No one is satisfied with the trial court's action, and thus we have four appellants: (1) the Board, contending that the trial court should have left the Board's decision intact had it-the trial court-applied the correct standard of review and deferred to the Board's administrative expertise; (2) City C, essentially in agreement with the Board, contending that it should be confirmed as the sole recipient of the sales tax, and the Board's decision reinstated; and (3) and (4) Cities A and B, in essence contending that the Board's erroneous reasoning is sufficiently clear that they should be restored as the proper recipients of the sales tax as a matter of law. Cities A and B also contend they are entitled to more than the Board awarded, namely, to "full retroactive allocation."
BACKGROUND
The Statutory Framework
California has had a state sales tax since 1933. (Stats. 1933, ch. 1020; Rev. & Tax. Code,
The sales tax is imposed "for the privilege of selling tangible personal property at retail," and is calculated as a percentage of "the gross receipts of the retailer from the sale of all tangible personal property sold by that person at retail." (§ 7202, subd. (a); see § 6051 [same for state tax].) As we explained recently: "The sales tax is imposed on retailers .... 'The retailer is the taxpayer, not the consumer.' [Citation.] The central principle of the sales tax is that retail sellers are subject to a tax on their 'gross receipts' derived from retail 'sale' of tangible personal property.[
When last we visited the subject, we concluded that as state law did not address "when transfer of title occurs," the Board did not exceed its authority "by using section 2401, subdivision (2), of the California Uniform Commercial Code to determine that issue." ( City of South San Francisco , supra ,
The concept of transfer of title, particularly where and when it occurs, is central to this controversy.
The Taxpayer's Operations
Up to January 1, 2006, Medline Industries, Inc. (Medline), a privately held Illinois corporation, shipped its retail health care products to Medline-owned
The order is reviewed at the Ontario facility. If there is no difficulty or problem with the order, it is "fulfilled" by MedTrans picking up the desired goods at a warehouse and then delivering them to the California customer. MedCal buys the goods from Medline Holdings, and pays MedTrans to deliver them. The customer is told to make payment to MedCal. In short, product distribution was still from the warehouses, but it was at the direction of Ontario, which was now the nerve center of operations. Sales zoomed, and California became one of Medline's largest and fastest growing markets.
Once the Ontario facility began operations, Medline stopped reporting to the Board that sales were occurring at the warehouses. Instead, after obtaining a seller's permit from the Board (see § 6066; Cal. Code Regs., tit. 18, § 1699 ), MedCal began reporting the California sales attributable to its Ontario-based sales force to Ontario. The net result was that Ontario would now get the sales taxes which had previously gone to Fontana and Lathrop. This loss of millions of dollars was not going to be meekly accepted.
Administrative Proceedings Before the Board
Medline's shift of sales operations triggered six years of administrative proceedings before the Board. Initiated by the Cities of Fontana and Lathrop with individual petitions for "reallocation" (per Cal. Code Regs., tit. 18, § 1807 ) filed in November 2006, joined by San Bernardino in 2009, the intent
The administrative record comprises more than 3500 pages. No substantial purpose would be served by documenting every aspect of the procedural history before the Board. However, some features are germane to this appeal.
The formal petitions for allocation were filed only after the Board's initial investigation concluded that "based on all available information at this time, the City of Ontario will be entitled to the local tax on sales made by MedCal." Fontana and Lathrop protested that the Board's investigation had failed to smoke out the commercial realities uncovered by the cities' own sleuthing.
Ontario appealed, and in October 2013, the five-member Board held a hearing on Ontario's appeal to reverse the Appeals Division's recommendation. In the course of Ontario's presentation, the Board heard a brief "statement" from a member of the Ontario City Council; a slightly lengthier statement by James Abrams, who gave his job description as "Chief Operating Officer of Medline Industries, Inc.," "the executive officer responsible for Medline's Finance Division"; and Eric Gerstein, Medline's "VP of Tax."
The Board also heard from its legal department, which defended the conclusion of the appeals division that the sale should be deemed to occur at Medline's warehouses, and thus the sales tax should be allocated to the municipalities where the respective warehouse was located. At greater length, counsel for Fontana, Lathrop, and San Bernardino echoed this recommendation.
By far the largest part of the hearing was spent on "discussion" and questions by the Board. Some of the questions were answered by Gerstein and Robert Kievert, who worked under Gerstein as Medline's "Director of Tax."
The following day, the members of the Board announced the decision. Member Betty Yee stated she believed the various documents between Medline entities "were established more to deal with issues of liability among the entities ... and less about ... consideration of ... tax requirements." "But I am ... convinced and ... was compelled by the testimony yesterday about the ... title flow." Member Jerome Horton agreed, cautioning that form should not be elevated over substance. Yee's motion to "find for Ontario" was seconded and passed without discussion.
The second issue addressed by the Board was "Whether taxpayer correctly allocated the local tax as sales tax to Ontario." Again, the Board acted on the basis of "statements" made by MedCal's representatives at "the Board's hearing," as well as "declarations signed under penalty of perjury by some inside and outside sales staff who stated that they were employees of taxpayer and knew the Ontario office was their only office for purposes of performing their sales activities."
And thus the conclusion in favor of Ontario: "We find credible and persuasive the statements made by taxpayer's representatives that the outside sales staff principally negotiated the subject sales and that they were assigned to work out of taxpayer's Ontario office when they became employees of taxpayer. This means their selling activities are attributed to the Ontario office even when such activities are done from their homes, on the road traveling to meet customers at their places of business, or at the customers' places of business. Thus, the sales are subject to sales tax based on the undisputed fact that title to the goods passed inside California and based on our finding that the Ontario office participated in the sales by virtue of the activities of the outside sales staff. Since the negotiations by the outside sales staff are
Proceedings in the Trial Court
The Petition
In April 2014, Fontana, Lathrop, and San Bernardino (hereafter collectively Cities) commenced this action by filing a petition (superseded within a week with a first amended petition) for a writ of administrative mandamus and declaratory relief. The goal was "to obtain redress for over $17 million in local sales tax revenues" that the Board "improperly allocated, since 2006 and continuing to the present day, to ... City of Ontario."
In their first cause of action, styled "Petition for Writ of Mandate-
Expanding on this point, Cities further alleged: "The 'retailer' is Medline, not MedCal, as evidenced by: (a) the chain of title, including invoices from Medline's suppliers showing Medline as the purchaser, purchase orders from California customers issued to Medline, invoices to customers prepared by Medline showing Medline as the seller and calling for payment to Medline's location, and payments from California customers to Medline; and (b) multiple agreements between Medline, MedCal, and other wholly-owned Medline subsidiaries, including a subsidiary named Medline Industries Holdings, LP ('Holdings'), which clarify that Medline uses its subsidiaries to approve Medline 's customers' sales orders and to manage Medline's sales to customers, and that title to the goods sold to California customers generally rests
In their other cause of action, Cities sought declaratory relief to the effect that the Board's decision was incorrect, thus obliging it "to correct, reallocate, and redirect to Petitioners ... the ... past incorrect payments of sales tax revenues to Ontario," those payments totaling $17,667,453 "as of October 2013."
Cities prayed for: (1) issuance of a writ of administrative mandamus commanding Ontario and MedCal "to either return to [the Board] or to pay directly to Petitioners all of the local sales tax revenues at issue, in the correct amounts due ... totaling no less than $17,667,453 as of October 2013, along with additional local sales tax revenues since October 2013, ... plus pre-judgment interest" and (2) "declaratory relief, as set forth above and/or otherwise consistent with the relief sought herein."
The Trial Court's Decision
The matter was submitted to the court on the basis on the administrative record; a "Joint Compendium" submitted by Cities of 34 exhibits (29 of which were already in the administrative record); written briefs; and extensive argument.
The court's decision came in the form of a detailed 26-page order that obviously reflected considerable industry and thought. The first subject addressed was the standard of review the court would use. The court concluded that the administrative mandamus review did not involve a fundamental vested right, but rather "merely economic" interests-"the allocation of sales taxes among local governments"
The court then considered "whether to defer to the BOE's evaluation of witness credibility and the court finds that such deference is not appropriate in this case. As permitted by 18 CCR [Cal. Code Regs., tit. 18] 5523, the
The court then moved to the issue of transfer of title under section 6006, specifically the "Fact Issue" of "Which Medline entity was the 'retailer' that transferred title to consumers." Because "[t]he intent of the parties is the most important factor in determining if, when, or where title has been transferred," the court then addressed a number of documents in the administrative record to discover "[t]he factual issue" of "the identification of the retailer." Its examination led the court to conclude "[t]he evidence is consistent and shows that during the relevant time period, the customers of the Medline entities thought that they were receiving title from Medline." "These documents strongly suggest that customers thought that they were buying the products, and obtaining title, from Medline," which "the customers understood that Medline ... was the ... entity responsible for paying sales tax."
The court's examination of a number "[c ]ontracts between and among the Medline entities " showed that a number of them "state that Medline ... was transferring title to the customers." Moreover, "At the BOE hearing, [four] Medline witnesses testified consistently and repeatedly that the Medline entities did not have contracts stating that ... title to goods was transferred from Holdings to MedCal."
Next, "The internal bookkeeping entries of the Medline entities show that Holdings sold goods to MedCal and that MedCal recorded revenue from customers. The internal bookkeeping entries of the MedCal entities reflect the internal intent or understanding of the Medline entities, but do not reflect the 'objective manifestations of agreement or objective expressions of intent' of the parties in the retail transactions. Therefore, the bookkeeping entries of the Medline entities are not relevant to the issue of which entity passed title to the customers in the retail transactions."
Lastly, the court looked to "Statements of Representatives " at the hearing before the Board. "Cities were represented by Ms. Sturdivant, who stated ... that she conducted a transaction with the Medline entities and that MedCal was never mentioned. Medline's representatives stated that Ms. Sturdivant's transaction was representative of approximately 1.3% of Medline's retail sales to California customers. [¶] Medline's representatives stated that
The court's legal analysis proceeded as follows:
(1) "There is no substantial evidence to support the BOE's factual conclusion that MedCal passed title to consumers and therefore was the retailer .... The law and the evidence compel the conclusion that Medline passed title to the customers and was therefore the retailer. The law required the BOE to focus on the intent of the parties to the retail transactions and to discern that intent from the contracts between the parties to the retail transactions. The contracts with customers and the invoices to customers clearly identify Medline ... as the seller. The contracts among the Medline entities clearly state that Medline ... was to sell the goods to the customers. California law follows the objective theory of contracts under which 'the parties' undisclosed intent or understanding is irrelevant to contract interpretation.' [Citation.] Looking at the contracts, it is clear that under California law it was Medline ... that sold the goods to, and passed title to, the customers. Furthermore, the Supply Agreements [aka Corporate Program Agreements] signed in 2010 address the issue of sales taxes specifically and state that it is Medline Industries, Inc. ... that was responsible for the sales taxes on the Products and Services provided to customers. ...
"Medline argued that the BOE was permitted to ignore the understandings of the consumers who received title and ignore the language of the contracts between and among the Medline entities and instead find MedCal passed title to consumers because under the terms of contracts that did not exist, Holdings was supposed to have transferred title to MedCal so MedCal could then transfer title to consumers. This argument is based largely on the internal understandings and journal entries of the Medline entities. This argument must fail because it is contrary to the clear terms of the actual contracts and can be viewed as a de facto attempt to reform the contracts to include MedCal as a party. [Citation.] The journal entries among the Medline entities might inform the interpretation of the contracts among the Medline entities, but they certainly cannot change the terms of the contracts between the Medline entities and their customers."
(2) "Alternatively, Medline's argument can be viewed as an attempt to treat Medline's subsidiary corporations as Medline divisions. Mr. Gerstein, Medline's Vice President of Tax, stated, 'our customers, frankly, don't care which legal entity it is, they care about buying Medline product and getting the Medline Reputation and quality that comes with it.' ....
(3) "The contemporaneous documentary evidence of bookkeeping entries within and among the various Medline entities shows
(4) "Medline argues that its transactions are electronic and that as a result there is no 'paper trail' of title. The user of paper or electronic records is beside the point. The point is that there is no substantial evidence to support the conclusion that MedCal transferred title to consumers. Medline's internal accounting entries, whether electronic or on paper, cannot change the parties to the taxable retail transactions."
(5) "The court finds that the BOE failed to apply established California law on the transfer of title, and that under the correct application of California law there is no substantial evidence for the BOE's factual finding that MedCal (the sales entity) transferred title to the customers and was responsible for paying the sales tax."
(6) "Having found that there is no substantial evidence for the BOE's conclusion that MedCal was the retailer, the court does not reach the issue of which Medline entity was the 'retailer.' That is a factual issue for the BOE on remand. Similarly, the court does not reach the issue of where the 'retailer' is located, as that too is a factual issue for the BOE on remand."
(7) As to the "Remedy," "The court will remand the matter to the BOE with instructions to vacate the Summary Decision in Case No. ID 435564
A judgment directing issuance of a writ of mandate to the Board was entered in due course, from which these timely appeals were perfected by all the parties.
DISCUSSION
The Standard of Review
Although the able briefs of counsel for the parties cover a wide area of subjects, the actual inquiry before us is quite limited. However, we are met at the outset with a unbridgeable gulf between what the
Given the parties' agreement that no fundamental right is involved, and there being no question that the Board proceeded in the manner required by law, this court on review would apply the identical standard as the trial court-is there substantial evidence in the administrative record to support the Board's summary decision No. ID 435564? (E.g., Benetatos v. City of Los Angeles , supra ,
The Board appears to accept this, in part. Its sole argument in its opening brief is stated in these terms: "The judgment should be reversed because substantial evidence supports the Board's decision; and the Superior Court
Cities do not argue that a fundamental right is involved, and they concur that "the standards governing this court's review are identical to those used by the trial court." Even though they ostensibly prevailed in the trial court, Cities nevertheless maintain the trial court employed the wrong standard of review, which they see as far more restricted than does the Board or did the trial court. This is how they frame the issue:
"The trial court determined that the BOE failed to proceed in the manner required by law, because it 'failed to apply established California law on the transfer of title.' In short, the BOE failed to properly interpret and apply the determinative Revenue and Taxation Code provisions. The central issue presented to the trial court was whether the BOE erred in its legal determination on undisputed facts that MedCal, and not Medline, was the retailer under Revenue & Taxation Code section 6015(a)(1). The facts establishing the identity of the retailer were not disputed; rather, they were memorialized in Medline's own written transactional documents, to which Medline is bound, and which cannot be contradicted by extrinsic evidence.
"It is well established that the application of the tax statutes to undisputed facts, as was involved here , presents a question of law to the trial court. [Citation.] The
"Because the BOE failed to properly apply the governing statutes and regulations to undisputed evidence, the independent judgment (or independent review) standard applies here. The relevant facts in the record were undisputed, and assessing witness credibility was not an issue. The key issues
"Even though interpreting the applicable statutes and applying them to the undisputed facts presented a purely legal issue, the trial court instead characterized 'the identification of the retailer' as a factual issue, and it concluded that 'there is no substantial evidence to support the BOE's factual conclusion that MedCal passed title to consumers and therefore was the retailer as defined in Rev. and Tax 6015(a)(1).' Although the trial court applied the wrong standard, in doing so, it reached the correct conclusion. There was no substantial evidence supporting the BOE's finding that MedCal was the retailer." (Italics added.)
Much of this disagreement is attributable, particularly from Cities' perspective, to the trial court's decision. For example, the court did state at the start of its decision that it "finds that the BOE failed to apply established California law on the transfer of title, and that under the correct application of California law there is no substantial evidence for the BOE's factual finding that MedCal (the sales entity) transferred title to the customers and was responsible for paying the sales tax." This could be interpreted as the trial court determining that the Board either (1) committed an error of law ("failed to apply established California law") or (2) made a factual finding in the absence of substantial evidence to support it. In truth, the trial court's decision does seem to straddle this distinction by concluding that without substantial evidence that MedCal passed title the Board could not designate MedCal as the seller (or "retailer" in the trial court's language).
Initially, Cities appear to want to finesse the point. By repeatedly emphasizing that there are only "undisputed facts," Cities would transmute the issue of whether Medline or MedCal passed title into a question of law to which we would bring our independent review. (See, e.g., Microsoft Corp. v. Franchise Tax Bd . (2006)
But then Cities focus upon the trial court's later sentence, that "the law and the evidence compel the conclusion that Medline passed title to the customers and was therefore the retailer," which they describe as the trial court's "central holding." Cities further assert "The record supports no other reasonable conclusion," thus making the trial court's remand to the Board a pointless exercise. In fact, Cities view the issue as so patently obvious that
"Our review is governed by Code of Civil Procedure section 1094.5, which defines prejudicial abuse of discretion as an agency's decision being unsupported by its findings or its findings being unsupported by the evidence (id., subd. (b)). Where support for findings is challenged, abuse of discretion exists if 'the findings are not supported by substantial evidence in light of the whole record' (id., subd. (c)).
" 'The "in light of the whole record" language means that the court reviewing the agency's decision cannot just isolate the evidence supporting the findings and call it a day, thereby disregarding other relevant evidence in the record. [Citation.] Rather, the court must consider all relevant evidence, including evidence detracting from the decision, a task which involves some weighing to fairly estimate the worth of the evidence. [Citation.]' ( Lucas Valley Homeowners Assn. v. County of Marin (1991)
"The County and Commission urge that the trial court misapplied the standard, improperly reweighing the evidence. ..." "[T]he ... argument is academic in the procedural posture of this case. Our review standard on appeal is identical to the trial court's. ( Bixby v. Pierno, supra,
The Supreme Court subsequently summarized the point with more economy: "An appellate court's review of the administrative record for ... substantial evidence ... is the same as the trial court's: The appellate court reviews the agency's action, not the trial court's decision; in that sense appellate judicial review ... is de novo." ( Vineyard Area Citizens for Responsible Growth, Inc. v. City of Rancho Cordova (2007)
Moreover, our Supreme Court has directed that "a trial court must afford a strong presumption of correctness concerning the administrative findings, and the party challenging the administrative decision bears the burden of convincing the court that the administrative findings are contrary to the weight of the evidence." (
It must be conceded that the tenor of the trial court's lengthy order is troubling. It appears to reflect a de novo review, with no suggestion of deference to the final result of the extensive administrative proceedings. It does seem to approach the matter from the perspective of Cities-stating what does not support the Board instead of looking to see what does-thus appearing to put the burdens of persuasion and proof on the Board. Also, it is disconcerting to see the statements made at the hearing by Medline officers-which obviously could support the Board's decision-virtually dismissed out of hand. True, they did not address the Board under oath, but no one at the hearing suggested that they should. As the Board notes, its rules allow for " 'hearsay evidence,' " particularly when, as occurred here, it was received without objection.
A bit of practical reality should also be observed. The Board initially allotted Ontario, assisted by Medline and MedCal, a total of 15 minutes to present their appeal. Once again, 15 minutes . Even assuming that the Board had already familiarized itself with the 350 pages of Ontario's brief and exhibits, it would be a formidable job
Finally, it is puzzling to ponder the trial court's conclusion that the Board "had no opportunity to observe the demeanor, manner, or attitude of any percipient witness." After all, we are talking about the persons who addressed the Board at the hearing, so each person's "demeanor, manner, or attitude" was perceivable-indeed, perceived-by the Board, which went to the trouble to twice single out those persons as "credible and persuasive" in its final decision. As for whether these persons qualified as "percipient" or personally knowledgeable about the information in their respective statements, no such hesitation was voiced to the Board, and in any event does not appear to be required by the Board's rules. (See fn. 15, ante .)
Given that no fundamental right is at issue, it is more than appropriate for courts to defer to the Board's expertise in resolving this issue. (See, e.g.,
The possibility of disagreement ordinarily inheres in the substantial evidence standard. (See, e.g., Martin v. Alcoholic Bev. etc. Appeals Bd . (1961)
This is why we emphasize that the primary focus of our inquiry is whether the administrative record has substantial evidence that supports the Board's decision. Our review for substantial evidence is no less than a fresh and complete reexamination of the administrative record. In that sense Cities are correct in classifying our review as independent, but they are mistaken in seeing the problem as purely one of law resting on the "undisputed facts" in that record. Some historical facts may not be controverted, but, as will be
Thus, Cities cannot merely point to evidence that supports the trial court's decision, nor can they selectively cull the administrative record for the bits and pieces that may not support the Board. Cities must go beyond that, establishing that the evidence in the administrative record is so comprehensively one-sided that the Board's decision was not only against the weight of that evidence, it was a decision so lacking in support that it cannot command the assent of reasonable minds.
The Board's Decision Is Supported by Substantial Evidence
At no point has any party disputed that taxable sales of personal property, i.e., Medline products, were being made in California by a retailer. Whether the retailer was Medline or MedCal was the central issue before the Board. How the Board resolved that issue depended upon how it would handle the issue of when title to the taxable personal property was transferred by the retailer. Determining when title passed would also determine who was the retailer.
Title
As previously noted, this court recently concluded that because state law did not "address when transfer of title occurs" for purposes of
California Uniform Commercial Code section 2401 does not have a lot to say about the mechanics of determining where or when title to tangible personal property is passed by a retailer to a consumer. It was not always so.
Prior to 1965, the problem of passing title was a fertile field of dispute. (See, e.g., Kidd, The Passage of Title (1960) 14 Wyo. L.J. p. 25 ["The problem of finding the intention of the parties is extremely difficult, and has left us with a mass of confusing and conflicting cases."].) That changed when the Uniform Commercial Code became effective in California. In the words of a prominent commentator: "Unlike pre-Code law in which the location of title to goods determined many important issues arising under sales contracts, the Code de-emphasizes title practically to the vanishing point. ... [I]n resolving the legal consequences ... arising from the contract of sale, basically nothing depends on the location of title." (Henson, The Law of Sales (1985) p. 89; see 4 Witkin, Summary of Cal. Law (10th ed. 2005) Sales, § 124, p. 122.) "The application of Section 2-401 is extremely limited, ... for virtually noting [sic ] in Article 2 [governing sales of goods] depends on title," but the provision does retain a modest utility, in that "[r]ules for determining the location of title appear to be stated principally to fulfill a need arising occasionally under tax law or criminal law."
That case law looked primarily to the intent of the contracting parties to determine when title passed, and that determination was ordinarily treated as an issue of fact. (E.g., South S.F. Pkg. etc. Co. v. Jacobsen (1920)
Documents
Traditionally, the most significant source of intent would be the written contract, if the parties made one. (See Sakamu v. Zellerbach Paper Co . (1938)
It may be, as Medline's top tax officer told the Board, that Medline runs a "very lean" operation (see fn. 10 and accompanying text, ante ), but it is certainly not a tidy one in terms of its administrative paper trail. This is most evident with respect to certain contractual arrangements Medline had with Medline Holdings and MedTrans prior to formation of MedCal. These arrangements are spelled out in four two-page agreements, all dated January 1, 2005, governing storage and shipment of
The most pertinent of these writings is the "Warehouse Services Agreement." In brief, it specifies that Medline will provide Medline Holdings "with general warehousing services of its finished goods and product [purchased according to the "Distribution Agreement"] ... including ... the preparation of product for shipment," in exchange for which Medline Holdings will pay Medline a "monthly fee of $1.28 per square foot of warehouse space" as well as "charges ... for services rendered" to be billed "on a periodic basis." The agreement also provides that "while title to the finished goods and product
None of these four writings specifies a term for performance. However, each is scrupulous in specifying that one Medline entity will be charged for products, services, or facilities furnished to another Medline entity, and the formula for calculating compensation. None appears to have been replaced or superseded with a new agreement taking account of MedCal's formation. Had Medline been a little less "lean" and taken the trouble to prepare updated agreements, this controversy would have been greatly simplified, and perhaps even obviated.
For the trial court, the documents it examined "strongly suggest that customers thought that they were buying the products, and obtaining title, from Medline," which "the customers understood ... was the ... entity responsible for paying sales tax." The trial court's selective examination of documents in the administrative record led it to conclude the "evidence is consistent and shows that during the relevant time period, the customers of the Medline entities thought they were receiving title from Medline." Our own examination of the entire record, with due regard for the limited nature of allowable judicial review, requires that these questions be resolved in favor of the Board's decision.
Certainly there was a mass of documentary evidence that the Medline employees who serviced customers up to 2006 were rebranded as MedCal employees as MedCal was being inserted into the existing retail network. The same evidence showed that the new MedCal sales representatives uniformly told prospective customers that they (the representatives) worked exclusively for MedCal. When existing customers communicated with a sales representative via e-mail, the response identified the sender as working for MedCal. In support of its decision, we presume the Board found this evidence credible.
Moreover, it is undisputed that when a new account was opened, the customer filled out a "Customer Credit Application and Agreement" on a form headed "MEDCAL SALES LLC, 3350 Shelby Street, Suite 200, Ontario, CA 91764 ." And it was shown that MedCal sales reps were paid on a commission basis, that is, on the basis of what they sold . From all this documentation, the Board argues, "a reasonable person could infer that the customers thought MedCal, not Medline, transferred title," an inference the trial court erroneously
Perhaps most tantalizing, and enigmatic, are the "Supply Agreement[s]" executed by various customers. All have the prefatory recital that "Customer and Medline intend to establish a vendor-vendee relationship." But three of the agreements begin by stating the agreement is between the customer "and Med Cal Sales, LLC, an Illinois corporation ('Medline')," and these documents are executed by "MED CAL SALES, LLC." The fourth states that the agreement is between the customer and "Medline ... and its wholly owned consolidating subsidiaries, MedCal Sales ... and Medline Industries Holdings," all of which hereafter "collectively referred to as 'Medline.' " This agreement was executed on behalf of "MEDLINE INDUSTRIES." Each agreement provides that "Customer shall be responsible for the payment of all applicable sales ... tax incurred by Medline ... on all Products ... provided to Customer" "[t]o the extent these taxes are applicable. One hundred percent (100%) thereof shall be added to invoices and paid in full by Customer." And all but one of these agreements also provides where notices required by the agreement are to be sent: "If for Medline, to: [¶] Med Cal Sales, LLC [¶] One Medline Place [¶] Mundelein, Illinois 60060."
The inference just quoted by the Board can be reinforced with these documents. Granted, with the exception of the "Corporate Program Agreement[s]," the status and function of MedCal is somewhat opaque. However, reading them from the perspective of upholding the Board's decision does add some clarity. Thus, the sales tax provisions do not expressly say that Medline will incur sales tax liability because it is the sole entity selling Medline products in California or to California customers. The "[t]o the extent these taxes are applicable" language is open to the interpretation that Medline may not automatically or necessarily incur such liability. The entirety of the agreements can be read as establishing that when they say Medline they intend to mean MedCal. Three of the supply agreements are easily read to identify MedCal as the real contracting party and the entity that will pull the laboring oar in performing the agreement, meaning also that it is MedCal that will provide the goods and receive payment from the customer for those goods. The fourth can be read to the same conclusion, because "Medline" as used in that agreement is a collective designation that expressly
Documents may be important, even dispositive, but they should not be made a litmus test. Nor should the four corners become a fetish. It is a bedrock principle of taxation that substance is more important than form. (E.g., Microsoft Corp. v. Franchise Tax Bd., supra ,
Here, contrary to Cities' reading that the writings cited by the trial court are "controlling [and] cannot be disputed or altered by extra-contractual evidence of 'internal intent,' " we conclude those documents are far from dispositive. It is therefore appropriate to widen the focus to "the conduct of the parties ... and the circumstances of the case," which may be established by parol evidence. ( Woodbine v. Van Horn , supra ,
Circumstantial Evidence
As already noted, at the hearing the Board was in effect told that the sole reason for creating MedCal and inserting it into the existing distribution process was to reduce the amount of sales tax that Medline, as an entire entity, would pay.
There is more "conduct of the parties ... and the circumstances of the case." Remember, following delivery of the ordered goods, the customer would continue to deal only with MedCal sales reps and employees. If the customer had complaints, they would be addressed to, and handled by, the same MedCal sales representative who helped place the order. Additionally, it was MedCal that the customer
There is more. As already noted, Medline official Gerstein explained to the Board how the order and shipping process operated to pass title from MedCal to the customer. Again, this was evidence of ponderable force. ( Cal. Code Regs., tit. 18, §§ 5523.6 - 5523.7 ; Woodbine v. Van Horn , supra ,
The reasons for Medline's changes were explicit-and never denied. The strategic intent could not be clearer. As one member of the Board noted at the hearing, Medline was simply following the celebrated observation of Learned Hand: "[T]here is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands." ( Commissioner of Internal Revenue v. Newman (2d. Cir. 1947)
To this end, Medline implemented an extensive restructuring of its operations. It interjected a new actor, and made it the employer of record for personnel formerly paid by Medline. As part of its "very lean" operating ethos (see fn. 10 and accompanying text, ante ), Medline reflected the restructuring
So, which entity is the "retailer" that made the "sale" that involved "transfer of title"? ( §§ 6015, 6006, subd. (a).) Is it MedCal, as the Board's staff initially concluded and the Board ultimately concluded, or is it Medline, as the Board's staff and Appeals Division intermediately concluded? Given the
It is for administrative agencies " ' "to weigh the preponderance of conflicting evidence" ' " before them ( Eden Hospital Dist. v. Belshe , supra ,
The Board could reasonably conclude that Medline was sufficiently sophisticated to know how to shift sales situs operations to satisfy section 6006's definition of a sale. It is reasonable to assume that the practice of luring retailers to change location, a practice so prevalent it was substantially restricted by the Legislature (see fn. 6, ante ), was familiar to the Board. It is equally reasonable to assume that the Board had seen a number of relocations that were motivated by concerns of reducing the amount of sales tax a given retailer would actually pay, and, following the bedrock principle of taxation that substance is more important than form (e.g., Microsoft Corp. v. Franchise Tax Bd ., supra ,
Our careful review of the administrative record establishes that there is ample evidence,
DISPOSITION
The judgment is reversed, and the cause is remanded to the trial court with directions to enter a judgment denying the petition. The Board, the City of Ontario, MedCal Sales, LLC, and Medline Industries, Inc., shall recover their respective costs of appeal.
We concur:
Kline, P.J.
Miller, J.
Notes
Statutory references are to this code unless otherwise indicated.
This conception of the sales tax has been recognized from its beginning: "The tax being a direct obligation of the retailer and, so far as the consumer is concerned, a part of the price paid for the goods and nothing else, it is neither in fact nor in effect laid upon the consumer." "[I]t is a tax in the same category as property and excise taxes payable by an independent contractor engaged in the business of retail sales which, although they are reflected in the higher cost of the product or commodity offered, must be considered merely as a necessary expense of conducting the business." (Western L. Co. v. State Bd. of Equalization (1938)
" 'Transfer of possession' includes only transactions found by the board to be in lieu of a transfer of title, exchange, or barter." (§ 6006, subd. (a).) The concept of transferring possession, but not title, never figured in the administrative proceedings and is not an issue here.
This is the general rule. Exceptions are when "the tangible personal property sold is delivered by the retailer or his or her agent to an out-of-state destination or to a common carrier for delivery to an out-of-state destination," and when "a retailer has no permanent place of business in the state or has more than one place of business." (§ 7205, subds. (a), (b)(1).)
Particulars about MedTrans are scanty. Extrapolating from the statement of James Abrams, the "Chief Operating Officer and ... Executive Officer responsible for Medline's Finance Division," that MedTrans "owns and operates a 280 unit truck fleet which delivers product to ... MedCal," it seems fairly safe to conclude that Medline Holdings runs a number of inventory distribution centers, none of which is in California, and is responsible for shipping Medline products to the warehouses in California.
Two points concerning the location agreement are significant.
First, it should be noted that Ontario was only responding to an overture from Medline, an overture which, in Medline's language, included a request for "financial assistance from the city." (See fn. 20, post .) This practice of luring retailers to relocate was restricted by the Legislature in 2009, but the change was not retroactive. (See former Gov. Code, § 53084.5, added by Stats. 2009, ch. 4, repealed and largely reenacted by Stats. 2015, ch. 717; Hosseini, Chapter 4 to the Rescue: California Attempts to Prevent the Unjust Reallocation of Local Sales and Use Taxes (2010)
Second, the signatories to the agreement were the Ontario Redevelopment Agency and MedCal. The only mention of Medline in the agreement is that notices to MedCal are to be sent to Medline at its Illinois headquarters.
Following dissolution of the redevelopment agency as statutorily ordered in 2011, its performance under the agreement was assumed by the City of Ontario.
Although the point is somewhat obscure, it appears that only income generated from customer-initiated telephone calls is allocated to the Medline distribution warehouses. This would appear to be the "1.3% of Medline's retail sales to California customers" mentioned in the trial court's order.
Fontana and Lathrop told the Board: "Based on the research shown above, it does not appear that MedCal's Ontario office is the place that the company's 214 sales representatives report to on a regular basis. It is also evident that the Ontario office does not review and process all order [s] placed by California customers. All the information we received indicate that the sales representatives call on clients, deliver new product information, establish new accounts and pricing, etc. After an account is established, customers are directed to place orders via internet or by calling or faxing the Iowa call center. In almost all cases, the first point of California contact with a customer orders [sic ] are the fulfillment and distribution centers in Fontana and Lathrop."
Medline has a headquarters staff that, pursuant to the "Administrative Services Agreement," provides every subsidiary with "general services related to overall management and strategy, accounting and bookkeeping, legal, human resources, information technology and other corporate management services." Gerstein told the Board this avoids "duplicate functions when they're not needed." The subsidiaries are billed by Medline for these services. In Gerstein's words: "we run very lean, Medline does." These services cost MedCal approximately $16 million per year.
In his declaration, Kievert stated he is "solely an employee of Medline Industries," his actual "business title is Director of Tax, Compliance and Audit," and he is "responsible for the tax compliance and tax audits, for Medline and its wholly owned subsidiaries, including MedCal."
Each of the two issues was denominated as a "LEGAL ISSUE" and subdivided into "FINDINGS OF FACT," "APPLICABLE LAW," and "ANALYSIS & DISPOSITION." As will be seen, both of the Board's ultimate determinations was stated in the language of a finding of fact ("[w]e find"), and correctly so. The Board's characterization of what it was deciding as "legal issue[s]" will not be followed. (Cf. Linberg v. Stango (1931)
Cities also alleged a cause of action for "Petition For Writ of Mandate-Code Civ. Proc. § 1085," that is, traditional mandamus. However, the trial court noted the parties' agreement that "the petition is properly under CCP 1094.5." This agreement was clearly sound (see, e.g., City of Palmdale v. Board of Equalization (2012)
Actually, the notices of appeal by the Board, Ontario, Medline, and MedCal were filed prior to entry of the judgment. In accordance with the principle that notices of appeal are to be liberally construed in favor of their sufficiency, each notice will be deemed to refer to the subsequent judgment. (Cal. Rules of Court, rules 8.100(a)(2), 8.104(d).)
The pertinent regulations provide in relevant part:
"(a) Admissible Evidence. Any relevant evidence, including affidavits, declarations under penalty of perjury, and hearsay evidence, may be presented at a Board hearing. Each party will be permitted to comment on or respond to any affidavits, declarations, or other evidence.
"(b) Submission of Evidence. ... The Board will consider any objections to, and comments on, the evidence presented at the hearing in assigning weight to such evidence. The Board may refuse to allow the presentation of evidence that it considers irrelevant, untrustworthy, or unduly repetitious." (Cal. Code Regs., tit. 18, § 5523.6.)
"Witnesses. The taxpayer ... may offer the testimony of any person who can provide relevant information concerning the matter, including representatives of the taxpayer ... who have knowledge concerning the facts at issue in the matter." (Cal. Code Regs., tit. 18, § 5523.7(a).) "The Board Chair may, at the Board Chair's discretion, direct any witness to testify under oath or affirmation, and any Board Member or party to a matter may request that any witness testify under oath or affirmation." (Id ., subd. (d), italics added.) "Each party may cross-examine opposing witnesses ...." (Id ., subd (e).)
The circumstances also include Cities' failure to raise the issue in their opening trial brief. (See Borror v. Department of Investment (1971)
In their petition for rehearing, Cities insists that when title transferred is not near as important as who did the transferring. But this approach only begs the question of which entity held title to the goods when MedTrans put those goods on its truck for delivery of those goods to the customer. As shown in this opinion, it is that question which is required by the statutory siting of the taxable transaction at "the place of business of the retailer." (§ 7205; see § 6015, subd. (a)(1) [defining retailer].) In a sense, asking who, when or where title transfers to the customer are merely different ways of framing the same question.
To reiterate, the actual statutory language provides: "Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place; and in particular and despite any reservation of a security interest by the bill of lading. [¶] (a) If the contract requires or authorizes the seller to send the goods to the buyer but does not require him to deliver them at destination, title passes to the buyer at the time and place of shipment; but [¶] (b) If the contract requires delivery at destination, title passes on tender there." (Cal. U. Com. Code, § 2401, subd. (2).)
This provision was part of the Uniform Sales Act, which was effective from August 1931 (Stats. 1931, ch. 1070) until it was repealed to make way for the California Uniform Commercial Code (Stats. 1963, ch. 819, § 2).
We have not forgotten that " 'The retailer is the taxpayer, not the consumer' " in the eyes of the sales tax. (City of South San Francisco , supra ,
Cities insists there is no confusion if we focus on two specific documents emphasized by the trial court. This approach is indicative of Cities' continuing misperception of the judicial role, namely, to look at the entirety of the administrative record for substantial evidence which supports the final decision of the administrative agency. Given the precise state of the record here, each party can point to specific items in its favor. The judicial task in such a case is in effect to undertake a broad balancing with a rebuttable presumption in favor of the administrative decision. It would be a rarity if there were one or two dispositive items in a substantial administrative record. This case is not that rarity.
In an October 2005 internal memo announcing setting up the MedCal operation, the Medline management tried to emphasize that employees of Medline, Medline Holdings, and MedCal should henceforth identify themselves with the precise name of their employer in "situations where you are entering into a formal legal document," and specifically, "If you are a member of the sales organization in CA, and thus employed by Med Cal Sales, LLC, you should use the name of Med Cal Sales LLC on any formal legal documents that you are signing." However, the memo went on to blur these distinctions in the manner suggested in the text: "In standard transaction documents and other Non-legally binding documents, in ordinary business correspondence, and in other situations, employees of each of the three entities can simply refer to their employer and their company as 'Medline.' For example, marketing materials, boxes, invoices, and purchase orders should now simply use the name Medline, as opposed to Medline Industries, Inc. or one of the other two entity names."
In addition to the oral "testimony," the Board also had before it Kievert's declaration in which he stated: "Medline approached Ontario to discuss creating a sales office in California and requested financial assistance from the city to make this sale office a viable option. The incentive enabled Medline to move its sales operation to California. Consistent with standard Medline business procedures, a separate legal entity (MedCal Sales, LLC) was established to operate this new California sales office and to begin hiring fulltime office sales employees." There is similar evidence in the administrative record.
Cities believe the manner of payment shows just the contrary, that the money was intended for Medline. They rely on the heading of the invoice the customer receives as showing that payment is due simply to Medline. However, Gerstein told the Board that collecting payment was one of the administrative services provided to all the subsidiaries. That explanation constitutes testimonial proof permitted by the Board's rules. (Cal. Code Regs., tit. 18, §§ 5523.6 -5523.7 ; Woodbine v. Van Horn , supra ,
Information on a taxpayer's federal returns may prove pertinent to an inquiry before the Board. (See Navistar Internat. Transportation Corp. v. State Bd. of Equalization (1994)
The trial court was thus in error when it disregarded "documentary evidence of bookkeeping entries" as "beside the point" and "not relevant to the inquiry of what the parties to the retail transaction intended." As previously noted, the intent of the actual customer was essentially unknowable. (See fn. 20 and accompanying text, ante .) This is precisely why California Uniform Commercial Code section 2401 is useful. By establishing rules on title passage, subject to explicit agreement by the buyer and seller, the statute makes the absence of evidence of those parties' intent "beside the point." All that was truly germane was whether MedCal had the title to pass. If it did, as the Board concluded, it does not matter which entity the buyer thought was passing title, because only MedCal had title to the goods the buyer was purchasing. Of course, the whole problem could be avoided by including a statement about title to passage among the terms and conditions, if MedCal requires every new customer to agree to its terms and conditions, or when making an internet purchase. (Cf. Ambers v. Beverages & More, Inc . (2015)
Howard stated in his declaration: "A privately held, multi-entity, multi-national company with rapidly growing sales and fast growing geographic territories requires less formality from its wholly owned subsidiaries, then would be required of non-related entities. Nonetheless, it must follow Federal tax laws regarding transfer pricing. Transfer prices are used when individual entities of a larger multi-entity firm are treated and measured as separately run entities. Transfer pricing rules recognize that it is common practice for a large multi-entity, multi-national, organization to establish efficient processes by streamlining back office operations under one unified umbrella. These unified costs are then shared by each legal entity throughout the organization through a transfer price (i.e., a cost allocation method) used to attribute a corporation's net profit or loss. These charges between related parties are made for goods, services, or use of property (including intangible property such as brand names).... The legal agreements provided by MedCal, to the Department, reflect Medline's charges to MedCal for these back office services.
"Additionally, larger multi-entity organizations electronically create purchase orders and sales invoices. This information is accounted for in accordance with the Federal transfer pricing rules. ... The individuals conducting field audits ... are keenly aware of the changes made to the electronic environment within the back office of a large multi-entity organization" and "have firsthand experience that taxpayers no longer operate through a paper environment."
In light of the conclusion, we summarily reject as moot Cities' arguments (1) that because "none of the local sales tax revenues at issue could be allocated to Ontario," they "should be allocated to Fontana, Lathrop, or San Bernardino." "On remand, the BOE should be ordered to perform a simple accounting to confirm which distribution center participated in each of the sales," and (2) that this "reallocation ... should be made retroactively to 2006, when the misallocation started."