S & Ls Exempt From Municipal Business Taxes, California Supreme Court Rules
In a ruling that could cost cities millions of dollars in tax revenues, the state Supreme Court said Monday that financial institutions such as savings and loans are exempt from paying municipal business taxes.
In a unanimous decision, the court ruled that a city’s right to govern its own municipal affairs is not the issue when local taxation is a subject of statewide concern.
Deputy City Atty. John Doherty of San Francisco had estimated that in losing the case, San Francisco would have to refund $22 million to savings and loans, while Los Angeles would owe $216 million.
The dispute began in 1987 when California Federal Savings & Loan sued the city of Los Angeles in Superior Court, claiming that non-bank financial institutions have the same protection under the state Constitution as banks, which are exempt from paying local taxes.
Superior Court Judge Vernon G. Foster agreed, and ordered Los Angeles to refund $5.5 million to the savings and loan for business license taxes collected from 1982 through 1984--plus $1.7 million in interest.
Los Angeles, joined by San Francisco and 23 other California cities, appealed the decision. In 1984 the 2nd District Court of Appeal in Los Angeles sided with the cities, holding that the state could not interfere in the government of a chartered city.
California Federal then asked the Supreme Court to review the matter.
In Monday’s decision, the high court ruled that the issue in the case was not the conflict of municipal affairs versus state power, but that “it is that of adjusting the conflict between the effect of the city’s business license tax and the Legislature’s asserted interest in the uniform taxation of commercial banks and financial corporations, including savings banks.”
The court said that issue, rather than the question of whether the city’s status as a charter city encompasses the power to levy local taxes, “is the real issue before us.”
Los Angeles Assistant City Atty. Richard Dawson said he had not seen the decision but is “disappointed that the court seems to be changing the law.”
California Federal S&L; attorney Aaron M. Peck said he was gratified by the decision, saying, “I think the Supreme Court correctly interpreted the law.”
The cities had argued that the Legislature does not have the power to limit the taxing authority of home-rule cities chartered by the state Constitution.
The savings and loan argued that it was not attacking home rule but was challenging the “unwarranted” expansion of city powers, contending that there are 17 other cases in which Los Angeles has tried to expand the power of cities--and has lost 15 times.
