs denial of the claim permitted him to challenge the tax in superior court. A refund suit would have raised the same issues appellants sought to raise here concerning the validity of the use tax imposed on service contracts. This case is therefore distinguishable from Andal v. City of Stockton (2006) 137 Cal.App.4th 86, upon which appellants rely. In that case, plaintiffs challenged the constitutionality of a local tax ordinance, and the court allowed the action to proceed because the administrative refund remedy provided no mechanism for a constitutional challenge or other adequate legal remedy. (Id. at pp. 90-94.) In contrast, the allegation that use taxes are illegally collected on computer service contracts is well within the purview of an administrative claim and, upon a denial of the claim, taxpayers are afforded access to superior court for a judicial determination on the validity of the tax. (Rev. & Tax. Code,  6901, 6933.)

Appellants suggest that a refund suit may redress the wrong done to them but is inadequate to prevent future harm to other taxpayers because only a declaration of the taxs invalidity will compel SBE to stop flaunt[ing] the tax laws. We will not assume, as appellants invite us to do, that SBE would disregard an adverse ruling on its interpretation of tax laws and willfully ignore its duty to administer the tax laws fairly and honestly. (See Schoderbeck v. Carlson, supra, 113 Cal.App.3d at p. 1038.)

disposition

The judgment is affirmed.

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Sepulveda, J.

We concur:

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Ruvolo, P. J.

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Rivera, J.

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[1] A sales tax is a tax on the freedom of purchase . . . . A use tax is a tax on the enjoyment of that which was purchased. (McLeod v. Dilworth Co. (1944) 322 U.S. 327, 330.) For intrastate sales, California imposes a sales tax on the retailer; for interstate sales, California imposes a use tax on the purchaser. (Brandtjen & Kluge, Inc. v. Fincher (1941) 44 Cal.App.2d Supp. 939, 942.) Both sales and use taxes are collected by retailers and forwarded to SBE.