Judge Lee W. Tsao, Case Number: 22NWCV00135, Date: 2024-01-11 Tentative Ruling

Judge: Lee W. Tsao, Case: 22NWCV00135, Date: 2024-01-11 Tentative Ruling

Case Number: 22NWCV00135 Hearing Date: January 11, 2024 Dept: C

EMERALD SEVEN, LLC v. STATE OF CALIFORNIA, CALIFORNIA DEPARTMENT OF TAX AND FEE ADMINISTRATION

CASE NO.: 22NWCV00135

HEARING: 01/11/24

I. Defendant CALIFORNIA DEPARTMENT OF TAX AND FEE ADMINISTRATION’s Demurrer to Plaintiff’s Second Amended Complaint is SUSTAINED without leave to amend.

II. Defendant CALIFORNIA DEPARTMENT OF TAX AND FEE ADMINISTRATION’s Motion to Strike the First Amended Complaint is MOOT.

Moving Party to give notice.

Defendant’s Request for Judicial Notice is GRANTED. (Cal. Ev. Code §452.)

This action was filed by Plaintiff EMERALD SEVEN, LLC (“Plaintiff”) on February 28, 2022, against Defendant CALIFORNIA DEPARTMENT OF TAX AND FEE ADMINISTRATION (“Defendant”).

On June 20, 2023, Plaintiff filed the operative Second Amended Complaint (“SAC”), which asserts the following causes of action:

(1) Declaratory Relief – Misclassification of Taxpayer;

(2) Declaratory Relief – Jeopardy Determination;

(3) Declaratory Relief- Jurisdiction;

(4) Declaratory Relief – Improper Notice;

(5) Violation of Due Process;

(6) Injunctive Relief;

(7) Quiet Title;

(8) Gross Negligence; and

(9) Breach of Contract

The SAC alleges that “Defendants violated the CDFTA Compliance Policy and Procedures Manual… because they did not equitably and uniformly enforce the provisions of the various business tax laws and regulations administered by Defendants. Defendants in bad faith did not mail the December 1^st 2020, CDFTA Request Letter to Mr. Duong nor to Mr. Duong’s process server to properly register the ‘correct legal ownership to determine and pay any taxes to the CDFTA’ as the ‘cannabis retailer/taxpayer.’…. Defendants ‘closed-out’ Mr. Duong’s account without providing Mr. Duong an opportunity to provide documents to show Mr. Duong is not liable for the taxpayer/tenant’s taxes, without discussing the allegations against Mr. Duong; thus, violating CDFTA’s policy to ‘examine books, records, and returns’ to competently and/or equitably determine whether to ‘recommend an audit, creation of an estimated liability, and close out the account without further action.’” (SAC ¶35.)

Defendant CALIFORNIA DEPARTMENT OF TAX AND FEE ADMINISTRATION (“Defendant” or “CDTFA”) demurs on the following grounds: (1) Plaintiff Jimmy Duong lacks standing to litigate this tax dispute because he is not the taxpayer, and thus, not the real party in interest; (2) the California Constitution, article XIII, section 32 and Revenue and Taxation Code sections 6931 and 6932 prohibit the issuance of an injunction, writ of mandate, or other legal or equitable process to prevent or enjoin the assessment and collection of tax; (3) The Court does not have jurisdiction over the SAC because Plaintiff has not exhausted its administrative remedies; (4) Plaintiff fails to state a claim for gross negligence because a public entity and its employees are not liability for an injury caused by the administration of tax laws and the collection of tax under Gov. Code §860.2; (5) Plaintiff has not complied with the Government Claims Act which requires a claim for money or damages against a public entity to be presented to the State before filing a lawsuit; and (6) Plaintiff fails to state a claim for breach of contract because CDFTA’s enforcement of the Sales and Use Tax Law does not create a contractual relationship with Plaintiffs .

The demurrer to the first through ninth causes of action is SUSTAINED without leave to amend.

Article XIII, §32 of the California Constitution prohibits legal or equitable actions against the state to prevent or enjoin the collection of any tax, and provides that the taxpayer must pay the allegedly illegal tax and then bring an action to recover the tax paid. Where a lawsuit targets assessment of tax, the plaintiff must first pay the tax, even if a plaintiff only seeks declaratory relief. (California Dept. of Tax and Fee Administration v. Sup. Ct. (2020) 48 Cal.App.5th 922, 933.) Here, Plaintiff does not allege that it has paid the assessed tax prior to filing this action, as required by the “pay first, litigate later” rule codified in Cal. Const. art, XIII, §32.

Similarly, Revenue and Taxation Code §6931 prohibits illegal or equitable actions against the state to prevent or enjoin the collection of any tax.

Moreover, Plaintiff’s eighth cause of action is barred by Gov. Code §860.2, which states that “[n]either a public entity nor a public employee is liable for any injury caused by: (a) instating any judicial or administrative proceeding or action for or incidental to the assessment or collection of a tax. (b) An act or omission in the interpretation or application of any law relating to a tax.” (Id.) Plaintiff’s eighth cause of action is also seemingly barred because Plaintiff does not allege that filed a timely tort claim. (Gov. Code §905(a).)

The Motion to Strike is DROPPED as MOOT.