Opinion
NOT TO BE PUBLISHED
San Francisco County Super. Ct. No. CGC 07-459514
Sepulveda, J.
In a dispute over the allocation of local sales taxes collected on jet fuel delivered to San Francisco International Airport, the trial court sustained demurrers to the first amended complaint for declaratory relief and a writ of mandate filed by San Mateo County (San Mateo) against the State Board of Equalization (SBE) and the City of Oakland (Oakland). The trial court ruled that the SBE provides an administrative remedy for claims of tax misallocation and that San Mateo has to exhaust the available administrative remedy before seeking redress in the courts. (§ 7209; Cal. Code Regs., tit. 18, §§ 1807, 5250, subd. (a).) The trial court was correct. We affirm the judgment of dismissal.
All statutory references are to the Revenue and Tax Code unless otherwise specified.
I. Statutory and Regulatory Background
A. Sales tax
“California, like most states, imposes a statewide retail sales tax. (§ 6051 et seq.) The California sales tax is imposed upon retailers for the privilege of conducting business, and is measured by the retailer’s gross receipts from sales of all tangible personal property sold in this state.” (Dell, Inc. v. Superior Court (2008) 159 Cal.App.4th 911, 922, fn. omitted.) California’s tax laws embody “a comprehensive tax system created to impose an excise tax, for the support of state and local government, on the sale, use, storage or consumption of tangible personal property within the state.” (Wallace Berrie & Co. v. State Bd. of Equalization (1985) 40 Cal.3d 60, 66.)
Retailers pay a specified percentage of their gross receipts from sales of tangible personal property sold within the state. The statewide sales tax base rate is currently 8.25 percent, which is composed of a state portion and a local portion for cities and counties for sales within their boundaries. (§§ 6051-6051.7.) Currently, the state receives 7.25 percent and local governments receive 1 percent of the 8.25 percent base rate imposed. (§ 7203.1, subd. (a).) “For each sale, 0.25 of the local tax is allocated to the county where the sale occurs, for transportation projects. The remaining 0.75 percent local tax is allocated to the county if the sale occurred in the unincorporated portion of the county, or to a city if the sale or use occurred in that city.” (Board of Equalization Formal Issue Paper 05-010 (Oct. 31, 2005) p. 3; see §§ 7202, subd. (h), 7203.1, subd. (a).) In addition to the statewide base rate, many local governments have established special districts that impose sales taxes ranging from.10 percent to 1 percent. (State Board of Equalization Publication 71, California City and County Sales and Use Tax Rates (April 1, 2009) http://www.boe.ca.gov/pdf/pub71.pdf.) In some California communities, the combined rate for statewide sales tax and district taxes is 10.25 percent. (Ibid.)
B. Allocation of sales tax to local jurisdictions for jet fuel and other goods
The SBE collects sales tax from retailers and distributes the tax to the state and local governments. Retailers file periodic tax returns with the SBE allocating their sales tax payments among the appropriate local governments. (§ 6452; Cal. Code Regs., supra, § 1802, subd. (d).) Generally, retail sales are deemed consummated at the retailer’s place of business and the local government receives sales tax if that place of business is within its geographic boundaries. (§ 7205, subd. (a).) If a retailer has more than one place of business in this state that participates in the sale, the local tax is usually allocated to the place of business where the principal negotiations were conducted. (§ 7205, subd. (b); Cal. Code Regs., supra, § 1802, subd. (a)(2)(B).)
Taxation of jet fuel originally fell within these general rules and sales were taxed at the jurisdiction where negotiations took place. (Assem. Com. on Appropriations, Rep. on Assem. Bill No. 451 (2005 Reg. Sess.) April 27, 2005 at p. 2.) In 1998, legislation was enacted to shift local tax revenue from the location of jet fuel companies’ corporate offices, where sales where negotiated, to the location of airports, where the fuel was delivered. (Ibid.; former § 7205, subd. (b)(2), added by Stats. 1998, ch. 1027, § 2 (Assem. Bill No. 66).) Proponents of the legislation, introduced as Assembly Bill 66, “argued that because local governments with airports provide services to those airports, and because residents of communities with airports suffer some inconvenience as a result of the airports, those jurisdictions ought to receive the Bradley-Burns [local] sales tax revenue from sales of jet fuel pumped into aircraft at those airports.” (Assem. Com. on Appropriations, Rep. on Assem. Bill No. 451 (2005 Reg. Sess.) April 27, 2005 at p. 2.)
Thus, from 1999 through 2007, the sale of jet fuel was deemed to have occurred at the point of delivery of the fuel to the aircraft if the principal negotiations for the sale were conducted in this state and the retailer had more than one place of business in this state. (Former § 7205, subd. (b)(2), added by Stats. 1998, ch. 1027, § 2 (Assem. Bill No. 66).) The law was later amended, in legislative proceedings described below. (§ 7205, subd. (b)(2), amended by Stats. 2005, ch. 391, § 2.) As amended, and beginning in 2008, the sale of jet fuel is deemed to occur at the point of delivery of the fuel to the aircraft, regardless of the number of places of business operated by the retailer. (§ 7205, subd. (b)(2).)
Additional rules apply to sales of jet fuel at multijurisdictional airports. (§ 7204.03.) San Francisco International Airport (SFO) is a multijurisdictional airport. SFO is owned and operated by the City and County of San Francisco (San Francisco) but is located primarily within an unincorporated area of San Mateo. Taxes collected on the sale of jet fuel at SFO are split evenly between San Francisco and San Mateo. (§ 7204.03, subd. (b)(2)(A).)
C. Buying companies
A buying company “is a legal entity that is separate from another legal entity that owns, controls, or is otherwise related to, the buying company and which has been created for the purpose of performing administrative functions, including acquiring goods and services, for the other entity.” (Cal. Code Regs., supra, § 1699, subd. (h)(1).) The SBE provides an example. “CA Manufacturing, Inc. has manufacturing plants throughout California. Currently each plant purchases office supplies and other consumable supplies individually. In order to take advantage of volume purchase discounts, CA Manufacturing, Inc. forms a separate corporation, CA Buying, Inc., to purchase supplies for all CA Manufacturing, Inc.’s plants. CA Buying, Inc. purchases the supplies without tax for resale and then sells the supplies to the individual plants.” (State Board of Equalization Tax Information Bulletin Supplement (Sept. 1, 2002), http://www.boe.ca.gov/news/pdf/sep02tibsupp.pdf.) The SBE notes that “[o]ne outcome of purchasing through buying companies is that the local tax associated with the retail sale of taxable goods is allocated to the location of the buying company.” (Ibid.) For example, using the scenario above, “when CA Manufacturing, Inc.’s plants purchased their own supplies, the local taxes associated with the purchases were generally allocated to the city and county of the supplier’s location (the place where the retail sale was made). By using CA Buying, Inc. to purchase and sell the supplies, all the local taxes are allocated to the city and county where CA Buying, Inc. is located (the place where the retail sale occurs).” (Ibid.)
D. Redirection of local sales taxes through buying companies
As noted above, “[o]ne outcome of purchasing through buying companies is that the local tax associated with the retail sale of taxable goods is allocated to the location of the buying company.” (State Board of Equalization Tax Information Bulletin Supplement (Sept. 1, 2002), http://www.boe.ca.gov/news/pdf/sep02tibsupp.pdf.) “Absent the existence of a buying company, the local taxes are allocated according to the cities in which the vendors are located. However, a central buying company purchases goods for resale and will allocate the local tax to the city in which the central buying company is located.” (Board of Equalization, Second Discussion Paper, Proposed Regulatory Changes Regarding Place of Sale in the Case of “Buying Companies” and When Customers Place Orders on Seller’s Website (Aug. 6, 2001) p. 4 (“BOE Second Discussion Paper”).)
Buying companies therefore have the effect of shifting local tax from one jurisdiction to another. “The shifting of local tax from one jurisdiction to another does not result in retailers paying any additional tax. Therefore, any additional revenue derived by one city will be at the expense of others.” (BOE Second Discussion Paper, p. 4.) The use of buying companies can also result in retailers paying less local tax. “In an effort to expand both the employment and tax base of their city, some city governments have provided financial incentives to businesses that establish ‘buying companies’ in their jurisdictions, ” like rebates on the local taxes paid. (BOE Second Discussion Paper, pp. 4-5.)
E. Regulation of buying companies
In 2002, the SBE promulgated a regulation concerning buying companies. (Cal. Code Regs., supra, § 1699, subd. (h) (Regulation 1699(h)).) Regulation 1699(h), subdivision (1), provides that “[i]t is presumed that the buying company is formed for the operational reasons of the entity which owns or controls it or to which it is otherwise related. A buying company formed, however, for the sole purpose of purchasing tangible personal property ex-tax for resale to the entity which owns or controls it or to which it is otherwise related in order to re-direct local sales tax from the location(s) of the vendor(s) to the location of the buying company shall not be recognized as a separate legal entity from the related company on whose behalf it acts for purposes of issuing it a seller’s permit. Such a buying company shall not be issued a seller’s permit. Sales of tangible personal property to third parties will be regarded as having been made by the entity owning, controlling, or otherwise related to the buying company. A buying company that is not formed for the sole purpose of so re-directing local sales tax shall be recognized as a separate legal entity from the related company on whose behalf it acts for purposes of issuing it a seller’s permit. Such a buying company shall be issued a seller’s permit and shall be regarded as the seller of tangible personal property it sells or leases.”
Regulation 1699(h), subdivision (2) states that “[a] buying company is not formed for the sole purpose of re-directing local sales tax if it has one or more of the following elements: [¶] (A) Adds a markup to its cost of goods sold in an amount sufficient to cover its operating and overhead expenses. [¶] (B) Issues an invoice or otherwise accounts for the transaction. [¶] The absence of any of these elements is not indicative of a sole purpose to redirect local sales tax.”
II. Economic Development Agreement Between United and Oakland
In April 2003, United Air Lines, Inc. (United) and Oakland entered into an economic development agreement (Agreement). Under the Agreement, United established a subsidiary sales office, or buying company, in Oakland to administer its sales. In exchange for United establishing the company in Oakland, Oakland agreed to make economic incentive payments to United equal to 65 percent of the local taxes Oakland collected. The Agreement maximized sales tax revenue for Oakland and reduced costs for United.
At the time of the Agreement, the sale of jet fuel was deemed to have occurred at the point of delivery of the fuel to the aircraft if the principal negotiations for the sale were conducted in this state and the retailer had more than one place of business in this state. (Former § 7205, subd. (b)(2); added by Stats. 1998, ch. 1027, § 2.) Upon establishment of a buying company in Oakland, United had just one business location in California. United was thus no longer subject to the special rule for allocating local sales tax from jet fuel sales. Instead, United’s transactions fell under general tax rules, which allocate local sales tax based on the location of the sales office of the buying company, regardless of where the jet fuel was delivered. (§ 7205, subd. (a); Cal. Code Regs., supra, § 1802, subd. (a).)
It is alleged that the Agreement resulted in Oakland receiving additional annual sales tax revenue approaching $1 million, and United receiving an annual tax rebate of nearly $2 million. The benefit to Oakland and United allegedly came at the expense of San Mateo and other local governments hosting airports that previously received jet fuel sales tax revenue.
III. San Mateo Contests Buying Company Regulation and Allocation of Sales Tax
In December 2004, San Mateo petitioned the SBE to amend or repeal its buying company regulation, Regulation 1699(h), and also petitioned the SBE to reallocate sales taxes paid to Oakland for sales of jet fuel made through United’s Oakland buying company but delivered to aircraft at SFO. San Mateo’s petition raised issues that would later be asserted in the litigation at issue here. San Mateo asserted, among other things, that Regulation 1699(h) was inconsistent with state law in recognizing the validity of a buying company’s resales to a parent company if it adds a markup or “issues an invoice or otherwise accounts for the transaction, ” without stricter requirements for operational and legal separation between the companies. (Cal. Code Regs., supra. § 1699, subds. (h)(2)(A) & (B).) San Mateo also asserted that the regulation was invalid as applied to jet fuel taxes because state statutes intend the taxes to go to the jurisdictions where fuel is delivered to aircraft, and federal statutes limit collection of jet fuel taxes to political subdivisions where jets take off or land. The SBE did not amend or repeal Regulation 1699(h) concerning buying companies and, to date, has not reallocated jet fuel sales taxes.
IV. Amendment of Jet Fuel Tax Statutes
In 2005, while San Mateo’s request to amend or repeal Regulation 1699(h) was pending, several local governments supported legislation to amend the statutes governing taxation of jet fuel to provide that taxation occurs at the point of delivery to aircraft, regardless of whether the seller has one or more than one place of business. (Assem. Bill No. 451 (2005 Reg. Sess.) §§ 1, 2; see Assem. Com. on Revenue and Taxation, Rep. on Assem. Bill No. 451 (2005 Reg. Sess.) April 11, 2005 at pp. 3-4.)
An Assembly report observed that existing law created special rules for jet fuel sales that were intended to direct jet fuel tax revenue to jurisdictions where airports are located instead of jurisdictions where corporate offices are located and sales negotiated, as would occur under general tax laws. (Assem. Com. on Revenue and Taxation, Rep. on Assem. Bill No. 451 (2005 Reg. Sess.) April 11, 2005 at p. 3.) The report noted that “[a]n unintended result of AB 66 [establishing existing law] is that when a retailer has only one location in California, the tax is allocated to the location of the retailer and not to the point of delivery. In 2003, the City of Oakland and United Airlines (UAL) entered into an agreement to shift all Bradley-Burns local sales and use tax revenue attributable to UAL’s purchase of jet fuel for its California aircraft to the City of Oakland. In return for locating a single source purchasing and resale business (United Aviation Fuels Company, Inc.) in Oakland, Oakland agreed to grant UAL a business incentive payment equal to 65% of the sales tax received from the sale of jet fuel by UAL’s Oakland subsidiary. Although the agreement between the City of Oakland and UAL is inconsistent with the intent of AB 66, it is legal. Oakland and UAL have simply taken advantage of the requirement that a retailer have more than one place of business in California in order for local sales tax revenue to be allocated to the wingtip. By using only one retailer to sell all of its jet fuel in California, UAL can ensure that all local sales tax revenue generated from its jet fuel sales is allocated to the location of that sales office.” (Ibid.)
An Assembly committee report noted that the purpose of the pending bill is to correct “a perceived loophole in AB 66 [prior legislation] by providing that the point of sale for the purposes of allocating sales and use tax revenue from jet fuel is the point of the delivery of jet fuel into the aircraft. Proponents assert that AB 66 did not explicitly provide for wingtip allocation of local sales and use tax revenue in the case of a retailer with a single location because the Legislature did not envision the establishment of an airline subsidiary to serve as a single retailer for the purpose of effectuating a sales tax rebate agreement.” (Assem. Com. on Appropriations, Rep. on Assem. Bill No. 451 (2005 Reg. Sess.) April 27, 2005 at p. 2.) According to the bill’s author, the bill was “intended to ensure that local governments that host airports receive the benefit of sales tax on jet fuel, as envisioned by the Legislature when it passed AB 66.” (Assem. Com. on Revenue and Taxation, Rep. on Assem. Bill No. 451 (2005 Reg. Sess.) April 11, 2005 at p. 2.) The Assembly member who introduced the bill said: “This bill will close a loophole and restore the Legislature’s intent when it passed AB 66.” (Ibid.)
The bill was amended in the Senate to delay implementation of the jet fuel tax law changes until 2008, and to conduct a study on the broad issue of revenue-sharing agreements like the one between Oakland and United. (Sen. Amend. to Assem. Bill No. 451 (2005 Reg. Sess.) June 27, 2005; Sen. Com. on Revenue and Taxation, Rep. on Assem. Bill No. 451 (2005 Reg. Sess.) June 29, 2005 at p. 4.) The study was intended to create “a uniform solution and public policy around the issue of these agreements.” (Sen. Com. on Revenue and Taxation, Rep. on Assem. Bill No. 451 (2005 Reg. Sess.) June 29, 2005 at p. 4.) However, the bill was later amended to delete the requirement of a legislative study. (Sen. Amend. to Assem. Bill No. 451 (2005 Reg. Sess.) Aug. 17, 2005.) The provision for delayed implementation of the statutory change to the taxation of jet fuel remained. (Ibid.) The legislative history provided by the parties on appeal shows some legislative consideration of the effect of the delayed implementation on the Agreement between United and Oakland. A Senate committee analysis noted that the amended bill, with a January 1, 2008 effective date, would require the Agreement to cease on January 1, 2008, whereas under another version of the bill, the legislation would become effective on January 1, 2006, “and there would be no revenue sharing allowed (the United/Oakland deal would have no ‘grace period’).” (Sen. Com on Amendments Analysis of Assem. Bill No. 451 (2005 Reg. Sess.) Aug. 29, 2005.) The bill was passed with the provision for delayed implementation. (Stats. 2005, ch. 391, § 3.) Accordingly, the statutes governing taxation of jet fuel to provide that taxation occurs at the point of delivery to aircraft, regardless of whether the seller has one or more than one place of business, did not become operative until January 1, 2008. (Stats. 2005, ch. 391, § 3.)
V. San Mateo Files Lawsuit and Demurrers are Sustained
In May 2006, San Mateo sued the SBE, Oakland, United, and United’s subsidiary, United Aviation Fuels. San Mateo alleged that United lobbied the SBE to promulgate Regulation 1699(h) governing buying companies and utilized the regulation to establish a fraudulent buying company in Oakland that evaded taxes due San Mateo for jet fuel delivered to SFO. San Mateo alleged that it began losing tax revenue in 2003 and was losing “well over a million dollars each year in critical sales tax revenue because of the United Airlines scheme; revenue that goes directly into the pockets of United and the City of Oakland, which bears none of the economic or social costs of operations at San Francisco International Airport.”
San Mateo stated two causes of action against the SBE and Oakland: (1) an action for declaratory relief finding Regulation 1699(h) invalid and ordering reallocation of jet fuel taxes as if the regulation never existed; and (2) a request for a writ of mandate ordering the SBE to reallocate jet fuel sales tax for aircraft flying out of SFO. San Mateo stated three causes of action against United for antitrust violations and unfair business practices.
The lawsuit was originally filed in state court but was removed to federal court by United. In September 2006, the federal court found that San Mateo was barred by the doctrine of sovereign immunity from prosecuting claims against the SBE in federal court, and remanded those claims to San Mateo Superior Court. San Mateo’s claims against United remained in federal court. In January 2007, venue on the state claims was changed from San Mateo Superior Court to San Francisco Superior Court.
In February 2008, the SBE and Oakland filed separate motions for judgment on the pleadings. (Code Civ. Proc., § 438.) In September 2008, the trial court granted the motions with leave to amend. San Mateo then filed its first amended complaint, with which we are concerned here on appeal. The SBE and Oakland separately demurred in October 2008, raising a number of grounds. (Code Civ. Proc., § 430.30.) In December 2008, the court sustained the demurrers without leave to amend. The court found that San Mateo failed to exhaust its administrative remedies because it has a claim pending before the SBE to recover tax revenues. The court dismissed the action without prejudice to San Mateo refiling the action when the administrative reallocation petition process was complete. Judgment was entered in February 2009, and this appeal followed.
VI. The Demurrers Were Properly Sustained
San Mateo argues that the demurrers were improperly sustained because its first amended complaint states facts sufficient to constitute causes of action that are not barred by any failure to exhaust administrative remedies. We conclude that the demurrers were properly sustained. San Mateo’s first cause of action for a judicial declaration on the validity of SBE Regulation 1699(h) is not properly pleaded because it seeks reallocation of previously distributed jet fuel taxes when an administrative remedy exists for the relief sought. The existence of an administrative remedy likewise bars San Mateo’s second cause of action seeking a writ of mandate ordering the SBE to reallocate disputed jet fuel taxes.
A. Standard of review following demurrer
The principles that guide our review of San Mateo’s pleading are undisputed. “On appeal from a judgment dismissing an action after sustaining a demurrer without leave to amend, the standard of review is well settled. We give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] Further, we treat the demurrer as admitting all material facts properly pleaded, but do not assume the truth of contentions, deductions or conclusions of law. [Citations.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse.” (City of Dinuba v. County of Tulare (2007) 41 Cal.4th 859, 865.)
B. Exhaustion of administrative remedies doctrine
The demurrers here were sustained on grounds that San Mateo failed to exhaust administrative remedies. “In general, a party must exhaust administrative remedies before resorting to the courts.” (Coachella Valley Mosquito & Vector Control Dist. v. California Public Employment Relations Bd. (2005) 35 Cal.4th 1072, 1080.) “[W]hen a statute and lawful regulations pursuant thereto establish a quasi-judicial administrative tribunal to adjudicate statutory remedies, the aggrieved party is generally required to initially resort to that tribunal and to exhaust its appellate procedure.” (Jonathan Neil & Assoc. Inc. v. Jones (2004) 33 Cal.4th 917, 930 (Jonathan Neil).) The exhaustion doctrine has also “been applied when a private or public organization has provided an internal remedy, ” and in other contexts where administrative expertise is important. (Id. at pp. 930-931.) Thus, even in those cases where “the legislative intent to resort in the first instance to administrative remedies is not entirely clear, courts have required exhaustion when they ‘have expressly or implicitly determined that the administrative agency possesses a specialized and specific body of expertise in a field that particularly equips it to handle the subject matter of the dispute.” (Id. at p. 931.)
There are exceptions to the exhaustion doctrine. (Coachella Valley Mosquito & Vector Control Dist. v. California Public Employment Relations Bd., supra, 35 Cal.4th at p. 1080; Edgren v. Regents of University of California (1984) 158 Cal.App.3d 515, 521.) Futility is one exception. “Failure to exhaust administrative remedies is excused if it is clear that exhaustion would be futile” because “the party invoking the exception ‘can positively state that the [agency] has declared what its ruling will be on a particular case.’ ” (Jonathan Neil, supra, 33 Cal.4th at p. 936.) Inadequacy of the administrative process to handle the dispute is another exception where, for example, the dispute is complex yet the process fails to provide for “the taking of testimony, submission of legal briefs, or resolution by an impartial finder of fact.” (Glendale City Employees Assn., Inc. v. City of Glendale (1975) 15 Cal.3d 328, 342-343.) The administrative process must meet “minimal due process standards” or administration exhaustion is excused. (Jonathan Neil, supra, 33 Cal.4th at p. 936, fn. 7.) “Under another exception, exhaustion of administrative remedies may be excused when a party claims that ‘the agency lacks authority, statutory or otherwise, to resolve the underlying dispute between the parties.’ ” (Coachella Valley Mosquito & Vector Control Dist. v. California Public Employment Relations Bd., supra, 35 Cal.4th at pp. 1081-1082.)
For example, a determination concerning the validity of a tax policy has been held to be beyond the reach of the available administrative proceeding and thus not subject to exhaustion requirements. (Agnew v. State Bd. of Equalization (1999) 21 Cal.4th 310, 320 (Agnew).) In Agnew, the California Supreme Court held that a plaintiff taxpayer did not fail to exhaust administrative remedies in filing a declaratory relief action challenging the validity of the SBE’s tax policy requiring payment of interest as a precondition to acting upon a sales tax refund request because the challenge “did not involve any issue subject to determination through the administrative refund remedy available to plaintiff.” (Agnew, supra, at p. 320; accord Star-Kist Foods, Inc. v. Quinn (1960) 54 Cal.2d 507, 511 [constitutionality of tax statute beyond agency purview].) Simply stated, the exhaustion doctrine does not apply if the administrative agency does not have the power to decide the issues in dispute. (Star-Kist Food, Inc., supra, at pp. 510-511.)
It is the plaintiff’s burden to establish that administrative remedies have been exhausted, or that facts exist to excuse the administrative exhaustion requirement. (Westinghouse Elec. Corp. v. County of Los Angeles (1974) 42 Cal.App.3d 32, 37.) The requirement is viewed with favor and not lightly excused “because it facilitates the development of a complete record that draws on administrative expertise and promotes judicial efficiency.” (Karlin v. Zalta (1984) 154 Cal.App.3d 953, 980.)
C. The SBE provides an administrative remedy for reallocation of local taxes
The SBE has the power to reallocate improperly distributed local taxes if promptly notified of the misallocation. (§ 7209; Cal. Code Regs., supra, §§ 1807, 5250, subd. (a).) A detailed administrative procedure is provided when a local government claims incorrect distribution of sales tax. (Ibid.) The procedure includes an initial staff investigation with recourse to several layers of agency review culminating in a board hearing. (Cal. Code Regs., supra, § 1807, subds. (b), (c) & (d).)
California Code of Regulations section 1807, concerning requests for reallocation of local tax, was amended in 2008. Both the original and amended versions of the regulation provide a detailed administrative procedure for tax reallocation disputes and differences between the two versions are immaterial here. We cite the current regulation.
Specifically, section 7209 provides: “The board may redistribute tax, penalty and interest distributed to a county or city other than the county or city entitled thereto but such redistribution shall not be made as to amounts originally distributed earlier than two quarterly periods prior to the quarterly period in which the board obtains knowledge of the improper distribution.” SBE regulations provide that “[a] claim or inquiry regarding the incorrect or non-distribution of local or district taxes must meet the requirements of California Code of Regulations [, supra], sections 1807 and 1828, respectively.” (Cal. Code Regs., supra, § 5250, subd. (a).) The referenced regulation governing reallocation of local taxes provides a detailed administrative procedure. (Cal. Code Regs., supra, § 1807.)
Under the regulated procedure, a city or county may file a petition for “investigation of suspected misallocation of local tax.” (Cal. Code Regs., supra, § 1807, subd. (a)(3).) The SBE provides a form, BOE-549-L that may be used. The reallocation request “must contain sufficient factual data to support the probability that local tax has been erroneously allocated and distributed.” (Ibid.) The data must include the taxpayer’s name and specific reasons and evidence questioning the taxpayer’s allocation. (Id. at § 1807, subd. (a)(3)(A) & (E).) The petition must be submitted to the SBE Allocation Group, which then acknowledges and investigates the petition. (Id. at § 1807, subd. (b)(1) & (2).) If the Allocation Group determines that a misallocation has not occurred, it must notify the petitioner and “state the basis for that determination” in a written decision. (Id. at § 1807, subd. (b)(2).) The petitioner may appeal the decision of the Allocation Group by submitting a written objection. (Id. at § 1807, subd. (b)(4) & (6).) The Allocation Group then considers any objection and issues a written supplemental decision. (Id. at § 1807, subd. (b)(7.)
If the Allocation Group upholds the denial, the petitioner has 30 days from the mailing of the supplemental written decision to file an objection that is forwarded to the Appeals Division for review. (Cal. Code Regs., supra, § 1807, subds. (b)(8), (c)(1) & (2).) Petitioner’s Appeals Division objection “must state the basis for the objecting jurisdiction’s disagreement with the supplemental decision and include all additional information in its possession that supports its position.” (Id. at § 1807, subd. (c)(1).) The Appeals Division conducts an appeals conference at which petitioner and other interested parties have “the opportunity to explain their respective positions regarding the relevant facts and law to the Appeals Division conference holder.” (Id. at § 1807, subd. (c)(3).) Within a prescribed period of time after final submission of the issue, generally 90 days, the Appeals Division issues a written Decision and Recommendation (D&R) “setting forth the applicable facts and law and the conclusions of the Appeals Division.” (Id. at § 1807, subd. (c)(4).) Petitioner may appeal the D&R by submitting a written request for a Board hearing. (Id. at § 1807, subd. (c)(5).) Petitioner may submit a brief to the Board and participate in the Board hearing. (Id. at § 1807, subd. (d)(3) & (4).) The Board hearing is generally conducted in accordance with the rules for tax appeals. (Id. at § 1807, subd. (d)(5).) Those rules permit representation by an attorney, submission of documentary evidence, and the testimony of witnesses. (Id. at §§ 5523, subd. (a), 5523.6, subd. (a), 5523.7, subd. (a).) The Board issues a written decision following the hearing. (Id. at §§ 5560, subd. (a).) The Board’s “final decision on a petition for reallocation exhausts all administrative remedies on the matter for all jurisdictions.” (Id. at § 1807, subd. (d)(5).)
D. San Mateo’s pleading seeks reallocation of jet fuel taxes
San Mateo’s first amended complaint seeks reallocation of jet fuel taxes. The first cause of action against the SBE and Oakland seeks a judicial declaration that Regulation 1699(h) concerning buying companies is invalid. San Mateo alleges that Regulation 1699(h) is invalid because it is inconsistent with state law in recognizing the validity of a buying company’s resales to a parent company if it adds a markup or “issues an invoice or otherwise accounts for the transaction, ” without stricter requirements for operational and legal separation between the companies. San Mateo alleges that the regulation “allows recognition of business units and subsidiaries that have no separate legal identity.” San Mateo further alleges that Regulation 1699(h) is specifically invalid as applied to jet fuel taxes because state statutes intend the taxes to go to the jurisdictions where fuel is delivered to aircraft, and federal statutes limit collection of jet fuel taxes to political subdivisions where jets take off or land.
San Mateo’s pleading states: “The lack of protection [from fraudulent tax redirection] afforded by Regulation 1699(h) is exemplified by the tax-redirection scheme that prompted this Action. It is clear that United formed a business office in Oakland for the sole purpose of obtaining a kick-back of sales tax dollars.... [¶]... Because Regulation 1699(h) does not prevent entities like United from siphoning away public dollars through creation of business offices with no permissible business purposes, it is invalid.” San Mateo’s first amended complaint prays for a declaration that Regulation 1699(h) is invalid generally and as applied to jet fuel. San Mateo alleges that a declaration of invalidity will require the SBE to reallocate jet fuel taxes distributed to Oakland from 2004 to 2008.
San Mateo’s second cause of action is for a “writ of mandate ordering the [SBE] to comply with its mandatory duties” to reallocate jet fuel taxes. (Capitalization altered.) Specifically, San Mateo wants “an order mandating that the SBE examine and determine whether United Airlines maintained a separate legal identity from the Oakland buying company” and “examine and determine whether United Airlines[’] purpose in forming the Oakland buying company was to redirect sales tax.”
E. San Mateo failed to exhaust administrative remedies before seeking tax reallocation
San Mateo, in seeking reallocation of jet fuel taxes, must resort to the administrative procedure established by statute and regulations for tax reallocation. As noted above, “when a statute and lawful regulations pursuant thereto establish a quasi-judicial administrative tribunal to adjudicate statutory remedies, the aggrieved party is generally required to initially resort to that tribunal and to exhaust its appellate procedure.” (Jonathan Neil, supra, 33 Cal.4th at p. 930.) Even in those cases where “the legislative intent to resort in the first instance to administrative remedies is not entirely clear, courts have required exhaustion when they ‘have expressly or implicitly determined that the administrative agency possesses a specialized and specific body of expertise in a field that particularly equips it to handle the subject matter of the dispute.” (Id. at p. 931.)
A statute vests the SBE board with the power to reallocate taxes, and regulations promulgated under that statute establish a detailed administrative procedure for seeking reallocation. (§ 7209; Cal. Code Regs., supra, §§ 1807, 5250, subd. (a).) Even if, as San Mateo asserts, it is unclear whether the Legislature intended parties seeking tax reallocation to submit their grievance to the SBE administrative procedure, it is clear that the SBE possesses a specialized and specific body of expertise in the field of tax law and local tax distribution that particularly equips the SBE to handle the subject matter of San Mateo’s dispute. Under these circumstances, the expertise of the SBE should be initially engaged to consider the dispute, subject to judicial review after the SBE completes its administrative process. (Code Civ. Proc., § 1094.5.) On appeal, San Mateo offers several reasons why the administrative exhaustion requirement either does not apply, or should be excused here. None is persuasive.
1. The administrative process provides adequate timelines for resolution
First, San Mateo argues that it should be excused from availing itself of the SBE administrative remedy because there are no established timelines for resolution of administrative reallocation requests. San Mateo argues in its brief on appeal that the “SBE does not set any timelines for completion” of the process and “can unilaterally and indefinitely deny the relief” San Mateo seeks “through simple inaction.” In its first amended complaint, San Mateo alleges that San Mateo submitted a reallocation request form to the SBE in December 2004 but that the SBE “did not respond” to its reallocation request “between December 2004... and July 2008.” “In July 2008, the State Board of Equalization wrote a letter to the County. The purpose of the letter was unclear, but it is possible that the letter constitutes a decision of the SBE to reject, in large part, the County’s position in the Incorrect Distribution of Local Tax Form. The County responded in writing to that letter in the beginning of August and asked for clarification as to whether the letter was intended to constitute a decision on the County’s position in the Incorrect Distribution of Local Tax Form. To date [September 2008], the State Board of Equalization has not responded to the County’s request for clarification.”
We are puzzled by the state of the record, which fails to include the referenced reallocation request and related letters either to substantiate or to refute San Mateo’s allegations. San Mateo did not include the reallocation request or related letters as exhibits to its pleading, and respondents did not provide them with a request for judicial notice despite relying upon San Mateo’s claimed failure to exhaust administrative remedies in their demurrers. While the state of the record is puzzling, it is not our place to explore the facts following a demurrer. “[W]e treat the demurrer as admitting all material facts properly pleaded.” (City of Dinuba v. County of Tulare, supra, 41 Cal.4th at p. 865.) We therefore accept the pleaded fact that San Mateo filed a tax reallocation request that the SBE has not definitively resolved.
Nevertheless, the lack of SBE action to date does not excuse San Mateo from pursuing its administrative remedy. It is not true, as San Mateo asserts, that the SBE “does not set any timelines for completion” of the reallocation process and “can unilaterally and indefinitely deny the relief” San Mateo seeks “through simple inaction.” The regulatory reallocation process does have set timelines. Upon receiving a reallocation request, the SBE “Allocation Group will promptly acknowledge a submission intended as a petition.” (Cal. Code Regs., supra, § 1807, subd. (b)(1).) The Allocation Group then investigates the petition and issues a written decision to grant or to deny the petition. (Id. at § 1807, subd. (b)(2).) “If the Allocation Group does not issue a decision within six months of the date it receives a valid petition, the petitioner may request that the Allocation Group issue its decision without regard to the status of its investigation. Within 90 days of receiving such a request, the Allocation Group will issue its decision based on the information in its possession.” (Id. at § 1807, subd. (b)(3).) The regulation thus provides sufficient safeguards for timely resolution of San Mateo’s reallocation request. San Mateo may invoke those safeguards. If the SBE failed to acknowledge San Mateo’s reallocation request, and continues to do so, San Mateo may seek a writ of mandate to compel acknowledgement of its reallocation request and review as regulated. (See Schoderbek v. Carlson (1980) 113 Cal.App.3d 1029, 1033-1034, fn. 5, disapproved on another ground in Woosley v. State of California (1992) 3 Cal.4th 758, 792 [plaintiffs may seek writ of mandate if tax agency refuses to consider claim].) If the SBE acknowledged the request but failed, and continues to fail, to take any action to resolve the matter after acknowledgement then San Mateo may demand issuance of a decision by the Allocation Group as the regulation permits, and seek a writ of mandate if the SBE ignores the demand. We therefore reject San Mateo’s argument that the administrative process is inadequate to resolve the tax reallocation dispute. The SBE reallocation proceeding provides adequate due process including safeguards for timely resolution-San Mateo simply needs to invoke them.
2. Pursuit of the administrative remedy would not be futile
As a second excuse for failing to exhaust administrative remedies, San Mateo argues that pursuing the remedy would be futile. San Mateo says an administrative hearing on reallocation would be futile because any reallocation would require the invalidation of buying company Regulation 1699(h) and the evaluation of United’s tax allocation under a different rule for determining legal separation between parent and subsidiary corporations, and the SBE has refused to repeal or to renounce Regulation 1699(h). San Mateo’s pleading alleges that it petitioned the SBE to amend or to repeal Regulation 1699(h), pursuant to Government Code section 11340 et seq., and that the SBE “verbally denied the petition” in November 2005. Our own research shows, in documents we have judicially noticed, that repeal and various amendments to Regulation 1699(h) were indeed considered and rejected by the SBE in November 2005. (Evid. Code, § 452, subd. (c); SBE, Business Taxes Committee Meeting Minutes (Nov. 15, 2005); SBE Formal Issue Paper 05-010 (Oct. 31, 2005).)
But the SBE’s prior refusal to repeal or to amend Regulation 1699(h) does not make the administrative reallocation request futile. While the exhaustion of administrative remedies may be excused where it is clear exhaustion would be futile, futility is a narrow exception. “The futility exception requires that the party invoking the exception ‘can positively state that the [agency] has declared what its ruling will be on a particular case.’ ” (Jonathan Neil, supra, 33 Cal.4th at p. 936.) The SBE’s earlier refusal to repeal Regulation 1699(h) does not indicate how it will decide San Mateo’s reallocation petition. While the SBE chose not to repeal the regulation, it did not positively state what its ruling would be on San Mateo’s particular request that the regulation not be applied to United’s allocation of jet fuel taxes. Even if reallocation cannot be accomplished without the SBE ruling Regulation 1699(h) invalid, the SBE’s prior refusal to repeal the regulation does not foreclose the SBE from finding the regulation invalid, either generally or as applied to the particular transactions at issue here. Whether or not to repeal a regulation is a policy matter distinct from the adjudicative question that will be presented to the SBE when determining the validity and proper application of the regulation in a particular case.
For the sake of clarity, we emphasize that the disputed validity of the regulation is a proper subject for the reallocation process. SBE’s appellate briefing wrongly states that “[a]bsent repeal of the regulation by the SBE, the SBE’s staff can only operate in accordance with the regulation.” In fact, SBE staff may not rely upon an invalid regulation and thus should take care to consider the validity or invalidity of Regulation 1699(h) when reviewing San Mateo’s reallocation request. An invalid regulation is “vulnerable to attack at the administrative level.” (Woods v. Superior Court (1981) 28 Cal.3d 668, 680.) Our Supreme Court has rejected the argument that an attack on the validity of a regulation in an administrative proceeding is a useless or futile act because an administrative agency is compelled to enforce its regulations. (Ibid.) Only valid regulations may be enforced. The validity of a regulation is thus the proper subject of an administrative hearing and subsequent judicial review. (Ibid.)
Exhaustion of the administrative reallocation process therefore is not futile. The fact that the SBE previously refused to repeal Regulation 1699(h) does not preclude the SBE from invalidating the regulation or limiting the regulation’s reach when considering the particular transactions at issue in San Mateo’s tax reallocation request. Any reliance upon Regulation 1699(h) by the SBE will be subject to judicial review, at which time the court will have the benefit of a complete record that includes SBE’s determinations about the validity and specific application of the regulation to the facts at issue-a benefit that would be denied were the court to attempt a declaration on the validity of the regulation in the first instance.
3. The declaratory relief cause of action is not exempt from the exhaustion of administrative remedies requirement
As a third basis for challenging the dismissal of its action, San Mateo argues that its first cause of action for declaratory relief is exempt from the exhaustion of administrative remedies requirement. It is true, as San Mateo notes, that “[a]ny interested party may obtain a judicial declaration as to the validity of any regulation” by bringing an action for declaratory relief in the superior court. (Gov. Code, § 11350, subd. (a).) But declaratory relief actions, like all actions, are generally subject to the exhaustion of administrative remedies doctrine. “ ‘The declaratory relief provisions do not independently empower the courts to stop or interfere with administrative proceedings by declaratory decree.’ ” (Tri-County Special Educ. Local Plan Area v. County of Tuolumne (2004) 123 Cal.App.4th 563, 576.)
The form of the cause of action-whether pleaded as one for declaratory relief, a writ or damages-is not the deciding factor in determining application of the exhaustion of administrative remedies doctrine. The doctrine applies when a statute and implementing regulations establish an administrative tribunal to adjudicate remedies and the issue in dispute is subject to determination through the available administrative process. (Jonathan Neil, supra, 33 Cal.4th at p. 930; Agnew, supra, 21 Cal.4th at p. 320.) San Mateo misunderstands Agnew in arguing that it is categorically entitled to bring a declaratory relief action challenging the validity of a regulation. In Agnew, the California Supreme Court held that a plaintiff taxpayer did not fail to exhaust administrative remedies in filing a declaratory relief action challenging the validity of the SBE’s tax policy requiring payment of interest as a precondition to acting upon a sales tax refund request because the challenge “did not involve any issue subject to determination through the administrative refund remedy available to plaintiff.” (Agnew, supra, at p. 320.) The policy on prepayment of interest that was at issue in Agnew was not an issue that could be raised in an administrative process limited to refund matters, and thus was an issue outside the authority of the administrative agency to review and one properly submitted to the court. It was not the declaratory relief form of the action that was dispositive in the court finding that administrative remedies need not be exhausted-it was the absence of any administrative remedy sufficient to address the issue in dispute.
Here, in contrast, San Mateo’s declaratory relief cause of action does involve issues subject to determination through the administrative tax reallocation process. In its first amended complaint, San Mateo seeks a declaration that “Regulation 1699(h) is invalid generally and as applied to jet fuel sales tax and [an] order that sales tax be reallocated as if Regulation 1699(h) never existed.” (Capitalization altered.) San Mateo alleges: “if the Court concludes that Regulation 1699(h) is invalid, the State Board of Equalization will be required to reallocate to the County of San Mateo jet fuel taxes allocated to the City of Oakland from 2004 to 2008.”
The relief sought in this judicial proceeding is precisely the relief available through the administrative reallocation process. As noted above, the SBE has the power to reallocate improperly distributed local taxes and provides a comprehensive administrative process beginning with staff investigation and proceeding through several layers of review. (§ 7209; Cal. Code Regs., supra, §§ 1807, 5250, subd. (a).) The validity of Regulation 1699(h), both generally and as applied to jet fuel sales tax, is a matter subject to administrative determination (and subsequent judicial review after exhaustion of the administrative process). (Woods v. Superior Court, supra, 28 Cal.3d at pp. 677, 680.)
San Mateo mistakenly asserts that the reallocation process “only addresses past allocation of United’s jet fuel sales tax” and has no bearing on “a determination of the validity of Regulation 1699(h).” San Mateo’s mistake is perhaps rooted in the SBE’s insistence that “[a]bsent repeal of the regulation by the SBE, the SBE’s staff can only operate in accordance with the regulation.” As we emphasized above, the SBE is wrong on this point.
An administrative agency may not rely upon an invalid regulation and thus necessarily determines the validity of a regulation in enforcing it. An administrative agency “ ‘[p]roceeding pursuant to an invalid regulation is not proceeding in the manner required by law’ ” and is subject to reversal by a petition for a writ of administrative mandate. (Woods v. Superior Court, supra, 28 Cal.3d at p. 678.) As the California Supreme Court has noted: “If the trial court should find that the regulations are invalid as applied to [the writ petitioners], it may grant them relief for [the agency’s] ‘abuse of discretion’ in applying invalid regulations.” (Ibid.) It is thus well established that the validity of a regulation is the proper subject of an administrative hearing and subsequent judicial review. (Id. at pp. 677, 680.) It is also well established that the administrative agency’s tribunal should, in the first instance, resolve issues concerning the validity of the agency’s regulations. “Permitting administrators an opportunity to construe challenged regulations in a manner to avoid their invalidation is preferable to requiring a court challenge. Moreover, in those cases where the validity of such a regulation must be judicially resolved, the task of a reviewing court is simplified by a narrowing and clarification of the issues in an administrative hearing.” (Id. at p. 681.) San Mateo must exhaust its administrative remedies before resorting to the courts.
F. Our finding that San Mateo’s action was properly dismissed for failure to exhaust administrative remedies forecloses any need to address respondents’ other grounds for sustaining the demurrers
Respondents the SBE and Oakland argue that numerous other grounds support the demurrers. Respondents argue that (1) San Mateo’s declaratory relief action fails to plead a present controversy because it seeks invalidation of Regulation 1699(h) for the regulation’s effect on the taxation of jet fuel but that effect ended with a statutory amendment to the jet fuel tax laws that became operative in 2008; (2) the separation of powers doctrine bars San Mateo’s action because the Legislature positively determined that San Mateo was entitled to no more relief than a prospective statutory amendment of the jet fuel tax laws; (3) the action presents a political question that was resolved by the Legislature with the passage of limited remedial legislation; and (4) the courts should abstain from granting San Mateo any relief because the case presents an economic policy decision best left to the Legislature. Our finding that San Mateo’s action was properly dismissed for failure to exhaust administrative remedies forecloses any need to address respondents’ other grounds for sustaining the demurrers.
We have determined that this action is barred by San Mateo’s failure to exhaust administrative remedies. The SBE provides an extensive administrative process for investigating claims of tax misallocation and the SBE clearly possesses expertise in these matters. (§ 7209; Cal. Code Regs., supra, §§ 1807, 5250, subd. (a).) Under these circumstances, the trial court was correct in finding that San Mateo must exhaust its administrative remedies and finish the process it started in requesting reallocation of taxes before San Mateo may seek judicial redress. Accordingly, San Mateo may pursue its administrative tax reallocation request with the SBE and then seek judicial review of SBE’s final administrative determination by petitioning for a writ of administrative mandate.
VII. Disposition
The judgment is affirmed. The parties shall bear their own costs incurred on appeal.
We concur: Ruvolo, P. J.Rivera, J.