Opinion
8-5-1953
CITY OF LOS ANGELES v. BELRIDGE OIL CO. * Civ. 19431.
Ray L. Chesebro, City Atty., Bourke Jones, Asst. City Atty., and James A. Doherty, Deputy City Atty., Los Angeles, for appellant. Wellborn, Barrett & Rodi, Vernon Barrett, F. C. L. Head, Los Angeles, for respondent.
CITY OF LOS ANGELES
v.
BELRIDGE OIL CO.
Aug. 5, 1953.
Rehearing Denied Aug. 26, 1953.
Hearing Granted Oct. 1, 1953.
Ray L. Chesebro, City Atty., Bourke Jones, Asst. City Atty., and James A. Doherty, Deputy City Atty., Los Angeles, for appellant.
Wellborn, Barrett & Rodi, Vernon Barrett, F. C. L. Head, Los Angeles, for respondent.
FOX, Justice.
Plaintiff appeals from a judgment in an action to recover license taxes from defendant. The cause was decided upon stipulated facts, both parties moving for summary judgment. The motion of defendant company was granted.
Plaintiff's complaint, incorporating the complete license ordinance of the city of Los Angeles, prayed judgment in the amount of $9,768.30 as unpaid business license taxes owing for the years 1948-1950, inclusive. Plaintiff's claim is based on its asserted right to impose a business license tax on defendant measured by the gross receipts of the company during those years as a person engaged within the city in 'selling goods, wares or merchandise at wholesale' as defined in section 21.166, Los Angeles City License Tax Ordinance. Neither the amount of the gross receipts nor the computation of the amount of the tax is here in issue. The character of defendant's business activity, stipulated to by the parties and made a part of the complaint, will be more comprehensively set forth below. Defendant's answer, relying upon the stipulations relating to the nature of its operations, denies that it comes within the intended purview of section 21.166 for reasons which will subsequently be more fully discussed. As separate defenses, the answer also alleges that the City's right to a recovery for the years 1948 and 1949, or, alternately, for the year 1948 alone, is barred by the applicable limitations provisions of sections 339(1) and 338(1) of the Code of Civil Procedure. By way of a fourth separate defense, defendant challenges the plaintiff's constitutional right to levy the claimed tax on defendant. The trial court granted defendant's motion for a summary judgment dismissing the action.
The stipulation as to facts presents a detailed survey of the over-all conduct of defendant's operations, and from it we extract only so much as is requisite to the adjudication of the issues presented. Defendant is engaged in the production of crude oil and natural gas, all of its wells being located in Kern County (designated herein as 'the field'), which is the site of its field offices and the scene of all its physical operations. Defendant's head office is situated in the city of Los Angeles. Its various products are marketed under long-term contracts of sale at prices prevailing at the time the sales contracts are executed. The products covered by these contracts are segregated and delivered to the purchasers directly at the field plants and never enter the territorial limits of the city of Los Angeles while title remains in defendant. It is the City's contention that by the operation of section 21.166 of the licensing ordinance, it may levy a tax on defendant measured by the gross receipts derived from the sale of all its products produced and delivered in Kern County.
In support of its position, plaintiff focuses its attention on the phases of defendant's activities governed by its head office in the city of Los Angeles, where defendant carries on important managerial and administrative functions. Most of the working time of defendant's high-level officers--its president, two vice presidents (one of whom performs the duties of secretary), treasurer, four assistant secretaries, an assistant treasurer, purchasing agent and controller--is spent there. The board of directors of defendant company meets in Los Angeles, which is where management policies are generally formulated, though policy decisions may also be made in the field by conferences between the field manager and authorized company officers. The company's banking is done in Los Angeles. Belridge's president and treasurer spend all their time at the head office, while the vice presidents, purchasing agent, and controller spend between 60 and 90 percent of their time there, the rest being devoted to work in the field. The equivalent of 16 full-time employees, constituting about 7 percent of the personnel, spend virtually all their working time at the head office, where approximately 7 percent of the company's expenses are incurred. Defendant's sales contracts are negotiated by the officers who work most of the time at the Los Angeles office, but the amount of time consumed in actual negotiations in the years 1947-1950 amounted to less than one half of one percent of their total working time. Approximately 15 percent of the time required for conducting negotiations leading to sales was consumed in Los Angeles, and an equal amount at the office of purchasers in San Francisco; the balance was handled by mail, telephone and telegraph communication between defendant's Los Angeles office and the purchasers' offices in San Francisco. Defendant signed the contracts at its head office. There is a readily available market in the field for Belridge's products and sales promotion occupied only a small part of defendant's business activities.
The head office is responsible for an extensive amount of clerical work and record keeping. Among the books and records kept there are the corporate stock records, the general and property ledger, cash and journal records, income tax, insurance and purchasing records, correspondence files, contracts, production summaries, and copies of various records, all prepared by the field office. Monthly billings to purchasers and payroll reports to federal and state agencies emanate from the head office. Defendant's obligations are all paid from the head office except emergency wage payments and disbursements for miscellaneous items, which are paid from a checking account in Bakersfield carrying an average balance of between $2,000 and $3,000. Other payroll checks for all field employees are written and signed at the head office and mailed to the field office for distribution, but the payrolls for such employees are prepared in the field office where all pertinent payroll data is kept, and which supplies the home office with the information for the individual paychecks it prepares. The head office makes all purchases, except those of an emergency nature, but these purchases are based on requisitions presented by the field office. All policy questions in connection with expenditures for normal operating purchases are determined at the field office, and though they may be very large in amount, are customarily paid by the head office as a matter of routine without special approval. Payment for the sales of all items sold by defendant are received from purchasers at the head office and deposited in Los Angeles bank accounts.
The cost of operating the head office has ranged from $161,000 to $242,000 during the years in question.
All of defendant's manifold activities incident to the operation of its oil field is concentrated within the borders of Kern County. In its extensive physical operations, it has employed, in the period here under consideration, a staff of between 191 and 250 workers, and its operating costs in the field have varied from $2,473,466 for the year 1947 to $3,111,321 in 1950. Its field operations are concerned with the problems of where and how to drill wells in order to achieve maximum production efficiency; the actual drilling and daily operation of the wells; the gathering of crude oil and natural gas there produced and the extraction of natural gasoline and liquefied petroleum gas; the delivery of the above substance to purchasers; the installation and maintenance of plant equipment and facilities and the making of all original accounting records related to the functions described. Two field warehouses are maintained containing an inventory of materials worth between $500,000 and $1,000,000. Records relating to the quantity and prices and receipt and disbursement of all items of the inventory are kept in the field, and inventories of this property are sent monthly and annually to the head office.
The field office is directed by a resident field manager, who is subject to orders only from the president and vice presidents. These orders are generally given him verbally by a vice president at the field but are sometimes communicated by letter or telephone from the head office. The field manager sometimes participates in formation of policy, but in this regard he ranks below the president and vice presidents.
The field engineering office keeps detailed records of the drilling reports of each well and of the production, repairs and all operations performed in connection with each individual well, of which it sends copies to the head office. A separate report is made to the head office of all labor, equipment and material used in the various operations for which the field office is accountable. Such records and reports, which are necessary for the billing of the purchasers of petroleum products, are sent to the head office.
All field employees are hired at the field office, where employment applications are filed and a copy sent to the head office. The field office keeps a record of each worker's employment history, and furnishes a labor distribution sheet on each employee to the head office covering the hours worked each day on each job, pay rate, and other matters. The union contract is negotiated, prepared and signed in the field by the company's two vice presidents, without any action thereon emanating from the head office except that the outcome is reported to the board of directors. The field office issues group insurance cards to its employees and processes claims thereunder for payment at the head office. The intricate and complicated problem of the assessment of Belridge's mineral rights is the responsibility of the field office, and is handled by a petroleum engineer stationed at the field who represents the company in discussions with Kern County taxation officials.
Defendant paid a license tax for the years 1948 and 1949 in the amount of $12 for each year, the minimum sum required under section 21.190 of the License Ordinance, after discussion with and at the request of representatives of the city clerk of Los Angeles. On January 4, 1950, defendant again paid the sum of $12, but an objection to such amount was made on January 24, 1950, whereupon defendant paid an additional sum of $161 under section 21.190, measuring the tax by the gross cost of maintaining the head office (see section 21.190(d)). It was not until the latter part of March, 1950, that plaintiff first indicated to defendant that its license tax payments should be based on its gross receipts.
Defendant's liability under section 21.190 is not here in issue, the question being defendant's liability, if any, under section 21.166 of the License Ordinance. The City contends that the judgment is erroneous on the theory that defendant company is a person engaged in selling goods, wares and merchandise at wholesale within the meaning of section 21.166, which imposes on such persons a tax measured by the gross receipts derived from such sales. This contention, in our opinion, cannot be sustained.
Our consideration is therefore addressed to the question of whether the language used in the ordinance under which a business license tax is claimed from defendant purports to describe and cover the particular business in which it is engaged. From a study of the phraseology and an analysis of the import of section 21.166, it is evident that defendant's business operations in Los Angeles were not intended to be included in the businesses mentioned as subject to the license tax imposed therein. This conclusion is fortified by an examination of the structure and purposes of the Los Angeles Business License Tax Ordinance as disclosed by its underlying policy.
Section 21.166 is one of three 'catchall' provisions found near the very end of the ordinance, which contains over 150 separate sections and subsections descriptive of specific kinds of businesses upon which is imposed a prescribed tax. In some sections the word 'business' or a term of analogous significance is used, but other sections dealing with particular occupations omit reference to the word 'business' or any equivalent term. Section 21.49, one of the general provisions of the ordinance which precedes the lengthy enumeration of the various categories of business within its purview, provides in part as follows: '* * * a license is required to be obtained by every person engaged in any of the businesses, trades, callings or professions specified in the following sections of this Article; * * *' From the catalogue of detailed and distinct varieties of businesses which next follow, it is plain that the purpose of the ordinance is to levy a tax upon the privilege of carrying on a designated occupation or business. Martin Ship Service Co. v. City of Los Angeles, 34 Cal.2d 793, 794, 215 P.2d 24.
'The term 'business,' as used in a law imposing a license tax on businesses, trades, professions, and callings, ordinarily means a business in the trade or commercial sense, one carried on with a view to profit or livelihood.' Cuzner v. California Club, 155 Cal. 303, 311, 100 P. 868, 871, 20 L.R.A.,N.S., 1095. (Italics added.) Among the listed occupations is the business of producing oil, which is covered by section 21.124, and reads in part as follows: 'For every person producing oil from any well located in the City of Los Angeles, the sum of $2.00 per quarter for each such well producing four hundred (400) barrels or less of oil per quarter, plus 1/2 cent per barrel oil produced by each such well in excess of four hundred (400) barrels per quarter. * * *' This section, of course, patently applies to the type of business in which defendant is engaged. Union Pac. R. R. Co. v. City of Los Angeles, 53 Cal.App.2d 825, 830, 128 P.2d 408. However, it is here concededly inapplicable since by its explicit terms it operates only within the territorial limits of the municipality.
Following the exhaustive enumeration of occupations found in the license ordinance come the three catch-all sections. Section 21.167 requires every person selling goods, wares and merchandise at retail, and who is not specifically licensed, to pay tax measured by gross receipts at the rate of 50 cents per $1,000. Section 21.190, under which defendant has until the commencement of this action paid its license tax, requires every person engaged in any trade, calling, profession, occupation, vocation or other means of livelihood not otherwise specifically licensed, to pay a tax measured by gross receipts at the rate of $1 per $1,000.
The pertinent language of section 21.166, the catch-all provision here involved, reads as follows: 'Every person manufacturing and selling any goods, wares or merchandise at wholesale, or selling goods, wares or merchandise at wholesale, and not otherwise specifically licensed by other provisions of this Article, shall pay * * *' Since defendant's production of oil takes place outside Los Angeles, plaintiff makes no claim that Belridge is a person 'manufacturing and selling' within the language of section 21.116. It is plaintiff's position that, by the use of the term 'selling goods, wares and merchandise,' it was the intention of the framers of section 21.166 to include within its scope the business in which defendant is engaged. We are unable to agree that this is a fair, reasonable, or contemplated application of the language employed.
The language of section 21.166 is couched in the alternative and plainly discloses that its authors had two categories of business in mind. In the first instance, it refers to persons 'manufacturing and selling any goods, wares, or merchandise at wholesale'; this is conjoined by a statement referring to persons 'selling goods, wares or merchandise at wholesale.' (Italics added.) The tax under the ordinance being an excise tax on the privilege of engaging in a particular kind of business, see McAdams Oil Co. v. Los Angeles, 32 Cal.App.2d 359, 364, 89 P.2d 729, it is clearly manifest that it was intended to reach both those engaged in a pursuit primarily of a creative nature who sell the product of their manufacture, as well as those engaged in callings of which selling alone is the essence. It is a matter for judicial cognizance that in the commercial world, there is a marked distinction between a business of a manufacturing or productive nature and one in which selling, trading or dealing is the fundamental feature. Kansas City v. Butt, 88 Mo.App. 237; Chattanooga Plow Co. v. Hays, 125 Tenn. 148, 140 S.W. 1068, 1069-70. As defendant points out, it is to be inferred that the words 'manufacturing and' were intended to have some meaning. If the word 'selling' of its own force were designed to embrace 'manufacturing and selling,' there would have been no reason to particularly mention 'manufacturing and selling.' It follows from a logical interpretation of the two terms chosen that 'selling' as here employed was not intended to include businesses where an activity like manufacturing was the dominant nature of the enterprise and selling merely the function or medium by which its output is metamorphosed into realizable gain. See Chattanooga Plow Co. v. Hays, supra. The reasonableness of such a distinction was pointed out in the case of Davis v. Mayor and Council of Macon, 64 Ga. 128, where the court had under consideration the validity of a license tax ordinance exempting a farmer selling his own meat product from an occupation tax levied upon the selling of butcher's meat. It was there said: 'The producer whose trade is incident to production, and the middleman whose trade is intermediary between the producer and the consumer, belong not to the same class but to different classes of subjects in a scheme of taxation. At least the difference is wide enough to justify, if not to compel, its recognition in shaping the scheme.' And in an analogous connection, it was stated in American Sugar Refining Co. v. State of Louisiana, 179 U.S. 89, 21 S.Ct. 43, 45, 45 L.Ed. 102: 'But from time out of mind it has been the policy of this government, not only to classify for purposes of taxation, but to exempt producers from the taxation of the methods employed by them to put their products upon the market.' (Italics added.) By spelling out this dichotomy, the framers of the ordinance wished to make certain that on the one hand manufacturers who necessarily sell would not be able to evade the effect of the statute on the grounds that selling is only an incidental aspect of their business. On the other hand, in using the term 'selling,' it is practical and reasonable to infer that the ordinance endeavors to take in all other business classifications of a merchandising or mercantile nature (those heterogeneous and diversified businesses which variously go under generic classifications such as merchant, trader, dealer, wholesaler, jobber, distributor, etc.) in which selling per se, rather than the manufacture, creation or production of goods, is the essential character of the business operation.
Since defendant's production of oil takes place outside Los Angeles, plaintiff makes no claim that it is a person 'manufacturing and selling,' the language of section 21.166 most descriptive of defendant's business. Plaintiff urges, however, that defendant is engaged in 'selling activities' within the city, and maintains that even though the greater part of Belridge's efforts are expended in the production of something to sell and a much lesser part in its so-called 'selling activities,' it must be considered as 'selling goods, wares and merchandise' within the meaning of the ordinance. However, this disregards the fact that an examination of the context and general structure of the license ordinance discloses that the concept of 'business' or 'occupation' as distinguished from an ancillary activity, inheres throughout. Also it overlooks the significance of the words 'manufacturing and selling' which are contained in section 21.166. While Belridge admittedly is engaged in 'selling' in the sense that it markets the product it produces, that is not the dominant nature of its business; hence it cannot properly be characterized as a person 'selling' in the sense the expression is used in section 21.166. It may be observed that Robert Louis Stevenson once wrote, in a cynical epigram: 'Everyone lives by selling something.' But, as has been previously pointed out, it is the occupation of selling, as a recognized and identifiable mercantile business, and not 'selling activities' which are merely an incidental though important part of an integrated business such as manufacturing, to which the phrase 'selling goods, wares and merchandise' applies in this context. See In re Holmes, 187 Cal. 640, 644-645, 203 P. 398.
Of some pertinency to this point is the ratio decidendi in the case of City and County of San Francisco v. Larsen, 165 Cal. 179, 181, 131 P. 366, 367, where a restaurateur sought to come within the license-tax exemption offered a person 'who at any fixed place of business * * * sells or manufactures goods, wares, or merchandise'. In discussing whether a restaurant keeper is either a seller or manufacturer of goods, the court stated: 'It cannot be denied that the eating of food by a customer at a restaurant, in the regular course of business, involves a sale of the food eaten. The price of the food alone is usually not specified, but it is included in a lump sum, with the charge for service and use of dishes, chair, and table. It is nevertheless a sale of the food consumed, within the technical definition of that term.
'But this single point of coincidence does not necessarily bring the restaurant keeper within the class described in the exempting clause. We are not dealing solely with the question whether or not he does, in his business technically sell goods, but with the question whether or not, within the meaning of the provision prohibiting license taxes upon described places of business, he is a person who 'sells or manufactures goods, wares, or merchandise.' We must look to the phrase as a whole, consider its object and purpose, and give it a meaning according to the ordinary acceptation of the words used. When we speak of a place where the business of selling or manufacturing goods, wares, or merchandise is carried on, we do not usually think of restaurants in that connection. One who mixes and cooks foodstuffs is engaged in the business of manufacturing goods, if we use the words according to their literal meaning, but, if we mention manufacturers we should scarcely expect to be understood to refer to the keeper of restaurants. A restaurant keeper is not, according to ordinary usage, either a merchant or a manufacturer.' So here we are convinced that when the term 'selling' was used in the alternative and in contradistinction to 'manufacturing and selling,' the framers of the law were imposing a tax upon the privilege of carrying on a business distinct from one of a manufacturing nature, and of which selling was the paramount attribute. It was not intended to be a privilege tax on 'selling activities' related to a manufacturing or producing business. The sale of the products of manufacture is an indispensable aspect of the business of manufacturing; the power to manufacture implies the power to sell what is produced. Commonwealth v. Thackra Mfg. Co., 156 P. 510, 27 A. 13. It was not the legislative intent to tax a business which in common parlance is universally spoken of as a manufacturing or production business under a designation not appropriate to it, nor is this justified by a rational view of the statutory language.
Plaintiff argues that the definition of the phrase 'selling goods, wares, and merchandise' contained in section 21.08(t) expands the limits of its commonly accepted understanding to cover defendant's operations. This section provides (with italics added to stress the provisions plaintiff contends are here specially applicable):
'The phrase 'selling goods, wares and merchandise' shall, in addition to any other meaning established at law, be deemed to extend to and include in its application persons who engage in the business of fabricating, serving or supplying for a price, tangible personal property furnished, produced or made at the special order of purchasers or consumers, or for purchasers or consumers who do or who do not furnish, directly or indirectly, the specifications therefor.' While this plainly evinces an intent to enlarge the ordinary comprehension of the phrase, it is far from disclosing any purpose to depart from all established meanings and traditional understandings of the expression. Rather, it reinforces our position that the ordinance recognizes the line of demarcation between businesses of a manufacturing and of a selling nature, but is here endeavoring to encompass certain peripheral or hybrid enterprises which do not too clearly lend themselves to characterization in the one sphere or the other. Thus the most cogent interpretation of the somewhat intricate language of the section appears to be that it was basically designed, as respondent suggests, to embrace such occupations as custom fabricators, restaurateurs and the like, which are in a borderland area of occupational classification so far as a catchall provision covering the business of 'selling' is concerned. This is clearly emphasized by the definition of 'sale' and 'sell' contained in the preceding section 21.08(s). The addition in section 21.08(t) of the words 'for purchasers or consumers who do or who do not furnish, directly or indirectly, the specifications therefor,' when construed in connection with the words they immediately follow ('at the special order of purchasers or consumers') suggest no more than an intent to negate any intimation that custom purchasers or consumers would lose such status by omitting the furnishing of specifications for the merchandise. We cannot perceive that the circumscribed and guarded language of this clause was meant to apply to Belridge's business. Any such intention could have been expressed in more forthright and unequivocal language.
In further support of its thesis that defendant is engaged in 'selling,' or activities which are part of a selling business, plaintiff cites Natural Gas Co. of Virginia v. Commonwealth, 186 Va. 921, 45 S.E.2d 177, 178. That case presents no analogy to the case at bar. The question there presented was whether plaintiff, who was the local agent of a foreign corporation, came within the purview of a statute imposing a tax on 'commission merchants,' defined as 'Every person * * * buying or selling for another any kind of merchandise on commission, * * *.' Plaintiff advertised the product, solicited orders, made delivery from its own warehouse and remitted the proceeds, less commissions, to the foreign corporation. Plaintiff argued that it was a 'broker' rather than a 'commission merchant.' The court found that plaintiff's activities in behalf of its foreign principal constituted selling for which it received a commission, thus bringing it within the statutory definition of that term, 'commission merchant.' But as the court points out, plaintiff's promotion, negotiation and completion of sales for its principal (its selling activities) constituted the 'heart and soul of the contract' between the parties--or, in other words, the essence of its business.
While we think the legislative intent clear, it is well recognized that where substantial doubt exists as to whether or not a particular business is included within the descriptive or designating language of an ordinance imposing a license tax, that doubt must be resolved in favor of the taxpayer. (53 C.J.S., Licenses, § 13, p. 495; 33 Am.Jur., Licenses, p. 329.) 'In every case involving 'the interpretation of statutes levying taxes, it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the government, and in favor of the citizen.' [Citations.]' Pioneer Express Co. v. Riley, 208 Cal. 677, 687, 284 P. 663.
In view of the foregoing conclusion it becomes unnecessary to consider other issues raised by counsel.
The judgment is affirmed.
MOORE, P. J., and McCOMB, J., concur. --------------- * Subsequent opinion 271 P.2d 5. 1 Section 21.166 reads in part: 'Every person manufacturing and selling any goods, wares or merchandise at wholesale, or selling goods, wares, or merchandise at wholesale, and not otherwise specifically licensed by other provisions of this Article, shall pay for each calendar year, or portion thereof, the sum of $8.00 for the first $20,000, or less, of gross receipts, and, in addition thereto, the sum of $40cents per year for each additional $1,000 of gross receipts, or fractional part thereof, in excess of $20,000; * * *' 2 Section 21.190, subdivision (d) provides for an allocation of income and reads in part as follows: 'When the gross receipts are derived from or attributable to sources both within and without the city, the license tax imposed by this section shall be measured by the gross receipts derived from or attributable to sources within this city. Such gross receipts shall be determined by an allocation upon the basis of pay roll, value and situs of tangible property, general expenses, or by reference to any of these or other factors, or by such other method of allocation as is fairly calculated to determine the gross receipts derived from or attributable to sources within this city. Gross receipts attributable to isolated or occasional transactions at places outside the city but within the State of California, where the licensee is not engaged in business shall be considered as gross receipts derived from or attributable to sources within this city. Gross receipts derived from or attributable to sources within this city include (a) gross receipts from tangible or intangible property located or having situs in this city and (b), when not contrary to law, gross receipts from any activities carried on in this city regardless of whether carried on in interstate, intrastate or foreign commerce. * * *' 3 Section 21.08(s) reads: 'The words 'sale' and 'sell' shall be deemed to include and refer to: the making of any transfer of title, in any manner or by any means whatsoever, to tangible personal property for a price, and to the serving, supplying or furnishing, for a price, of any tangible personal property fabricated or made at the special order of consumers who do or who do not furnish directly or indirectly the specifications therefor. A transaction whereby the possession of property is transferred but the seller retains the title as security for the payment of the price shall likewise be deemed a sale. The foregoing definitions shall not be deemed to exclude any transaction which is or which, in effect, results in a sale within the contemplation of law.'