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

CITY OF LOS ANGELES, Plaintiff and Respondent, v. CLINTON MERCHANDISING CORPORATION, Defendant and Appellant.*

Civ. 25376.

Decided: March 20, 1962

Shearer & Fields, Bertram Fields and Bernard Shearer, Beverly Hills, for appellants. Roger Arnebergh, City Atty., Bourke Jones and James A. Doherty, Asst. City Attys., and Robert C. Summers, Deputy City Atty., for respondent.

This is an appeal from a judgment for plaintiff entered by the superior court in an action by the City of Los Angeles to recover certain license taxes allegedly due and payable by defendant for the years 1955 through 1958.

The judgment sustained an assessment for license taxes measured by ‘gross receipts' under three separate and distinct sections of the Los Angeles Municipal Code.1 The amount of $40.20 was assessed under section 21.167, based on receipts allocated to that aspect of defendant's business involving retail sales of merchandise to defendant's employees; the amount of $8,840.18 was assessed under section 21.166, based on receipts allocated to that aspect of defendant's business allegedly involving the wholesale sale of merchandise; and the amount of $3,392.84 was assessed under section 21.190, based on amounts received allocated to that aspect of defendant's business involving activities other than its alleged sales. Defendant did not contest the retail sales assessment under section 21.167.

The amount of tax claimed by the city was based upon an audit of defendant's records. The findings of the city's administrative board of review affirmed the original assessment for such taxes levied by the city clerk.

The trial court, confirming the findings of the board of review, awarded judgment to the city in the sum of $12,629.70 plus interest from the date of such findings in the sum of $1,105.50 as provided by Los Angeles Municipal Code section 21.05.

Defendant Clinton Merchandising Corporation is an affiliate of various retail sales corporations (hereafter called ‘store corporations'). It acts as the central managing, accounting and disbursing office for the store corporations. It collects all of the receipts of the store corporations and pays all of their obligations. It advances moneys for any of the store corporations having receipts insufficient to cover their obligations. It renders various advisory services to the store corporations.

Defendant also arranges and negotiates for the purchase of merchandise to be sold by the store corporations. The merchandise in question is purchased by the defendant with defendant's own funds. Such merchandise is, in most cases, shipped to and stored for short periods of time in defendant's warehouse prior to its being distributed to store corporations. Merchandise remaining in defendant's warehouse at the end of an accounting period is carried on defendant's books as inventory. Defendant makes occasional sales from such merchandise both at wholesale and retail to employees.

Upon the books of defendant as between itself and each store corporation it enters the moneys paid out by it for store payroll cost, advertising and distributed merchandise as an ‘advance.’ Defendant collects all of the receipts of the store corporations, credits a percentage fee which has varied between 5 per cent and 6 per cent to its own account and credits the balance to the respective accounts of the store corporation as ‘repayment of advances.’ Certain items, such as payroll expense, are directly allocated to particular store corporations. Other cost items, such as television advertising, are allocated among the store corporations in the ratios that each store corporation's sales bear to the combined sales of all store corporations in the area of the telecast.

The trial judge found that the defendant, during the years 1955, 1956, 1957 and 1958, engaged in the business of selling goods, wares and merchandise both at wholesale and retail and in the business of providing various services to others as an independent contractor.

The court further found that the only payments for license tax made by defendant for such periods were based upon a portion of the gross receipts from charges for services and a portion of the gross receipts from wholesale sales, which portion varied between 5 per cent and 6 per cent during the years in question, and that the tax found to be due was computed upon the total applicable gross receipts derived by defendant from the respective activities in question less full credit given for payment so made (and for a nominal amount of sales tax overpayment).

The court concluded as a matter of law that during the years in question defendant engaged within the City of Los Angeles in the kind of businesses described in sections 21.166, 21.167 and 21.190 of the Los Angeles Municipal Code and that the receipts derived from said businesses which were used by plaintiff in computing taxes due under the respective sections are ‘gross receipts' as that term is defined in section 21.00 of the Los Angeles Municipal Code. It was determined that the provisions of the Los Angeles Municipal Code imposing the tax upon defendant and the procedures followed under that code for the purpose of determining the amount of tax due from defendant were valid and constitutional exercises of the taxing power of the City of Los Angeles and that as of the date of judgment the amount owing to the city was $13,735.20.

The two principal issues presented by this appeal are:

1. Whether or not the measure of tax imposed under section 21.190 is correct. (Defendant concedes that it is taxable under said section.)

2. Whether or not defendant's activities fall within the purview of the activities taxed under Los Angeles Municipal Code section 21.166.

Los Angeles Municipal Code section 21.190, which imposes a license tax upon persons engaged in general occupational activities within the City of Los Angeles, measures its tax by the gross receipts from such activities. It is not a tax upon such receipts; it is a tax upon the activity, measured by gross receipts.

The fact that a business tax may be measured by gross receipts does not convert the tax into a tax upon such receipts. (American Mfg. Co. v. St. Louis, 250 U.S. 459, 39 S.Ct. 522, 63 L.Ed. 1084.)

Section 21.00, subdivision (a), defines gross receipts as, ‘The total amount of the sale price of all sales, the total amount charged or received for the performance of any act, service or employment of whatever nature it may be * * * including all receipts, cash, credits and property of any kind or nature, any amount for which credit is allowed by the seller to the purchaser without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, interest paid or payable, losses or any other expense whatsoever; * * *’

Defendant contends that certain of its revenues are not ‘gross receipts' and should not be included therein in determining the amount of license tax payable by it. The revenues which it asserts should be excluded are those not received by it ‘for the performance of any act, service or employment’ and therefore are not ‘gross receipts.’ However, the trial court properly found such revenues to be included within the definition of ‘gross receipts' as set forth in section 21.00, subdivision (a), of the municipal code.

The tax imposed by section 21.190 is upon the activities and the stipulation of facts sets forth that these are the activities of the defendant.

The case of Rexall Drug Co. v. Peterson, 113 Cal.App.2d 528, 248 P.2d 433, allowed taxation under the same section of the same activities, having substantially the same fact pattern of operation as involved here.

In the Rexall case (Rexall Drug Co. v. Peterson, supra, 113 Cal.App.2d at 529, 248 P.2d at page 433) the court found that the company ‘* * * administers the whole business enterprise, maintains a head office in Los Angeles, and furnishes accounting, financial, personnel, legal, executive managerial, and directive services to its subsidiaries. For these services Rexall charges each subsidiary its proportionate cost thereof. No profit is charged.’ Rexall contended unsuccessfully that in accounting between it and its subsidiaries debits for intercompany bookkeeping were not gross receipts as contemplated by the ordinance.

Defendant compares parts of its activities to those of a business manager in that it pays its own expenses out of its fees, and such fees are defendant's only ‘gross receipts' or ‘compensation.’ It also pays out moneys for its clients' expenses and is repaid such sums in addition to its fees.

The repayment of such amounts spent for clients' expenses by the attorney, by the business manager, and by defendant, defendant asserts, are not ‘gross receipts' since they are not payments ‘for the performance of any act, service or employment’ but are merely reimbursement for advances which are paid to the taxpayer in addition to his gross receipts. However, as the trial judge noted in his memorandum opinion, the items of revenue included in the gross receipts of defendant pertained directly to the activities in which the defendant engaged and are the measure of the tax imposed.

Section 21.00, subdivision (g), provides that a ‘[s]ale * * * shall be deemed to include * * * [t]he making of any transfer of title, in any manner or by any means whatsoever, to tangible personal property for a price, and to the serving, supplying or furnishing, for a price, of any tangible personal property fabricated or made at the special order of consumers who do or who do not furnish directly or indirectly the specifications therefor.’ The defendant herein purchases merchandise using its own funds. The merchandise, in most instances, is shipped to and stored in defendant's warehouse. It is carried on its books as inventory. The defendant makes occasional sales at wholesale and retail from its warehouse although the bulk of the merchandise is distributed to the stores as needed. Title to and physical possession of the merchandise pass to defendant upon its acquisition and are transferred by defendant to one or the other of its affiliated stores. This operation, to the extent pertinent here, is identical with the operation of a wholesaler's business. The mere attaching of different labels to various steps employed (e. g., calling the costs of acquiring merchandise ‘advances') does not change the character of the operation. Defendant argues that the fact the merchandise is stored for short periods of time in its warehouse places it within the classification of a ‘broker’ as defined in section 21.79. Under the latter classification a lesser rate of tax is imposed. However, it is significant, as the trial judge pointed out, defendant at no time sought or obtained a license under that classification.

Section 21.79 dealing with the licensing of commission merchants or brokers provides that persons in that classification may take title to goods during transit and may store them for a ‘short period of time’ without losing such business classification. However, these are only two factors to be considered in the complete scheme of operations which may be taken into consideration in determining the business classification in which a particular type of enterprise properly belongs. Some factors are common to many enterprises whereas others may be entirely dissimilar. All of the facts of defendant's operation were considered by the city's administrative board. The findings of that board, as well as those of the trial judge, were that the defendant's activities constituted selling goods at wholesale. This classification was supported by substantial evidence.

The judgment is affirmed.


1.  All subsequent references to section numbers will refer to appropriate section of the Los Angeles Municipal Code.

BURKE, Presiding Justice.


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