ORDER AND AMENDED OPINION
The Opinion filed on July 16, 2009, is amended as follows: On page 959, strike the following text:
The “hotel tax” in California derives from a state law that permits municipalities to “levy a tax on the privilege of occupying a room or rooms, or other living space, in a hotel, inn, tourist home or house, or other lodging.” Cal. Rev. & Tax Code § 7280(a).
and insert the following text:
Oakland’s authority to enact a “hotel tax” is derived from the city’s status as a “Charter City.”
See City of San Bernadino Hotel/Motel Ass’n v. City of San Bernadino,
No further petitions for rehearing will be entertained.
This is a classic case of jumping the gun. The City of Oakland brought suit against ten Internet travel companies, claiming that they failed to calculate and remit occupancy taxes in violation of the Transient Occupancy Tax Ordinance. The difficulty is that Oakland never assessed or imposed the tax; instead, the City filed suit in federal court for, among other things, collection of the taxes. The district court dismissed the suit with prejudice because the City failed to comply with the Ordinance’s exhaustion requirement. We agree that exhaustion is required, although we conclude that dismissal without prejudice is appropriate. Absent a tax assessment, there is nothing to enforce nor could we divine what the “unpaid taxes” might be. The starting point for resolution of this dispute is not the federal court but the administrative process, which is geared to address precisely these questions.
Background 1
According to the complaint, the Internet travel companies negotiate discount hotel rates and then sell hotel rooms to consumers. The retail charge to the customer includes the wholesale price that the operators pay to the hotels, an online service charge, and any taxes. The Internet travel companies collected taxes from users based on the retail price of the room, but remitted to Oakland the taxes based only on the wholesale price. The companies kept the “tax” they collected from the consumers on the markup from the wholesale price to the retail price. Although the
Oakland's authority to enact a “hotel tax” is derived from the city’s status as a “Charter City.”
See City of San Bernadino Hotel/Motel Ass’n v. City of San Bernadino,
The Ordinance lays out a multi-step administrative process for assessment. In mandatory terms, the Ordinance provides that the Tax Administrator “shall proceed to determine and assess against such operator the tax, interest and penalties” and provide notice of the assessment. Id. § 4.24.090. If the operator does not contest the Tax Administrator’s assessment, it “shall become final.” Id. The operator may appeal, however, in which case the Tax Administrator must provide a justification for the assessment and conduct a hearing, following which the Tax Administrator “shall determine” the tax owed. The operator is permitted a further appeal to the Oakland Taxation and Assessment Board of Review. Id.
Against this backdrop, the district court dismissed the case with prejudice for lack of subject matter jurisdiction. The court concluded that failure to exhaust the administrative process was fatal to the City’s tax liability claim and that Oakland had not made any assessment against the travel companies and “indeed not ... even initiated any administrative process.” Because the City’s other claims — conversion, unfair business practices, unjust enrichment, and imposition of a constructive trust — are dependant on the Internet travel companies’ tax liability, the court likewise dismissed these claims for failure to exhaust.
Analysis
I. Exhaustion is Required Under California Law
Under California law, exhaustion of administrative remedies is a jurisdictional requirement and “absent a clear indication of legislative intent [a court] should refrain from inferring a statutory exemption from [the State’s] settled rule requiring exhaustion of administrative remedies.”
Campbell v. Regents of Univ. of Cal,
Oakland is not the first California city to dispute the hotel tax vis-a-vis Internet travel companies. In consolidated litigation involving a municipal ordinance similar to the one at issue here, the cities of Los Angeles and San Diego sued a group of Internet travel companies in Los Angeles Superior Court. That court rejected
Oakland argues that its Ordinance does not require a tax assessment before suit is brought and that, in any case, the administrative remedies apply only to the operators, not the taxing authority. This strained interpretation is belied by the plain language of the Ordinance. The Ordinance uses mandatory language to impose the City’s initial obligation, i.e. the Tax Administrator “shall obtain facts and information on which to base his or her estimate of the tax due,” “shall ... assess ... the tax,” and “shall give notice of the amount to be assessed.” Ordinance § 4.24.090 (emphasis added). The operator may challenge this assessment of course and is entitled to a hearing and review. Id.
To suggest that the City is somehow exempt from this administrative process because the Ordinance does not spell out a right to an appeal process for the City would upend the Ordinance. The City has nothing to appeal after the assessment process — it unilaterally imposes the tax. The provision permitting the City to bring an enforcement action for the recovery of outstanding taxes, Ordinance § 4.24.130, does not mean that there can be an enforcement action without an assessment. This same argument was labeled “flawed” and rejected by the state court in Los Angeles: “The City’s position makes two assumptions that are not supported by the allegations in its complaint. First, an action seeking judicial enforcement assumes there is something to enforce. With no assessment, however, there is nothing that the City is seeking to ‘enforce.’ Second, the City’s assumes there are unpaid taxes.” City of Los Angeles v. Hotels.com, L. P., No. BC 326693 at 8. The assessment and appeal are part of an interrelated administrative process that fixes the tax due.
Oakland offers an alternate argument, namely that exhaustion is excused because the administrative remedy is inadequate and the process would be futile. We acknowledge that the exhaustion requirement has some flexibility and that in appropriate cases, these principles support exceptions to the exhaustion requirement.
See Ogo Assoc, v. City of Torrance,
The notion that the administrative process leaves the City out in the cold makes no sense here. As the district court noted, “The City’s remedy for collecting suspected unpaid taxes begins with an audit and assessment.” The City is central to the administrative process, once there is a final assessment and the tax remains unpaid, the City may file suit to collect the tax. This administrative chronology, which imposes an obligation on the City to first assess the tax, hardly renders the administrative remedy inadequate.
Similarly, we reject the City’s characterization that exhaustion would be futile because the position of the parties is already “clear.” The issue in this case is not the “positions” of the parties but rather the actual tax liability. If such a futility exception to the administrative exhaustion requirement were triggered by a taxpayer taking the position that the tax is not owed, the exception would swallow the rule.
II. Unexhausted Claims Should Be Dismissed Without Prejudice
Claims should be dismissed with prejudice only when it is clear that no amendment could cure a defect in the complaint. The district court mistakenly concluded that dismissal with prejudice was appropriate “because it is clear that absent any actual assessment of tax liability against the Defendants, any amendment to the complaint would be futile.” However, failure to exhaust administrative remedies is properly treated as a curable defect and should generally result in a dismissal without prejudice.
See O’Guinn v. Lovelock Corr. Center,
AFFIRMED IN PART; REVERSED IN PART. Costs on appeal are awarded to Appellees.
Notes
. This background description is derived from the Complaint, which we accept as true.