1250 SIXTH STREET, SUITE 20 5
SANTA MONICA, CA 90 401
310 - 576 -1233
Memorandum
To: Richmond City Council
Date: May 16, 2024
From: Beverly Grossman Palmer and Julia Michel
Re:
City of Richmond Tax on Refined Feedstock
EXECUTIVE SUMMARY
A City of Richmond general tax on the privilege of conducting oil refining within the City of Richmond, based upon the volume of feedstock refined within the City of Richmond, is a legally sound approach to taxation that should withstand legal challenge. This general tax requires a 50 percent + 1 threshold for adoption by the voters, and raises revenue for general governmental use. It is our conclusion, as set forth in detail herein, that the proposed tax addresses the legal issues raised in connection with past efforts to tax refining activity in Richmond, and adopts an excise tax, which is a well-established approach to city taxation in general that puts this tax within the heartland of local tax measures that have been upheld by the courts.
BACKGROUND ON PROPOSED TAX MEASURE
Communities for a Better Environment (“CBE”) and Asian Pacific Environmental Network (“APEN”) have proposed to the City Council that it place before the voters a general tax on the privilege of conducting the business of refining in the City of Richmond. The proposal is to tax input feedstock (meaning material that is brought into a refinery in the City of Richmond and subjected to refining) $1.00 per barrel of feedstock. The proposed ordinance could broadly define refining to capture a wide range of potential refining activities that impact the City of Richmond when conducted within the City. The proposal could also utilize a broad definition for “feedstock” to capture a range of potential inputs to refining processes in the future. Details would be subject to future discussion after Council consideration of the proposal at the May 21, 2024, City Council meeting.
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The proposed tax would be additional to any taxes currently imposed by the City. At present, the Chevron Refinery in Richmond is the only refinery operating within the City borders. It is our understanding that Chevron’s tax liability to the City is established by a settlement agreement that will sunset on June 30, 2025. The proposed tax would therefore go into effect on July 1, 2025, so as to avoid any argument that the proposal is contrary to the 2010 settlement agreement between the City and Chevron. As currently envisioned, the proposed tax would be collected on a quarterly basis.
ANALYSIS
I. Excise Tax on Refining Feedstock
A. General Tax
The proposed tax would be a general tax, as opposed to a special tax. A general tax placed on the ballot by City Council would require support of a simple majority of the vote (50% + 1). As a general tax, all revenue generated by the tax would be directed to the City’s General Fund and spending would remain subject to the Council’s discretion. We conclude that this approach of placing a general tax before the voters avoids legal uncertainty created by the pending statewide ballot measure known as the Taxpayer Protection and Government Accountability Act, which would prohibit use of so-called advisory questions on a ballot in connection with general tax measures. The proposed general tax must be presented consistent with the requirements of the pending statewide measure to ensure that the ordinance would not have to be reapproved in a future election.
B. Proposed Taxation Mechanism and Related Legal Issues As discussed above, the proposed excise tax would impose a $1.00 per barrel tax on each barrel (42 U.S. gallons) of feedstock that is refined at any refinery in Richmond. The tax will be paid by the refiner.
It is not a tax on gasoline or motor vehicle fuel and will not apply to motor vehicle fueling stations.
A. Tax on the Privilege of Conducting Refining Operations in Richmond The proposed tax applies to the privilege of conducting refining operations in the City of Richmond, based upon the refinery “inputs” that are subjected to the refining process in Richmond, as measured by the volume of material refined (as opposed to the value of that material). This approach is Richmond City Council
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specifically proposed in consideration of prior legal challenges to taxes on refining in an effort to address the identified flaws and new potential challenges to such measures.
1. Measure T and the Dormant Commerce Clause
A key purpose of our analysis is to evaluate whether the proposed tax would be subject to the same legal challenges as the 2008 Measure T, which also imposed a tax on refining in the City of Richmond. Measure T operated as an amendment to Richmond’s business license tax, imposing a tax on businesses in exchange for the privilege of conducting business in the City. Specifically, Measure T required those engaged in manufacturing (which included “any process of refining or processing hydrocarbons, petroleum or crude oil to produce products for use as fuels, lubricants, solvents, plastics, or other intermediate or final products”) to pay a percent of the value of the raw materials used during the manufacturing process. Measure T was also a “tandem” tax, meaning that it required manufacturers to pay the “greater” of a “head tax” ($234.10 plus $40.10/employee for every employee above 25) or a “raw materials tax” (“one fourth of one percent (.025%) of the value of materials used in the manufacturing process during the calendar year immediately preceding the year in which the fee is paid”).1
“Tandem” taxes such as Measure T tend to receive greater judicial scrutiny because they inevitably result in higher tax burdens for companies operating among more than one jurisdiction—an outcome that courts have concluded violates the “dormant” Commerce Clause of the U.S.
Constitution. State and local taxes may be challenged as violating the “dormant” Commerce Clause,
1 The specific provision at issue stated:
“Value” means, with respect to materials used in manufacturing, the actual cost or fair market value, whichever is greater, of all the materials used in manufacturing. With respect to any materials used in manufacturing for which there is a published spot price in the financial markets, “value” shall be deemed to be equal to such published spot price for purposes of this chapter unless substantial evidence is presented to the Tax Collector that the actual fair market value of the materials is lower. Notwithstanding the foregoing, for purposes of calculating the license fee for any manufacturing process involving crude oil, the value of such crude oil shall be deemed to be equal to the product of (i) the total amount of crude oil used during the period of calculation for the business license, times (ii) the average daily spot price of New York Mercantile Exchange Inc. Light Sweet Crude Oil (trading symbol CL), or, if such index is no longer published, such other index as is determined to be comparable by the Tax Collector, for such period.
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and in reviewing such a challenge, courts will uphold the challenged tax only if it satisfies the four- pronged test set forth in Complete Auto Transit, Inc. v. Brady (1977) 430 U.S. 274: the tax is (i) applied to an activity with a substantial nexus with the taxing jurisdiction, (ii) fairly apportioned, (iii) does not discriminate against interstate commerce, and (iv) is fairly related to the services provided by the local jurisdiction. (Id., at p. 279.)
Chevron challenged Measure T on “dormant” Commerce Clause grounds, focusing on whether that tax was fairly apportioned. When determining whether a tax is “fairly apportioned,” cases instruct courts to look to both the “internal” and “external” consistency of the tax. Internal consistency tests the structure of the tax; it hypothesizes that the challenged taxing regime is replicated in every jurisdiction, and asks whether a company doing business in more than one jurisdiction would be subject to greater tax than a company confining its operations to a single jurisdiction. (Oklahoma Tax Comm’n v. Jefferson Lines, Inc. (1995) 514 US 175, 185.) External consistency looks to “the economic justification for the State’s claim upon the value taxed, to discover whether a State’s tax reaches beyond that portion of value that is fairly attributable to economic activity within the taxing State.” (Northwest Energetic Services, LLC v. California Franchise Tax Bd. (2008) 159 Cal.App.4th 841, 863.)
The superior court in the Measure T case concluded that the tax failed the “internal consistency” test because of the “tandem tax” component. (Order, pp. 12-13.) A slew of other California cases had concluded similar “tandem taxes” were also constitutionally infirm. (General Motors Corp. v. City of Los Angeles (1995) 35 Cal.App.4th 1736; General Motors Corp. v. City & County of San Francisco (1999) 69 Cal.App.4th 448; Union Oil Co. v. City of Los Angeles (2000) 79 Cal.App.4th 383; cf. Macy’s Dept. Stores, Inc. v. City and County of San Francisco (2006) 143 Cal.App.4th 1444, 1451 [“It is only the tandem interaction of the City’s payroll and gross receipts taxes that violates the commerce clause under the internal consistency test. In isolation, each of the taxes is valid.”].)
Importantly, however, the superior court did not conclude that the tax on refinery “inputs” was unconstitutional.2 That is, the difficulties with the “internal consistency” test can be ameliorated by
2 Even Chevron acknowledged that “[t]he issue is not whether the head tax or the value tax, when considered separately, are externally consistent under the Commerce Clause.” (Chevron Supplemental Reply, 9/25/2009, p. 9.)
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not structuring a tax to be a “greater of” two options. The proposal is structured to tax only one thing:
a tax on each barrel of feedstock that is refined in Richmond.
As opposed to internal consistency, the “external consistency” test is concerned with the underlying economic realities of how the tax applies in practice, and the analysis is undertaken on a case-by-case basis to determine whether a tax is fairly apportioned as applied to particular taxpayers.
Typically, such issues are addressed by having tax liabilities “apportioned” based on the business that is done within the municipality. Unfortunately, Measure T did not contain an apportionment provision. What is more, when the City suggested during the litigation that there were options for how tax officials could enact apportionment, the superior court concluded that would be inappropriate because voters were given the impression that the full, unapportioned amount would be raised from Chevron. (Order, p. 14.) The superior court also found the City’s argument to be inconsistent with Elections Code section 9217, which prohibits a city’s legislative body from repealing or amending a voter-adopted municipal ordinance, unless the ordinance authorizes the city to repeal or amend it. (Order, p. 19.) In other words, the problem was that “reading in” an apportionment provision or apportionment guidelines would have effectively amended the text of the ordinance, thereby violating Elections Code section 9217. For this reason, CBE and APEN propose to include express apportionment provisions empowering any necessary apportionment to be performed by the Tax Collector.3 It is not uncommon for measures, including tax measures, to establish and set a policy and delegate authority to another (here, the tax assessor) to “fill up” the details of a scheme. (E.g., Kugler v. Yocum (1968) 69 Cal.2d 371, 376.)
3 Moreover, based upon the proposal to tax refining activity on the basis of the volume of feedstock that is refined in Richmond only, apportionment may be unnecessary. Apportionment issues arise most obviously when the tax is on a company’s entire income or all of its gross receipts. For a company such as Apple, for example, it may be based in California but have income from sales in 50 states. If California taxed 100% of Apple’s income, it would be taxing “more than its fair share”— which is why it is common to see apportionment formulas based on a percent of sales within the taxing state. The proposed tax on refining in Richmond only applies to refinery operations conducted in Richmond, so it only reaches activity taking place within the jurisdiction. Out of an abundance of caution, CBE and APEN proposed that it would still be prudent to include some language providing for apportionment..
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2. Inventory Tax
Chevron had also argued that Measure T was a property tax on “business inventories” precluded by Revenue and Taxation Code (hereinafter “RTC”) sections 2194 and 129.5 It is our opinion that the proposed tax on feedstock that is refined in Richmond is an excise tax, not a property tax, and therefore the “business inventory” exemption does not apply.
Prior to 1980, California imposed an “ad valorem” (read: “value” 6) tax upon certain tangible personal property in the possession of businesses on the tax lien dates. Today, the Revenue and Taxation Code (hereinafter “RTC”) exempts business inventories from such property taxes. “Business inventories” include “all tangible personal property, whether raw materials, work in process or finished goods, which will become a part of or are themselves items of personalty held for sale or lease in the ordinary course of business.” (Cal. Code Regs., tit. 18 (hereinafter “Regulation”), § 133.)
Although there are no cases applying the “business inventory” exemption to crude oil or refined petroleum products held out for sale, these items could be considered exempt because crude oil is raw material that “will become a part of” the refined products held out for sale, and the refined products are “themselves items . . . held for sale” in the ordinary course of business. (Regulation, § 133.)
However, the business inventory exemption means that business inventories are exempt from property taxes. Yet the tax being contemplated in Richmond is not a property tax but rather an ordinary excise tax on the privilege of engaging in refining. Ingels v. Riley (1936) 5 Cal.2d 154 is the
4 RTC § 219 provides:
For the 1980-81 fiscal year and fiscal years thereafter, business inventories are exempt from taxation and the assessor shall not assess business inventories.
5 RTC § 129 provides in pertinent part:
‘Business inventories’ shall include goods intended for sale or lease in the ordinary course of business and shall include raw materials and work in process with respect to such goods.
6 Black’s Law Dictionary defines “ad valorem” as “proportional to the value of the thing taxed.” Webster's Dictionary has a similar definition, defining it as “according to value: a term applied to (a) a duty laid upon goods at a certain rate per cent according to their invoiced value, rather than upon the quantity of pieces; (b) an assessment of taxes laid on the value of property.”
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key case defining the difference between an excise tax and a property tax. The case focuses on how a tax on property “does not impose any condition nor does it place any restriction upon the use of the property taxed,” whereas a privilege (read: “excise”) tax “is imposed upon the right to exercise a privilege, and its payment is invariably made a condition precedent to the exercise of the privilege involved.” (Ibid.) Factors that courts have used to identify a property tax include:
• Whether “mere ownership” of the property makes one liable for the tax (Thomas v. City of East Palo Alto (1997) 53 Cal.App.4th 1084, 1086.)
• Whether there is no relationship or proportionality between the volume of business conducted in the City - and thus the demand for municipal services - and the amount of tax imposed (RTC, § 37101(b); City of Oakland v. Digre (1988) 205 Cal.App.3d 99, 108);
• Whether the tax is “generally due and payable annually at a set time” (id., at p. 106).
By contrast, an excise tax is not a property tax when it taxes “the exercise of one of the incidents of property ownership, such as the ability to transfer or devise property, or the ability to use, store or consume” property. (Tesoro Logistic Operations, LLC v. City of Rialto (2019) 40 Cal.App.5th 798, 810–811; Thomas, 53 Cal.App.4th at p. 1088 [a valid excise tax is a tax on “any of the incidents of ownership, such as sale, transfer, rental, special use of certain city services, and so on.”].)
Citing the court of appeal’s analysis of the business inventories exemption and its legislative history in Amdahl Corp. v. County of Santa Clara (2004) 116 Cal.App.4th 604, 623, Chevron argued that the Measure T value tax had many of the attributes of a property tax on business inventories: (1) the tax was based on value (ad valorem); (2) the tax was imposed annually; (3) the tax was due on a set date each year; (4) the tax was based on the value of materials that flowed through the inventory account of a manufacturer-raw materials incorporated into the final manufactured product; and (5) the tax was imposed on raw materials.
The superior court disagreed with Chevron and concluded that “while value is used as a factor in determining the amount of tax, the entire inventory of every manufacturer is not being taxed” and therefore Measure T “is not a tax upon inventory precluded by Revenue & Taxation § 219.” (Order, p. 22.) The key reason was that “the volume times value factor is simply being used as a measure of the amount of business being performed in Richmond by Chevron.” (Ibid.) This reflects the Supreme Court’s statement that an excise tax “does not become a property tax simply because Richmond City Council
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it is proportioned in amount to the value of the property used in connection with the privilege which is taxed.” (Ingels, Cal.2d at p. 161.)
Finally, as the superior court in the Measure T litigation noted, the fact that the Measure T tax was based on the value of crude oil that underwent the refining process weighed in favor of concluding that Measure T operated as a property tax. The proposal being considered involves taxing inputs volumetrically, rather than value, adding another argument why the proposal being considered should not be considered a “property” tax under the applicable legal precedent.
3. Use Tax
Based on the Measure T litigation, a challenger might also repeat Chevron’s argument that a tax on raw materials or the refined product constitutes a “use tax” that is preempted by the Bradley-Burns Uniform Sales and Use Law, Revenue and Taxation Code §§ 7200, but it is our conclusion that the proposed tax would withstand such a challenge.
The California Legislature has adopted a statute allowing cities and counties to levy a business license tax, Government Code section 37101. This is a classic type of “excise” tax. (Dondlinger v.
Los Angeles County Regional Park & Open Space Dist. (2019) 31 Cal.App.5th 994, 1002 [“An excise is a ‘tax imposed on the manufacture, sale, or use of goods (such as a cigarette tax), or on an occupation or activity (such as a license tax or an attorney occupation fee)’”], quoting Black’s Law Dictionary.)
California also has a state sales tax. The sales tax is imposed on retailers “[f]or the privilege of selling tangible personal property at retail ... in this state....” (City of South San Francisco v. Board of Equalization (2014) 232 Cal.App.4th 707, 713, quoting RTC, § 6051.) “The retailer is the taxpayer, not the consumer.” (Loeffler v. Target Corp. (2014) 58 Cal.4th 1081, 1104.) The central principle of the sales tax is that retail sellers are subject to a tax on their “gross receipts” derived from retail “sale” of tangible personal property. (City of South San Francisco, 232 Cal.App.4th at p. 713, quoting RTC, § 6051.) The term “sale” means “[a]ny transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration.” (RTC, § 6006, subd. (a).)
California’s state “use” tax complements the sales tax by taxing products bought outside California and used or consumed in California as though these products were purchased inside Richmond City Council
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California. (Dondlinger, 31 Cal.App.5th at p. 1002 [“A use tax is a ‘tax imposed on the use of certain goods that are bought outside the taxing authority’s jurisdiction. Use taxes are designed to discourage the purchase of products that are not subject to the sales tax.’”] [quoting Black’s Law Dict.].) In contrast to a sales tax, the use tax falls on the purchaser, although the retailer may collect the tax as an agent. (City of South San Francisco, 232 Cal.App.4th at p. 713.) “California imposes a use tax on tangible personal property that is (1) purchased from a retailer, (2) stored, used, or consumed in this state, and (3) for which no California sales tax was paid at the time of purchase.” (Ibid.; RTC, §§ 6201, 6202, 6401; Regs., § 1620, subd. (b); Searles Valley Minerals Operations, Inc. v. State Bd. of Equalization (2008) 160 Cal.App.4th 514, 520.) The law presumes that tangible personal property brought into California is purchased for storage, use or other consumption here. (City of South San Francisco, 232 Cal.App.4th at p. 713; § 6246.) Before the Bradley-Burns Act, cities and counties passed their own sales and use taxes, which contributed to a lack of uniformity and increased costs of administration. The Bradley-Burns Act was the Legislature’s way of relieving cities from operating sales and use tax collection systems of their own; it allows cities to enact their own sales and use taxes at a rate of 1 percent or less of the gross receipts of the retailer from the sale of tangible personal property sold by that person at retail within the city, and in return, the Board of Equalization administers the taxes. However, the Legislature precluded the Board of Equalization from administering these local sales or use taxes if they are not “identical” to the state sales and use tax law (City of South San Francisco, 232 Cal.App.4th at p. 726) or impose a greater tax than what Bradley-Burns allows. (Cultiva La Salud v. State of California (2023) 89 Cal.App.5th 868, 879–880). In short, in a case where the state sales tax is applicable, the state-administered local sales tax is also applicable; when the state sales tax is inapplicable, the local sales tax is inapplicable. (Ibid.) As explained by the court of appeals in Rivera and the Supreme Court in A.B.C.
Distributing Co. v. City and County of San Francisco (1975) 15 Cal.3d 566, 575, “although the state has preempted the field of sales and use taxation, nothing prevents a municipality from levying a ‘substantially different’ tax otherwise authorized by law.” (See Rev. & Tax Code, § 7203.5 [“Nothing in this section shall be construed as prohibiting the levy or collection by a city, county, redevelopment agency, or city and county of any other substantially different tax authorized by the Constitution of Richmond City Council
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California or by statute or by the charter of any chartered city.”].)7 A license tax upon a business measured by gross receipts and utility users charges are examples of “substantially different” taxes. (Rivera, 6 Cal.3d at p. 139.) The proposed tax on the business activity of engaging in refining would be of the same ilk, “substantially different” from a “use tax.” There are few cases discussing this aspect of Bradley-Burns. (See Cultiva La Salud v. State of California (2023) 89 Cal.App.5th 868; A.B.C. Distributing Co., supra; Rivera, supra; Century Plaza Hotel Co. v. City of Los Angeles (1970) 7 Cal.App.3d 616, 625.)
In the Measure T litigation, Chevron argued that Measure T constituted an improper “use” tax because “use” is broadly defined as including “the exercise of any right or power over tangible personal property incident to the ownership of that property, and also includes the possession of, or the exercise of any right or power over, tangible personal property by a lessee under a lease, except that it does not include the sale of that property in the regular course of business.” (RTC, § 6009.) Chevron claimed that Regulation 1525 exempts the “use” from the “use tax” when the tangible personal property is purchased “for the purpose of incorporating it into the manufactured article to be sold, as, for example, any raw material becoming an ingredient or component part of the manufactured article.” In other words, Chevron’s argument is that a tax on raw materials that are “used” during the refining process constitutes a “use” tax within the meaning of the statute, but is made non-taxable by an exemption.
This argument improperly conflates a tax on the “use” of a product (like crude oil in the refining process) with a “use tax” when they are analytically different:
A use tax is a ‘tax imposed on the use of certain goods that are bought outside the taxing authority’s jurisdiction. Use taxes are designed to discourage the purchase of products that are not subject to the sales tax.’ An excise is a ‘tax imposed on the manufacture, sale, or use of goods (such as a cigarette tax), or on an occupation or activity (such as a license tax or an attorney occupation fee).’
7 RTC section 37101 specifically allows legislative bodies to license “for revenue and regulation, and fix the license tax upon, every kind of lawful business transacted in the city, including shows, exhibitions, and games. It may provide for collection of the license tax by suit or otherwise.” Subdivision (b) makes clear that such taxes, when they are levied “upon a business operating both within and outside the legislative body’s taxing jurisdiction,” must be structured “so that the measure of tax fairly reflects that proportion of the taxed activity actually carried on within the taxing jurisdiction.”
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(Dondlinger, 31 Cal.App.5th at p. 1002, quoting Black’s Law Dictionary.) That is, the proposed tax is not a “use tax” but rather an “excise tax” on the activity of refining within Richmond.
Courts have sustained the imposition of simultaneous ad valorem property taxes and excise taxes, as well as duplicative excise taxes. (See, e.g., City of Berkeley v. Cukierman (1993) 14 Cal.App.4th 1331, 1340–1341 [“The case law holds only that there be no double taxation of property. The mere fact that the state (or local authority) imposes one excise tax upon one activity does not prevent the state or local authority from imposing another excise tax upon the same privilege for the same period.”]; Fox etc. Corp. v. City of Bakersfield (1950) 36 Cal.2d 136; Cukierman, 14 Cal.App.4th at p. 1341 [“To put it another way, the constitutional prohibition against double taxation applies only to ad valorem property taxes, and property tax and excise tax can be imposed simultaneously.”].)
Altogether, placing a tax on the privilege of conducting oil refining in the City of Richmond, while superficially similar to Measure T in some respects, would differ importantly because it excludes any ‘tandem’ measure, and includes proper apportionment protocols. Moreover, as the tax would be based on the volume of feedstock refined in Richmond, will function legally as an excise tax and not a property or use tax.
CONCLUSION
We appreciate the City Council’s careful consideration of CBE and APEN’s proposal to establish a new source of revenue for the City of Richmond by taxing the privilege of conducting refining within City borders. We are happy to provide more detail as to any aspect of this memorandum upon request, including copies of any of the cases, court filings, or statutes cited.