California Appeals Court Declines Locality’s Request to Rewrite Unlawful Tax Law

The BR State + Local Tax Spotlight

By Eugene J. Gibilaro

How far should courts go to save tax laws that are plainly unlawful? In a case recently decided by an intermediate appeals court in California, a California locality, the City of Moreno Valley, asked the court to rewrite a local ordinance “to convert the tax [to be imposed] from an unlawful sales and use tax to a lawful transactions and use tax.” City of Moreno Valley v. California Dep’t of Tax and Fee Admin., C097747, Super. Ct. No. 34-2022-80003915-CU-WM-GDS (Jan. 16, 2024). The Court declined the City’s request, finding that the proper role of the courts “is fundamentally to interpret laws, not to write them,” and that it was inappropriate in this case for the Court to exercise “the extraordinary power” to rewrite the City’s ordinance. This case is a reminder that words have meaning and if a taxing authority is disregarding the plain meaning of the law, taxpayers should be prepared to fight back.

California law permits localities to impose two similar types of taxes on retail transactions: (1) a sales and use tax (“SUT”); and (2) a transactions and use tax (“TUT”). For localities that impose both an SUT and a TUT, a consumer’s receipt from a retail purchase in the locality will include charges for both SUT and TUT (in addition to charges for the state-level sales and use tax). California law states that a locality’s SUT rate may not exceed 1.25 percent and its TUT rate may not exceed two percent. Moreover, no locality may “impose, extend, or increase any general tax unless and until the tax is submitted to the electorate and approved by a majority vote.”

In 2021, the City declared an ongoing fiscal emergency and called a special election for the City’s voters to consider a measure to increase the City’s SUT rate from one percent to two percent. The City’s voters approved the measure and proposed ordinance. However, the California Department of Tax and Fee Administration, which administers and collects local SUT and TUT on behalf of localities, informed the City that it was unable to administer the tax as written because it imposed a SUT rate of two percent, which exceeded the maximum 1.25 percent rate permitted by State law.

The City Council responded by adopting a revised ordinance to impose a TUT at a rate of one percent (the City did not previously impose a TUT). The City argued that its imposition of a TUT at a rate of one percent in lieu of increasing the SUT from one percent to two percent did not require new voter approval because “the voters had effectively already approved the new ordinance because it was ‘consistent with the intent’” of the approved measure to increase taxes on retail transactions by one percent. The City asked the Court to declare that the approved measure validly imposed a one percent TUT and to rewrite the City’s ordinance as needed to make the ordinance lawful.

The Court rejected the City’s invitation to rewrite the ordinance to save it from being invalid under California law. The Court found that while “[t]he City’s voters were no doubt misguided in believing they could enact a two percent tax under the [SUT] law,” that consideration was insufficient in itself “to trigger the absurdity doctrine and allow a wholesale rewriting of the ordinance.” The Court also concluded that judicial reformation of the ordinance was not proper because the Court was “unable to conclude with confidence that the City's voters would support [the Court’s] rewriting the ordinance to impose a tax that the voters never considered and that is materially different from the tax they approved.”

This update is one in a series of updates written for the February 2024 edition of The BR State + Local Tax Spotlight.

© 2024 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.