CALIFORNIA DEPARTMENT OF TAX AND FEE ADMINISTRATION еt al., Petitioner, v. SUPERIOR COURT, Respondent. JEREMY DANIEL KINTNER, Real Party in Interest.
B294400
Court of Appeal of California, Second Appellate District, Division Two
May 7, 2020
48 Cal.App.5th 922
Robert S. Draper, Judge
CERTIFIED FOR PUBLICATION; Super. Ct. No. BC684614
WRIT PETITION from an order of the Superior Court of Los Angeles County, Robert S. Draper, Judge. Petition granted.
Mark Bernsley for Real Party in Interest.
No appearance for Respondent.
FACTS AND PROCEDURAL BACKGROUND
I. Facts1
Back in 2009, HK Architectural Supply, Inc. (“HK Architectural“) was a closely held corporation. Jeremy Daniel Kintner (plaintiff) was an officer and shareholder in HK Architectural, and in that capacity controlled its operations.
On May 28, 2009, the California Franchise Tax Board suspended HK Architectural‘s corporate status. Despite being suspended, HK Architectural continued to do business but did not pay any sales tax.
In February 2012, the Board of Equalization (the Board) assessed plaintiff for the amount of sales tax that HK Architectural owed but never remitted to the Board for the last three quartеrs of 2009. The Board initially assessed plaintiff $71,408 in unpaid taxes and penalties, but subsequently reduced the assessment to $67,389.53 (exclusive of interest).2 The Board assessed plaintiff pursuant to (1) a 1980 “policy” of holding the “officers and shareholders
As did the trial court, we grant the California Department of Fee and Tax Administrаtion‘s request for judicial notice. (
II. Procedural Background
A. Original complaint
In November 2017, plaintiff sued the Board and its successor entity, the California Department of Tax and Fee Administration (the Department).3 Plaintiff alleged three claims for declaratory relief—two seeking declarations that the Policy and the Regulation, respectively, constituted an “illegal and unconstitutional exercise of legislative power,” and one seeking a declaration that the Board‘s refusal to consider challenges to the Policy or Regulation during administrative proceedings violated due process. As relief, plaintiff prayed for declarations that the Policy and Regulation “may not be implemented, enforced or otherwise relied upon” and that the assessment against plaintiff “was illegal, unconstitutional and void.”
The trial court granted judgment on the pleadings to the Board and the Department. Because plaintiff had not paid the sales tax he was challenging, the court reasoned, the “pay-first, litigate-second rule” set forth in the “text” of the ”
B. First amended complaint
1. Allegations
In June 2018, plaintiff filed a first amended complaint. Contrary to the conditions of the trial court‘s grant of leave to amend, the first amended complaint was not a refund action because plaintiff had yet to pay—or file an administrative refund claim for—the vast majority of the outstanding tax assessment. Indeed, it was not until after he filed his original complaint that plaintiff paid—and filed an administrative refund claim for just 11 pеrcent of the assessed amount (that is, $7,450.98 of the $67,389.53 assessed tax liability).
Plaintiff also alleged that he had standing to bring these claims for declaratory relief due to three distinct “interests and controversies“: (1) as a person against whom a tax had been assessed based on the Policy and the Regulation, (2) as a “responsible officer” of a different “closely held corporation” called JK Supply Corp. (“JK Supply“), against whom the Policy and Regulation could be applied in the future, and (3) as a “member[] of the public” and “citizen” of California interested in “hav[ing] all branches of government . . . act within the bounds of their constitutional authority.” Throughout the first amended complaint, plaintiff repeatedly cited
As relief, plaintiff prayed for a declaration that (1) the Policy and the Regulation are “illegal” and “violate[] the . . . Constitution,” and (2) “[a]ny purported liability based on the Policy” or the Regulation “is not a ‘tax’ or liability for a ‘tax’ for purposes of the Constitution and laws of California.” Plaintiff alleged that he did “not seek . . . to prevent or enjoin the collection of any tax.”
2. Demurrer
The Department demurred to the first amended complaint. After briefing and a hearing, the trial court overruled the demurrer. In its order, the court rejected plaintiff‘s argument that the 2012 assessments were not “taxes.” However, because plaintiff “omitted [from the first amended complaint] the prayer [from his original complaint] that [the Department‘s] assessment against him be absolved,” the court viewed plaintiff‘s lawsuit as “an action to determine the validity of а particular regulation.” This meant, the court continued, that plaintiff‘s lawsuit was “separate from any claim related to an individual‘s assessment” and “not one ‘maintained to recover the tax paid,‘” such that the pay-first rule did not apply. For support, the court cited
C. Writ petition
In December 2018, the Department filed a petition for a writ of mandate seeking an order overturning the trial court‘s ruling. In December 2019, we issued an alternative writ of mandate ordering the trial court to enter a new order sustaining the demurrer with leave to amend “to allege payment of the tax due and a claim for refund.” After the trial court declined to vacate its order, plaintiff filed a return and the Department filed a traverse.
The Department argues that the trial court erred in overruling its demurrer to plaintiff‘s first amended complaint because, in its view, the two declaratory relief claims alleged in that pleading are barred by the “pay-first, litigate-later” rule embodied in section 32. As a threshold matter, plaintiff argues that we should dismiss the Department‘s petition as inappropriate for writ review. We will examine the threshold issue first.
I. Propriety of Writ Review
Even though a trial court‘s ordеr overruling a demurrer is subject to review on appeal from the final judgment, an appellate court has the option to review such an order prior to final judgment through a writ of mandate. (San Diego Gas & Electric Co. v. Superior Court (1996) 13 Cal.4th 893, 912-913). However, writ review is appropriate only when (1) “the remedy by appeal would be inadequate” (Powers v. City of Richmond (1995) 10 Cal.4th 85, 113) or (2) the writ presents a “significant issue of law” or an issue of “widespread” or “public interest” (Brandt v. Superior Court (1985) 37 Cal.3d 813, 816; Fogarty v. Superior Court (1981) 117 Cal.App.3d 316, 321; Cryolife, Inc. v. Superior Court (2003) 110 Cal.App.4th 1145, 1151). Writ review is appropriate in this case because the Department‘s petition presents a significant issue of law (that is, whether a taxpayer may avoid the pay-first rule by challenging an unpaid assessment via a declaratory relief claim), and this is an issue of great public interest (because, as noted below, the pay-first rule is necessary to keep government running).
II. The Demurrer
In reviewing an order overruling a demurrer, we ask whether the operative complaint “states facts sufficient to constitute a cause of action” (Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126) and, if it does, whether that complaint nevertheless “‘disclose[s] some defense or bar to recovery’ [citation]” (Casterson v. Superior Court (2002) 101 Cal.App.4th 177, 183). In undertaking the inquiry, we accept as true all “‘material facts properly pleaded‘” аnd consider any materials properly subject to judicial notice. (Centinela Freeman, supra, 1 Cal.5th at p. 1010.) We independently review a trial court‘s order overruling a demurrer (Apple Inc. v. Superior Court (2017) 18 Cal.App.5th 222, 240), including its analysis interpreting constitutional and statutory provisions (California Advocates for Nursing Home Reform v. Smith (2019) 38 Cal.App.5th 838, 864).
The propriety of
A. Does section 32 apply to—and bar—plaintiff‘s declaratory relief claims?
California requires retailers to pay sales tax on the “tangible personal property” they sell at “retail.” (
The origin of this “pay first, litigate second” rule is section 32, which 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.”
(
Although section 32‘s plain language purports to preclude only “legal or equitable process . . . to prevent or enjoin the collection of any tax” until “[a]fter payment of [the disputed] tax” (
Because plaintiff has not paid the full amount of the sales tax he disputes, his declaratory relief claims are barred by section 32. Through his declaratory relief claims, plaintiff seeks a declaration that the Policy and the Regulаtion are “illegal” and “unconstitutional.” Because, as plaintiff elsewhere alleges, the outstanding tax assessment against him rests exclusively upon the validity of the Policy and the Regulation, a declaration that the Policy and the Regulation are “illegal” and “unconstitutional” would invalidate them and negate the sole basis of his outstanding and unpaid tax assessment. In short, the net result or effect of plaintiff‘s declaratory relief claims is to absolve him of tax liability.
What is more, the net result or effect of plaintiff‘s lawsuit does not go away just because he has also alleged that he is a member of the public with a general interest in making sure that the government stays within the lines of its constitutional authority and that he is an officer of a different closely held corporation to which the Policy or Regulation might be applied in the future should both he and that corporation refuse to pay sales tax. Were we to conclude otherwise, taxpayers with outstanding tax assessments could effortlessly evade section 32‘s “pay first” rule by alleging that they are also members of the public. Given that this would be true in nearly every case, seсtion 32 would become a dead letter.
B. Does section 11350 operate to exempt plaintiff‘s declaratory relief claims from section 32?
By its plain text,
Thus, we are squarely presented with the question: Is a declaratory relief claim authorized by
We conclude that declaratory relief claims brought by taxpayers with outstanding tax assessments are not exempt from section 32‘s “pay first” rule, even if brought pursuant to
First, this is the result dictated by the canons of statutory construction. One of the principal canons requires us to look first to the plain language of the provision at issue. (Jarrow Formulas, Inc. v. LaMarche (2003) 31 Cal.4th 728, 735).
Second, the purpose underlying
Third, our Supreme Court has already strongly suggested that
Plaintiff vehemently resists this conclusion and offers what boils down to four arguments in opposition.
First, he asserts that the weight of precedent is on his side. Pacific Motor, supra, 28 Cal.App.3d 230, he explains, expressly “hold[s] that the validity of an administrative tax regulation . . . may be determined by a declaratory relief action commenced under”
Although the language from Pacific Motor could be read expansively to create an exemption from section 32‘s “pay first” requirement, there is good reason not to read it so broadly—namely, (1) because Pacific Motor at no point indicated that the plaintiff in that case had any outstanding and unpaid tax assessment, and (2) because Pacific Motor itself narrowed the scope of its holding when it elsewhere ruled that a “tax regulation‘s validity” may be “determined” in a declaratory relief claim “so long as the tax collector is not hindered in his duties thereby” (Pacific Motor, supra, 28 Cal.App.3d at p. 236, italics added). In its proper context, it is difficult to read Pacific Motor as authorizing declaratory relief claims—such as those with the net result or effect of invalidating outstanding tax assessments—that do hinder tax collection.
Neither Agnew nor Pacific Gas lend Pacific Motor any greater stature. Agnew cited Pacific Motor in the course of finding that the declaratory relief action in that case was not “barred by” section 32 (Agnew, supra, 21 Cal.4th at p. 320), but the taxpayer-plaintiff in Agnew had complied with section 32 by paying the outstanding tax prior to filing suit (id. at p. 314); although he had not paid the interest on the assessment before filing suit, our Supreme Court ultimately held in Agnew that section 32‘s “pay first” requirement applied only to the tax liability itself and not the associated interest (id. at pp. 323, 327, 333). Because the taxpayer in Agnew did “pay first,” Agnew cannot be read to endorse the failure to do so. Pacific Gas cited Pacific Motor, but only to distinguish it as dealing with “the validity of a tax regulation.” (Pacific Gas, supra, 27 Cal.3d at p. 280, fn. 4.) Pacific Gas‘s holding thus did not rest on the validity of Pacific Motor; its seemingly favorable citation to Pacific Motor is thus dicta and hence not binding (e.g., Fireman‘s Fund Ins. Co. v. Maryland Casualty Co. (1998) 65 Cal.App.4th 1279, 1300-1301).
Properly read, Pacific Motor does not construe
Second, plaintiff contends that his declaratory relief claims should be permitted to proceed under
Third, plaintiff argues that he has carefully crafted the first amended complaint to be “solely a declaratory relief action,” that he has specifically disclaimed any request “to prevent or enjoin the collection of any tax,” and that granting his requested relief “would not compel [the Department] to take any specific action with respect to the assessment” against him. He acknowledges that his initial сomplaint sought a declaration that the Policy and Regulation “not be implemented, enforced or otherwise relied upon,” but now claims that his prior allegations regarding his outstanding tax assessments were “excessive detail” that was “unnecessary,” “distracting” and “[ir]relevant.”
We decline plaintiff‘s invitation to ignore the practical effect of his declaratory relief claims. As noted above, the applicability of section 32‘s “pay first” rule to declaratory relief claims depends on whether those claims have the “net result” or “effect” of аdjudicating the plaintiff‘s outstanding tax liability. (Loeffler, supra, 58 Cal.4th at pp. 1101, 1128; Woosley, supra, 3 Cal.4th at p. 785; Calfarm, supra, 48 Cal.3d at p. 838; Pacific Gas, supra, 27 Cal.3d at p. 280; O‘Hara, supra, 39 Cal.3d at pp. 638-640; Modern Barber, supra, 31 Cal.2d at p. 723.) Whether the existence of plaintiff‘s outstanding tax assessment was previously pled or is instead judicially noticed, that assessment exists, it will be affected by the adjudication of his declaratory relief claims, and that adjudication will bind the Department as it seeks to collect the unpaid assessment. We must disregard plaintiff‘s conclusory allegations to the contrary (Loeffler, at p. 1100 [on demurrer, “the reviewing court ‘does not assume the truth of contentions, deductions or conclusions of law‘“]), and must look at the substance and effect of his clаims rather than the labels he uses for them (see Urick v. Urick (2017) 15 Cal.App.5th 1182, 1197 [“[t]he effect of [a plaintiff‘s] proposed action . . . controls over the label that she gave to the remedy that she sought“]). To be blunt, one cannot plead around reality.
Lastly, plaintiff in passing suggests that denying him the right to pursue a declaratory relief claim under
Where an “action is barred as a matter of law, the demurrer is properly sustained without leave to amend.” (Cal. Auto. Dismantlers Ass‘n. v. Interinsurance Exch. (1986) 180 Cal.App.3d 735, 742.) As discussed above, section 32 bars plaintiff‘s declaratory relief claims unless and until he pays the full amount of the outstanding tax assessment. He admits he has not done so, and has declined to do so even after the trial court initially gave him leave to amend solely to allege a “refund action.” Accordingly, his claim is barred as a matter of law and the demurrеr must be sustained without leave to amend. In light of this outcome, we have no occasion to consider the merits of plaintiff‘s challenges to the Policy or the Regulation.
DISPOSITION
The petition is granted. A writ of mandate hereby issues directing the trial court to vacate its order overruling the demurrer to the first amended complaint, and to enter a new and different order sustaining the demurrer without leave to amend. This court‘s order staying the proceedings in the trial court is vacated. The Department is entitled to its costs incurred in this writ proceeding.
CERTIFIED FOR PUBLICATION.
HOFFSTADT, J.
We concur:
LUI, P.J.
CHAVEZ, J.