This Week in State Tax

In a recent opinion, the California Supreme Court held that state law requires the Government Claims Act (GCA) to serve as the exclusive statewide framework for presenting claims for money or damages against local public entities, including refund claims for local business license taxes.

The case involved a taxpayer that operated a refinery in the California charter city of Carson. The refinery was subject to the oil industry business license tax, a gross receipts-based levy. After an audit, the City issued an assessment which the taxpayer paid under protest and then submitted a written refund claim directly to the City in the manner and within the time prescribed by the GCA. The City rejected the claim as untimely and procedurally defective on the basis that the taxpayer had not followed additional local administrative procedures requiring a written request for review to the finance director and a further appeal to the city manager before any refund claim could proceed.

The taxpayer then filed a refund action in superior court, asserting that California law preempted the city ordinance that attempted to impose administrative prerequisites on claims for money or damages that went beyond the requirements of the GCA. A trial court agreed with the City and dismissed the taxpayer’s claim, reasoning that the taxpayer first had to complete the City’s two-step internal review process before it could rely on the GCA. The taxpayer appealed, and the Court of Appeal likewise sided with the City, treating the local procedures as a valid administrative “exhaustion” requirement that could sit on top of the state claims framework.

Upon review, the California Supreme Court held that the state, through enactment of the GCA, had fully occupied the field governing the manner in which claims for money or damages, including local tax refund claims, must be presented to public entities and that cities cannot change the filing deadlines, required content, or validity of those claims by insisting that taxpayers complete additional local procedures first. This determination, it stated, is consistent with the legislative history of the GCA as well as other precedents of the Court. Cities may offer internal review processes, but those processes must be optional and cannot be a gatekeeping tool to decide whether a local tax refund claim is properly or timely filed under the GCA. The Court did not address whether the city correctly calculated the taxpayer’s business license tax or properly sourced the taxpayer’s gross receipts under California law. It focused solely on the procedural issue, and the case was sent back to the trial court to address the substantive issues in the claim.

Please contact Jim Kuhl and Brian Phillips with questions about Tesoro Refining & Marketing Company v. City of Carson.

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The Supreme Court of Hawaii recently resolved a procedural question of whether a taxpayer may challenge the facial validity of a tax administrative rule through the state's declaratory relief statute for agency rules, rather than being forced to wait for an assessment and litigate through the tax appeal process. The Court concluded that the taxpayer has standing as an "interested person" to seek a judicial declaration on the validity of an agency rule, notwithstanding a separate statute that bars declaratory relief in "any controversy with respect to taxes." In reaching this result, the Court overruled its earlier decision in Hawaii Home Infusion Associates v. Befitel, rejected the state's mootness argument, and remanded the case for further proceedings.

The dispute arose from a rule promulgated by the Department of Taxation in 2018 which addressed when certain agent services are used or consumed in Hawaii for General Excise Tax (GET) purposes. Under the rule, income is sourced to where a transient accommodation or travel-related booking is located rather than where a booking agent is situated when making the reservation. As a result, the taxpayer, an online travel and accommodation reservation platform, became subject to Hawaii’s GET on the commissions it earned on Hawaii bookings.

In 2019, before any tax was assessed, the taxpayer filed suit in state circuit court under a statute allowing an “interested person” to pursue a declaratory action, seeking a declaration that the services sourcing rule was invalid under the federal Internet Tax Freedom Act and the Commerce and Supremacy Clauses of the U.S. Constitution. While the suit was pending, the Department of Taxation assessed the taxpayer substantial tax, penalty and interest for the period 2010 through 2020. The taxpayer separately appealed that assessment to the tax appeal court.

The Department of Taxation moved to dismiss the declaratory action, arguing that the pending assessment appeal rendered the case a "controversy with respect to taxes," which state law prevents from being subject to a declaratory action. The circuit court agreed and dismissed the taxpayer’s declaratory action, reasoning that the sourcing rule could instead be tested through the tax appeal. The Intermediate Court of Appeals affirmed, holding that the taxpayer lacked standing and that declaratory relief was unavailable because the matter involved taxes. The taxpayer then appealed to the Hawaii Supreme Court.

The Supreme Court agreed with the taxpayer and vacated the lower courts’ decisions. The Court held that the interested person statute used by the taxpayer and the statute barring declaratory relief for tax controversies are separate and independent statutes. Central to the Court's reasoning was that the interested person statute contains no language excluding tax rules from its reach, so nothing prevents a taxpayer from using it to challenge a tax regulation on its face.

The Court also resolved several related issues. It overruled Hawaii Home Infusion Associates, holding that the interested person statute provision directing the action be filed where the petitioner resides or has its principal place of business addresses venue, rather than being a limitation on the court's subject matter jurisdiction. Therefore, it was appropriate for the action to be filed where the agency promulgating the rule was located, as was the case here. The Court further held that the case was not moot even though the tax appeal court had already invalidated the service sourcing rule, because the issue of whether declaratory relief is available for tax rules remained unresolved and was too important to leave unaddressed. Finally, the Court held that the taxpayer qualified as an "interested person" with standing, reversing the Intermediate Court of Appeals.

Please contact Reid Okimoto and Jacob Herlitz with questions regarding Booking.com B.V. v. Suganuma.

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Late Thursday afternoon, a state appellate court lifted a temporary restraining order issued by a Staten Island judge barring further implementation of New York’s new pied-á-terre tax, which is currently expected to be paid starting in January 2027. The flurry of orders originated from a taxpayer suit challenging certain actions taken by the New York City Department of Finance as part of the rollout. The tax, which takes the form of a property tax surcharge, applies to certain high-value homes that are not used as primary residences by the owner. As described in last week’s TWIST on this subject, the Department mailed notices in July to approximately 17,000 property owners identified as potentially subject to the surcharge, later extending the documentation deadline for owners contesting applicability to September 18.

A group of taxpayers challenged the notices—as well as the Department’s publication of a list of homeowners, addresses, and values of properties that may be subject to the surcharge—alleging Department’s actions had caused “mass confusion”. On Monday, August 10, a trial court judge granted the taxpayers’ request for a temporary restraining order barring the Department from maintaining its public list; taking further action related to the mailed notices; or enforcing the September 18 deadline. The judge scheduled a hearing on the matter for August 31. New York City filed a request to appeal, and the appellate court, on August 13, placed a hold on the order pending further action, thus allowing the City to proceed with implementation for now.

Please contact Alec Schwartz or Jennifer White with questions about the New York City pied-á-terre property tax surcharge.

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