State Supreme Court to Address Whether State Agencies Must Collect Local Taxes

By Gary Hook

A case pending before the California Supreme Court could significantly affect the extent to which state government agencies may be required to collect and remit local taxes.

A 1956 California Supreme Court decision established the principle that state agencies are not subject to local regulation insofar as the "sovereign activities" of those agencies are concerned, and this principle applies to taxation as well as other types of regulation.

State agencies themselves are immune from local taxation, but local governments may tax private parties doing business with state agencies. Can these principles be applied to require state agencies with parking facilities in San Francisco to collect the city's parking tax from people using those facilities, and remit the tax proceeds to the city? That is what the court will address in City and County of San Francisco v. Regents of the University of California (Supreme Court Case No. S242835).

A San Francisco ordinance imposes a 25 percent tax on the rent charged to parking facility users. The tax is imposed on the users, but parking facility operators are required to collect the tax from users and remit the proceeds to the city. In the early 1980s, San Francisco attempted to collect a parking tax deficiency from the University of California at San Francisco, but UCSF claimed immunity and the city dropped the matter.

In 2011, the city reasserted its claims and instituted proceedings against the UC Regents and other state parties. On May 25, 2017, the First District Court of Appeal issued a decision in favor of the UC Regents, but Justice Kathleen Banke issued a lengthy dissenting opinion that could pave the way for a reversal by the Supreme Court.

Under the Supreme Court's 1956 decision in Hall v. Taft, state agencies are not subject to local regulation unless something in the state constitution or statutes provides otherwise. The courts look to whether the activity in question constitutes a "sovereign activity," and if it is, the state agency is exempt from local regulation unless something in the constitution or statutes overrides that exemption.

The majority opinion in the Court of Appeal's May decision concluded that the parking facilities operated by UC campuses in San Francisco furthered a governmental purpose, because they were integral to the educational and clinical purposes of the institutions. Parking was essential for medical students, faculty and patients at the UCSF Medical Center, and also for the students and faculty at the Hastings Law School, which is a UC facility. For that reason, the parking facilities were immune from local regulation, and the majority concluded that UC was not required to comply with the collection and remittance requirements of the city's parking tax.

One of the cases discussed at some length in both the majority and dissenting opinions was the 1973 Court of Appeal decision in City of Modesto v. Modesto Irrigation District. In that case, the court ruled that Modesto could lawfully require a state irrigation district to collect and remit a city utility users tax on sales of electricity. The rationale was that the irrigation district was engaged in a "proprietary activity" to the extent of its electricity sales, and thus to this extent was acting outside the boundaries of the "sovereign activity" of providing irrigation.

The Court of Appeal majority in the San Francisco parking case thought that operating parking facilities at UC campuses was closely enough related to the core educational and clinical functions that the result in City of Modesto was not appropriate.

Justice Banke's dissenting opinion said the result in the case leaves the law in this area in a state of disarray. Justice Banke thought the burden the city sought to impose on the state agencies was minimal, particularly since the city apparently had agreed to reimburse UC for the costs of collecting the tax. The dissenting opinion focused on the fact that the parking tax was imposed not on the state agencies, but on the parking facility users, and there is a long line of authority confirming that private parties doing business with state agencies are subject to local regulation and taxation with respect to those activities.

Justice Banke's dissent also argued for a more practical approach in which it would not matter whether the activities of the third parties were within the sphere of the agencies' governmental functions. The parking facility users here were subject to city regulation and taxation, the collection and remittance burden on the state agencies was minimal, and so the dissenting opinion would have required the UC Regents to comply with San Francisco's parking tax ordinance.

There are multiple layers of complex legal authorities behind both the majority and dissenting opinions, relating to the constitutional powers of state agencies vs. local governments, the powers of charter cities vs. general law cities, and the statutory powers vested in the state universities. Both opinions struggle to articulate the nature of the immunity that shields state agencies from local regulation, and even look to U.S. Supreme Court decisions on federal-state matters for guidance.

The California Supreme Court's future decision is likely to have a significant effect on the scope of municipal taxing powers. While state agencies have long enjoyed broad immunity from local regulation, Justice Banke's dissent has given the Supreme Court a lot to think about. In prior decisions, the Supreme Court has not directly addressed the scope of municipal taxing powers in a case involving state-local relationships, so both state and local officials will be closely watching to see how the court resolves this controversy.

Gary Hook received his law degree (with honors) from Golden Gate University School of Law in San Francisco, and served for 29 years as in-house tax counsel for Chevron Corporation before retiring in 2017 to write about tax and fiscal policy.


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