County's Bingo Tax Passes One Test, But Challenge Doesn't End
An assessment levied by Sacramento County on nonprofit organizations that conduct bingo games did not violate a 1994 initiative barring the imposition of a tax or fee on a nonprofit group's income, the Third District Court of Appeal has ruled. However, the appellate panel sent the case back to the trial court to determine whether the fees were closely related enough to county expenses to be legal.
This is not the first time that bingo operators and Sacramento County have been to court. Last year, the Third District ruled in Arden Carmichael, Inc. v. County of Sacramento, (2000) 79 Cal.App. 4th 1070, that the county's 1% tax levied on bingo operators' gross receipts from June 1994 through December 1996 was illegal under Proposition 176. Voters approved that initiative, which amended article XIII, § 26 of the state constitution, in June 1994.
Apparently recognizing problems with its assessment, the county changed its procedures in January 1997 so that the fee was based on a percentage of a bingo operator's prize payouts. The fee ranged from 1.15% to 1.225% of prize payouts depending on the three-month timeframe.
The bingo operators sued, claiming that the new fee structure was still linked to gross receipts. They also argued that the fee violated Penal Code § 326.5, which permits fees for law enforcement and public safety activities that are directly related to bingo activities. Sacramento County Superior Court Judge John Lewis ruled for the county.
In the published portion of its opinion, the Third District upheld Lewis's ruling on the fee's constitutionality vis-a-vis Proposition 174. But in the unpublished part of the decision, the court said Lewis should not have granted summary adjudication on the issue of whether the fees were adequately tied to the county's actual cost of providing service.
In their appeal, the bingo operators argued that by taxing prize payouts, the county was indirectly doing what it could not — namely, taxing nonprofit organizations' gross receipts. The bingo operators pointed out that the county's revised formula collected almost exactly the same amount of revenue as the outlawed gross receipts tax.
However, the court rejected this argument as beside the point. The issue, the court ruled, was the precise language used in Proposition 174 and by the county.
The court held that Sacramento County's assessment was a tax on bingo operators' expenses, not on receipts. Such a tax is legal under Proposition 174, according to the court, which cited ABC Distributing Co. v. City and County of San Francisco, (1975) 15 Ca.3d 566. "[T]he state Supreme Court distinguished a tax measured by an expense incurred by plaintiffs from one measured by their income," Justice Daniel Kolkey wrote for the Third District. "In response to plaintiffs' suggestion that a payroll expense tax was, in essence, an income tax because it was paid from plaintiffs' income — a suggestion similar to that of plaintiffs in this case — the state high court observed that ‘all taxes necessarily involve some reduction of and relationship to available revenues.'"
The court also considered voters' intent by examining the Proposition 174 ballot arguments. The court held that the exemption from a gross receipts tax created by Proposition 174 "was intended to protect contributions and other categories of revenue from direct taxation." Sacramento County was taxing expenses, which would have a similar effect on nonprofit organizations' funding by encouraging them to reduce expenses, the court reasoned.
In the unpublished part of its opinion, the court said that Sacramento County must prove its fees are tied to expenses. The county defended its practice of averaging costs and including numerous "indirect expenses." The court did not rule on Sacramento County's defense but made clear it was skeptical, saying that the county's estimated revenues and costs were an improper basis for fees. "The statutory standard is not whether the estimated revenues do not unreasonably exceed the estimated cost, but whether the actual revenue derived from the fee does not ‘exceed the actual cost incurred in providing the service,'" Kolkey wrote, citing the Penal Code.
The Case:
Arden Carmichael, Inc. v. County of Sacramento, No. C031367, 01 C.D.O.S. 9400, 2001 DJDAR 11693. Filed October 31, 2001.
The Lawyers:
For Arden Carmichael: H.L. Koelewyn, Hoseit & Koelewyn, (916) 922-8823.
For the county: Elaine DiPietro, deputy county