HomeMy WebLinkAbout2020-10-01; Callaway Golf and TaylorMade Golf Business License Tax Appeals; Rocha, LauraTo the members of the:
CITY COUNCIL ~
Date '0/4 h.J) CA ~ cc ~
CM _.!!!._ ACM ~ DCM (3) .,L
Oct. 1, 2020
Council Memorandum
To: Honorable Mayor Hall and Members ofthe City Council
From: . Laura Rocha, Deputy City Manager, A~· ·strative Services
Via: Geoff Patnoe, Assistant City Manager G-f ·
Re: Callaway Golf and TaylorMade Golf B siness License Tax Appeals
{city of
Carlsbad
Memo ID# 2020206
This memorandum provides information related to the appeal ofthe decision of the license
collector following the final determination of past due business license taxes owed by Callaway
Golf and TaylorMade Golf.
Background
Every person or company doing business in the City of Carlsbad is required by city ordinance to
have a valid business license in order to conduct business in the city. Both Callaway Golf and
TaylorMade Golf have contested the methodology used by the city to calculate business license
taxes based on gross receipts going back to fiscal year 2015-16. During this period of time, both
companies have been using an incorrect methodology to calculate th~ir business license taxes,
which has resulted in a large underpayment oftaxes as determined by the license collector by
both companies.
Discussion
Since fiscal year 2015-16, the business license taxes paid by Callaway Golf and TaylorMade Golf
have been calculated incorrectly. Both businesses have been operating, since that time, without
a valid business license. The city has been working with both Callaway Golf and TaylorMade Golf
to ensure that their business license taxes have been calculated correctly and equitably. For
several years, the city asked both companies for supporting documentation used by these
entities to support their calculations. TaylorMade Golf sent in documents in 2018, while
Callaway Golf did not submit any documentation. Both companies have taken the position that
the city's methodology for calculating business license taxes for companies doing business in
multiple states is incorrect and not equitable.
The city subsequently hired an outside attorney in May 2018 to assist in determining whether
the city's method for calculating business license taxes for companies doing business in multiple
states was fair and equitable. The attorney's research resulted in a recommendation that the
city use an apportionment schedule that has been proven to be both fair and equitable. The city
worked with outside counsel for the next 18 months to determine the amount of business
license taxes owed by Callaway Golf and TaylorMade Golf using the new apportionment
schedule. It was determined that the amount owed by Callaway Golf was equal to $1,029,274
Administrative Services Branch
Finance Department
1635 Faraday Avenue I Carlsbad, CA 92008 I 760-602-2430 t
Council Memo -Callaway Golf and TaylorMade Golf Business License Tax Appeals
Oct. 1, 2020
Page 2
and TaylorMade Golf was equal to $350,332, for fiscal years 2015-16, 2016-17, 2017-18, 2018-19
and 2019-20. '
Both Callaway Golf and TaylorMade Golf asked for a hearing with the license collector for the
city. The hearings were held on Feb. 27, 2020. At the hearings, both Callaway Golf and
TaylorMade Golf had the opportunity to present any evidence and submit documents supporting
their contention that the initial determinations were incorrect. These documents were taken
into consideration by the license collector in making her decision. The license collector amended
the total of the business license taxes owed as calculated by the apportionment schedule to only
include fiscal years 2017-18, 2018-19, and 2019-20, which resulted in a reduced amount of taxes
payable to the city. On July 20, 2020, both companies were sent letters notifying them of the
license collector's final decision (see attached letters).
Next Steps
Callaway Golf and TaylorMade Golf have two options; either pay the fees owed as calculated by
the city or appeal the decisions made by the license collector to the City Council. City staff in the
Finance Department have been informed by Callaway Golf and TaylorMade Golf that they would
like to exercise their rights to appeal to the City Council, as outlined in section 5.04.090 of the
city's municipal code, the decisions made by the license collector.
Attachments: A. Final Hearing Decision for Callaway Golf
B. Final Hearing Decision for TaylorMade Golf
cc: Scott Chadwick, City Manager
Celia Brewer, City Attorney
Kevin Branca, Finance,Director
DocuSign Envelope ID: 81E1EC2E-1549-43DA-9008-0488E7F84521 Attachment A
. (cicyof
Carlsbad
Final Decision of License Collector Following Hearing
on Business License Tax Liability of Callaway Golf Company
· for 2015-16 Through 2019-20 Tax Years
Summary of Decision
On February 27, 2020, a hearing was held pursuant to section B(3)(b) of Administrative
Order No. 81 of the City qf Carlsbad ("the City"), regarding the License Collector's December
. 13, 2019 Initial Determination that Callaway Golf Company ("Callaway'') owed $1,029,274 in
business license tax, including penalties, for the 2015-16 through 2019-20 tax years. Based on
the evidence and argument presented at the hearing and the evidence in the record, it is hereby
determined that Callaway owes $544,479 in unpaid business license taxes for the 2017-18, 2018-
19, and 2019-20 tax years, which includes $181,493 in penalties. The portion of the Initial
Determination that found taxes and penalties owing for the 2015-16 and 2016-17 tax years is
hereby abated. This is the Final Decision of the License Collector, under City of Carlsbad
Administrative Order No. 81, section B(3 )(b ), for Callaway' s business license tax liability for the
2015-16 through 2019-20 tax years.
Administrative History
On December 13, 2019, following an audit of Callaway's business license taxes, an
Initial Determination of the amount of unpaid business license taxes owed by Callaway for the
2015-16 tax year through the 2019-20 tax year was issued under Administrative Order No. 81,
section B, based on the records available to the City. The Initial Determination determined that
Callaway owed the City a total of $1,029,274 in unpaid business license taxes for these tax years,
including $287,999 in penalties for the 2015-16, 2016-17, 2017-18, and2018-19 tax years. The
Initial Determination stated that the business license tax for the 2019-20 tax year would be
subject to penalties beginning January 1, 2020.
On December 19, 2019, pursuant to Administrative Order No. 81, section B(3), Callaway
requested a hearing on the Initial Determination. The City and Callaway mutually agreed to hold
the hearing on the Initial Determination beyond the 30-day requirement for holding a hearing on
an Initial Determination. On January 28, 2020, the City formally notified Callaway that the
hearing would be held on February 27, 2020.
The hearing on the Initial Determination was held on February 27, 2020 at 3:00 p.m. at
1635 Faraday Avenue, Carlsbad, CA 92008 before Laura Rocha; License Collector and Deputy
City Manager of Administrative Services of the City of Carlsbad. Present at the hearing were
John Newren (Director of Global Tax for Callaway), Sarah Kim (Vice President, General
Counsel, and Corporate Secretary for Callaway), Charles J. Moll (counsel for Callaway), Cheryl
Gerhardt (Finance Manager for Business ;License of the City of Carlsbad), Benj~ P. Fay
Administrative Services 1635 Faraday Avenue I Carlsbad, CA 92008 I 760-602-2430 t I 760-602-8553 f
DocuSign Envelope ID: 81 E1 EC2E-1549-43DA-9008-0488E7F84521
Final Decision of Tax Liability of Callaway Golf Co. for2015-16 to 2019-20 Tax Years
July 20, 2020 -
. Page 2
( counsel for the License Collector of the City of Carlsbad), and Cindie McMahon (Assistant City
Attorney of the City of Carlsbad). The hearing was audio recorded.
The City's Business License Tax
Under Title 5 of the Carlsbad Municipal Cod~, the City imposes a business license tax on
businesses operating in the City. Under Classification D of section 5.08.010, manufacturers are
required to pay "a license tax of $25 .00 plus 20 cents for each $1,000.00 of annual gross receipts
or portion thereof." This tax is "due and payable annually in advance·on the first day of the
month in which the business was originally established." (Carlsbad Municipal Code §
5.04.020(B).) If the tax is not paid within 60 days of frs due date, a 25% penalty is automatically
applied. (Ibid.) If the tax remains unpaid 90 days after it is due, the penalty increases to 50%.
(Ibid.) .
The City's business license tax is imposed on the activity of operating a business. It is
measured by the business's gross receipts of the priot year (e.g. business license tax:for the 2015-
16 tax year is based on a business's 2014 gross receipts). To ensure that the amount of tax is
proportional to the amount of_business conducted in the City, the City apportions a business's
gross receipts using a three-factor apportionment formula modeled on the long-established
Uniform Division of Income for Tax-Purposes Act ("UDITP A") apportionment formula. (See
Attachment A, City of Carlsbad Administrative Order No. 81.)
This formula uses three factors that are weighted evenly: sales, payroll, and property. A
percentage for each factor is calculated. For sales, this percentage is the fraction in which the
numerator is the total sales occurring in Carlsbad and the denominator is the company's total
· sales everywhere. For payroll, the percentage is the fraction in which the numerator is the total
payroll occurring in Carlsbad and the denominator is the company's total payroll everywhere.
And for property, the percentage is the fraction in which the numerator is the total property
owned in Carlsbad and the denominator is the company's total property owned everywhere.
Rented property is valued at eight times the annual rental rate. The percentages for the three
factors are then averaged, which yields the percentage of total gross receipts attributable to the
City.
Section 5.04.020 of the Carlsbad Municipal Code provides that "[f]or the purposes of
determining the correct tax to be collected, the license collector may at any time require a
licensee to furnish his or her books of account and records for inspection and audit and may
require the production of other documents and information regarding the business as authorized
by law." Administrative Order No. 81 further provides that "[i]f the License Collector
determines that an insufficient amount of tax has been paid by an applicant or licensee, or if no
tax has been paid by an applicant or licensee and the due date for paying the tax has passed, or if
the License Collector and an applicant or licensee disagree as to the amount of tax due or owing
to the City, the License Collector shall make a determination of the amount of tax that is due,
including penalties and interest if applicable, using such information as is available to the
License Collector ('Initial Determination')."
DocuSign Envelope ID: 81E1EC2E-154943DA-9008-0488E7F84521
Final Decision of Tax Liability of Callaway Golf Co. for 2015-16 to 2019-20 Tax Years
July 20, 2020
Page3
Thereafter, an "applicant or licensee may, within ten days of service of an Initial
Determination, request a hearing on the Initial Determination." If a timely written request is
made, ''the License Collector shall schedule a hearing to be held within 3 0 days of receipt of the
request for a hearing." (Administrative Order No. 81.) At the hearing, '<the applicant or licensee
shall present all evidence and argument supporting its contention that the Initial Determination is
incorrect and establishing what it contends the determination should be," (Id.) Within 30 days
of the hearing, "the License Collector shall issue a written decision that will be the License
Collector's Final Decision and serve it upon the applicant or licensee." (Id.)
A. The City's Business License Tax Audit of Callaway
In December of 2017, the City notified Callaway that its business license tax was selected
for audit and requested documentation to support the amount of tax remitted by the company for
the 2017-18 tax year. In January of 2018, Callaway provided some documents related to its
2017-18 business license tax.
On June 18, 2018, Cheryl Gerhardt, the City's Finance Manager, emailed John Newren
referencing a conversation between the two from the prior week during which she had informed
Mr. Newren that the City would be using the UDITP A three-factor apportionment fonnula to
apportion Callaway's gross receipts for purposes of the City's business license tax.
On June 19, 2018, Mr. Newren emailed Ms. Gerhardt to see if the City had a memo on
UDITP A that explained why the UDITP A method of apportionment was the best interpretation
for how to apportion gross receipts in Carlsbad. In response, Ms. Gerhardt indicated that she
could not share the City's memo because it was attorney-client privileged, but that Mr. Newren
could ask her for clarification if he was unsure about its application.
_On June 21, 2018, Mr. Newren emailed Ms. Gerhardt with questions as to why the City
chose the UDITPA model. On July 11, 2018, Ms. Gerhardt responded to each of Mr. Newren's
questions via email.
On July 12, 2018, Mr. Newren emailed Ms. Gerhardt, indicating that he disagreed with
the City's position that the UDITPA model is an appropriate methodology to calculate gross
receipts and explaining why he thought it was inappropriate.
On August 7, 2018, Benjamin Fay, counsel for the License Collector of the City of
Carlsbad, sent a letter to Mr. Newren addressing the objections that Mr. Newren raised in his
June 21 and July 12 emails to Ms. Gerhardt regarding the City's use of the UDITPA model to
apportion its business license tax.
On August 17, 2018, Mr. Newren emailed Ms. Gerhardt, proposing a different
apportionment methodology. On September 21, 2018, Mr. Fay emailed Mr. Newren, explaining
that the City did not intend to accept his proposed methodology, responding to some of the
DocuSign Envelope ID: 81E1EC2E-1549-43DA-9008-0488E7F84521
Final Decision ofTax Liability ofCalJaway Golf Co. for 2015-16 to 2019-20 Tax Years
July 20, 2020
Page4
points raised in his email, and suggesting that the two arrange a phone call to discuss the points
raised. On October 1, 2018, Mr. Newren emailed Mr. Fay, requesting the ordinance in which the
City adopted the UDITPA mo~el for all taxpayers'. Mr. Fay responded, indicating that the City
adopted the three-factor apportionment methodology administratively. On October I 0, 2018,
Mr. Newren requested the administrative materials in which the City adopted and explained the
UDITPA methodology. In response, Mr. Fay attached his August 7 letter to Mr. Newren in
which he had explained the application of the UDITPA model. On October 26, 2018, Mr.
Newren emailed Mr. Fay a petition for alternative apportionment.
On December 21, 2018, Ms. Gerhardt sent a letter to Jennifer Thomas at Callaway
acknowledging receipt of a $5,672.66 check from Callaway for its 2018-19 business license tax
and stating that it would be applied as a partial payment of the taxes Callaway_ owes for the 2015-
16, 2016-17, and 2017-18 tax years. The Jetter also stated that the City needed tax documents to
calculate Callaway' s license tax for the three-year period ending October 31, 2018 and for the
2018-19 tax year.
On January 23, 2019, Mr. Fay sent Mr. Newren a copy of Administrative Order No. 81,
and on February 5, 2019, Mr. Fay informed Mr. Newren that Callaway's request for an
alternative apportionment had been denied.
On October 4, 2019, the City informed Callaway that it was preparing a determination of
the amount of tax owed by the company for the 2015-16, 2016-17, 2017-18, and 2018-19 tax
years and requested additional records in order to accurately state the amount of business license
taxes owed by Callaway. On October 21, 2019, the deadline set by the City for submission of the
requested records, Mr. Newren sent a letter to the City, requesting an in-person meeting prior to
Callaway"s production ofrecords. On November 14, 2019, the License Collector responded to
Mr. Newren, indicating that she would be happy to meet with him to discuss the matter, but that
Callaway's production ofrecords could not be contingent upon any such meeting. The License
Collector reiterated the request for records and provided a new deadline of November 27, 2019
for the production of records. Mr. Newren did not provide any records.
As of December 2019, Callaway had only remitted $5,043 in business license tax to the
City for the 2015-16 tax year, $3,404 for the 2016-17 tax year, $3,348.24 for the 2017-18 tax
year, $5,672.66 for the 2018-19 tax year, and $6~i for the 2019-20 tax year.
B. Initial Determination, Hearing, and Post-Hearing Actions
On December 13, 2019, the License Collector issued an Initial Determination of the
~ount of unpaid business license tax owed by Callaway for the 2015-16 tax year to, and
including, the 2019-2020 tax year, based on the records available to the City.
The Initial Determination found that Callaway is a manufacturer of golf equipment
operating within the City. It is subject to the City's business license tax and is taxed under
Classification D of section 5 .08.010, which requires Callaway to pay "a license tax of $25.00
plus 20 cents for each $1,000.00 of annual gross receipts or portion thereof." Callaway's
DocuSign Envelope [D: 81E1EC2E-1549-43DA-9008-0488E7F84521
Final Decision of Tax Liability of Callaway Golf Co. for 2015-16 to 2019-20 Tax Years
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Page5
business license tax is due on November 1 of each year and is for the business license period
from November 1 to October 31. ·
The Initial Determination found that Callaway owed the City _an additional $1,029,274 in
unpaid business license taxes and penalties for the 2015-16, 2016-17, 2017-18, 2018-19, and
2019-20 tax years, and that penalties would begin to accrue on the amount owed for the 2019-20
tax year on January 1, 2020. The Initial Determination was based on the information in the
_ following records, which were either previously provided by Callaway to the City or collected by
the License Collector in order to determine the amount of tax that is due by Callaway ''using
such information as is available." (See Administrative Order No. 81.)
• The gross receipts that Callaway believes are attributable to sales in Carlsbad for
the 2016-17, 2017-18, and 2019-20 tax years, based on the business license
renewals Callaway submitted to the City for these years;
• Callaway's U.S. Corporation Income Tax Return, IRS Form 1120, for 2015 and
2016;and
• The net sales amounts stated in Callaway' s United States Securities and Exchange
Commission Form 10-K for 2014, 2017, and 2018.
Based on the information in these records, Callaway's gross receipts for the 2015-16,
2016-17, 2017-18, 2018-19, and 2019-20 tax years were apportioned using the UDITPA three-
factor formula as adopted by the City. Because Callaway did not provide the records requested
in the City's October 4, 2019 and November 14, 2019 letters, the License Collector applied the
three-factor formula· using the information available, as outlined above, and assumed that 100%
of Callaway' s payroll and property value for each year were .attributable to Carlsbad, given that
Callaway did not provide any information relating to its payroll in Carlsbad, its payroll
everywhere, its property value in Carlsbad, or its property value everywhere. For Callaway's
sales in Carlsbad, the License Collector used the gross receipts amount reported by Callaway in
its business license renewals, when available, as the company's total sales occurring in Carlsbad,
but when this information was not available to the License Collector, the License Collector
assumed that 100% of Callaway's sales were attributable to Carlsbad. For CaJlaway's total sales,
the License Collector used the gross receipts amount per line 1 c on Federal Form 1120, when
available, or the net sales amount per Form 10-K for the years that Federal Fortn 1120 was not .
available to the License Collector.
The apportionment analysis determined that Callaway underpaid its business license
taxes for the 2015-_16, 2016-17, 2017-18, 2018-19, and 2019-20 tax years. After applying the
amount of business license tax actually remitted by the company for each tax year, it was
determined that Callaway owed the City $741,275 in unpaid business license taxes and $287,999
in penalties, for a total of $1,029,274. ·.
On December 19, 2019, Callaway requested a hearing on the Initial Determination, and
by mutual agreement the hearing was held on February 27, 2020. The notice of the hearing
reminded Callaway that penalties for the 2019-20 taxes had begun to accrue on January 1, 2020.
At the hearing, Callaway had the opportunity to present all evidence and argument supporting its
DocuSign Envelope ID: 81 E1EC2E-1549-43DA-9008-0488E7F84521
Final Decision ofTax Liability of Callaway Golf Co. for 2015-16 to 2019-20 Tax Years
July 20, 2020
Page6
contention that the Initial Determination was incorrect and establishing what it thought the
determination should be. Callaway brought a printed PowerPoint presentation to the hearing, but
no other documents. At the close of the hearing, the City reiterated that if there were any records
Callaway could provide to the City regarding sales, payroll, and property, they could submit
them. In response, Callaway indicated that it would provide information for the sales factor and
anything else that might be helpful. The hearing was left open for Callaway to submit additional
infonnation to the City. On March 19, 2020, Callaway submitted the following supplemental
information:
• A letter dated April 26, 2017 from Jennifer Thomas at Callaway to Michael Stauffer at
the City, in which Ms .. Thomas explained Callaway' s business license tax calculation for
the 2016-17 business license tax;
• An email chain from May 2017 between Callaway representatives and Michael Stauffer
at the City, in which Mr. Stauffer indicated that Callaway's business license tax
calculation was sufficient and that a business license for the 2016-17 tax year would be
issued; and ·
• Callaway's Schedule R _for 2018 that was filed with the State and shows Callaway's
California sales and a calculation of the "single sales factor methodology" for the 2019-
20 tax year based on the Schedule R. In this calculation, Mr. Moll, counsel for Callaway,
subtra<;:ted the California sales of entities that do not conduct any business activities in
Carlsbad from Callaway's total California sales, to identify the sales that "would be
treated under the proposed methodology as entirely Carlsbad sales."
.,
Counsel for Callaway agreed to extend the deadline for issuance of this Final Decision to
July 20, 2020.
Discussion
A. The absence of a formally adopted apportionment formula did not render the tax
unconstitutional or mean that no tax was owed.
Callaway argues that until the three-factor apportionment formula was formally adopted
by the City in January of 2019, the City's business license tax was unconstitutional because it
was not apportioned and that, as a result, Callaway did not owe any tax before January 2019.
This is incorrect. The remedy for an unapportioned, but otherwise valid, tax is not to completely
exempt the taxpayer from the tax, but to apportion the tax and to require the taxpayer to pay the
correctly apportioned amount. If the tax has already been paid, then the remedy is to refund to
the taxpayer the amount the taxpayer would not have paid if the tax had been properly
apportioned; the remedy is not to refund the entire tax.
For support, Callaway cites McKesson Corporation v. Division of Alcoholic Beverages
and Tobacco (1990) 496 _U.S. 18; arguing that it holds that "unapportioned and improperly
apportioned taxes are void, and the remedy is a refund of all taxes paid." This is not an accurate
statement of this case. AfcKesson held that "[i]f a State places a taxpayer under duress promptly
to pay a tax when due and relegates him to a postpayment refund action in which he can
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Final Decision of Tax Liability of Callaway Golf Co. for 2015-16 to 2019-20 Tax Years
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Page7
challenge the tax's legality, the Due Process Clause of the Fourteenth Amendment obligates the
State to provide meaningful backward-looking relief to rectify any unconstitutional deprivation."
(McKesson, supra, 496 U.S. 18, 31.) This means that if the government requires a taxpayer to
pay a tax before resolving the taxpayer's objections to it, the government must give the taxpayer
the ability to assert its objections and to obtain relief sufficient "to rectify any unconstitutional
deprivation." That does not mean refunding the entire tax.
McKesson involved.a challenge to a Florida excise tax that the petitioner contended
discriminated against interstate commerce because it favored distributors of local products. The
Florida Supreme Court had agreed that the tax discriminated against interstate commerce and
enjoined any future preferential treatment for.distributors oflocal products, but it refused to give
the petitioner a refund of any of the discriminatory taxes the petitioner had paid. The United
States Supreme Court reversed the Florida Court's refusal to provide any backwards-looking
relief, explaining that the appropriate remedy was for the State to· "reformulate and enforce the
Liquor Tax during the contested tax period in any way that treats. petitioner and its competitors in
a manner consistent with the dictates of the Commerce Clause." (Id at 40.) This could be done
"by refunding to petitioner the difference between the tax it paid and the tax it would have been
assessed were it extended the same rate reductions that its competitors actually received" or ''to
the extent consistent with other constitutional restrictions, the State may assess and collect back
taxes from petitioner's competitors who benefited from the rate reductions during the contested
tax period, calibrating the retroactive assessment to create in hindsight a nondiscriminatory
scheme" or a combination of both. (Id at 40-41.) Importantly, the Court held that "the State
may retain the tax appropriately levied upon petitioner pursuant to this reformuJated scheme
because this retention would deprive petitioner of its property pursuant to a tax scheme that
is valid under the Commerce Clause." (Id at 40.) McKesson certainly did not hold that the
entire tax had to be refunded-only that part of the tax that exceeded constitutional limitations.
In reaching this conclusion, the Court relied on a long line of Supreme Court precedent,
including Atchison, T. & S.F.R. Co. v. (?'Connor (1912) 223 U.S. 280 (when a state tax is
improperly applied to out-of-state activities, the remedy is a refund of that portion of tax
improperly imposed on out-of-state activities) and Montana National Bank of Billings v.
Yellowstone County (1928) 276 U.S. 499 (a person forced to pay a discriminatory tax is entitled
to a refund of the excess tax). ·
California follows this line of reasoning. In Ventas Finance I, LLC v. Franchise Tax Bd.
(2008) 165 Cal.App.4th 1207, the trial court ordered the Franchise Tax Board ("FIB") to refund
all of the taxes paid by the plaintiff because the State had not properly apportioned the plaintiffs
income between in-state sources and .out-of-state sources. The Court of Appeal reversed,
explaining that "neither federal due process nor any principle of California law requires FTB to
refund the entire amount Ventas paid." (Id. at 1212.) "[T]he court erred by ordering that Ventas
was entitled to a full refund of the entire amount of tax it paid, •.. The court should instead have
ordered a refund of the difference between the levy actually paid and the amount that could be
collected without violating the Commerce Clause using a proper method of apportionment." (Id.
at 1233.)
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Final Decision of Tax Liability of Callaway Golf Co. for 2015-16 to 2019-20 Tax Years
July 20, 2020
Page 8
Callaway also cites Ferran v. City of Palo Alto (1942) 50 Cal.App.2d 374, General
Motors Corp. v. City and County of San Francisco (1999) 69 Cal.App.4th 448, and City of
Modesto v. National Med, Inc. (2005) 128 Cal.App.4th 518 to support its position that the ,
remedy for an unapportioned tax is a refund of the entire tax. Ferran is inapposite because it did
not involve a refund of taxes or any backwards-looking remedy. The remedy directed by the
court of appeal was an injunction against the further application of the city's tax that was
improperly measured by the number of employees working outside the city.
General Motors Corp. concerned a business tax on automobile sellers that the court
found discriminated against out-of-city manufacturers. The court found that San Francisco's
proffered backwards-looking remedy-refund of taxes paid on goods for which a manufacturing
tax had already been paid to another city-failed to eliminate the disparate treatment; and ·
therefore held that the entire tax had to be refunded. In contrast, when a tax is improperly
apportione~ or not apportioned at all, the constitutional infirmity can be remedied by properly .
apportioning the tax l!,nd refunding any tax paid over the properly apportioned amount. General
Motors Corp. does not hol~ that the appropriate remedy for a tax that can be apportioned is a
refund of all tax paid.
City of Modesto simply reiterates the rule stated in McKesson, explaining that "[i]f a city
collects a business license tax on activity carried on outside of its boundaries, i.e., the tax is not
apportioned, that extraterritorial tax is beyond the city's power to impose. In such a situation: no
corrective action by th_e city can cure the invalidity of the tax. Rather, the city has no choice but
to <undo' the unlawful deprivation by refunding the tax previously paid by the business on its
extraterritorial activities." (City of Modesto, supra, 128 Cal.App.4th at 525; emphasis added.)
.In othe~ words, the remedy is not to refund all taxes-just those paid on extraterritorial activities.
Callaway's contention that the City's business license tax was invalid and that no tax
could be applied to it until the three-factor apportionment formula was formally adopted in
!anuary 2019 is contrary to law and not supported by the cases cited by Callaway.
B. Applying the City's three-factor apportionment formula to Callaway's 2017-18,
2018-19, and 2019-20 tax years is not an unreasonable retroactive application of the
apportionment formula.
Callaway argues that it would violate its due process rights for the City to apply its three-
factor apportionment formula retroactively to the 2015-16 tax year. Callaway relies primarily on
two cases to support its argument: UnitedStates v. Carlton (1994) 512 U.S. 26 and City of
Modesto v. National Med, Inc., supra, 128 Cal.App.4th 518. Carlton involved federal legislation
passed in December of 1987 to close a loophole that had beeri mistakenly created by a statute
passed in October of 1986. The Court held that the retroactive application of the tax law back to
October of 1986 did not violate due process because it had a legitimate purpose, was not ·
arbitrary, and the period ofretroactivity, 14 months, was "modest." Callaway emphasizes that in
a concurring opinion, Justice O'Connor suggested that "[a] period of retroactivity longer than the
year preceding the legislative session in which the law was enacted would raise ... serious
constitutional questions." (Carlton, supra, 512 U.S. 26 at 38.)
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Final Decision of Tax Liability of Callaway Golf Co. for 2015-16 to 2019-20 Tax Years
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In City of Modesto, the city sought to apply apportionment guidelines, adopted in 2004,
to the 1996 tax year. The court of appeal held that "it would be overly burdensome to force [the
taxpayer] to produce up to nine-year-old documentation that it was not previously required to
maintain in order to prove 'with clarity' its right to apportion gross receipts." (Modesto, supra,
128 Cal:App.4th at 522.) This period of retroactivity, the court held, was not "modest" and was
too long. (Id at 529.)
The License Collector has decided to abate the portion of the Initial Determination that
found taxes and penalties owing for the 2015-16 and 2016-17 tax years. Any remaining period
ofretroactivtty is therefore limited to the 2017-18 tax year, the year in which Callaway was .
informed of the application of the City's apportionment formula, and is therefore well within the
holdings of Carlton, Modesto, and the other cases on this issue.
In a telephone conversation in early Jun~ of 2018, Ms. Gerhardt informed Mr. Newren
that the City was using the three-factor formula to apportion gross receipts, and this was restated
ina June 18, 2018 email from Ms. Gerhardt to Mr. Newren. Additionally, from June of2018
through October of 2018, Mr. Newren had numerous exchanges with Ms. Gerhardt and Mr. Fay
regarding the City's use of the three-factor apportionment formula. This was during the 2017-18
tax year, which runs from November 1 to October 31. Although Administrative Order No. 81,
which formally adopted the formula was not signed until January 16, 2019, Callaway was well
aware of the City's use of the formula by June 2018. By limiting the application of the
apportionment formula to the 2017-18 tax year and those years following it, any period of
retroactivity is well within the 14 months approved in Carlton and far less than the nine years
rejected in Modesto.
-Callaway also argues that the City's adoption of the formula was not "prompt" because
the City was aware as early as 2009 that its business license tax was not adequately apportioned,
but the formula was not applied until 2018. Mr. Moll argued that it was unreasonable for the
City to wait ten years before acting and then to apply the formula retroactively for four years.
However, Mr. Newren acknowledged that Callaway had never challenged the City's business
license tax ordinance until 2018. Callaway has not presented any evidence that it informed the
City a decade ago that its business license tax was unconstitutional because it was
unapportioned. In any event, this objection is irrelevant since the License Collector has decided
to apply the three-factor apportionment formula beginning with the 2017-18 tax year, in which
Callaway was first notified of its application.
Callaway also argues that it had "settled expectations" regarding its calculation of
business license tax based on the "point of sale" methodology, which uses only the receipts from
products that were manufactured or distributed out of Carlsbad to measure the business license
tax, because the City had accepted that methodology following audits in the past and the parties
had previously agreed to that methodology. In support of this argument, after the hearing,
Callaway submitted an April 26, 2017 letter from Jennifer Thomas at Callaway to Michael
Stauffer at the City, in which Ms. Thomas explained Callaway's business license tax calculation
for the 2016-17 business license tax, and an email chain from May 2017 between Callaway
. DocuSign Envelope ID: 81 E1 EC2E-1549-43DA-9008-0488E7F84521
Final Decision of Tax Liability of Callaway Golf Co. for2015-16 to 2019-20 Tax Years
July 20, 2020
Page 10
representatives and Mr. Stauffer in which Mr. Stauffer indicated that Callaway's business license
tax calculation was sufficient and that a business license for the 2016~ 17 tax year would be
issued.
While Mr. Stauffer, the City's former Finance Manager, may have accepted Callaway's
methodology for the 2016-17 tax year, the City did not formally adopt Callaway's ''point of sale"
methodology as its apportionment methodology for future years. Additionally, Callaway was
aware, by at least June 18, 2018, that the City was using the three-factor apportionment formula;
Because Callaway had notice of the City's use of this formula during the 2017-18 business
license tax year, the License Collector has limited this Final Decision to the 2017-18; 2018-19,
and 2019-20 tax years.
Finally, there can be no question that the adoption of the apportionment formula has a
legitimate purpose, which is to ensure that the application of the City's business license tax
complies with the Commerce Clause of the United States Constitution and the Equal Protection
and Due Process Clauses of the California Constitution. It is also clearly not arbitrary, since it is
modeled after an apportionment formula that has been approved by the United States Supreme
Court for 80 years. And it is not unreasonably retroactive because it is being applied to Callaway
in the tax year in which Callaway was first notified of the formula.
· C. The three-year statute of limitations in section 338 of the Code of Civil Procedure
does not apply to this administrative proceeding.
Callaway argues that the City's administrative determination of the amount of taxes owed
by Callaway for past years is limited by the three-year statute of limitations in section 338 of the
Code of Civil Procedure. However, it is well-established that the statutes of limitations iri the
Code of Civil Procedure only apply to the filing of a legal action in a court of law and do not
. apply to administrative proceedings. "The general and special statutes of limitation referring to
actions and special proceedings are applicable only to judicial proceedings; they do not apply to
administrative proceedings." ( City of Oakland v. Public Employees' Retirement System (2002)
95 Cal.App.4th 29, 48, quoting 3 Witkin, Cal. Procedure (4th ed. 1996) Actions,§ 405(2), p.
510.) "[S]tatutes of limitations found in the Code of Civil Procedure ... do not apply to
administrative actions."' (Robert F Kennedy Medical Center v. Department of Health Services
(1998) 61 Cal.App.4th 1357, 1362; see Krolikowski v. San Diego City Employees' Retirement
System (2018) 24 Cal.App.5th 537,559 ["Case law establishes that when, as here, recoupment is
obtained through an administrative process, rather than through a lawsuit filed in court, the
statute of limitations does not apply."].) The three-year statute of limitations in section 338 of
the Code of Civil Procedure therefore does not apply to this administrative proceeding.
Moreover, the statute of limitations is tolled while the City is engaged in the
administrative procedures regarding the tax (City of Los Angeles v. Centex ielemanagement, Inc.
(1994) 29 Cal.App.4th 1384, 1386-89); and since the City is abating the tax determination for the
2015-16 ~d 2016-17 tax years, even if the three-year statute oflimitations applied and was not
tolled, it would not limit the City's ability to make a determination of taxes due for the 2017-18,
2018-19, and 2019-20 tax years.
DocuSign Envelope ID: 81E1EC2E-1549-43DA-9008-0488E7F84521
Final Decision of Tax Liability of Callaway Golf Co. for 2015-16 to 2019-20 Tax Years
July 20, 2020
Page 11
D. The three-factor apportionment formula is not too burdensome.
Callaway argues that the three-factor apportionment formula is too burdensome. The
License Collector is not aware of any case in the eight decades that the three-factor formula has
been in use in which a court held that the formula was too burdensome. Moreover, this
contention is belied by the fact that Callaway conceded that it could fairly easily produce much
of the information needed for the formula. For instance, at the hearing, Mr. Newren
acknowledged that information related to "sales in Carlsbad and sales outside of Carlsbad is not
particularly difficult" to obtain and that' Callaway could prod~ce that information. In fact, after
the hearing, Callaway produced some information related to its total sales within and outside of
California for one tax year. When questioned by the City regarding the payroll data that it is
required to compile and file with the State, which includes California wage information, Mr.
Newren acknowledged that Callaway has wage data-the payroll tax returns exist. For payroll
information just for Carlsbad, Mr. Newren and Mr. Moll detailed the difficulties that ·Callaway
would face in trying to compile this information, but again, Mr. Newren acknowledged that this
information could be obtained. Finally, with respect to the property factor, the City asked
Callaway if it was particularly difficult to identify the value of its property in the City, to which
Mr. Newren explained that Callaway could probably get about 70% of it "fairly easily'' and that
they _might be able to design a process going forward to get the remaining information. In sum,
Mr. Newren acknowledged that if the City and Callaway agreed on how the three-factor
apportionment formula works, the formula "may be doable," but continued to assert that it would
impose an administrative burden on both Callaway and the City.
'i Contrary to Callaway' s argument that the formula will result in administrative burdens
for both parties and despite the fact that that is not a sufficient legal argument, the City has found
that other companies in Carlsbad have had no problem providing the information necessary for
the formula. As explained at the hearing, to show the information that Callaway deems difficult,
such as payroll data for Carlsbad, other companies typically take the State numbers (e.g. total
California wages) and show the exclusions (e.g. non-Carlsbad employee wages). If the City can
tie the amounts to a source document and it looks reasonable, that is sufficient for the City.
Additionally, the City noted that there are records that the City requested that Callaway must
report per state and federal law-such as total sales, which may be found in Callaway's U.S.
Corporation Income Tax Return (IRS Form 1120) or Schedule R, which is filed with the State,
and total payroll, which may be found in Callaway's Quarterly Federal Tax Return (IRS Form
941 ). And for property, Callaway' s total property amount should be stated in financial
statements, and Callaway presumably has addresses for the property it owns in the City.
Callaway argues that providing the information for the three-factor formula is too
burdensome, but it has conceded that much of the information is relatively easy to obtain. And
after the hearing, Callaway produced its Schedule R for 2018, which shows its total sales within
and outside of California. Callaway did not identify any burdens associated with this document
production. For those factors that are more difficult for Callaway--such as payroll or property
just for Carlsbad-Callaway has not even attempted to compile the necessary information. The
City is always willing to work with a taxpayer if some information is difficult to obtain, but
DocuSign Envelope ID: 81 E1 EC2E-1549-43DA-9008-0488E7F84521
Final Decision of Tax Liability of Callaway Golf Co. for 2015-16 to 2019-20 Tax Years
July 20, 2020
Page 12
Callaway has not even tried to generate the necessary info1mation or to discuss with the City
ways to lessen the burden.
E. The three-factor apportionment formula is not unconstitutionally vague.
Callaway asserts that the three-factor apportionment formula is unconstitutionally vague,
suggesting that there could be uncertainty regarding some of its terms, such as the parameters of
the business (e.g. entire unitary business, worldwide business, waters edge, etc.), what should be
included in the various factors, whether and how to include intercompany transactions, and
. which state's interpretation or answer governs the various uncertainties. But these kinds of
uncertainties arise frequently in the application of any tax and they do not render the tax
inapplicable.
Callaway cites City of San Bernardino Hotel/Motel Association v. City of San Bernardino
(1997) 59 Cal.App.4th 237 to support its argument that the formula is too vague, but that case
involved contradictory definitions irt a transient occupancy tax. The tax stated that it applied to
''transients" staying in a "hotel." A hotel was defined as a place where a transient stays for up to
30 days, while a transient was defined as someone who ·stays in a hotel for up to 90 days. The
court found this to be too confusing. The three-factor formula does not contain any similarly
contra~ctory terms.
"[11he mere fact that a new statute [ordinance] requires interpretation does not make it
unconstitutionally vague." (Garcia v. Four Points Sheraton LAX(2010) 188 Cal.App.4th 364,
387.) The three-factor formula has been applied for 80 years, and it has never been found to be
unconstitutionally vague. It may require some interpretation, but that does not make it invalid. ·
And to the extent there are any uncertainties in the future, City staff is available to discuss them.
Additionally, at the hearing Callaway conceded that it could produce the information or
records and design processes to obtain the relevant information. The simple fact that much of
the information needed for the formula can be obtained indicates that it is not too vague.
Nonetheless, Callaway indicated that it had a number of questions on how exactly to design
processes to obtain the relevant information, to which the City noted that such questions had
never before been asked of the City and that there had been no attempt to actually produce the
information. Mr. Newren acknowledged that it was the first time he had raised the questions, but
claimed he had no chance to do so before the hearing: He noted that Callaway requested a
· meeting with the City to discuss the matter, but the City responded by reiterating its request for
records. In response, the City indicated that the point of the hearing was to provide Callaway the
opportunity to establish how much tax it thought it owed, yet Callaway again failed to bring any
of the requested records. And, at the close of the hearing, Callaway indicated that it would
provide sales information and any other information that might be helpful, yet its post-hearing
supplemental production only included information related to Callaway' s total sales everywhere
for the 2019-20 tax year based on its Schedule R for 2018. Callaway did not include this
information for any other tax years, nor did it produce any of the other documents or information
that Callaway conceded was available or relatively easy to obtain.
DocuSign Envelope ID: 81E1EC2E-1549-43DA-9008-0488E7F84521
Final Decision ofTaxLiability of Callaway Golf Co. for 2015-16 to 2019-20 Tax Years
July 20, 2020
Page 13
F. Callaway's policy arguments against the City's three-factor apportionment formula
are irrelevant
Callaway argues that the City's three-factor apportionment formula is outdated and has
been abandoned by most states because it discourages companies from locating their -
headquarters in jurisdictions that apply it. But this is a policy argument, not a legal argument.
At the hearing, Callaway conceded that the three-fa:ctor formula has been "blessed" by the
courts. That many jurisdictions have moved away from using this formula for policy reasons is
irrelevant to the legal validity of the formula.
G. The City declines to adopt Callaway's proposed alternative apportionment ·
formulas.
Callaway suggests two alternative apportionment methods for the City to use. First, it
proposes the City use the "point of sale" methodology, which it contends is the methodology it
· has used in the past and that the City has accepted, which uses only the receipts for products
manufactured or distributed out of Carlsbad to measure the business license tax. Second, it
proposes using the sales factor for the entire State of California, which Callaway already has to
calculate for its California taxes. The City declines to adopt either of these methods.
It is worth noting that the proposal to use the California sales factor, which is used by the
State of California to apportion taxes, and which is based on Callaway's sales in the entire state,
could violate the Commerce Clause of the United States Constitution and the Equal Protection
and Due Process Clauses of the California Constitution if used to apportion Carlsbad tax because
it would be basing the Carlsbad tax on business activities outside the City.
Final Decision
Callaway is a manufacturer of golf equipment. It conducts business within the City of
Carlsbad. It is therefore subject to the City's business license tax for its business operations in
the City. It is appropriately t11Xed under Classification D of section 5.08.010 of the Carlsbad
Municipal Code, which requires it to pay "a license tax of $25.00 plus 20 cents for each
$1,000.00 of annual gross receipts or portion thereof." Callaway' s business license tax is due on
November 1 of each year for the following 12-month period (until Qctober 31 of the following
year).
After considering the evidence in the record and the arguments made by Callaway, the
License Collector hereby determines that the Initial Determination of taxes and penalties owed
by Callaway for the 2015-16 and 2016-17 tax years shall be abated. The License Collector
further determines that Callaway owes the City $544,479 in unpaid business license taxes and
penalties for the 2017-18, 2018-19, and 2019-20 tax years.
Despite the City's numerous requests for the records and information needed to apply the
three-factor apportionment formula, Callaway's opportunity to produce such records and
information at the hearing, and CaIIaway' s opportunity following the hearing to submit such
DocuSign Envelope ID: 81E1EC2E-1549-43DA-9008-0488E7F84521
Final Decision ofTax Liability of Callaway Golf Co. for 2015-16 to 2019-20 Tax Years
July 20, 2020 .
Page 14
records and information, Callaway has refused to provide most of the records and information
requested by the City to apply the formula and apportion Callaway' s gross receipts. Therefore, '
this Final Decision is based on the information in records that were either previously provided by
Callaway to the City, Callaway's limited post-hearing supplemental production, or collected by
the License Collector in order to determine the amount pf tax that is due by Callaway "using
such information as is available." (See Administrative Order No. 81.) Callaway's gross receipts
for the 2017-18, 2018-19, anci 2019-20 tax years have been apportioned using the three-factor
formula adopted by the City as follows:
For the 2017-18 tax year, Callaway's gross receipts have been apportioned using the
gross receipts reported by Callaway in its· business license renewal as the company's total sales
occurring in Carlsbad and its gross receipts per line le ·on Federal Form 1120 as the company's
total sales everywhere, and with the assumption that 100% of Callaway's payroll and property
values are attributable to Carlsbad, given that Callaway has not provided any information
relating to its payroll in Carlsbad, its payroll everywhere, its property value in Carlsbad, or its
property value everywhere. The License Collector has also corrected a discrepancy in the Initial
Determination related to Callaway's total sales everywhere per line le on Federal Form 1120.
Callaway's total gross receipts for the 2017-18 tax year were $652,126,mH. Applying the City's
three-factor apportionment formula, Callaway's apportioned gross receipts (apportioned to
reflect Callaway' s business activity• in the City) for the 2017-18 tax year were $440,287; 794.
For the 2018-19 tax year, the License Collector has identified a correction that can be
made to the Initial Determination regarding the calculation of Callaway' s business license tax.
The Initial Determination apportioned Callaway' s gross receipts for the 2018-19 tax year based
on the assumption that 100% of Callaway' s gross receipts were attributable to Carlsbad because
Callaway had not provided any records that would enable the License Collector to apportion its
gross receipts based on sales, payroll, and property. However, the City does, in fact, have
Callaway' s business renewal for the 2018-19 tax year in its records, and it can therefore use the
information stated in that form as the gross receipts attributable to sales in Carlsbad. For
purposes of this Final Decision, Callaway' s gross receipts for the 2018-19 tax year have been
apportioned using the gross receipts -reported by Callaway in its business license renewal as the
company's total sales occurring in Carlsbad and its net sales amount per Form 10-K as the
company's total sales everywhere, and with the assumption that 100% of Callaway' s payroll and
property values are attributable to Carlsbad because Callaway did not provide any information
relating to its payroll in Carlsbad, its payroll everywhere, its property value in Carlsbad, or its
property value everywhere. Callaway' s total gross receipts for the 2018-19 tax year were
$1,048,736,000. Applying the City's three-factor apportionment ·formula, Callaway's
apportioned gross receipts (apportioned to reflect Callaway's business activity in the City) for
the 2018-19 tax year were $708,563,438 ..
· Finally, in its post-hearing supplemental production for the 2019-20 tax year, Callaway
produced its Schedule R for 2018 and calculated the sales that "would be treated under the
proposed [ single sales factor] methodology as entirely Carlsbad sales" by subtracting the sales
from entities that do not conduct any business activity in Carlsbad from Callaway's total
California sales, as reported in its Schedule R. The License Collector has decided not to use this
DocuSign Envelope ID: 81E1EC2E-1549-43DA-9008-0488E7F84521
Final Decision of Tax Liability of Callaway Golf Co. for2015-16 to 2019-20 Tax Years
July 20, 2020
Page 15
calculation as Callaway's total sales occurring in Carlsbad because it likely includes some sales
that are not wholly attributable to Carlsbad. Therefore, for the 2019-20 tax year, Callaway's
gross receipts have been apportioned using the gross receipts reported by Callaway in its
business license renewal as the company's total sales occurring in Carlsbad and its total sales
within and outside of California per Schedule R as the company's total sales everywhere, and
with the assumption that 100% of Callaway's payroll and property values are attributable to
Carlsbad because Callaway did not provide any information relating to its payroll in Carlsbad, its
payroll everywhere, its property value in Carlsbad, or its property value everywhere. Callaway's
total gross receipts for the 2019-20 tax year were $1,069,602,345. Applying the City's three-
factor apportionment formula, Callaway's apportioned gross receipts (apportioned to reflect
Callaway's business activity in the City) for the 2019-20 tax year were $714,154,357.
After subtracting the amount of business license tax actually remitted by Callaway for the
2017-18, 2018-19, and 2019-20 tax years, and adding the appropriate penalties, the License
Collector fmds that Callaway owes the following balances:
For the 2017-18 tax year, Callaway owes $84,738 in unpaid business license tax, plus
$42,369 in penalties, for a total of$127,107.
For the 2018-19 tax year, Callaway owes $136,069 in unpaid business lic.ense tax, plus
$68,035 in penalties, for a total of $204,104.
For1fle 2019-20 tax year, Callaway owes $142,179 in unpaid business license tax, plus
$71,089 in penalties, for a total of $213,268.
In total, for the 2017-18, 2018-19, and 2019-20 tax years, Callaway owes the City
$362,986 in unpaid business license taxes and $181,493 in penalties, for a total of $544,479. A
full analysis of the City's apportionment of Callaway' s gross receipts is set forth in Attachment
B. Please remit payment to the following address: ·
City of Carlsbad, Finance Department
Attn: Cheryl Gerhardt, Finance Manager
1635 Faraday Ave.
Carlsbad, CA 92008
Pursuant to Administrative Order No. 81, Callaway may appeal this Final Decision of the
License Collector to the City Council, as provided in sections 5.04.090 and 1.20.310 of the
Carlsbad Municipal Code.
Date: July 20, 2020
Laura.Rocha
License Collector/Deputy City Manager
DocuSign Envelope ID: 81E1EC2E-1549-43DA-9008-0488E7F84521
Final Decision of Tax Liability ofCa1Iaway Golf Co. for 2015-16 to 2019-20 Tax Years
July 20, 2020
Page 16
Attachment A: Administrative Order No. 81
Attachment B: Apportionment Analysis for Callaway Golf Company
Attachment A
{cityof
Carlsbad
Administrative Order No. 81
Date: December 17, 2018
To: All City Departments
From:
Subject:
Scott Chadwick, City Manager
Business License Tax Procedures
PURPOSE:
To establish specific guidelines for the administration of business license taxes.
POLICY:
A. Delegation of Authority
The City Manager designates the Administrative Services Director as the License Collector and the Tax
Administrator for business license taxes. (Municipal Code § 2.µ..040) . ,
With regard to the Fina"nce Director's duties, the Finance Director designates the Finance Manager as
the Finance Director's-designee for the administration of business license taxes. (Municipal Code§ .
5.04.020.) .
B. Administrative Procedures for Business License Taxes
The City Manager adopts the following administrative procedures for busi(less license taxes
(Municipal Code§ 5.04.150):
1. · Initial Determination of the Amount of Tax Due
If the License Collector determines that an insufficient amount of tax has been paid by an
applicant or licensee, or if no tax has been paid by an applicant or licensee and the due date
for paying the tax has passed, or if the License Collector and an applicant or licensee disagree
as to the amount of tax due or owing to ~he City, the License Collector shall make a
· detemiination of the amount of tax that is due, including penalties and interest if applicable,
using such information as is available to the License Collector· ("Initial Determination").
2. Service of an Initial Determination
The Initial Determination shall be served on the applicant or licensee by placing a copy of the
.Initial De~ermination in the United States Mail, addressed to the address on file with the
License Collector for the applicant or licensee. Service is effective on the date the Initial
City Hall
1200 Carlsbad Village Drive I ·carlsbad, CA 92008 I 760-434-2820 I 760-720-9461 fax I www.carlsbadca.gov
I,
Determination is placed in the mail. If the License Collector has an email address for the
applicant or licensee, then the Initial Determination shall also be sent by email.
-:,
3. Right to a Hearing on an Initial Determination and Issuance of a Final Decision
(a) An applicant or licensee may, within ten days of service of an Initial
Determination, request a hearing on the Initial Determination. Jhe request must be
. made in writing to the License Collector. _If a timely request is made,. the License
Collector shall schedule a hearing to be held within 30 days of receipt of the request
for a hearing. The applicant or licensee shall be provided with at least 10 days written
notice of the hearing. Service oft~e notice.shall be provided in the same manner as
service of an Initial Determination.
(bl At the hearing, the applicant or licensee shall present all evidence and
argument supporting its contention that the Initial Determination.is incorrect and
establishing what it contends the determination should be. Within 30 days of the
hearing, the License Collector shall issue a written decision that will be the License
Collector's Final Decision and serve it upon the applicant or licensee. The Final
Decision shall be served in the same manner as service of an Initial Determination.
4. Appeal to the City Council
The applicant ·or licensee inay appeal a Final Decision of the License Collector to the Qty
Council as provided in section 5.04.090 of the Municipal Code.
5. Apportionment
For the apportionment of gross receipts for the determination of business license taxes, the
City will use the following three-factor formula (sales, employment, and property):
AP= (SF+ EF +PF)/ 3
The resulting percentage will be applied to the business's gross receipts to determine th~
receipts attributable to the City for calculation of business license tax.
This apportionment formula is based on the formula in the Uniform Division of Income for Tax
Purposes Act (UDITPA). The City will look to the UDITPA formula for non-binding guidance,
but the City will apply its apportionment formula as appropriate to ensure a fair, equitable,
and constitutional apportionment of its-business lice~se taxes.
Definitions
AP The percent of the business's gross receipts apportioned to Carlsbad
(Apportionment Percentage).
SF The business's sales in Carlsbad divided by the business's overall total sales
(Sales Factor).
EF The business's payroll in Carlsbad divided by the business's overall total
payroll (Employee Factor).
· PF The value of the business's property in Carlsbad divided by the overall total
value of the business's property. Rented property is valued at 8 times the
annual rent (Property Factor}.
Callaway Golf Company, Inc.
total sales occuring in Carlsbad
Sales
company's total sales everywhere
Sales ratio
total payroll occurlng In Carlsbad
Payroll
company's total payroll everywhere
Payroll ratio
total property owned* In Carlsbad
Property
total-property owned* everywhere
Property ratio
Sales+ Payroll+ Property
Business License Tax
3
Average Apportionment
Apportioned Gross Receipts
• Rented property is valued at eight times the annual rental rate
CALLAWAY-Calculation of all years (Final)
Yearly Summary
Sales
Payroll ·
Property ·
X Company's total sales Business License Tax
Gross Receipts per Form 1120, Schedule R or 101<
Taxable Subtotal
State Fee + ZS Base Fee
Tax Amt
Previously Paid
Penalities
Balance Due
Business license for
year ending 10/31/18
16,611,201
652,126,091
2.547%
100.000%
100.000%
202.547%
3
67,516%
652,126,091
440,287,794!
440,288
29
88,087
-3,348.24
42,369
127,107!
TOTAL AMOUNT DUE .,!· ______ _ 544,479!
ATTACHMENT B
Business llcense for Business license for
year ending 10/31/19 year ending 10/31/20
28,218,313 . 3,258,381
1,048,736,000 1,069,602,345
2.691% 0,305%
100.000% 100.000%
100.000% 100.000%
202.691% 200.305%
3 3
67.564% 66.768%
1,048,736,000 1,069,602,345
708,563,438! 714,154,357!
708,563 714,154
29 29
141,742 142,860
-5,672.66 -681
68,035 71,089
204,104! 213,268!
7/17/2020
10:16AM
DocuSign Envelope ID: 6990EDCB-624D-4D9B-8338-F2BA98AEA 193 Attachment B
{ City of
Carlsbad
Final Decision of License Collector Following Hearing
on Business License Tax Liability of TaylorMade Golf Company
for 2015-'!6 Through 2019-20 Tax Years
. Summary of Decision
On February 27, 2020, a hearing was held pursuant to section B(3)(b) of Administrative
Order No. 81 of the City of Carlsbad (''the City"), regarding the License Collector's December 2,
2019 lnitial Determination that TaylorMade Golf Company ("TaylorMade") owed $350,332 in
business license tax, including penalties, for the 2015-16 through 2019-20 tax years. Based on
the evidence and argument presented at the hearing and the evidence in the record, it is hereby
determined that TaylorMade owes $218,211 in unpaid business license taxes for the 2017-18,
2018-19, and 2019-20 tax years, which includes $72,737 in penalties. The portion of the Initial
Determination that found taxes and penalties ·owing for the 2015-16 and 2016-17 tax years is
hereby abated. This is the Final Decision of the License Collector, under City of Carlsbad
Administrative Order No. 81, section B(3)(b), for TaylorMade's business license tax liability for
the 2015-16 through 2019-20 tax years.
Administrative History
On December 2, 2019, following an audit ofTaylorMade's business license taxes, an
Initial Determination of the amount of unpaid business license taxes owed by TaylorMade for the
2015-16 tax year through the 2019-20 tax year was issued under Administrative Order No. 81,
section B, based on the records provided by TaylorMade. The Initial Determination determined
that TaylorMade owed the City a total of $350,332 in unpaid business license taxes for these tax
years, including $103,356 in penalties for the 2015-16, 2016-17, 2017-18, and 2018-19 tax years.
The Initial Determination stated that the business license tax for the 2019-20 tax year would be
subject to penalties beginning January 1, 2020. · ·
On December 11, 2019, pursuant to Administrative Order No. 81, section B(3),
TaylorMade requested a hearing on the Initial Determination. The City and TaylorMade
mutually agreed to hold the hearing on the Initial Determination beyond the 30-day requirement
for holding a hearing on an Initial Determination. On January 28, 2020, the City formally
notified TaylorMade that the hearing would be held on February 27, 2020.
The hearing on the Initial Determination was held on February 27, 2020 at 1 :00 p.m. at
1635 Faraday Avenue, Carlsbad, California, 92008 before Laura Rocha, License Collector and·
Deputy City Manager of Administrative Services of the City of Carlsbad. PreseIJ.t at the hearing
were Martin Osborne (Tax Director for TaylorMade), Charles J. Moll (counsel for TaylorMadeJ,
Cheryl Gerhardt (Finance Manager for Business License o(the City of Carlsbad), Benjamin P.
Administrative Services 1635 Faraday Avenue I Carlsbad, CA 92008 I 760-602-2430 t I 760-602-8553 f
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Fay ( counsel for the License Collector of the City of Carlsbad), and Cindie McMahon (Assistant
City Attorney of the City of Carlsbad). The hearing was audio recor4ed.
The City's Business License Tax
Under Title 5 of the Carlsbad Municipal Code, the City imposes a business license tax on
businesses operating in the City. Under Classification D of section 5.08.010, manufacturers are
required to pay "a license tax of $25.00 plus 20 cents for each $1,000.00 of annual gross receipts
or portion thereof." This tax is "due and payable annually in advance on the first day of the
month in which the business was originally established." (Carlsbad Municipal Code §
5.04.020(B).) If the tax is not paid within 60 days of its due date, a 25% penalty is automatically
applied. (Ibid.) If the tax remains unpaid 90 days after it is due, the penalty increases to 50%.
(Ibid.)
The City's business license tax is imposed on the activity of operating a business. It is
measured by the business's gross receipts of the prior year (e.g. business license tax for the 2015-
16 tax year is based on a business's 2014 gross receipts). To ensure that the amount of tax is
proportional to the amount of business conducted in the City, the City apportions a business's
gross receipts using a three-factor apportionment formula modeled on the long-established
Uniform Division of l.n,come for Tax Purposes Act ("UDITPA") apportionment formula. (See
Attachme11:t A, City of Carlsbad Administrative Order No. 81.)
This formula uses three factors that are weighted evenly: sales, payroll; and property. A
percentage(or each factor i~ calculated. For sales, this percentage is the fraction in which the
numerator is the total sales occurring in Carlsbad and the denominator is the.company's total
sales everywhere. For payroll, the percentage is the fraction in which the numerator is the total
payroll occurring in Carlsbad and the denominator is the company's total payroll everywhere.,
And for property, the percentage is the fraction in whkh the numerator is the total property
owned in Carlsbad and the denominator is the company's total property owned everywhere.
Rented property is valued at eight times the annual rental rate. The percentages for the three
factors are then averaged, which yields the percentage of total gross receipts attributable to the
City.
Section 5.04.020 of the Carlsbad Municipal Code provides that "[f]or the purposes of
determining the correct tax to be collected, the license collector may at any time require a
licensee to furnish his, or her books of account and records for inspection and audit and may
require the production of other documents and information regarding the. business as authorized
· by law." Administrative Order No. 81 further provides that "[i]fthe License Collector
determines that an insufficient amount of tax has been paid by an applicant or licensee, or if no
tax has been paid by an applicant or licensee and the due date for paying the tax has passed, or if
the License Collector and an applicant or licensee disagree as to the amount of tax due or owing
to the City, the License Collector shall make a determination of the amount of tax that is due,
including penalties and interest if applicable, using such information as is available to the
License Collector ('Initial Determination')."
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Thereafter, an "applicant or licensee may, within ten days of service of an Initial
Determination, request a hearing on the Initial Determination." If a timely written request is
made, •'the License Collector shall schedule a hearing to be held within 30 days of receipt of the
·request for a hearing." (Administrative Order No. 81.) At the hearing, •'the applicant or licensee
shall present all evidence and argument supporting its contention that the Initial Determination is
incorrect and establishing what it contends the determination should be." (Id.) Within 30 days
of the hearing, "the License Collector shall issue a written decision that will be the License_
Collector's Final Decision and serve it upon the applicant or licensee." (Id.)
A. The City's Business License Tax Audit of TaylorMade
In December of 2017, the City requested tax verification documents from Tay lorMade
relating to its business license tax. In May of 2018, after TaylorMade failed to respond·_to the
City's initial request, the City again requested this information. In an August 14, 2018 email
from Cheryl Gerhardt to Martin Osborne, the City notified TaylorMade that it was using the
UDITPA three-factor formula to apportion gross receipts for business license taxes, reiterated its
request for records, and informed TaylorMade that because it did not have a current business
license, the City sought tax verification documents from 2014,2015, and 2016, so that it could
determine the correct amount of business license tax for the 2015-16, 2016-17, and 2017-18 tax
years.
In a series of emails between Mr. Osborne and Ms. Gerhardt, the City clarified for
TaylorMade the information that it was seeking, and in Augiist and September of 2018
TaylorMade provided the City with tax verification documentation, primarily for 2016, which
enabled the City to apportion TaylorMade's gross receipts using the UDITPA three-factor
formula as adopted by the City for the 2015-16, 2016-17, and 2017-18 tax years. .On September
13, 2018, Ms. Gerhardt sent Mr. Osborne an invoice for $148,881, which would bring
TaylorMade's business license current for the 2015-16, 2016-17, and 2017-18 tax years. Ms.
Gerhardt indicated that this amount did not include any penalties. At that time, Ms.' Gerhardt
also suggested that Mr. Osborne send documentation relating to TaylorMade 's 2018-19 business
license so that the company could renew its license on time.
On October 9, 2018, Ms. Gerhardt emailed Mr. Osborne to inform him that TayJorMade
had not paid its business license tax for the 2015-16, 2016-17, and 2017-18 tax years as invoiced,
and that if payment'was not received by the end of October, penalties would be applied. Ms.
Gerhardt also requested documentation to calculate the business license tax for 2018-19.
On December 11, 2018, Ms. Gerhardt sent a letter to Mr. Osborne, acknowledging a
partial payment made by the company for the 2018-19 tax year and attaching an updated invoice
for the 2015-16, 2016-17, and 2017-18 tax years in the amount of$212,457, which included
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penalties. Again, the City requested records for 2017, so that it could calculate the correct
amount of tax for the 2018-19 tax year.
In a letter dated October 4, 2019, the City informed TaylorMade that it was preparing a
determination of the amount of tax due by the company for the 2015-16, 2016-17, 2017-18, and
2018-19 tax years, and requested additional records in order to accurately calculate and apportion
the amount of business license taxes owed by TaylorMade. TaylorMade provided the requested
records.
On October 11, 2019, the City received a business license renewal form prepared by
TaylorMade for the 2019-20 tax year, accomp~ied by a check for $7,001. On October 15.,
2019, the City requested documentation to verify the correct amount of business license tax
owed for the 2019-20 tax year. TaylorMade provided the requested records.
As of December 2019, TaylorMade had remitted $5;090 in business license tax to the
City for the 2015-16 tax year, $5,821 for the 2016-17 tax year, $7,000 for the 2017-18 tax year,
$6,118 for the 2018-19 tax year, and $7,001 for the 2019-20 tax year.
B. Initial Determination, Hearing, and Post-Hearing Actions
On December 2, 2019, the License Collector issued an Initial Determination of the
amount of unpaid business license tax owed by TaylorMade for the 2015-16 tax year to, and
including, the 2019-2020 tax year, based on the records provided by TaylorMade.
The Initial Determination found that TaylorMade is a manufacturer of golf equipment.
operating within the City. It is subject to the City's business license tax and is taxed under
Classification D of section 5.08.010, which requires TaylorMade to pay "a license tax of$25.00
plus 20 cents for each $1,000.00 of annual gross receipts or portion thereof." TaylorMade's
business license tax is due on November 1 of each year and is for the business licei:;ise period
from November I to October 31.
The Initial Determination found that TaylorMade owed the City an additional $350,332
in unpaid business license taxes and penalties for the 2015-16, 2016-17, 2017-18, 2018-19, and
2019-20 tax years, and that penalties would begin to accrue on the amount owed for the 2019-20
tax year 011 January 1, 2020. The Initial Determination was based on the information in the
following records, which were provided by TaylorMade to the City in August and September of
2018 and October of2019:
• Carlsbad Sales Reports for 2014, 2015, 2016, 2017, and 2018, which were prepared by
TaylorMade;
• TaylorMade's U.S. Corporation Income Tax Return, IRS Form 1120, for 2014, 2015,
2016, 2017, and 2018;
• Carlsbad Payroll Ledgers for 2014;2015, 2016, 2017, and 2018, Which were prepared by
Taylor Made;
4
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• TaylorMade's Quarterly Federal Tax Retupl, IRS Form 941, for 2014, 2015, 2016, 2017,
and 2018; and
• Property Value Ledgers and Property Breakdown Reports for 2014, 2015, 2016, 2017,
and 2018, which were prepared by TaylorMade.
Based on the information in these records, TaylorMade's gross receipts for the 2015-16,
2016-17, 2017-18, 2018-19, and 2019-20 tax years were apportioned using the UDITPA three-
factor formula as adopted by the City. The apportionment analysis determined that TaylorMade
underpaid its business license taxes for each of these tax years. After applying the amount of
business license tax actually remitted by the company for each tax year, it was determined that
TaylorMade owed the City $246,977 in unpa1d business license taxes and $103,356 in penalties,
for a total of $350,332.
On December 11, 2019, TaylorMade requested a hearing on the Initial Determination,
and by mutual agreement the hearing was held on February 27, 2020. The notice of the hearing
reminded TaylorMade that penalties for the 2019-20 taxes had begun to accrue on January 1,
2020. At the hearing, TaylorMade had the opportunity to present all evidence and argument
supporting its contention that the Initial Determination was incorrect and establishing what it
thought the determination should be. TaylorMade brought a printed PowerPoint presentation to
the hearing, but no other documents. At the close of the oral presentation on February 27, 2020,
the hearing was left open for TaylorMade to submit additional information to the City. On
March 20, 2020, TaylorMade submitted the following supplemental information:
• A claim, dated October 30, 2009, seeking a refund of $344,158 in business license tax for
the 2006-07, 2007-08, and 2008-09 tax years, alleging that the tax had not been
apportioned; and
• The assertion by Mr. Moll, counsel for TaylorMade, that in June of2011 he met with
Colette Wengenroth, the City's fopner Finance Manager, and told her that the tax was
defective because it was not apportioned, and an email chain, from 2011, between Mr.
Moll and Ms. Wengenroth, in which Mr. Moll attached apportionment cases and a Los
Angeles clerk's ruling regarding apportionment.
Counsel for TaylorMade agreed to extend the deadline for issuance of this Final Decision
to July 20, 2020.
Discussion
A. The absence of a formally adopted apportionment formula did not render the tax
unconstitutional or mean that no tax was owed,
TaylorMade argues that until the three-factor apportionment formula was formally
adopted by the City in January of 2019, the City's business license tax was unconstitutional
because it was not apportioned and that, as a result, TaylorMade did not owe any tax before
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January 2019. This is incorrect. The remedy for an unapportioned, but otherwise valid, tax is
not to completely exempt the taxpayer from the tax, but to apportion the tax and to require the
taxpayer to pay the correctly apportioned amount. If the tax has already been paid, then the
remedy is to refund to the taxpayer the amount the taxpayer would not have paid if the tax had
. been properly apportioned; the remedy is not to refund the entire tax.
For support, TaylorMade cites McKesson Corporation v. Division of Alcoholic_ Beverages
and Tobacco (1990) 496 U.S. 18, arguing that it holds that "unapportioned and improperly
apportioned taxes are void, and the remedy is a refund of all taxes paid." This is not an accurate
statement of this case. McKesson held that "[i]f a State places a taxpayer under duress promptly
to pay a tax when due and relegates him to a postpayment refund action in which he can
challenge the tax's legality, the Due Process Clause of the Fourteenth Amendment obligates the
State to provide meaningful backward-looking relief to rectify any unconstitutional deprivation."
(McKesson, supra, 496 U.S. 18, 31.) This means that if the government requires a taxpayer to
pay a tax before resolving the taxpayer's objections to it, the government must give the taxpayer
the ability to assert its objections and to obtain relief sufficient "to rectify any unconstitutional
deprivation." That does not mean refunding 1:}le enti_re tax.
McKesson involved a challenge to a Florida excise tax that the petitioner contended
discriminated against interstate commerce because it favored distributors of local products. The
Florida Supreme Court had agreed that the tax discriminated against interstate commerce and
enjoined any future preferential treatment for distributors of local products, but it refused to give
the petitioner a refund of any of the discriminatory taxes the petitioner had paid. The United
States Supreme Court reversed the Florida Court's refusal to provide any backwards-looking
relief, explaining that the appropriate remedy was for the State to "reformulate and enforce the
Liquor Tax during the contested tax period in any way that treats petitioner and its competitors in
· a manner consistent with the dictates of the Commerce Clause." (Id. at 40.) This could be done
"by refunding to petitioner the difference between the tax it paid and the tax it would have been
assessed were it extended the same rate reductions that its competitors actually received" or "to
the extent consistent with other constitutional restrictions, the State may assess and collect back
taxes from petitioner's competitors who benefited from the rate reductions during the contested
tax period, calibrating the retroactive assessment to create in hindsight a nondiscriminatory
scheme" or a combination of both. (Id. at 40-41.) Importantly, the Court held trat "the State
may retain the tax appropriately levied upon petitioner pursuant to this reformulated scheme
because this retention would deprive petitioner of its property pursuant to a tax scheme that
is valid under the Commerce Clause." (Id. at 40.) McKesson certainly did not hold that the
entire tax had to be refunded-only that part of the tax that exceeded constitutional limitations.
In reaching this conclusion, the Court relied on a long line of Supreme Court precedent,
including Atchison, T. & S.F.R. Co. v. O'Connor (1912) 223 U.S. 280 (when a state tax is
improperly applied to out-of-state activities, the remedy is a refund of that portion of tax.
improperly imposed on out-of-state activities) and Montana National Bank of Billings v.
Yellowstone County (1928) 276 U.S. 499 (a person forced to pay a discriminatory tax is entitled
to-a refund of the excess tax).
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California follows this line of reasoning. In Ventas Finance I, LLC v. Franchise Tax. Bd.
(2008) 165 Cal.App.4th 1207, the trial court ordered the Franchise Tax Board ("FIB") to refund .
all of the taxes paid by the plaintiffbecause the State had not properly apportioned the plaintiffs
income between in-state sources and out-of-state sources. The Court of Appeal reversed,
explaining that "neither federal due process nor any principle of California law requires FIB to
refund the entire amount Ventas paid." (I,d at 1212.) "[T]he court erred by ordering that Ventas
was entitled to a full refund of the entire amount of tax it paid .... The court should instead have
ordered a refund of the difference between the levy actually paid and the amount that could be
collected without violating the Commerce Clause using a proper method of apportionment." (Id.
at 1233.)
TaylorMade also cites Ferran v. City_ of Palo Alto (1942) 50 Cal.App.2d 37 4, General
Motors Corp. v. City and County of San Francisco (1999) 69 Cal.App.4th 448, and City of
Modesto v. National Med, Inc. (2005) 128 Cal.App.4th 518 to support its position that the
remedy for an unapportioned tax is a refund of the entire tax. Ferran is inapposite because.it did
not involve a refund of taxes or any backwards-looking remedy. The remedy directed by the
court of appeal was an injunction against the further application of the city's tax that was
improperly measured by the number of employees working outside the city ..
General Motors Corp. concerned a business tax on automobile sellers that the court
found discriminated against out-of-city m;mufacturers. The court found that San Francisco's
proffered backwards-looking remedy-refund of taxes paid on goods for which a manufacturing
tax had already been paid to another city-· failed to eliminate the disparate treatment, and
therefore held that the entire tax had to be refunded. In contrast, when a tax is improperly
apportioned, or not apportioned.at all, the constitutional infirmity can be remedied by properly
apportioning the tax and refunding any tax paid over the properly apportioned amount. General
Motors Corp. does not hold that the appropriate remedy for a tax that can be apportioned is a
refund of all tax paid.
City of Modesto simply reiterates the rule stated in McKesson, explaining that "[i]f a city
collects a business license tax on activity carried on outside of its boundaries, i.e., the tax is not
apportioned, that extraterritorial tax is beyond the city's power to impose. In such a situation, no
corrective action by the city can cure the invalidity of the tax. Rather~ the city has no choice but
to 'undo' the unlawful deprivation by refunding the tax previously paid by the business on its
extraterritorial activities." (City of Modesto, supra, 128 Cal.App.4th at 525.) In other words,
the remedy is not to refund all taxes--just those paid on extraterritorial activities.
TaylorMade's contention that the City,s business license tax was invalid and that no tax
could be applied to it until the three-factor apportionment formula was formally adopted in
January 2019 is contrary to law and hot supported by the cases cited by IaylorMade. ·.
B. · Applying the City's three-factor apportionment formula to TaylorMade's 2017-18,
2018-19, and 2019-20 tax years is not an unreasonable retroactive application of the
apportionment formula.
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TaylorMade argues that it would violate its due process rights for the City to apply its
three-factor apportionment formula retroactively to the 2015-16 tax year. TaylorMade asserts
that the City knew as early as 2009 that its business license tax as applied to TaylorMade was not
properly apportioned, but the City did not adopt its apportionment formula until January of 2019.
It argues that it is unreasonable for the City to wait ten years before acting and then to apply the
· formula retroactively for four years.
To support its contention that the City knew that its tax was not properly apportioned,
TaylorMade submitted a copy of a letter dated October 30, 2009 sent to Lisa Irvine, the City's
Finance Director, asserting that the City's business license tax was not properly apportioned, and ·
emails from 2011, between Charles Moll and Colette Wengenroth, Finance Manager at the City,
referencing apportionment issues. Mr. Moll also stated at the hearing that he had met with
Colette Wengenroth and told her that he believed the City's business license tax was not properly
apportioned. ' · · ·
TaylorMade relies primarily on two cases to support its argument: United States v.
Carlton (1994) 512 U.S. 26 and City of Modesto v. National Med, Inc., supra, 128 Cal.App.4th
518. Carlton involved federal legislation passed in December of 1987 to close a loophole that
had been mistakenly created by a statute passed in October of 1986. The Court held that the
retroactive application of the tax law back to October of 1986 did not violate due process
because it had a legitimate purpose, was not arbitrary, and the period ofretroactivity, 14 months,
was "modest." TaylorMade emphasizes that in a concurring opinion Justice O'Connor suggested
that "[a] period ofretroactivity longer than the year preceding the legislative session in which the
law was enacted would raise ... serious constitutional questions." (Carlton, supra, 512 U.S. 26
at 38.) ·
In City of Modesto, the city sought to apply apportionment guidelines, adopted in 2004,
to the 1996 tax year. The court of appeal held that "it would be ov~rlyburdensome to force [the
taxpayer] to produce up to nine-year-old documentation that it was not previously required to
maintain in order to prove 'with clarity' its right to apportion gross receipts." (Modesto, supra,
128 Cal.App.4th at 522.) This period of retroactivity, the court held, was not "modest'' and was
too long. (Id.·at 529.)
In light of these arguments and the evidence provided by TaylorMade, the License
Collector will abate the portion of the Initial Detennination that found taxes and penalties owing
for the 2015-16 and 2016-17 tax years. Any remaining period of retro activity is therefore limited
to the 2017-18 tax year, the year in which TaylorMade was informed of the application of the
City's apportionment formula, and is therefore well within the holdings of Carlton, Modesto, and
the other cases on this issue.
On August 14, 2018, in an email from Ms. Gerhardt to Mr. Osborne, TaylorMade was
made aware that the City was applying the three-factor apportionment formula. This was during
the 2017-18 tax year, which runs from November 1 to October 31. Although Administrative
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Order No. 81, which formally adopted the formula was not signed until January 16, 2019,
TaylorMade was well aware of the formula and was collecting and providing the necessary
information beginning with the 2015-16 tax year in August of 20 I 8. In fact, in August and
. September of 2018, TaylorMade was able to provide most of the information needed to apply the
apportionment formula to the 2017-18 tax year. By limiting the application of the apportionment
formula to the 2017-18 tax year and those years following it, any period of retroactivity is well
within the 14 months approved in Carlton and far less than the nine years rejected in Modesto.
TaylorMade also argues that the City's adoption of the formula was not "prompt"
because TaylorMade had objected in 2009 that the tax was not adequately apportioned, but the
formula was not applied until 2018. This objection might be relevant if the City were trying to
apply the formula retroactively to 2009, but it is not It is also certainly not the case that because
the City did not "promptly'' adopt the formula soon after TaylorMade's 2009 objection that the
City is forever barred from adopting an apportionment formula.
TaylorMade also appears to suggest that the application of the three-factor formula is a
n:troactive tax increase, but the application of the appmtionment formula is not a tax increase.
The formula serves to satisfy the apportionment requirements of the United States and California
constitutions, and it has the effect of lowering the taxes TaylorMade would otherwise have to
pay without any apportionment. The tax rate in the Municipal Code has not been changed.
TaylorMade states that it has been using a "point of sale" apportionment formula in recent yeiµ-s,
which uses only the receipts from sales into Carlsbad and internet sales to measure the business
license tax, but the City never adopted TaylorMade's "point of sale" methodology. In fact,
according to the October 30, 2009 claim letter that TaylorMade submitted after the hearing, for
the 2006-07, 2007-08, and 2008-09 tax years, TaylorMade did not apportion any ofits receipts in
its tax returns. Applying the three-factor apportionment formula for those years might actually
have reduced taylorMade's taxes.
Finally, there can be no question that the adoption of the apportionment formula has a
legitimate purpose, which is to ensure that the application of the City's business license tax
complies with the Commerce Clause of the United States Constitution and the Equal Protection
and Due Process Clauses of the California Constitution. It is also clearly not arbitrary, since it is
an apportionment formula that has been approved by the United States Supreme Court for 80
years. And it is not unreasonably retroactive because it is being applied to TaylorMade in the tax
. year in which TaylorMade was first notified of the formula:
C. The three-year statute of limitations in section 338 of the Code of Civil Procedure
does not apply to this administrative proceeding.
TaylorMade argues that the City's administrative determination of the amount of taxes
owed by TaylorMade for past years is limited by the three-year statute of limitations in section
338 of the Code of Civil Procedure. However, it is well-established that the statutes of
limitations in the Code of Civil Procedure only apply to the filing·of a legal action in a court of
law and do not apply to administrative proceedings. "The general and special statutes of .
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limitation referring to actions and special proceedings are applicable only to judicial
proceedings; they do not apply to administrative proceedings." (City of Oakland v. Public
Employees' Retirement System (2002) 95 Cal.App.4th 29, 48, quoting 3 Witkin, CaL Procedure
( 4th ed. 1996) Actions, § 405(2)~ p. 510.) "[S]µtutes of limitations found in the Code of Civil
Procedure ... do not apply to administrative actions."' (Robert F. Kennedy Medical Center v.
Department of Health Services (1998) 61 Cal.App.4th 1357, 1362; see Krolikowski v. San Diego
City Employees' Retirement System (2018) 24 Cal.App.5th 537, 559 ["Case law establishes that
when, as here, recoupment is obtained through an administrative process, rather than through a
lawsuit filed in court, the statute oflimitations does not apply."].) The three-year statute of
limitations in section 338 of the Code of Civil Procedure therefore does not apply to this
administrative proceeding.
Moreover, the statute of limitations is tolled while the City is engaged in the
administrative procedures regarding the tax (City of Los Angeles v. Centex Telemanagement, Inc.
(1994) 29 Caj.App.4th 1384, 1386-89); and since the City is abating the tax determination for the
2015-16 and 2016-17 tax years, even if the three-year statute oflimitations applied and was not
tolled, it would not limit the City's ability to make a determination of taxes due for the 2017-18,
2018-19, and 2019-20 tax years.
D. The three-factor apportionment formula is not unconstitutionally vague.
TaylorMade asserts that the three-factor apportionment formula is unconstitutionally
vague, suggesting that there could be uncertainty regarding some of its terms, such as what
should be included in payroll, how a business should allocate payroll for an employee who works
both in and out of the City, whether receipts should only be counted to the "water's edge," or
how to handle intercompany transfers or sales between entities. -But these kinds of uncertainties
arise frequently in the application of any tax and they do not render the tax inapplicable.
When there is an uncertainty, the business can consult the City for guidance. In fact, in
this matter, TaylorMade and the City engaged in an email discussion of the proper information to
consider for the formula, and the City provided guidance on the issue. For instance, on August
30, 2018, Ms. Gerhardt emailed Mr. Osborne to ask about a discrepancy between the information
provided by TaylorMade relating to its total sales everywhere and its gross receipts per Federal
Form 1120. In response, on August 31, 2018, Mr. Osborne explained how he arrived at the total
sales everywhere number in the schedule he provided to the City. Thereafter, Ms. Gerhardt
explained that "other gross income" .should not be included in the total sales everywhere amount,
and that the total sales everywhere amount should be the same as the net sales amount in Federal
Form 1120. Additionally, the simple fact that TaylorMade was able to provide information
satisfactory to the City for the application of the formula indicates that it is not too vague. At the
hearing, TaylorMade's attorney listed a number of possible uncertainties, but none of these
claimed uncertainties have been raised by TaylorMade with the City as actual problems. To the
License Collector's knowledge, there have not been any questions about the application of the
three-factor formula raised by TaylorMade that finance staff, working with TaylorMade, have
not been able to resolve.
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TaylorMade cites City of San Bernardino HoteVMotelAssociation v. City of San
Bernardino (1997) 59 Cal.App.4th 237 to support its argument that the formula is too vague, but
that case involved contradictory definitions in a transient occupancy tax. The tax stated that it
applied to "transients" staying in a "hotel." A hotel was defined as a place where a transient
stays for up to 30 days, while a transient was defined as someone who stays in a hotel for up to
90 days. The court found this to be too confusing. The three-factor formula does not contain
any similarly contradictory terms .
. "[T]he mere fact that a new statute [ordinance] requires interpretation does not make it
unconstitutionally vague." (Garcia v. Four Points Sheraton LAX(2010) 188 Cal.App.4th 364,
387.) The three-factor formula has been applied for 80 years, and it has not been found.to be
unconstitutionally vague. It may require some interpretation, but that does not make it invalid.
E. The three-factor apportionment formula is not too burdensome. ·
TaylorMade argues that the three-factor apportionment formula is too burdensome, but
this contention is belied by TaylorMade' s ability to provide the necessary information to apply
the formula, as well as the ability of other companies to apply it. The License Collector is not
aware of any case in the eight decades that the three-factor formula has been in use in which. a
court held that the formula was too burdensome.
Moreover, the City is always willing to work with a taxpayer if some information is too
difficult to obtain. For example, when the City conducted its initial audit ofTaylorMade for the
2015-16, 2016-17, and 2017-18 tax years, the City allowed TaylorMade to provide backup data
for its payroll and property calculations for just 2016-not all three years. TaylorMade makes
general statements that providing the information for the thre~-factor formula is too burdensome,
but it has not specified which information is too difficult to get, and it has not discussed with
City staff how to work around the problem.
F. TaylorMade's policy arguments against the City's three-factor apportionment
formula are irrelevant.
TaylorMade argues that the City's three-factor apportionment fonn~la is outdated and
has been abandoned by most states because it discourages companies from locating their
headquarters in jurisdictions that apply it. But this is a policy argument, not a legal argument.
At the hearing, TaylorMade conceded that the three-factor formula has been "blessed" by the
United States Supreme Court. That many jurisdictions have moved away from using this
formula for policy reasons is in-elevant to the legal validity of the formula.
G. The City declines to adopt TaylorMade's proposed alternative apportionment
formulas.
DocuSign Envelope ID: 6990EDCB-624D-4D98-833&-F2BA98AEA 193
Final Decision of Tax Liability of TaylorMade Golf Co. for 2015-16 to 2019-20 Tax Years
July 20, 2020
Page 12
TaylorMade suggests two alternative apportionment methods for the City to use. First, it
proposes the City use the "point of sale" meth~dology, which it contends is the methodology it
has been using in recent years, which only uses the receipts from sales into Carlsbad and internet
sales to measure the business license tax. Second, it proposes using the sales factor for the entire
, State of California, which TaylorMade already has to calculate for its California taxes. The City
declines to adopt either of these methods.
It is worth noting that the proposal to use the California sales factor, which is used by the
State of California to apportion taxes, and which is based on TaylorMade's sales in the entire
state, could violate the Commerce Clause of the United States_ Constitution and the Equal
Protection and Due Process Clauses of the California Constitution if used to apportion Carlsbad
tax because it would be basing the Carlsbad tax on business activities outside the City.
' -
Final Decision
TaylorMade is a manufacturer of golf equipment. It conducts business within the City of
Carlsbad. It is therefore subject to the City's business license tax for its business operations in
the City. It is appropriately taxed under Classification D of section 5.08.010 of the Carlsbad
Municipal Code, which requires it to pay"a license tax of $25.00 plus 20 cents for each
$1,000.00 of annual gross receipts or portion thereof." TaylorMade's business license tax is due
on November 1 of each year for the following 12-month period (until October 31 of the
following year). -
After considering the evidence in the record and the arguments made by TaylorMade, the
License Collector determines that the Initial Determination of taxes and penalties owed by
TaylorMade for the 2015-16 and 2016-17 tax years shall be abated. The License Collector
further determines that TaylorMade owes the City $218,211 in unpaid business license taxes and
penalties for the 2017-18, 2018-19, and 2019-20 tax years. ·
TaylorMade' s total gross receipts for calculating business license taxes for the 2017-18,
2018-19, and 2019-20 tax years were $608,259,711, $657,196,125, and $541,353,790,
respective! y.
Applying the City's three-factor apportionment formula, TaylorMade's apportioned gross
receipts ( apportioned to reflect TaylorMade' s business activity in the City) for the 2017-18,
2018-19, and 2019-20 tax years were $271,774,748, $319,566,639, and $236,187,510,
respectively.
After subtracting the amount of business license tax actually remitted by TaylorMade for
the 2017-18, 2018-19, and 2019-20 tax years, and adding the appropriate penalties, the License
Collector finds that TaylorMade owes the following balances:
I
For the 2017-18 tax year, $47,384 in unpaid business license tax, plus $23,692 in
penalties, for a total of $71,076. ·
DocuSign Envelope ID: 6990EDCB-624O-409B-8338-F2BA98AEA193
Final Decision of Tax Liability ofTaylorMade Golf Co. for 2015-16 to 2019-20 Tax Years
July 20, 2020 .
Page 13
For the 2018-19 tax year, $57,824 in unpaid business license tax, plus $28,912 in
penalties, for a total of $86,736.
Fortlie 2019-20 tax year, $40,266 in unpaid business license tax, plus $20,133 in
penalties, for a total of $60,399.
In total, for the 2017-18, 2018-19, and 2019-20 tax years, TaylorMade owes the City
$145,474 in unpaid business license taxes and $72,737 in penalties, for a total of$218,211. A
full analysis of the City's apportionment ofTaylorMade's gross receipts is set forth in
Attachment B. Please remit payment to the following address:
City of Carlsbad, Finance Department
Attn: Cheryl Gerhardt, Finance Manager
1635 Faraday Ave.
Carlsbad, CA 92008
Pursuant to Administrative Order No. 81, TaylorMade may appeal this Final Decision of
the License Collector to the City Council, as provided in sections 5.04.090 and 1.20.310 ofthe
Carlsbad Municipal Code.
Date: July 20, 2020
Laura Rocha
License Collector/Deputy City Manager
Attachment A: Administrative Order No. 81 .
Attachment B: Apportionment Analysis for TaylorMade Golf Company
Attachment A
{cityof
Carlsbad
Administrative Order No. 81
I Date: December 17, 2018
To: All City Departments
From:
Subject:
Scott Chadwick, City Manager
Business License Tax Procedures
PURPOSE:
To establish specific guidelines for the administration of business license taxes.
POLICY:
A. Delegation of Authority
The City Manager designates the Administrative Services Director as the License Collector and the Tax
Administrator for business license· taxes. (Municipal Code§ 2.12.040)
With regard to the Finance Director's duties, the Finance Director designates the Finance Manager as
the Finance Director's designee for the administration of business license taxes. (Municipal Code§
5.04.020.)
8. Administrative Procedures for Business License Taxes
The City Manager adopts the following administrative procedures for busir:iess license taxes
(Municipal Code § 5.04.150):
\ 1. Initial Determination of the Amount of Tax Due
If the License Collector determines that an insufficient amount of tax has been paid by an
applicant or licensee, or ifno tax has been paid by an applicant or licensee and the due date
for paying the tax has passed, or if the License Collector and an applicant or licensee disagree
as to the amount of tax due or owing to the City, the License Collector shall make a
determination of the amount oftax that is due, including penalties and interest if applicable,
using such information as is available to the License Collector ("Initial Determination").
2. Service of an Initial Determination
The Initial Determination shall be served on the applicant or licensee by placing a copy of the
Initial Determination in the United States Mail, addressed to the address on file with the
License Collector for the applicant or licensee. Service is effective on the date the Initial
City Hall
1200 Carlsbad Village Drive I Carlsbad, CA 92008 I 760-434-2820 I 760-720-9461 fax I www.carlsbadca.gov
Determination is placed in the mail. If the License Collector has an email address for the
applicant or licensee, then the Initial Determination shall also be sent by email.
3. Right to a Hearing on an Initial Determination and Issuance of a Final Decision
(a) An applicant or_ licensee may, within ten days of service of an Initial
Determination, request a hearing on the Initial Determination. The request must be
made in writing to the License Collector. If a timely request is. made; the License
Collector shall schedule a hearing to be held within 30 days of receipt of the request
for a hearing. The applicant or licensee shall be provided with at least 10 days written
notice of the hearing. Service of the notice.shall be provided in the same manner as
service of an Initial Determination.
. .
. (b) At the hearing, the applicant or licensee shall present all evidence and
argument supporting its contention that the Initial Determination is incorrect and
establishing what it contends the determination should be. Within 30 days of the
hearing, the License Collector shall iss_ue a written decision tha·t will be the License
Collector's Final Decision and serve it upon the applicant or licensee. The Final
Decision shall be served in the same manner as service of an Initial Determination.
4. Appeal to the City Council
The applicant or licensee may appeal a Final Decision of the License Collector to the City
Council as provided in section 5.04.090 of the Municipal Code.
5. Apportionment
For the apportionment of gross receipts for the determination of business license taxes, the
City will use the following three-factor formula (sales, employment, and property):
AP =(SF+ EF +PF)/ 3
The resulting percentage will be applfed to the business's gross receipts to determine the
receipts attributable to the City for calculation of business license tax.
This apportionment formula is based on the formula in the Uniform Division of Income for Tax
Purposes Act (UDITPA). The City will look to the UDITPA formula for non-binding guidance,
but the City will apply its apportionment formula as appropriate to ensure a fair, equitable,
and constitutional apportionment of its business lice~se taxes.
Definitions
AP The percent of the business's gross receipts apportioned to Carlsbad
(Apportionment Percentage).
SF The business's sales in Carlsbad divided by the business's overall total sales
(Sales Factor).
EF The business's payroll in Carlsbad divided by the business's overall total
payroll (Employee Factor).
PF The value of the business's property in Carlsbad divided by the overall total
value of the business's property. Rented property is valued at 8 times the
annual rent (Property Factor):
Taylor Made Golf Company, Inc.
Sales
Payroll
Property
Business License Tax
total sales occurlng in Carlsbad
company's total sales everywhere
Sales ratio
total payroll occuring in Carlsbad
company's total payroll everywhere
Payroll ratio
total property owned* in Carlsbad
total property owned* everywhere
Property ratio
Sales+ Payroll+ Property
3
Average Apportionment
Apportioned Gross Receipts
• Rented property is valued at eight times the annual rental rate
TM Golf Company• Calculation of all years-rev (Flnal)
Yearly Summary
Business license for
year ending 10/31/18
34,869,970
Sales
608,259,711
5.733%
59,530,091
Payroll
79,147,232
75,214%
183,115,379
Property
344,882,447
53.095%
134.042%
X Company's total sales Bu~lness License Tax
3
44.681%
Gr~ss Receipts per form U20 608,259,711
271,774, 7481
Taxable Subtotal 271,775
State Fee + 25 Base Fee 29
Tax Amt 54,384
Previously Paid -7,000
Penalities 23,692
Balance Due 71,0761
TOTAL AMOUNT DUE 218,211!
Business license for
year ending 10/31/19
30,497,901
657,196,125
4.641%
74,820,845
87,496,743
85.513%
162,241,294
291,151,748
55.724,Y.
,145.877%
3
48.626%
657,196,125 .
319,566,6391
319,567
29
63,942
-6,118
28,912
86,7361
ATTACHMENT B
Business license for
year ending 10/31/20
34,914,428
541,353,790
6.449%
55,177,306
62,876,396
87.755%
65,748,192
179,235,938
36.682%
130.887%
3
43,629%
541,353,790
236,187,5101
236,188
29
47,267
-7,001
20,133
60,3981
7/17/2020
10:16AM