Tax News

CCH (cch.taxgroup.com) reports:

  The city of Anaheim was barred from invoking the constitutional pay first requirement in litigation that arose when the city assessed a local transient occupancy tax against a number of online travel companies (OTCs). The pay first rule applies only to actions against the state or an officer of the state and the local ordinance did not contain a similar requirement.

  Under Article XIII, Section 32, of the California Constitution, a taxpayer who wishes to challenge the assessment of a state tax must pay the disputed amount of tax before seeking recourse in the courts to recover the amount assessed. That provision, however, applies only to actions against the state or an officer of the state. After the city assessed the tax and interest against the OTCs, the OTCs, without first paying the assessed amounts, filed actions in superior court that sought mandamus and declaratory relief against the city and its administrative hearing officer. The city cited the pay first rule and demurred to the petitions on the ground that the OTCs had not paid the taxes allegedly due prior to filing suit. The superior court overruled the demurrers and the appellate court denied the city's petition for writ of mandate.

  Moreover, the local transient occupancy tax ordinance did not contain a pay first requirement and it did not provide taxpayers with an adequate remedy at law, such as a refund procedure, to challenge the legality of the tax. As such, the city had no statutory authority to impose a pay first requirement on the OTCs. The city argued that a pay first requirement should be imposed based on the public policy underlying Article XIII, Section 32. The appellate court, however, held that the city could not rely on a public policy argument because the taxes the city seeks to collect from the OTCs do not represent a predictable income stream on which the city has come to rely. Although the transient occupancy tax has been in effect since 1977, the city had sought to collect the tax only from hotel operators until 2007 when the city issued a notice of audit to the OTCs regarding unpaid taxes. The city had not collected any of the taxes it claimed the OTCs owed.

  The appellate court limited its holding to the procedural issue of whether the OTCs could seek mandamus and declaratory relief in the superior court without first paying the taxes. The court did not consider issues relating to the merits of the OTC claims, such as whether they are "operators" as defined in the ordinance, the applicability of Proposition 218, the possibility of criminal sanctions for nonpayment of the tax, or the due process concerns that arise from the fact that the city seeks to impose the transient occupancy tax for a seven-year period in which the OTCs had no notice that the city considered them subject to the tax.

City of Anaheim v. Superior Court of Los Angeles County , California Court of Appeal, Second Appellate District, No. B216250, November 24, 2009, ¶404-019

  Other References:

  Explanations at ¶60-480