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Court of Appeal, Second District, Division 4, California.

CALIFORNIA FEDERAL SAVINGS AND LOAN ASSOCIATION, Plaintiff and Respondent, v. The CITY OF LOS ANGELES, Defendant and Appellant.

No. B033596.

Decided: December 18, 1989

James K. Hahn, City Atty., Richard A. Dawson, Asst. City Atty., and Myrtle Dankers, Deputy City Atty., for defendant and appellant. Louise H. Renne, City Atty., and John J. Doherty, Deputy City Atty., as amici curiae, on behalf of defendant and appellant. McKenna, Conner & Cuneo, Aaron M. Peck, Martin S. Schwartz, Michael T. Lambert, and Theresa A. Kristovich, Los Angeles, for plaintiff and respondent.

After a court trial, judgment was entered, ordering defendant/appellant The City of Los Angeles (the City) to refund plaintiff/respondent California Federal Savings and Loan Association (CalFed) funds paid to the City for CalFed's business license tax for the years 1982, 1983, and 1984.1  The principal payment totalled $5,535,528.26;  and interest payments totalled $1,792,362.77, plus additional interest at varying daily rates to the date of judgment.   The court's ruling was premised on its determination that in an area of statewide concern, the State Legislature has the authority to curtail the taxing authority, for revenue purposes, of charter cities.   For the reasons discussed below, we find that this determination was erroneous;  consequently, we reverse the judgment.


The following facts are uncontroverted.   The City of Los Angeles is a charter city as defined by article XI, section 5 (formerly art. XI, § 6) of the California State Constitution.   CalFed is a depository institution legally chartered pursuant to section 5 of the Home Owners' Loan Act of 1933, 12 United States Code sections 1461, et seq. and created pursuant to California Financial Code, Division 2, commonly known as a “savings and loan” or “thrift bank”.2

The taxes in issue were assessed by the City pursuant to sections 21.00 et seq. of its municipal code, which impose license taxes measured by gross receipts upon various classifications of businesses within the City.   The City is empowered to impose such taxes by section 2, subdivision (11)(e) of its Charter.3  Under protest, CalFed paid the business license tax for the years 1982, 1983 and 1984 and each year unsuccessfully filed for a refund.

Section 3(5) of the City Charter prohibits discrimination in taxation as between persons engaged in the same business.

Pursuant to Revenue and Taxation Code, Division 2, Part 11, the state imposes a tax upon financial corporations based upon their net earnings.   Section 23182 of the Revenue and Taxation Code 4 provides that the tax imposed is “in lieu of all other taxes and licenses, state, county and municipal” upon the banks and financial corporations, except certain classes of taxes not pertinent here.5  It further provides that the changes in this section, made by the 1979–80 Legislature with respect to sales and use taxes, apply to income years beginning on and after January 1, 1980, and the remaining changes apply to income years beginning on and after January 1, 1981.

CalFed is a “financial corporation” within the meaning of this section.   Imposition of the subject tax by the City upon CalFed is prohibited by the terms of this statute.6

In enacting the legislation of which section 23182 is a part, the Legislature made the following finding:  “The amendment to Revenue and Taxation Code Section 23182 contained in this act reaffirms the Legislature's longstanding purpose of insuring competitive parity between banks and financial corporations by subjecting both types of institutions to an equivalent tax burden.   Equal treatment of banks and financial corporations promotes the continued existence of both types of institutions thereby affording a full range of financial services at competitive rates.   Moreover, taxation of banks and financial corporations at the rate determined under Revenue and Taxation Code Section 23186 insures that their tax burden will be comparable to the combined state and local tax burdens of nonfinancial corporations subject to Revenue and Taxation Code Section 23151.  [¶] The Legislature further finds that divergent and competing local tax measures imposed on financial corporations impair the uniform statewide regulation of banks and financial corporations.   For this reason and those earlier expressed, the Legislature declares that the state, by this amendment, has preempted such local taxation of financial corporations to the same extent as the state has heretofore preempted local taxation of banks.”  (Stats.1979, ch. 1150, § 20.)

Article XIII, section 27 of the California Constitution grants the Legislature the power to tax the net income of corporations, including State and national banks, and provides that this tax is in lieu of all other taxes and licenses upon banks or their shares, except certain taxes not relevant here.


CalFed filed its complaint for refund of tax on August 2, 1983.7  CalFed asserted that the imposition of the business license tax was unlawful on the following state grounds:  (1) section 23182 provides that the tax imposed upon financial corporations under the Bank and Corporation Tax Law is in lieu of all other taxes and licenses, state, county and municipal;  (2) article XIII, section 27, of the California Constitution requires that taxes imposed upon banks, unless otherwise provided by the legislature, be measured by net income and are in lieu of all other taxes and license fees upon banks, and CalFed is the functional equivalent of a bank;  and (3) section 3(5) of the Los Angeles City Charter prohibits discrimination in the amounts of taxes assessed among persons engaged in the same business, and the City's license tax upon CalFed discriminates between it and similar businesses, i.e. banks.

After a 19 day court trial during which numerous experts were called to testify, the court ruled that:  (1) in an area of statewide concern, the legislature may act to curb the taxing power of a charter city;  and (2) there was substantial evidence to support the Legislative findings in support of its enactment of section 23182.   The court rejected CalFed's assertions that it is the functional equivalent of a bank and that the City tax is in violation of section 3(5) of the City's charter.


The City asserts that:  (1) section 23182 is an unconstitutional attempt by the Legislature to regulate a municipal affair of a charter city, in violation of article XI, section 5, subdivision (a) of the California Constitution; 8 (2) the court erred when it failed to exercise its independent judgment to determine whether a matter is an issue of statewide concern or a municipal affair;  (3) the legislative findings in support of section 23182 are unreasonable;  and (4) the trial court made erroneous and prejudicial findings.


Legislative Curtailment of Charter City Power to Tax.

The threshold issue presented by the instant appeal is whether the legislature may curtail a charter city's power to tax for revenue purposes.

We begin with an explanation of the “home rule” doctrine, articulated in article XI, section 5, subdivision (a) of the California Constitution, quoted in footnote 8.   Early in this century, our Supreme Court described the purpose of this provision as being “to secure to the municipality that had, under the provisions of the constitution, adopted a charter for its own government, the maintenance of its charter provisions in municipal matters, and to deprive the legislature of the power, by laws general in form, to interfere in the government and management of the municipality.”  (Ex parte Braun (1903) 141 Cal. 204, 209, 74 P. 780.)   Thus, while the doctrine grants to chartered cities the authority to manage local affairs, it also restricts the power of the state Legislature to interfere with or override decisions on municipal matters made at the local level.

In Braun, supra, the City of Los Angeles imposed a business license tax for the purpose of raising revenue.   The tax was in direct conflict with a state legislative enactment which limited municipal power to license to purposes of regulation only.   The Braun court framed the issue as follows:  Can the state legislature deprive a charter city of power, conferred by its charter, to impose a license-tax for revenue purposes?   Answering in the negative, the supreme court held that the power of taxation is a power appropriate for a municipality to possess and that the power to impose taxes to raise revenue is a municipal affair.  (Ex parte Braun, supra, 141 Cal. at pp. 209–210, 74 P. 780.)

Subsequent cases reiterated the Braun holding, explaining that the charter city's power to tax for revenue purposes was “pursuant to the direct constitutional grant of the people of the state [citations], and that ‘the restrictions on the exercise of that power are only the limitations and restrictions appearing in the Constitution and in the charter itself.’   [Citation.]”  (Ainsworth v. Bryant (1949) 34 Cal.2d 465, 469, 211 P.2d 564.)  (See also Ex Parte Helm (1904) 143 Cal. 553, 557, 77 P. 453 [state statute restricting licensing power of municipalities and others to matters of regulation applied solely to general law cities not charter cities];  West Coast Adver. Co. v. San Francisco (1939) 14 Cal.2d 516, 526, 95 P.2d 138 [state statute restricting licensing power of cities did not apply to charter cities even though charter did not grant specific power to city to tax for revenue raising because the California constitution, not the charter, is the source of the city's power to levy taxes for revenue purposes];  American Locker Co. v. City of Long Beach (1946) 75 Cal.App.2d 280, 285, 170 P.2d 1005 [city license fee imposed for maintenance of coin operated lock boxes in railroad or bus stations or terminals permitted because charter was controlling, not state statute limiting licensing to regulatory purposes only];  City of Glendale v. Trondsen (1957) 48 Cal.2d 93, 98–103, 308 P.2d 1 [imposition of rubbish collection fee valid both as exercise of police power and a tax because charter city has powers of taxation except as limited by its charter and the Constitution];  In re Redevelopment Plan for Bunker Hill (1964) 61 Cal.2d 21, 73–74, 37 Cal.Rptr. 74, 389 P.2d 538 [broad power of taxation of charter city is limited not only by its own charter but by the California constitution, therefore, constitutional provision permitting tax allocation plan in a redevelopment area did not conflict with the city's charter];  A.B.C. Distributing Co. v. City and County of San Francisco (1975) 15 Cal.3d 566, 569, 125 Cal.Rptr. 465, 542 P.2d 625 [payroll expense tax was not a license, occupation or income tax, but a proper exercise of the constitutional power to levy taxes for general revenue purposes].)

The City cites these and other cases for its assertion that only through constitutional amendment or charter amendment can its power to tax for revenue purposes be limited.

CalFed counters with its own long list of cases which hold that “general law prevails over local enactments of a chartered city, even in regard to matters which would otherwise be deemed to be strictly municipal affairs, where the subject matter of the general law is of statewide concern.”   (Professional Fire Fighters, Inc. v. City of Los Angeles (1963) 60 Cal.2d 276, 292, 32 Cal.Rptr. 830, 384 P.2d 158.)   In Professional Fire Fighters, the Supreme Court held that a charter city was subject to the requirements of a state statute prohibiting cities and others from infringing upon the right of fire fighters to join a union because a consistent statewide policy regarding general rights and obligations of labor and management was a matter of statewide concern.  (Id., at p. 294, 32 Cal.Rptr. 830, 384 P.2d 158.)

A “statewide concern” analysis has been applied in a numerous cases.   (See Pipoly v. Benson (1942) 20 Cal.2d 366, 125 P.2d 482 [regulation of traffic is a statewide concern];  Abbott v. City of Los Angeles (1960) 53 Cal.2d 674, 681, 3 Cal.Rptr. 158, 349 P.2d 974 [municipal criminal registration act invalid because preempted by state and beyond charter city's constitutional powers];  Bishop v. City of San Jose (1969) 1 Cal.3d 56, 63, 81 Cal.Rptr. 465, 460 P.2d 137 [prevailing wage provision of Labor Code applicable to charter city employees];  City of Santa Clara v. Von Raesfeld (1970) 3 Cal.3d 239, 245, 90 Cal.Rptr. 8, 474 P.2d 976 [issuance of bonds at rates higher than approved by charter city voters permitted because legislative emergency enactment allowing same applied to charter cities];  Baggett v. Gates (1982) 32 Cal.3d 128, 185 Cal.Rptr. 232, 649 P.2d 874 [public safety officers' procedural bill of rights applied to charter cities];  People ex rel. Seal Beach Police Officers Assn. v. City of Seal Beach (1984) 36 Cal.3d 591, 205 Cal.Rptr. 794, 685 P.2d 1145 [charter city must comply with “meet and confer” requirement of Government Code before proposing a charter amendment concerned with terms and conditions of public employment].)

The above discussion reveals that two distinct lines of cases exist, each with uncompromising language and holdings.   The Braun line of cases holds that a charter city's power to levy taxes for revenue raising purposes is strictly a municipal affair, flowing directly from the California Constitution, and restricted only by amendment to the Constitution or to the charter.   The “statewide concern” line of cases holds that where the subject matter of the general law is of statewide concern, it will prevail over the city charter.   The distinguishing characteristic appears to be that the Braun cases concern the taxing authority of a charter city, and the “statewide concern” cases deal with charter city enactments of a regulatory nature which conflict with state legislation regulating the same field.9

In its Statement of Decision, the trial court acknowledged the holding of Braun and its progeny.   It commented, however, that “[n]either Braun, ․, nor any other decision holds that the taxing power of a charter city is paramount to conflicting legislation in an area of statewide concern.”   The court then proceeded to determine whether the tax here imposed had to give way to the statutory prohibition because an issue of statewide concern was involved.

 We hold that in doing so the court erred because it applied an “apples” test to an “oranges” situation.   The Braun cases are silent about the “statewide concern” test not because, as the court assumed, they meant their silence to invite application of a “statewide concern” analysis, but because it is irrelevant in a revenue tax situation.   No case has directly overruled the holding that the power of a charter city “to impose taxes ‘for revenue purposes, including license taxes, is strictly a municipal affair’ pursuant to the direct constitutional grant of the people of the state [citations], and that ‘the restrictions on the exercise of that power are only the limitations and restrictions appearing in the Constitution and in the charter itself.’  [Citation.]”  (Ainsworth v. Bryant, supra, 34 Cal.2d at p. 469, 211 P.2d 564, emphasis added.)

Having reached this conclusion, we need not and do not address the other arguments propounded by the City.


The judgment is reversed.   Each party to bear its own costs.


1.   Similar actions were filed by numerous savings and loan institutions.   The suits were coordinated for pretrial and trial proceedings and continue so on appeal.   The parties have stipulated that this action serve as a test case impacting disposition of the other coordinated actions.

2.   These savings and loans or thrift banks are distinguished from other financial institutions, created pursuant to the National Bank Act, 12 United States Code sections 21, et seq. and California Financial Code, Division 1, which are authorized to use the term “bank.”

3.   In effect for over 40 years, this business license tax also applies, among others, to attorneys, auctioneers, barbers, dentists, pool halls, motels, circuses, collection agencies, and most other businesses as well.  (L.A. Muni.Code, §§ 21.53–21.198.)   In the 1985–86 budget year, city revenues attributable to collection of the business license tax amounted to 8.8 percent of the total revenues.

4.   All subsequent statutory references are to the Revenue and Taxation Code unless otherwise indicated.

5.   The “in lieu” rate is measured by the net income and includes an addition to the tax rate paid by general corporations.   The rate is fixed at an amount designed to impose upon commercial banks, thrift banks and other financial corporations a tax burden comparable to the aggregate State and local tax burden of nonfinancial corporations.  (Rev. & Tax.Code, §§ 23183 and 23186.)

6.   The City temporarily waived collection of the business license tax in 1981 because the State agreed to reimburse the city for lost revenues.   It was reinstated in 1982 because the state had ceased reimbursing the City.

7.   In asserting the illegality of City's business license tax, CalFed alleged both federal and state grounds.   By stipulation, the trial was bifurcated into two classes of issues:  those arising under California law and those arising under federal Law.   The court's statement of decision addresses the state law issues only.   The federal law issues were dismissed, without prejudice, as moot.

8.   Known as the “Home Rule” provision, article XI, section 5, subdivision (a), in pertinent part, provides:  “It shall be competent in any city charter to provide that the city governed thereunder may make and enforce all ordinances and regulations in respect to municipal affairs, subject only to restrictions and limitations provided in their several charters and in respect to other matters they shall be subject to general laws.   City charters adopted pursuant to this Constitution shall supersede any existing charter, and with respect to municipal affairs shall supersede all laws inconsistent therewith.”

9.   We are cognizant of two cases which are of a hybrid nature.   Century Plaza Hotel Co. v. City of Los Angeles (1970) 7 Cal.App.3d 616, 87 Cal.Rptr. 166 invalidated a charter provision imposing an excise tax upon the purchase price of alcohol, sold by a retailer for consumption on the premises where sold.   The court determined that the state had preempted the field of alcoholic beverage taxation, had a constitutional grant of authority over licensing and regulation of the alcohol industry, and had enacted a complete legislative scheme of regulation—all of which distinguishes it from the case at bench.  (Cf. Rivera v. City of Fresno (1971) 6 Cal.3d 132, 139–140, 98 Cal.Rptr. 281, 490 P.2d 793.)Weekes v. City of Oakland (1978) 21 Cal.3d 386, 146 Cal.Rptr. 558, 579 P.2d 449 concerned the validity of a tax imposed on certain employees working within the city, whether a resident or non-resident, which was in conflict with a state statute prohibiting municipalities from levying income taxes upon its residents and nonresidents.   The “Court” opinion, signed by three justices, stated, “[The City's] right to enact a revenue-raising tax is not at issue unless the city's own charter imposes restrictions upon its taxing power ․, or the city ordinance is in direct and immediate conflict with a state statute or statutory scheme.   (Bishop v. City of San Jose (1969) 1 Cal.3d 56, 62 [81 Cal.Rptr. 465, 460 P.2d 137];  Pipoly v. Benson [supra] 20 Cal.2d 366, 370 [125 P.2d 482].)”  (Weekes v. City of Oakland, supra, 21 Cal.3d at p. 392, 146 Cal.Rptr. 558, 579 P.2d 449.)We note that the cases cited by the Supreme Court to support its statement that restrictions upon a charter city's taxing authority can be imposed if the city ordinance is in conflict with a state statute or statutory scheme are two cases which dealt with regulatory conflicts.   The court concluded the municipal tax was valid because it was not a tax upon income.   As there was no true majority opinion in Weekes, we find it of little precedential value.

GOERTZEN, Associate Justice.

McCLOSKY, Acting P.J., and GEORGE, J., concur.