Host International v. City of Oakland CA1/5

Filed 10/4/21 Host International v. City of Oakland CA1/5
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION FIVE
HOST INTERNATIONAL, INC., et A160692
al.,
Petitioners and Appellants,
(Alameda County Super. Ct.
v. No. RG19010616)
CITY OF OAKLAND, et al.
Respondents.
Host International, Inc. and HMSHost Corporation (collectively
“Host”) filed a petition for a writ of administrative mandate challenging
a decision by the City of Oakland Tax Board of Review (“Board”) that
held it liable for $371,195.40 in business taxes, penalties, and interest
based on failure to pay business tax on its subleasing activities. In this
appeal from the trial court’s denial of the petition, Host contends that
the Board’s determination that it was engaged in subleasing is
unsupported by substantial evidence. Further, Host asserts that, even
assuming it was engaged in subleasing, the amount of its tax liability
must be reduced because subleasing constituted less than 20 percent of
its receipts and the statute of limitations has run for certain years.
Because we conclude Host’s contentions lack merit, we affirm.
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BACKGROUND
A.
Under the Oakland Municipal Code, businesses operating in
Oakland must obtain a business tax certificate and pay business license
taxes each year. (Oakland Mun. Code, §§ 5.04.020, 5.04.070, 5.04.080,
subd. (A).) The amount of business tax liability depends on the type of
activities in which the business is engaged. (See id., §§ 5.04.290 -
5.04.500.) A separate business tax certificate is required for each
activity of the business unless the activity comprises less than 20
percent of the total gross receipts of the business. (Id., § 5.04.040.)
Thus, a business that engages in both retail sales and leasing of
commercial property must obtain separate certificates for each unless
the exception applies. (See id., §§ 5.04.290, 5.04.430, subd. (A).) City of
Oakland (“City”) tax authorities determine the appropriate business
tax classifications based on the information reported by the taxpayer.
(Id., §§ 5.04.090, subd. (A), 5.04.110, 5.04.120.)
B.
Host held a permit approved by the Port Department of the City
of Oakland (“Port”) to occupy space and operate food, beverage, retail,
and duty-free concessions at Oakland International Airport. In
exchange for the rights granted under the permit, Host was required to
pay monthly rent to the Port. In addition to authorizing retail
activities at the airport, the permit authorized Host to sublease and
assign its space to other parties with the consent of the Port.
The permit also required that Host comply with the Port’s non-
discrimination policy, as well as with United States Department of
Transportation regulations concerning a federal program to ensure
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nondiscrimination and remove barriers to participation in airport
concessions by business enterprises owned by socially or economically
disadvantaged individuals. (See 49 C.F.R. § 23.1.) In addition, the
permit required Host to report to the Port the gross receipts of
disadvantaged business enterprises listed in Exhibit 9 to the permit.
Exhibit 9 identifies several of Host’s suppliers and subtenants as
disadvantaged business enterprises.
Host entered into a second permit with the Port to pay rent in
exchange for the ability to occupy space and conduct business at
Oakland International Airport. The second permit also authorized
subleasing with the consent of the Port and required compliance with
nondiscrimination policies.
C.
In 2015, based on an audit of Host’s financial records, a City tax
auditor determined that Host owed the City unpaid business taxes,
penalties, interest, and fees for rental income from subleases between
2006 to 2015. Host had obtained a business certificate and paid
business tax for its retail activities, but not for subleasing. The auditor
reported that the liability calculations were based on estimates of
Host’s gross receipts from subleases because the “[t]axpayer did not
provide requested information.”
Host unsuccessfully appealed the audit results to City auditors,
asserting that it was engaged only in retail sales (not commercial
subleasing), that the 20 percent exception applied, and that the City
could not collect some of the back taxes because of the statute of
limitations. Host then appealed to the Board, which upheld the
determination of tax liability in the amount of $371,195.40.
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DISCUSSION
In addressing Host’s arguments on appeal, “[w]e review the
factual basis behind the agency’s order or decision for ‘substantial
evidence in ... light of the whole record.’ ” (Akella v. Regents of
University of California (2021) 61 Cal.App.5th 801, 813-814 (Akella);
see also Code Civ. Proc., § 1094.5, subd. (c).) To the extent Host’s
contentions raise questions of law, we review those questions de novo.
(Akella, supra, 61 Cal.App.5th at p. 815.) Applying these standards, we
affirm the trial court’s denial of Host’s petition.
A.
Host contends that the Board’s conclusion that it was engaging in
subleasing activity is unsupported by substantial evidence because the
subleases were required by federal law and Host did not reap a profit.
We conclude the Board correctly determined that Host was engaged in
subleasing.
It is undisputed that Host entered into agreements to rent space
to subtenants and received rent payments from them. In the
administrative proceedings, Host conceded that it leased space at the
airport, that it sublet some of that space to other businesses, that it
collected rent from the subtenants, and that it booked this revenue as
rental income. It provided a spreadsheet showing how much rent it
collected from its subtenants between 2006 and 2016. These facts alone
provide substantial evidence that Host engaged in subleasing.
Host argues that it should not be classified as a sublessor because
it only entered into subleases to comply with federal law and the terms
of its City permits. However, Host has failed to point to any provision
of either federal law or the permits that mandated its subleasing
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activities. In a footnote, Host cites 49 Code of Federal Regulations part
23, a detailed federal regulation that has more than 30 subparts
without identifying any particular provision. The rule requires
recipients of federal funds to identify aspirational goals for
disadvantaged businesses to participate in airport concessions, which
certainly could include subleases, but it imposes no quotas and we are
not aware of any sublease mandate. (See 49 C.F.R. §§ 23.25, 23.41,
23.57, 23.59, 23.61.) The permit requires Host to comply with the
federal rule but does not itself require the subleases. At the Board
hearing, counsel for Host conceded that “I can’t point you to a legal
document where it says” that Host is required to rent space to
businesses owned by disadvantaged individuals.
Host also asserts that its subleasing activities were not taxable
as business activity because it did not enter into the subleases for the
purpose of obtaining any gain, benefit, or advantage from them. Host
contends that its subleases therefore do not meet the definition of a
taxable “business,” which the City broadly defines as “any activity,
enterprise, profession, trade, or undertaking of any nature conducted
with the object of gain, benefit, or advantage, whether direct or
indirect, to the taxpayer or to another or others.” (Oakland Mun. Code,
§ 5.04.030.) Host reasons that it only engaged in subleasing because
the City made it a condition of the airport concession contract, not
because Host hoped to obtain a benefit from subleasing. But even
assuming Host were correct that the City made the subleases a
requirement, that would simply mean that, as Host explained at the
Board hearing, the subleases were part of the cost of doing business at
the airport. No subleases, no airport concession contract.
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Further, Host failed to place into the record any evidence
demonstrating that it did not profit from subletting. Notably, the
second permit expressly allowed Host to charge subtenants rent of up
to 125 percent of the amount it paid to the Port for the same space.
The City was unable to verify whether Host made a profit or charged a
fee because Host did not cooperate with the audit.
Finally, regardless of whether Host earned a profit from
subleasing, business license taxes like Oakland’s are based on gross
receipts – not income or profit. (See, e.g., Weekes v. City of Oakland
(1978) 21 Cal.3d 386, 393-394 (Weekes).) A business tax is “a tax upon
the privilege of doing business within the taxing jurisdiction.” (Park ’N
Fly of San Francisco, Inc. v. City of South San Francisco (1987) 188
Cal.App.3d 1201, 1215.) “[I]t is the privilege, not the income generated
by its exercise, that is the direct and immediate subject of the tax.”
(Weekes, supra, 21 Cal.3d at p. 397.) Whether Host’s subletting
activities are profitable or not is thus irrelevant to its business tax
liability.
B.
Host also challenges the amount of its tax liability, arguing that
an exception for business activity that comprises less than 20 percent of
its gross receipts would eliminate its liability for the years 2006
through 2009. In addition, Host contends that a three year statute of
limitations reduces its liability. We reject both arguments.
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1.
Host relies on Oakland Municipal Code section 5.04.040, which
provides that a separate certificate is not required for a business
activity that “produced less than twenty percent (20%) of the total gross
receipts” for the business in a given year. However, to verify the
applicability of this exception, the business must report its activities
and receipts to the City. (See, e.g., Oakland Mun. Code, § 5.04.090,
subd. (A) [requiring that taxpayers conducting business in the city file
annual statements with the Business Tax Section providing
information “required by the business tax section to enable it to
administer the provisions of this chapter”].) Here, although Host held a
business certificate for retail activities and reported those activities,
Host does not dispute that it failed to report its receipt of rental
payments from subleasing activity to the City.
Neither is there any dispute that, when the City audited Host in
2015, Host failed to cooperate and failed to provide requested
documentation to the City. Because Host failed to provide the
information requested for the audit, the City relied on estimates of
gross receipts from Host’s subletting activities, as authorized under the
Oakland Municipal Code. (See Oakland Mun. Code, § 5.04.650, subd.
(A) [“If any person fails to file a declaration as required by this chapter,
the Director of Finance shall in the exercise of reasonable discretion
make an estimate of the amount of the gross receipts or other measure
of tax applicable . . . based upon any factual information which is in the
Director of Finance’s possession”].) The City advised Host that if it
disagreed with its estimates of its gross receipts, it could “provid[e]
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actual gross receipts as a result of the sublease activity . . . to the
auditor.”
By the time of the Board hearing, the only documentation Host
presented was an unauthenticated chart entitled “Oakland Rent,”
purporting to show annual figures concerning rent paid by “DBE’s”
(presumably disadvantaged business enterprises) and “HII”
(presumably Host) respectively. According to the chart, the “% of DBE
rent to total” rent paid by Host was less than 20 percent for the years
2006 through 2009 but exceeded 20 percent beginning in 2010. The
chart was unaccompanied by any evidence explaining how the numbers
were derived, the precise meaning of each row of figures, or the
supporting documentation. In fact, Host has now conceded that the
chart “did not provide the relevant information with respect to the 20%
Rule.” At no time did Host place into the administrative record
evidence of its total gross receipts for the relevant years, which would
have been necessary for the Board to determine whether the 20 percent
rule was applicable. Under these circumstances, we find no error in the
Board’s conclusion that Host failed to present evidence sufficient to
establish that the 20 percent rule applies. (See Akella, supra, 61
Cal.App.5th at p. 814 [“ ‘Only if no reasonable person could reach the
conclusion reached by the administrative agency, based on the entire
record before it, will a court conclude that the agency’s findings are not
supported by substantial evidence. ’ ”].)
For the same reasons, we reject Host’s new argument, raised for
the first time in its reply brief on appeal, that if the Board had
determined the applicability of the 20 percent rule using the City’s
estimates and Host’s actual total gross receipts, it should have been
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clear that the sublease receipts “never even came close to 20%” of the
total. As noted, Host never provided the Board with evidence of its
total gross receipts.
We likewise reject Host’s motion to augment the record with a
corrected chart and accompanying declaration that were never
presented in the administrative proceedings. Judicial review of
administrative action “is generally limited to the evidence in the record
of the agency proceedings.” (Friends of the Old Trees v. Department of
Forestry & Fire Protection (1997) 52 Cal.App.4th 1383, 1390; see also
Code Civ. Proc., § 1094.5, subd. (c).) Although additional evidence may
be received if “the court finds that there is relevant evidence that, in
the exercise of reasonable diligence, could not have been produced or
that was improperly excluded at the hearing” (Code Civ. Proc., §
1094.5, subd. (e)), Host has failed to make such a showing. (See, e.g.,
Eureka Citizens for Responsible Government v. City of Eureka (2007)
147 Cal.App.4th 357, 367; see also Western States Petroleum Assn. v.
Superior Court (1995) 9 Cal.4th 559, 578.)
2.
We likewise conclude that Host’s statute of limitations argument
lacks merit. Although Oakland Municipal Code section 5.04.240
imposes a three-year statute of limitations for actions to collect
business taxes, the limitations period is tolled while the City “is
unaware of the existence or ongoing activities of a business due to the
taxpayer’s failure to obtain a business license and/or failure to comply
with annual reporting requirements.”
Oakland Municipal Code section 5.04.090, subdivision (A)
requires that each year, “[e]very person who is conducting usual and
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customary business activities on January 1st of the current tax year
shall . . . file with the Business Tax Section a written statement setting
forth the then applicable factor or factors that constitute the measure
of the [business] tax, together with such other information as shall be
required by the business tax section to enable it to administer the
provisions of this chapter.” Host does not dispute that it failed to
report its subleasing receipts to City tax authorities. As a result, City
tax authorities were unaware of Host’s subleasing activities until the
2015 audit.
Host contends that because the Port authorized Host to sublease
its space, the City was constructively on notice of its subleasing
activities. However, Host cites no authority for the proposition that it
can violate the reporting requirements on which the City’s tax
authorities rely and, instead, shift the burden to the tax authorities to
canvas other departments for information suggesting it owes further
taxes. Under the Oakland Municipal Code, the taxpayer’s compliance
with annual reporting requirements is necessary to ensure City tax
authorities are aware of the taxpayer’s business activities. (Oakland
Mun. Code, §§ 5.04.090, 5.04.240; cf. Prang v. Los Angeles County
Assessment Appeals Bd. No. 2 (2020) 54 Cal.App.5th 1, 22 [compliance
with requirement that specific agency be provided notice ensured that
the relevant agency had the information necessary to serve its “critical
role in expertly evaluating whether that change in ownership warrants
[tax] reassessment”].) Because City tax authorities were unaware of
Host’s subleasing receipts until 2015 due to Host’s failure to report
them, the Board correctly concluded that the statute of limitations does
not reduce Host’s liability.
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C.
Finally, Host contends that because it acted in good faith and
genuinely believed it was complying with the applicable tax laws,
fundamental fairness requires that the penalties and interest
mandated by the Oakland Municipal Code be waived. We disagree.
First, Host provide no response to the City’s point that the
applicable provisions of the Oakland Municipal Code contain
mandatory, not discretionary, language imposing penalties and interest
for delinquent taxes. (See Oakland Mun. Code, § 5.04.190 [penalty for
nonpayment of annual business tax “shall be” 25 percent if not paid by
May 1]; id., § 5.04.230 [“In addition to the penalties imposed, any
person who fails to remit any business tax . . . shall pay interest”; id., §
5.04.600, subd. (B) [“If an audit results in reclassification made
necessary by earlier misclassification based upon incorrect and/or
incomplete information supplied by a taxpayer to the Business Tax
Section, penalties and interest pursuant to Sections 5.04.190 and
5.04.230 shall be retroactively assessed upon amounts underpaid from
the date the correct taxes would have been due.”].) Second, this plea for
grace is a policy argument that should be directed to the City, not a
legal argument for the courts to resolve.
DISPOSITION
The judgment is affirmed.
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_______________________
BURNS, J.
We concur:
____________________________
JACKSON, P.J.
____________________________
SIMONS, J.
A160692
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