CITY OF LOS ANGELES v. SHELL OIL COMPANY (1969)

This is an appeal by defendant Shell Oil Company, a corporation (hereinafter, Shell) from a judgment in favor of plaintiff City of Los Angeles (hereinafter, the City) awarding a deficiency of a tax levied for 1958–1961 on Shell's privilege of engaging within the City in the business of selling gasoline and other petroleum products to out-of-city customers. Shell had unsuccessfully disputed the deficiency assessment at city tax department administrative hearings and had still declined to pay the asserted deficiency so the City filed this action in the superior court to collect the deficiency of the tax assessment. After trial before the court, findings of fact and conclusions of law were made and judgment was entered upholding the position of the City. This appeal followed.

This case is sequential to but a variable of the two key decisions dealing with section 21.166 of the Los Angeles Municipal Code,¹ and in the latter case with city clerk's Ruling No. 14 (hereinafter, Ruling 14), City of Los Angeles v. Belridge Oil Company, 42 Cal.2d 823, 271 P.2d 5 and 48 Cal.2d 320, 309 P.2d 417 (hereinafter, Belridge I and II) and Carnation Co. v. City of Los Angeles, 65 Cal.2d 36, 52 Cal.Rptr. 225, 416 P.2d 129 (hereinafter, Carnation).

Withdrawn Issues:

The parties helpfully have reduced the issues originally contained in the appeal to the most significant one, to wit: whether the tax on Shell's privilege of engaging in that category of its wholesaling business wherein sales of its petroleum products held in supply at its in-city bulk storage plant to its out-of-city service station dealers shall be measured on one hundred percent or an undivided fractional percent of the total gross receipts from such sales.

Preliminarily, we briefly identify the contentions no longer being pressed because doing so serves to record our understanding of what matters do not require our decision and to clarify the single issue being determined:

(1) Shell no longer contends that the findings of fact made by the trial judge are not complete or that some which were made are not supported by substantial evidence.

(2) Shell no longer resists the part of the tax levy measured from 25 percent of gross receipts from sales credited to Shell's in-city sales district and from 15 percent of gross receipts from other sales, wherein the merchandise was shipped directly to the wholesale customer from Shell's refinery situated outside the City.

(3) The City no longer contends that its ordinance levied a tax on Shell's in-city business activity of ‘handling’ (i. e., piping in, storing and trucking out) gasoline which became the subject of wholesales, in the manner that Carnation held was done as to Carnation Company's in-city business of manufacturing. (See also comment of author in Annotation in 106 A.L.R. 1332.)² The City concedes that the tax, as it is involved in this case, is solely on the privilege of engaging in the business of selling.

(4) The City no longer asserts that, although measuring the tax on Shell's wholesales of gasoline held at its in-city bulk storage plant to out-of-city service station dealers (the very great bulk of the wholesaling business of Shell under consideration) at 100 percent of gross receipts made no apportionment based on out-of-city business functions related to such sales, an overall apportionment was achieved as to Shell by reason of the fact that the City made an apportionment down to 25 and 15 percent of gross receipts from Shell's out-of-city refinery sales (a very small amount of the wholesaling business of Shell originally under consideration) and by taking the two categories of Shell's business of wholesaling in a combined unit.³

Initial Statement of Facts:

The evidential facts included in our fact recitals are substantial reproductions of or compatible with the ultimate facts set out by the trial judge in his written findings of fact.

Section 21.03 provided in part that ‘a business tax must be paid by every person engaged in any of the businesses * * * specified in Sections 21.50 to 21.198 * * * ; and a business tax is hereby imposed in the amount prescribed in the applicable section.’

Section 21.166(a), in pertinent part, provided that ‘Every person * * * selling any * * * merchandise at wholesale * * * shall pay for each calendar year’ certain sums for certain monetary segments of ‘gross receipts.’ (For example, $13 for the first $20,000 of gross receipts.)⁴

Pursuant to authority granted by section 21.15(h), the city clerk, who administered the taxing process, issued Ruling 14, Part I of which interprets section 21.166. Subparagraph (a) of paragraph 1 of Part I (hereinafter, paragraph 1(a)) sets the keynote for the entire interpretive aspect of the ruling. Excerpted for ease of opplication to our case, it says: ‘Whenever a person is engaged within the City * * * in a business subject to a tax [under section 21.166] only those gross receipts which are directly attributable to the business [activity] engaged in within the City * * * shall be included in the measure of the tax.’ (Emphasis and interpretive word added.)

Excerpted for application to our case, subparagraph (c) of paragraph 1 (hereinafter, paragraph 1(c)) reads:

‘(c) If the person engaged in such business [in our case selling at wholesale] * * * maintains within the City a place * * * from which he engages [to some extent] in such business, all [gross] receipts resulting from sales of * * * merchandise which [gross receipts] are in any manner attributable to business functions carried on * * * from that place * * *, and which * * * merchandise * * * [is] shipped from a place within the City * * * to a place outside the City but within the State of California, shall be considered directly attributable to the business [functions] engaged in within the City [so as to bring the matter within paragraph 1(a)].’ (Emphasis and interpretive wording added.)

Subparagraph (d) of paragraph 1 (hereinafter, paragraph 1(d)) is not now directly involved, but its provisions have some bearing on the meaning of paragraph 1(c). As applied to our case it reads, in part:

‘(d) If the person engaged in such business * * * maintains within the City * * * a place * * * from which he engages in [such] business and has receipts which are attributable both to business activities based upon that place of business and business activities carried on outside the City * * * 25 percent of the receipts resulting from the sale of * * * merchandise * * * sold by the person which are not shipped from * * * the City * * * as provided in paragraph (c) above, shall be considered directly attributable [to the in-city business activities] if four or more of the elements of the selling process listed below5 take place within the City * * * with respect to the sales of * * * merchandise which produce those receipts; if less than four of the listed elements of the selling process take place within the City, 15 percent of the gross receipts so derived shall be considered directly attributable.’ (Emphasis and interpretive wording added.)

The circumstances concerning Shell's make-up and activities came from the testimony of Shell personnel, under examinations by counsel for both sides, and from an operations manual. There was very little inconsistency in this evidence. It was pointed out that one of several major business functions of Shell was marketing, for the operation of which it had a separate department. The main function of Shell's marketing department, of course, was to sell the company's products. Shell's major product, as far as this case is concerned, was gasoline. The headquarters of the marketing department was New York City, New York.

The marketing department was geographically divided, below the head office, among regional, divisional and district offices. We are concerned with the regional office which was located in San Francisco, the division office which was located on Sixth Street in Los Angeles and covered quite a bit of Southern California (hereinafter, Division Office), and the district offices which were located in Los Angeles, Anaheim, Culver City, Long Beach, Pasadena and San Bernardino. The main function of the Division Office was to provide physical facilities for the staff and advisory assistance to the district offices within its area. Each district office primarily was engaged in making leases and sales agreements with dealers and servicing the established dealers. There were about 300 independent Shell service station dealers with places of business outside the City (hereinafter, dealers). Shell had a bulk storage plant located within the City (hereinafter, Bulk Plant). Gasoline was brought to the Bulk Plant by pipeline from a refinery (near Wilmington) which was located outside of the City. It was gasoline from the supply at the Bulk Plant which Shell sold and delivered by trucks to its dealers.

Shell paid a tax based on an undivided⁶ 20 percent in 1958 and on an undivided 25 percent in 1959 through 1961 of gross re ceipts from those sales. The City claimed that the tax payment should have been measured on 100 percent of the gross receipts from those sales based on paragraph 1(c) and in May 1961 levied the deficiency assessment which is the subject of this appeal.

The Contentions:

Shell contends, in effect, that paragraph 1(c) makes the tax, or at least its application to Shell, an improper and invalid exercise of the City's taxing power in violation of the apportionment requirement of Belridge I an II, because it leaves no room for recognition of significant out-of-city functions which are part of the total selling process.

The City does not appear to claim that paragraph 1(c) provides for apportionment; rather it asserts that it provides for allocation, that is, the allocation of sales having the features described in paragraph 1(c) out of the category of combined incity and out-of-city selling activities into a category where the entire selling process is considered in-city.⁷ The justification claimed for this allocation apparently is that the combination of shipment of the merchandise from a point within the city limits and the carrying on within the city limits of at least some additional elements of the total selling process is so significant an aspect of the selling process that other elements must be considered of negligible impact. The City, in effect, equates such combination as being tantamount to the situs of the customer's place of business being in-city.⁸ The City, even though it has foregone its contention that the business tax can be on the handling of the product, asserts that Carnation supports its construction of section 21.166 by Ruling 14⁹ and so limits the effect of Belridge I and II as to make the principle set forth therein inapplicable to the circumstances of this case.

Consideration of Belridge and Carnation:

Belridge I, referring to then section 21.49,¹⁰ the predecessor tax provision which present section 21.03 clarified, and section 21.166, held: ‘[T]he business license tax is on the privilege of engaging in selling activities in the City * * *.’ (P. 832, 271 P.2d p. 11.) (Emphasis added.) ‘[E]ven though the city can tax the activity of selling it can only base the tax on such selling activities as are carried out within its territorial limits. For this reason it is only those gross receipts which are attributable to selling activities within the city which should form the basis for the rate of tax. * * *’ (Pp. 831–832, 271 P.2d p. 10.) (Emphasis added.) It is clear that the second underscored phrase means only that undivided percentage of gross receipts which can be considered attributable to selling activities within the City. In Belridge II the City argued that this holding in Belridge I did not, say that the attribution had to be direct (p. 322, 309 P.2d 417). However, the Supreme Court stated in Belridge II that it had theretofore held (in Belridge I) that section 21.166 ‘applied to selling activities carried on within the city, the tax to be measured by that [undivided] portion of the gross receipts directly attributable to the defendant's selling activities in the city.’ (P. 324, 309 P.2d p. 419.) (Emphasis and interpretive word added.)

Following the opinion in Belridge I and II, the city amended its tax ordinance as indicated above to make it clear that the tax, as far as section 21.166 was concerned, was on the privilege of engaging in the business of manufacturing or selling and issued Ruling 14 in an effort to formulate a method of levying the tax compatible with the holding in Belridge I and II.

Part II of Ruling 14 explains that it was ‘promulgated by reason of * * * [Belridge I and II] which have made it necessary to devise a method by which the measure of the tax imposed upon persons who are engaged in * * * businesses both within and outside of the City * * * can be determined,'¹¹ and states the City's view that Belridge II enunciated the principle that ‘[gross] receipts may be included in the measure of the tax only if they are ‘directly attributable’ to * * * [in-city] business [activities].'¹² (Emphasis and interpretive words added.)

The actual holding in Carnation, in our opinion, does not back up the City's assertion that Carnation supports its allocation construction of Ruling 14. It turns on the alternative business dealt with in section 21.166 ‘manufacturing and selling’ (see footnote No. 4). Although the record in Carnation may show, as suggested by the City, that a few of the products sold by Carnation Company were manufactured outside of the city limits, and although Carnation recited (at page 38, 52 Cal.Rptr. at page 226, 416 P.2d at page 130) that it was ‘agreed that administrative and manufacturing, processing or handling facilities for all products here involved are located in Los Angeles' (emphasis added), which leaves open the proposition that not all of the products involved were manufactured in-city, the Supreme Court effectively narrowed the scope of its opinion to the business of manufacturing by stating that: ‘The incident of the tax which necessarily must have some minimum contact with Los Angeles is ‘manufacturing and selling,’ and the record reveals that all the product subjected to the measure of the tax * * * fall within that language as interpreted by ruling No. 14' (p. 40, 52 Cal.Rptr. p. 227, 416 P.2d p. 131), and that: ‘manufacturing, if not selling, provides the required ‘definite link’ * * * with the city.' (P. 40, 52 Cal.Rptr. p. 227, 416 P.2d p. 131.)

Having set this factual premise, the California Supreme Court then stated (p. 38, 52 Cal.Rptr. p. 226, 416 P.2d p. 130):

‘* * * [I]t is constitutional for a city to tax the privilege of manufacturing * * * goods within its boundaries, and to determine the amount of the tax on the gross receipts from sales of the goods, regardless of whether the sales are made within or without the boundaries. [Citation.]’

It is to be noted that the Carnation court made strong and explicit reference to the first part of section 21.166's dual taxablebusiness-activity factors, that is, the activity of ‘manufacturing and selling’ (as distinguished from the second factor of ‘selling’ only) and that it felt it appropriate to concentrate on manufacturing.¹³

It is probably the reference to Ruling 14 in the sentence quoted above which the City feels establishes that the Supreme Court has given its stamp of approval to it for all purposes. However, the Supreme Court in Carnation was only called upon to consider Ruling 14 as it dealt with the alternative business of manufacturing and, in particular, so it seems, with the circumstance wherein the entire manufacturing process took place in-city. The Carnation court makes a clear differentiation concerning the tax being on the business of manufacturing as compared with the business of selling. Moreover, it specifies a reason why there should be a limitation as to admeasurement of the tax from sales on the one (business of selling) and not on the other (business of manufacturing): ‘Because Belridge involved goods which were only sold in Los Angeles as distinguished from goods manufactured * * *¹⁴ there, the issues concerned only those portions of * * * [section] 21.166 * * * dealing with persons ‘selling * * * goods, * * *’ and not [with] persons ‘manufacturing * * * goods, * * *.’' (P. 38, 52 Cal.Rptr. p. 226, 416 P.2d p. 130.) ‘As sales in those cases [Belridge I and II] were the sole incidents which gave Los Angeles jurisdiction to tax the business activities there involved, the city was bound to measure its tax on only those sales made within its jurisdiction [which can be interpreted to mean, in light of other pronouncements in Belridge itself, only on those selling activities carried on within its jurisdiction], for constitutional reasons.’ (Pp. 39–40, 52 Cal.Rptr. p. 227, 416 P.2d p. 131.) Thus, it is appropriate to analyze Ruling 14 as it applies strictly to the business of selling as that concept is included in L.A.M.C. section 21.166.

Consideration of Paragraph 1(c) of Ruling 14:

The paragraph 1(c) factors were clearly present in Shell's situation. It maintained within the City a place from which it engaged in the business of selling gasoline at wholesale to its out-of-city dealers. Two places would so qualify, the Division Office where supervisory personnel for marketing with supporting staff were located and the Bulk Plant from which the gasoline was drawn for shipment to the dealers. At both locations business functions were carried on to which in some manner gross receipts from sales of gasoline to dealers were attributable. Consequently, it is important to determine what paragraph 1(c) means and whether using it makes the tax ordinance or its application to Shell unconstitutional. We note that Ruling 14, by means of paragraphs 1(c) and 1(d), segregates the business of selling into two separate categories: (1) the business of selling where the merchandise is shipped from the City and (2) the business of selling where the merchandise is not shipped from the City.

The City appears to interpret paragraph 1(c) as creating a sort of presumption that 100 percent of the total gross receipts from sales falling within its ambit are to be considered attributable to the in-city elements of the total selling process (with no attribution to out-of-city selling activities) as long as the merchandise is shipped from a place within the city limits to the out-of-city customer. Repositioning the phrases some for continuity of context and adding a few interpretive words, paragraph 1(c), as it relates to the business of selling, would seem to provide as follows:

If the person engaged in such selling business maintains within the City a place from which he engages in such business, and if the merchandise sold is shipped from a place within the City to a place outside the City, all gross receipts resulting from sales of such merchandise shall be considered directly attributable solely to the business functions engaged in within the City (and not in any way to business functions engaged in outside the City, even though such outside City functions appear to be contributive to such gross receipts) if the gross receipts are in any manner attributable to the business functions carried on at that place of business.15

There is no apportionment under this interpretation. It attempts to be an ‘allocation’ provision of the type defined by the City.

Although the true holding of Carnation, in our opinion, does not sanction an allocation theory based on the presence of the merchandise at a supply depot within the city limits for the purpose of shipment to out-of-city customers, there are in Carnation certain explanatory references to Belridge which afford some justification for the City's feeling that Ruling 14, as the City interprets it, is compatible with the spirit of Carnation and not made unacceptable by pronouncements in Belridge. First of all, in pointing out the intended extent of Belridge's decisional influence, the Supreme Court observed: ‘Belridge was never intended to be, and should not be read as applicable to a fact situation differing in any material respect from that then before the court.’ (P. 40, 52 Cal.Rptr. p. 227, 416 P.2d p. 131.) The fact situation in Belridge and the factual requisites for paragraph 1(c) do differ. In Belridge, although some of the total selling process (undoubtedly the negotiating and consummating activities which would be significant elements) took place within the City, the product itself never entered the city limits but was shipped from a point outside of the city to a destination also outside of the city limits. In paragraph 1(c's) format the merchandise is at least at rest within the city limits to the extent that it can be considered as being shipped from a place within the city limits to a place outside the city limits.

In Carnation the Supreme Court observed (at page 38, 52 Cal.Rptr. p. 226, 416 P.2d p. 130), ‘It is agreed that * * *^15a manufacturing, processing or handling facilities for all products here involved are located in * * * [the city limits] * * *.’ It then said, ‘Preliminarily we note that it is constitutional for a city to tax the privilege of manufacturing, processing or handling goods within its boundaries, and to determine the amount of the tax on the gross receipts from sales of the goods, regardless of whether the sales are made within or without the boundaries.’ The City points out that some of Carnation Company's products were manufactured out-of-city. It appears to argue from this that the tax as to these must have been on the selling part of the dual business concept specified in section 21.166 ‘manufacturing and selling’ and that the decision authorized its admeasurement from gross sales even though some were considered as having taken place out-of-city. However, the Supreme Court does not explain its decision this way, but in subsequent language places its emphasis on the manufacturing aspect, thus indicating it felt that the items manufactured out-of-city but processed or handled in-city along with the items manufactured in-city were not of sufficient consequence to be an influencing factor. The language alluded to is this (p. 38, 52 Cal.Rptr. p. 226, 416 P.2d p. 130):

‘Because Belridge involved goods which were only sold in Los Angeles as distinguished from goods manufactured and sold there, the issues concerned only those portions of sections 21.166 and 21.167 dealing with persons ‘selling any goods, wares, or merchandise,’ and not persons ‘manufacturing and selling any goods, wares or merchandise.’' (Emphasis added.)

In differentiating the fact situations of the two cases, the Supreme Court in Carnation said: ‘[In Belridge] * * * the taxpayer did no manufacturing in Los Angeles, and none of its goods ever entered Los Angeles before they were sold there.’ (Emphasis added.) (P. 38, 52 Cal.Rptr. p. 226, 416 P.2d p. 130.) The emphasized portion of the quotation suggests that the presence of merchandise at a supply depot within the city limits preparatory to shipment in connection with a sale would be accorded considerable importance. However, these explanations about Belridge do not warrant the conclusion by the City that it had correctly predicted in advance of Carnation that the presence of the merchandise within the City for shipment to out-of-city customers would be the determinative factor which effectually would remove that category of business transaction from the basic principle laid down in Belridge and allow for allocation no matter what other selling functions took place out-of-city. Too many significant elements in the total selling process could occur outside of the city limits. We do not believe that the Supreme Court was saying in Carnation (when it pointed to the circumstance in Belridge that none of the seller's goods ever entered Los Angeles before they were sold there) that the mere presence of the product within the city limits would make all other factors involved in the selling process, many of which could take place outside of the city limits, of no consequence.

In light of this conclusion, we consider that when applied only to the business of selling, paragraph 1(c), read as an allocation provision, is arbitrary, unreasonable, and contrary to the constitutional principle laid down in Belridge I and II, and even contrary to the doctrine expressed in paragraph 1(a) of Ruling 14. It fails to give recognition to significant factors in the selling process which could transpire outside of the city limits.¹⁶

The Problem of Apportionment and Additional Facts:

However, even though paragraph 1(c) has this unconstitutional aspect, it might have been applied against Shell in a manner which achieved fair and constitutional results. On the other hand, if the proper approach is to ignore Ruling 14, it is necessary to examine the circumstances to determine if apportionment would be essential. Out-of-city factors in the total selling process might have been of such negligible effect as to be of no consequence, thus making the use of 100 percent of gross receipts from the sales involved as the measure of the tax perfectly permissible.

Finding of Fact No. XIII states in part that, ‘* * * the major part of the sales activity takes place in the City of Los Angeles.’ (Emphasis added.)

This finding recognizes that a minor quantum of activities generating the gross receipts from wholesales to out-of-city dealers took place outside of the city; and minor could, but probably was not intended to, have meant up to 49 percent. At least the term ‘minor’ would support a substantial bundle of out-of-city selling functions of a significant nature.

Consistent with the composite sense of Finding of Fact No. XIII are the following evidential facts derived from the record bearing upon the division between in-city and out-of-city functions directly contributive to the sale of gasoline at wholesale to out-of-city dealers. Since the tax is on the overall privilege of engaging in the business of selling at wholesale, the entire process should be examined.¹⁷

Predominantly, the dealer operations were under subleases from Shell known as ‘L’ leases, Shell having previously leased the facility from its owner.¹⁸

Annually there was a turnover of dealers at the rate of 25 to 35 percent. Therefore, the function of binding the dealer to a quota of purchases by mutual execution of a sales agreement was an important part of the total selling process.¹⁹ The written sales agreement between Shell and the dealer was executed by District personnel in the District area, and it included a minimum monthly purchase requirement and a minimum load order requirement.²⁰

When a new dealership was created, instructions to the order-receiving-and-dispatching personnel of the Bulk Plant, detailing the arrangements set up for the supplying of the new dealer with gasoline under his sublease and sales agreement, were given on his behalf by District personnel. From this information plastic cards which were used by the truck drivers in connection with their delivery of gasoline loads to dealers and their invoicing therefor, were prepared. On them were listed, among other things, the method to be used for payment (remittance or currency, infra) and prices. Apparently provisions for prices were set out in the purchase agreements taken from basic price data set and altered as circumstances required in the Regional Office in San Francisco. The Division Office could modify prices under certain circumstances.

Activities carried on at the Bulk Plant also were involved in the selling process. Its physical facilities consisted of several bulk tanks having a total capacity of 982,000 gallons and various functional buildings and facilities. The draw from the storage tanks was about 17,000,000 gallons a month.²¹ The personnel consisted of various operating and administrative employees and the plant manager. Generally, the transport vehicles consisted of twelve truck-trailer units, eleven semis, and several small trucks (collectively hereinafter, trucks). There was an appropriate number of drivers to operate them. Altogether there were about 112 employees at the Bulk Plant including drivers, having a payroll of about $600,000 per year. In charge of all was the operations manager at the Division Office.

A dispatcher received and recorded all calls ordering gasoline. These came from the dealers or District salesmen toll free on a Zenith number. The majority of calls came from the former. A given dealer would put in an order better than once a week. Ninety-five percent of all deliveries to dealers were from the supply at the Bulk Plant.²² A driver making a delivery to a service station had with him the plastic card, invoices, meter tickets and load report forms (D2s). At the service station he dumped the gasoline, made out his load report, completed the invoice and left a copy of it with the dealer after the latter receipted for the load. This hand delivery of the invoice at the station constituted the billing to the dealer.

There were two principal methods by which dealers paid for gasoline²³ ordered and delivered. The more common was the ‘remittance’ system. This was described by a Shell witness as a ‘delayed action C.O.D.’ The dealer was allowed 48 hours to mail his remittance covering the invoice to the Bulk Plant or to his District Office for in-turn forwarding by it to the Bulk Plant. The greater part of a dealer's remittance consisted of the dealer's originals of the slips stamped out and signed when a motorist buys gasoline from a dealer with the familiar credit card. Between Shell and its dealers they were known as ‘D16s' and were treated as cash. The balance of the remittance apparently was in the form of a check drawn on the dealer's own bank account or cash. If the dealer failed to meet the 48-hour deadline, the follow-up and ‘prodding’ came from the District Office. Occasionally a dealer on the remittance plan, by reason of tardy compliance, was converted to a ‘currency’ basis (strict C.O.D.; the second principal method of payment). Apparently some dealers, because of poor credit rating, were put on ‘currency’ to begin with. Also, if a check was bad, the bank involved notified the Bulk Plant which teletyped the District Office for instructions. The District Office normally advised that the dealer should be put on ‘currency’, and a cashier at the Bulk Plant would put ‘currency’ on the dealer's plastic card for temporary guidance to truckers.

When a dealer was on ‘currency’, the trucker, before dumping, ascertained that the dealer had enough ‘D16s' and money to cover the load and he collected the payment forthwith upon presenting the C.O.D. invoice.²⁴

When a dealer's envelope with his remittance for a delivery of gasoline to his station arrived by mail at the Bulk Plant a remittance clerk received it, checked it against outstanding invoices, and passed it on to a cashier who balanced it out. The cashier made out a daily report sheet which was sent along with the ‘D16s' to data processing which was then at the Division Office.²⁵ Presumably data processing electronically recorded payments, checked them against invoice billing and determined inaccuracies, shortages and overrages of the dealers. Adjustment of these was made with the dealer involved by District personnel. The trucker's D–2 loading pass was checked against the invoice to ascertain that the gallons delivered tallied with the quantity of gasoline taken out.

When a driver came in he went to the cashier and turned in the C.O.D. payments collected, and these were similarly balanced out.

In recapitulation, the major aspects of the selling process to which gross receipts can be said to be directly attributable and the locale aspect to each are as follows:

1) The execution of the buy-and-sell agreements-out-of city;

2) The ordering of deliveries under the buy-and-sell agreements—part out-of-city and part in-city;

3) The delivery of the product including place of storage from which delivery initiated—part in-city and part out-of-city;

4) The billing for the product—out-of-city;

5) The receipt of payment for the product—part out-of-city and part in-city as to remittances; out-of-city as to currency;

6) The verification of amount of payment—in-city;

7) The dunning for delinquencies—out-of-city.

We make no evaluation as to the relative significance of each of these functions.

There is no question but what the in-city elements in the selling process as above recounted loom large, especially considering the role played by personnel at the Bulk Plant however, considering the number and types of selling functions that have an out-of-city aspect to which we feel gross receipts are directly attributable,²⁶ we cannot conclude that they are so negligible or insignificant that they can be ignored or considered overpowered by the fact of the merchandise being in-city for shipment purposes, so as to permit an admeasurement of the tax as if all the selling process elements of the category of the business of selling being taxed which were directly contributive to the generation of gross receipts were in-city.

Disposition:

The judgment is reversed and the case is remanded to the trial court so that a proper apportionment of gross receipts can be determined to govern the admeasurement of the tax. The achieving of this end may include a return of the matter to city tax department administrative hearings if the trial court, depending upon the attitude of the parties, deems it to be worthwhile. (Belridge I and McDonnell Douglas Corp. v. Franchise Tax Bd., 69 Cal.2d 506 72 Cal.Rptr. 465, 446 P.2d 313.)^*

Judgment reversed with directions.

FOOTNOTES

1.  Hereinafter references to code sections are to those of the Los Angeles Municipal Code for the years 1958–1961.

2.  No doubt the abandonment of this contention stems from the City's recognition that in section 21.166, L.A.M.C. handling is conspicuous by its absence and cannot reasonably be considered encompassed within the term manufacturing. The realistic conclusion is that section 21.166, L.A.M.C. and Ruling 14 envision handling only as a part of the selling process.

3.  It is now accepted that Shell's business of selling at wholesale to its out-of-city dealers should be analyzed for the necessity and extent of apportionment of gross receipts for tax base purposes as a separate and independent category of its wholesaling business. The parties appear to mutually recognize the authenticity generally of the process of categorizing Shell's wholesaling business from that standpoint. The differentiating factor creating an initial split into two such categories is the situs of the business operation of the wholesale customer (either a service station dealer or a bulk selfconsumer) to whom the gasoline is transported; one category stems from an incity situs, the other stems from an out-of-city situs. Now there appears to be mutual recognition of a further split (also into two categories) of the second of the original two categories. The differentiating factor is the point of origin of shipment to the out-of-city wholesale customer; one category stems from an in-city origin (here the service station dealer is the wholesale customer), the other stems from an out-of-city origin (here, generally, the bulk self-consumer is the wholesale customer).

4.  In this excerpt we have curtailed the wording to cover ‘selling’ only, since by mutual agreement this is the business activity being taxed. In complete form section 21.166 dealt with dual business activities, that of selling and that of manufacturing and selling. It is the latter activity that Carnation deals with. The full text of the first portion of this section reads as follows:‘(a) Every person manufacturing and selling any goods, wares or merchandise at wholesale, or selling any goods, wares or merchandise at wholesale, and not otherwise specifically taxed by other provisions of this Article, shall pay [etc.] * * *.’

5.  The elements of the selling process referred to are set out in seven paragraphs. Paragraph 1 thereof has multiple elements within itself. The seven paragraphs are excerpted as follows:‘1. Negotiating sales of * * * merchandise

FOOTNOTE.  ‘[S]oliciting * * * orders for the sale of merchandise, * * *.‘[R]eceiving * * * orders for the sale of merchandise, * * *‘[C]arrying on activities * * * designed to promote * * * the sale of * * * merchandise.‘2. Display of * * * samples of * * * merchandise * * * similar * * * to those offered for sale where the actual article sold * * * will be delivered from a place of storage * * * outside the City. * * *‘3. Processing of orders received * * * preparatory to their being accepted, where the actual acceptance occurs elsewhere.‘4. [A]cceptance of orders received * * *.‘5. [A]rranging for delivery * * * of articles sold * * * from a place of storage * * * located outside the City. * * *‘6. Billing for * * * merchandise sold.‘7. [C]ollecting receipts * * * resulting from sales of * * * merchandise.’

6.  Neither party nor the Belridge and Carnation courts use the term ‘undivided’ when referring to a portion or percentage of gross receipts; but it is felt that this is the concept in mind since the situation does not seem to have existed where some sales in the category under consideration produced gross receipts totally attributable to in-city functions but other such sales produced gross receipts totally attributable to out-of-city functions.

7.  The City advanced this contention in its oral argument. It appears to be asserted only indirectly in its brief. A number of cases use the terms ‘apportionment’ and ‘allocation’ interchangeably to cover the meaning we give here to apportionment. This circumstance must be borne in mind when analyzing those cases. The distinction, however, is definitely intended in this case.

8.  Shell seems to acknowledge that in-city customer situs eliminates any need for apportionment, but it does not concede that delivery from in-city storage is its equivalent.

9.  Carnation came down after the trial judge issued his Memorandum of Decision September 16, 1965, but before he made his findings of fact, conclusions of law and judgment on March 13, 1967.

10.  ‘[A] license is required to be obtained by every person engaged in any of the businesses * * * specified in the following sections of this Article; and for such license a tax is hereby imposed in the amount prescribed in the applicable section.’

11.  Probably this was intended to mean engaged in businesses which involved activities taking place both within and without the city limits.

12.  Again, under consideration would be an undivided percentage of gross receipts considered to be so attributable.

13.  It seems reasonable that the City should have coupled selling with manufacturing as the first factor, and it was most logical for the Supreme Court in Carnation to have laid the emphasis on manufacturing. Manufacturing is the significant activity being taxed; the selling feature is properly coupled with it because the tax is being measured by what the products sell for and there is no measure until the sale takes place. As the Supreme Court pointed out in Carnation, the measure could have been on some calculated value of the merchandise manufactured, and then selling would not have been involved at all.

14.  The omitted words are ‘and sold’; they are not significant in this context.

15.  Paragraph 1(c) seems to be ambiguous and can be given another meaning wherein it appears to be saying as follows: If the merchandise is shipped from a place within the city limits (where it has been at rest before it starts its movement) to a customer outside of the city limits, then it will be presumed that whatever activities go on at the business place the person maintains within the City directly contribute to gross receipts, even though actually these activities are of a type which only indirectly contribute to the generation of sales. This entitles that particular in-city activity to be considered among the totality of factors directly contributing to the generation of gross receipts (under the Belridge II direct contribution requirement). For example, if at the business place maintained by the person only certain administrative and supervisory activities were carried on and these, in actuality, could be said to only indirectly contribute to the generation of gross receipts, by reason of the presumption established by paragraph 1(c), this administrative and supervisory activity would be considered as having contributed directly to gross receipts from sales as to which the subject merchandise was shipped from a place within the City to a place outside the City.If paragraph 1(c) is read in this manner, it simply insures that the in-city place of business activities will be considered factors directly (rather than perhaps indirectly) contributive to gross receipts and, therefore, allows them to be equated with the totality of direct selling process factors occurring both within and without the City. It does not preclude apportionment. Significantly, however, if paragraph 1(c) is read this way it does not provide an apportionment formula (as paragraph 1(d) does) with a set undivided percentage of the whole to be applied for certain quantities of in-city factors, but it would appear to call for individualized administrative calculation of apportionment based upon an identification and evaluation of incity and out-of-city factors to which gross receipts would be considered directly atrtibutable in some proportion to each. This interpretation actually seems to be the more plausible semantically, but the City does not interpret it this way, and the City's interpretation of its own ruling is entitled to great weight. (Sedalia ex rel. and to Use of Ferguson v. Shell Petroleum Corp., 81 F.2d 193, 197, 106 A.L.R. 1327, 1331.) However, the premise that paragraph 1(c) provides for allocation and not apportionment is fortified to some extent by the circumstance that Part II of Ruling 14 contains no provision as to paragraph 1(c) which it does as to paragraph 1(d) authorizing an assessee to ‘apply to the City Clerk for [an individualized] computation of the applicable percentage’ if he ‘believes that the percentage of his [gross] receipts determined to be directly attributable [to his in-city selling functions] under the provisions of paragraph (d) * * * is greater than the facts justify.’ (Emphasis added.) We also feel that the portion of Part II of Ruling 14 which uses the term ‘formulae’ does not refer to paragraph 1(c), which truly does not set out any formula, but rather refers only to paragraph 1(d) and its formulae, the application of which results in 25 percent or 15 percent of gross receipts admeasurements. The clause which makes reference to ‘formulae’ reads as follows:‘Where formulae are prescribed, they are designed to provide a ready means of computing tax liability in the large majority of cases with little if any material adjustment, but flexible enough to permit adjustments in those cases where the general formula produces an inequity working to the disadvantage of the taxpayer of the City * * *.’Shell appears to be content to let the City make its ‘allocation’ intepretation and to assert that it makes section 21.166 unconstitutional.

15.  The omitted words are ‘administrative and’; they are not essential to the reasoning involved.

16.  Even the interpretation set out in footnote No. 15 to the effect that in-city activities will be considered directly contributive to gross sales because of the presence of the merchandise within the City for shipment from it, even though such activities in actuality might only be indirectly contributive, is not reasonable or logical.

17.  It is noted that Shell classifies its sales to dealers as its ‘retail business'. It considers its sales to self consumers as its wholesale business. However, from the standpoint of the concept of wholesales contained in the tax ordinance, both categories of business involve wholesaling.

18.  There were also ‘DL’ leases wherein Shell subleased back to the owner from whom it originally had leased; ‘S' stations wherein the operator was on salary from Shell; ‘E’ stations wherein in an emergency a temporarily hired operator was in charge; ‘OD’ stations wherein an open dealer had only a sales agreement with Shell; ‘C’ stations which were company controlled. The number of the types of leases other than ‘L’ leases was small, and, therefore, the practice with respect to them is not considered in reaching our decision.

19.  The execution of the sales agreement was contemporaneous with or immediately subsequent to the execution of a sublease which established the dealer as such. The person to be the dealer had previously been located by District personnel. We feel that these would be steps only indirectly contributive to sales. Almost without exception the subleases to the dealers were negotiated and executed on behalf of Shell by the District manager. Nonetheless the division resale manager had authority to execute Shell's subleases to dealers. The record does not disclose whether any of the subleases to dealers in the area and during the times involved in this case were executed by the division resale manager. The subleases were for the duration of one or three years. In connection with determining matters to be included in such leases, District personnel made traffic counts and analyzed and calculated the resale-to-the-public potential of the dealership.

20.  No form of the sales agreement is a part of the record, so we have no direct information as to its details.

21.  Although this storage capacity and draw meant that there would be frequent replenishment, the product, of course, was fungible, so that no particular quantity of gasoline piped in could be said to have remained in storage for a particular period of time. In any event, the fact of storage in the manner indicated was sufficient in our opinion to support the proposition that the shipment to out-of-city dealers was from the Bulk Plant rather than from the out-of-city refinery via the Bulk Plant.

22.  Some deliveries were made direct from the refinery to dealers. Apparently this process was common for some service stations in Santa Maria. Also, at times pipe lines running from the refinery to the Bulk Plant would not deliver enough gasoline. When it appeared that the supply at the Bulk Plant would run out, Shell trucks were sent to the refinery to load for deliveries to dealers. These deliveries were not of sufficient magnitude to have a bearing on determining the ratio between in-city and out-of-city elements in the total selling process and the relative significance thereof.Most deliveries from the refinery were to bulk self-consumers, whom Shell classified as its true wholesale customers. The problem about the tax on this category of business is one of the issues withdrawn from our consideration.

23.  There were other petroleum products sold by Shell to dealers such as lubricating oil and solvents, but they were in insignificant quantities, and we feel they can be ignored in coming to a decision in this case. However, it can be noted that occasionally lubricating oil was sold by Shell to dealers on a conventional type credit basis and payment was normally made by check after billing by the treasury department. It is not clear from the record which Shell office was the recipient. However, it was either the cashiers at the Bulk Plant or the Division Office, and the check was sent either direct or to the District Office for forwarding.

24.  The exact ratio of currency transactions and remittance transactions is not disclosed by the record. It is only stated, in effect, that there were substantially more remittance transactions.

25.  Now it is in Menlo Park.

26.  The list is not intended to be complete. On reconsideration at the proper lower level other selling activities may be recognized which can be considered part of the selling process and directly contributive to gross receipts. The examples set out in this opinion, however, do exemplify the type of function making direct contribution and therefore will serve as a guide in this respect.Also, as an aid in any future lower level proceedings which might take place to determine proper apportionment, we list in this footnote some of the activities which at least relate to the selling process but which we feel contribute only indirectly to the generation of gross receipts. Thus, whether these activities are accomplished in-city or out-of-city would not be significant. After each item we indicate where the activity is normally performed or where the personnel is based which usually performs it: The locating of persons to become dealers (out-of-city); securing locations for service stations (in-city); collecting credit information on potential dealers (in-city and out-of-city); receiving rental payments for dealers (in-city and out-of-city); supervising service functions including receiving and clearing complaints by dealers and customers (in-city and out-of-city); providing counseling service for district operations (in-city); keeping tab on availability of gasoline supply for dealers (in-city); recommending price support for dealers involved in gas wars (in-city); providing advertising aids to dealers (out-of-city: New York); providing fuel supply for truckers (in-city); providing in-service training and education for the district salesmen (in-city and out-of-city); handling ordering and delivery problems (in-city and out-of-city); ‘keeping finger on’ competitive activities of dealers (in-city and out-of-city); handling credit problems with dealers, including bad checks (in-city and out-of-city).

FOOTNOTE.  Advance Report Citation: 69 A.C. 524.

REPPY, Associate Justice.