Judge: Theresa M. Traber, Case: 23PSCV02623, Date: 2024-11-12 Tentative Ruling

Case Number: 23PSCV02623    Hearing Date: November 12, 2024    Dept: 47

Tentative Ruling

Judge Theresa M. Traber, Department 47

HEARING DATE:     November 12, 2024               TRIAL DATE: February 11, 2025

CASE:                         Happy Harbor Restaurant, Inc. v. California Dept. of Tax & Fee Administration

CASE NO.:                 23PSCV02623           

MOTION FOR SUMMARY JUDGMENT

MOVING PARTY:               Defendant California Department of Tax and Fee Administration

RESPONDING PARTY(S): Plaintiff Happy Harbor Restaurant, Inc.

CASE HISTORY:

·         08/25/23: Complaint filed.

·         05/09/24: Request for Dismissal as to Second Cause of Action filed.

STATEMENT OF MATERIAL FACTS AND/OR PROCEEDINGS:

            This is a tax refund action. Plaintiff alleges that Defendant collected excessive taxes on the sale of a restaurant.

Defendant moves for summary judgment.

TENTATIVE RULING:

Defendant’s Motion for Summary Judgment is GRANTED.

DISCUSSION:

Defendant moves for summary judgment.

Legal Standard

The function of a motion for summary judgment or adjudication is to allow a determination as to whether an opposing party can show evidentiary support for a pleading or claim and, if not, to enable an order of summary dismissal without the need for trial. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843.) Code of Civil Procedure Section 437c(c) “requires the trial judge to grant summary judgment if all the evidence submitted, and ‘all inferences reasonably deducible from the evidence’ and uncontradicted by other inferences or evidence, show that there is no triable issue as to any material fact and that the moving party is entitled to judgment as a matter of law.”  (Adler v. Manor Healthcare Corp. (1992) 7 Cal.App.4th 1110, 1119.)  “The function of the pleadings in a motion for summary judgment is to delimit the scope of the issues; the function of the affidavits or declarations is to disclose whether there is any triable issue of fact within the issues delimited by the pleadings.” (Juge v. County of Sacramento (1993) 12 Cal.App.4th 59, 67, citing FPI Development, Inc. v. Nakashima (1991) 231 Cal. App. 3d 367, 381-82.)

As to each claim as framed by the complaint, the defendant moving for summary judgment must satisfy the initial burden of proof by presenting facts to negate an essential element, or to establish a defense. (Code Civ Proc. § 437c(p)(2); Scalf v. D. B. Log Homes, Inc. (2005) 128 Cal.App.4th 1510, 1520.) Courts “liberally construe the evidence in support of the party opposing summary judgment and resolve doubts concerning the evidence in favor of that party.” (Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 389.) The lack of opposition by a plaintiff is not grounds to grant a motion for summary judgment if a defendant cannot meet their initial burden of proof. (See Thatcher v. Lucy Stores, Inc. (2000) 79 Cal.App.4th 1081, 1087.)

            Once the defendant has met that burden, the burden shifts to the plaintiff to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto. To establish a triable issue of material fact, the party opposing the motion must produce substantial responsive evidence. (Sangster v. Paetkau (1998) 68 Cal.App.4th 151, 166.)

Factual History

            This is an action demanding the repayment of excessive taxes allegedly collected by Defendant on the sale of a restaurant owned by Plaintiff. As evidenced by the undisputed record, Defendant commenced a sales tax audit of Plaintiff in 2016, ultimately covering the period between January 11, 2011, and September 30, 2019. (Defendant’s Separate Statement of Undisputed Material Fact Nos. 1-2; Plaintiff’s Response to Separate Statement Nos. 1-2.) In 2019, Plaintiff executed an agreement to sell a restaurant which it owned, initiating an escrow process managed by Central Escrow Group, Inc. (SSUMF No. 4; RSS No. 4.) On or about January 24, 2020, Central Escrow sent Defendant a Request for Certificate of Payment, seeking a certificate of release for the sale of the restaurant, and listing the sale price of the restaurant as $1,190,000. (SSUMF Nos. 5-7; RSS Nos. 5-7.) Defendant advised Plaintiff that the request had been made on January 31, 2020. (Id. No. 8.) On September 3, 2020, Defendant sent Central Escrow a Notice of Amounts Due and Conditional Release, stating that the full purchase price was due and informing Central Escrow that the full purchase price was to be held in deposit with Defendant “until all pending issues have been resolved.” (Id. Nos. 9-10.) At that time, Defendant’s audit of Plaintiff remained ongoing, and no formal deficiency determination had been issued. (Id. No. 11.) On September 28, 2020, Central Escrow sent Defendant a check in the amount of $1,030,827.48, which has been held in deposit since that time. (Id. Nos. 13-14.)

            On February 14, 2023, Plaintiff filed a refund claim with Defendant demanding the return of the funds conveyed by Central Escrow. (SSUMF Nos. 15-17; RSS Nos. 15-17.) Plaintiff subsequently filed this action on August 25, 2023, seeking damages in the same amount. (See Complaint ¶ 20.) In May of 2024, Defendant sent a letter to Plaintiff stating that Defendant had completed the audit and, based on its examination, proposed the issuance of a formal notice of deficiency determination in the amount of $1,058,393.26, consisting of $678,481 in taxes; $201,727.26 in interest through May 31, 2024, and $178,185 in penalties. (SSUMF Nos. 21-23; RSS Nos. 21-23.) Defendant’s letter was accompanied with supporting documentation, including calculations and recommendations regarding penalties. (Id. Nos. 24-28.) These papers were enclosed in a May 8, 2024 letter from Defendant’s Supervising Tax Auditor, Eileen Smith, which stated that Plaintiff had ten days from the date of the letter to contact Defendant regarding any questions or challenges to Defendant’s findings. (Id. Nos. 29-30.) Plaintiff requested a meeting with Defendant to review the analysis on May 20, 2024. (Id. Nos. 31-32.) At the time this action was filed, Defendant had not made a final determination regarding Plaintiff’s tax liability, and no notice of deficiency determination had been issued. (Id. No. 34.)

Exhaustion of Administrative Remedies

            Defendant moves for summary judgment on the sole remaining cause of action for overpaid taxes on the grounds that Plaintiff had not exhausted administrative remedies before pursuing this tax refund action.

            The California Sales and Use Tax Law authorizes the Department of Tax and Fee Administration to assess, collect, and refund taxes. (Rev. & Tax Code § 6001 et seq.; see also §§ 20, 20.5; Gov. Code § 15770.22.) Sections 6811 through 6815 require purchasers to withhold from the purchase price of a business, or its goods or stock, any amount which the seller owes under the Sales and Use Tax Law until the seller produces a receipt from the administering entity showing that all taxes have been paid or no amount is due. (Rev. & Tax Code § 6811.) If the purchaser does not withhold that amount from the purchase price, the purchaser is itself liable. (Id. § 6812(a).) The Department may require withholding of funds before the final tax liability is determined. (Rev. & Tax Code § 6183; Cal. Code Regs. Tit. 18 § 1702(b).) Such withheld funds are treated as security and are deemed payments only if they are in fact applied to the taxpayer’s liability. (Rev. & Tax Code § 6815.)

            Article XIII, section 32 of the California Constitution vests the Legislature with plenary control over the method to recover taxes paid. (Cal. Const. art. XIII § 32.) Consequently, a taxpayer must strictly comply with any administrative procedures established by the Legislature for the recovery of a tax before bringing an action in Court. (IBM Personal Pension Plan v. City and County of San Francisco (2005) 131 Cal.App.4th 1291, 1299.) Moreover, the disputed tax liability must be fully paid before the taxpayer may seek to recover any amount of that tax. (State Bd. Of Equalization v. Superior Court (1985) 39 Cal.3d 633, 636, 642-43.)

In the context of the Sales and Use Tax Law, a deficiency determination does not become final until either the 30-day period to seek redetermination has run (Rev. & Tax. Code §§ 6561, 6565), 30 days have passed from the Department’s order on any petition for redetermination (Rev & Tax. Code § 6561), or the appellate process with the Office of Tax Appeals has concluded.  (Gov. Code §§ 15670(a); 15671(a)91); 15672-15675.) Based on these provisions, Defendant argues that Plaintiff’s action is premature because no final determination had been made at the time the action was filed. (SSUMF No. 34). Consequently, Defendant contends, the withheld funds were not yet considered a “paid tax” because the amount owed had not yet been conclusively determined, and the funds remained held in security, rather than paid, as a matter of law. (SSUMF Nos. 13-14; Rev. & Tax. Code § 6185.)

Plaintiff, in opposition, dismisses Defendant’s position as “silly,” and asserts that payment of the assessed taxes was made by Central Escrow. Plaintiff appears to be operating under a misconception. Under the plain language of sections 6701 and 6185 of the Revenue and Tax Code, the funds received by Defendant from Central Escrow are security, not payment, as they have not yet been applied to Plaintiff’s tax liability precisely because that liability has not yet been finally determined. (Rev. & Tax Code § 6701, 6185.) Plaintiff’s associated argument that the three-year statute of limitations under section 6902.3 would have run if this action had not been filed is similarly unfounded. As payment under the Sales and Use Tax Law is not made until the funds are actually applied to Plaintiff’s liability, the statute of limitations has not yet begun to run, nor will it start running until such time as those funds are applied to the account. (See Rev. & Tax Code § 6902.3.) Moreover, Plaintiff’s bald assertions that the administrative process has concluded is both unsupported by law and belied by the undisputed facts, which establish that discussions between the parties are ongoing, and no formal determination has been made. (Plaintiff’s RSS Nos. 31-34.)

Based on the undisputed factual record, the Court finds that Defendant has demonstrated that Plaintiff cannot prevail on the sole remaining cause of action for overpaid taxes because Plaintiff’s tax liability has not yet been finally determined, no taxes have been paid as a matter of law, and, thus, Plaintiff has not exhausted its administrative remedies. Plaintiff, in contrast, has failed to demonstrate a triable issue of fact in this respect. The Court therefore finds that Plaintiff has not exhausted its administrative remedies and Defendant is entitled to summary judgment.

CONCLUSION:

            Accordingly, Defendant’s Motion for Summary Judgment is GRANTED.

            Moving Party to give notice.

IT IS SO ORDERED.

Dated:  November 12, 2024                            ___________________________________

                                                                                    Theresa M. Traber

                                                                                    Judge of the Superior Court

            Any party may submit on the tentative ruling by contacting the courtroom via email at Smcdept47@lacourt.org by no later than 4:00 p.m. the day before the hearing. All interested parties must be copied on the email. It should be noted that if you submit on a tentative ruling the court will still conduct a hearing if any party appears. By submitting on the tentative you have, in essence, waived your right to be present at the hearing, and you should be aware that the court may not adopt the tentative, and may issue an order which modifies the tentative ruling in whole or in part.