HomeMy WebLinkAbout2021-05-04; City Council; ; Business License Tax Appeal Hearings of Taylor Made Golf Company, Inc. and Callaway Golf CompanyMeeting Date: May 4, 2021
To: Mayor and City Council
From: Scott Chadwick, City Manager
Staff Contact: Laura Rocha, Deputy City Manager, Administrative Services
laura.rocha@carlsbadca.gov, 760-602-2415
Subject: Business License Tax Appeal Hearings of Taylor Made Golf Company, Inc.
and Callaway Golf Company
Districts: All
Recommended Action
•Hear and determine an appeal challenging the final decision of the license collector
finding underpaid business license taxes and penalties owed by TaylorMade Golf
Company, Inc.
•Hear and determine an appeal challenging the final decision of the license collector
finding underpaid business license taxes and penalties owed by Callaway Golf Company
Executive Summary
Taylor Made and Callaway conduct business within the City of Carlsbad. They are required to
have a business license and pay annual business license taxes. Because Taylor Made and
Callaway also conduct business outside of Carlsbad, their business license taxes must be
apportioned to cover only their business activities in Carlsbad. The city’s apportionment
formula is detailed in Administrative Order No. 81 – Business License Tax Procedures
(Attachment A to Exhibits 1 and 3). Using this formula, the deputy city manager of
administrative services, acting as the license collector, determined Taylor Made owed $218,211
(Exhibit 1 & Attachment B) and Callaway owed $544,479 (Exhibit 3 & Attachment B) in
underpaid taxes and penalties for tax years ending 2018, 2019, and 2020.1
Taylor Made and Callaway are appealing the license collector’s decisions (Exhibits 2 and 4).
They disagree with the city’s apportionment formula because they contend it penalizes
companies for investing in jobs and property in Carlsbad. They also contend the apportionment
formula should not have been applied before Jan. 16, 2019, when the city manager signed
Administrative Order No. 81.
1The license collector initially determined Taylor Made and Callaway also owed underpaid taxes and penalties for
tax years ending 2016 and 2017. For the reasons stated in the license collector’s final decisions, the license
collector abated the initial determinations and these tax years are not at issue in these appeals. The current tax
year ending 2021 is also not at issue in these appeals.
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Discussion
Background
Businesses within Carlsbad must have a business license and pay business license taxes.
(Carlsbad Municipal Code, §§ 5.04.020(A), 5.04.030.) Some businesses pay taxes based on set
fees and some businesses pay taxes based on the amount of their gross receipts. (CMC Chapter
5.08.) For wholesale or manufacturing businesses, the tax is $25.00 plus 20 cents for each
$1,000 of annual gross receipts. (CMC, § 5.08.010(D).) For businesses operating both within
and outside of Carlsbad, taxes on the businesses’ gross receipts must be apportioned to cover
only the businesses’ activities within Carlsbad. (Cal. Gov. Code, § 37101, subd. (b); see also
CMC, § 5.04.085.)
The city manager is responsible for administering and enforcing the city’s business license tax
ordinance. This responsibility includes the authority to adopt written procedures necessary for
the efficient administration of the ordinance. (CMC, § 5.04.150.) On Jan. 16, 2019, the city
manager signed Administrative Order No. 81 - Business License Tax Procedures. Among its
provisions, the order adopted an apportionment formula based on three factors: sales, payroll,
and property.
The formula calculates the percentage of a business's sales in Carlsbad, the percentage of the
business's payroll in Carlsbad, and the percentage of the business’s property in Carlsbad. These
percentages are added together and divided by three to determine an apportionment
percentage, which represents the business’s activities in Carlsbad. The apportionment
percentage is applied to the business’s gross receipts to determine the portion of gross receipts
taxable in Carlsbad.
The formula is derived from the Uniform Division of Income for Tax Purposes Act formula. Both
the United States Supreme Court and the California Supreme Court have determined this
formula is constitutional. (Container Corporation of America v. Franchise Tax Board (1983) 463
U.S. 159, 170, 183-184; Microsoft Corporation v. Franchise Tax Board (2006) 39 Cal.4th 750,
756.)
Neither Taylor Made nor Callaway currently has a valid business license. Detailed accounts of
the multi-year effort to audit and determine the amount of underpaid taxes and penalties owed
by Taylor Made and Callaway are included in the license collector’s final decisions in Exhibits 1
and 3.
Initial determinations
In December 2019, the license collector initially determined Taylor Made owed underpaid taxes
and penalties of $350,332 for the tax year ending 2016 through the tax year ending 2020. The
same month, the license collector determined Callaway owed underpaid taxes and penalties of
$1,029,274 for the tax year ending 2016 through the tax year ending 2020. The initial
determinations applied the apportionment formula in Administrative Order No. 81. Although
Administrative Order No. 81 was not signed until Jan. 16, 2019, Taylor Made was informed in
August 2018 and Callaway was informed in June 2018 of the apportionment formula the license
collector would use to determine the amount of taxes owed.
Final determinations
Both companies requested hearings on the initial determinations. The hearings were held on
Feb. 27, 2020. The companies offered information and arguments in support of their positions.
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After the hearings, both companies provided additional information for the license collector’s
consideration. The license collector issued final determinations on July 20, 2020 (Exhibits 1 and
3).
Most relevant to these appeals, the license collector determined the apportionment formula in
Administrative Order No. 81 was constitutional and that applying the formula to the tax year
ending 2018 through the tax year ending 2020 was not an unreasonable retroactive application
of the formula.
The license collector further determined that Taylor Made owed $218,211 and Callaway owed
$544.479 in underpaid taxes and penalties for these tax years.
City Council appeal
Taylor Made and Callaway are appealing the license collector’s decisions (Exhibits 2 and 4). The
appeals are authorized by CMC Sections 5.04.085 and 5.05.090.
The appeals raise two issues:
1. The city’s apportionment formula is invalid and penalizes companies for investing in jobs
and property in Carlsbad.
2. The apportionment formula should not have been applied before Jan. 16, 2019, when
the city manager signed Administrative Order No. 81.
Apportionment formula
As previously stated, the apportionment formula in Administrative Order No. 81 is
constitutional. (Container Corporation of America v. Franchise Tax Board (1983) 463 U.S. 159,
170, 183-184; Microsoft Corporation v. Franchise Tax Board (2006) 39 Cal. 4th 750, 756.)
However, the companies would prefer a formula that does not consider Carlsbad payroll or
property because the companies contend this is more consistent with modern trends. The
companies also contend that considering Carlsbad payroll or property in calculating business
license taxes creates a disincentive for businesses to locate jobs and facilities in Carlsbad. The
financial differences in the city’s apportionment formula and the companies’ preferred formula
are reflected in the tables in the Fiscal Analysis section below.
Applying Administrative Order No. 81 before Jan. 16, 2019
Retroactive application of tax regulations is not unconstitutional if the period of retroactivity is
modest and there is a rational basis for the retroactivity. (United States v. Carlton (1994) 512
U.S. 26, 30-33.) In this instance, the period of retroactivity is within the range the U.S. Supreme
Court has found to be modest and both companies were informed of the apportionment
formula several months in advance of its implementation. (United States v. Carlton, at p. 33.)
Additionally, there was a rational basis for the retroactive application of the apportionment
formula in Administrative Order No. 81 because it ensured business licenses taxes calculated
based on gross receipts are constitutional. It also ensured consistency in apportionment
calculations rather than allowing businesses to devise their own apportionment methods.
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Options
The City Council has three options for determining this appeal.
1. The City Council may uphold the final decision of the license collector by adopting the
Resolutions in Exhibit 5 and 6.
Pros
• City policies and standards are followed and enforced.
• City will be able to collect the amounts owed.
Cons
• May set a precedent that discourages compliance with city business license
regulations.
2. The City Council may grant the relief requested by Taylor Made and Callaway by
directing the City Manager to modify the apportionment formula to consider only
Carlsbad sales in apportioning business license taxes based on gross receipts. If the City
Council grants this relief, the companies’ concerns about the retroactive application of
Administrative Order No. 81 would appear to be moot.
Pros
• Eliminating payroll and property as apportionment factors and using only sales as
an apportionment factor may influence whether a business locates or remains in
Carlsbad.
Cons
• Eliminating payroll and property as apportionment factors and using only sales as
an apportionment factor may impact about 2,500 business license tax customers.
Staff would need to recalculate their business license taxes and issue refunds,
which would result in a decrease in business license tax revenue to the city.
3. The City Council may grant part of the relief requested by Taylor Made and Callaway by
directing the license collector via the City Manager to apply the apportionment formula
in Administrative Order No. 81 only to tax years ending 2019 or later.
Pros
• The second issue raised by Taylor Made and Callaway would be resolved.
Cons
• Other business license tax customers may also be impacted, which may require
recalculation and refunding of their business license taxes.
• This would result in less revenue to the city.
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Fiscal Analysis
The financial differences in the city’s apportionment formula and the companies’ preferred
formula are reflected in the tables in the below.
TAYLOR MADE
Apportioned –
Carlsbad sales
only
Apportioned –
total Carlsbad
business activity
Unapportioned –
total gross
receipts
Tax
Tax year ending Oct. 31, 2018 $6,974 $ 54,384 $121,652
Tax year ending Oct. 31, 2019 6,100 63,942 131,439
Tax year ending Oct. 31, 2020 6,983 47,267 108,271
Previously Paid -20,119 -20,119 -20,119
Penalties
Tax year ending Oct. 31, 2018 0 23,692 57,326
Tax year ending Oct. 31, 2019 0 28,912 62,661
Tax year ending Oct. 31, 2020 0 20,133 50,635
Total taxes due with penalties $ -62 $218,211 $511,865
CALLAWAY
Apportioned –
Carlsbad sales
only
Apportioned –
total Carlsbad
business activity
Unapportioned –
total gross
receipts
Tax
Tax year ending Oct. 31, 2018 $3,322 $ 88,087 $130,425
Tax year ending Oct. 31, 2019 5,644 141,742 306,112
Tax year ending Oct. 31, 2020 652 142,860 213,920
Previously Paid -9,703 -9,703 -9,703
Penalties
Tax year ending Oct. 31, 2018 0 42,369 63,539
Tax year ending Oct. 31, 2019 0 68,035 102,037
Tax year ending Oct. 31, 2020 0 71,089 106,620
Total taxes due with penalties $ -84 $544,479 $816,586
Business license taxes that are calculated based on gross receipts use either the business’s total
gross receipts or the apportionment formula in Administrative Order No. 81. If the City Council
adopts an apportionment formula that considers only a business’s sales in Carlsbad,
approximately 2,500 businesses may be affected by the formula change, which may reduce
annual business license tax revenue by an amount that cannot be estimated.
If the City Council decides the apportionment formula in Administrative Order No. 81 should
not apply to the tax year ending 2018, the unpaid taxes and penalties owed by Taylor Made
would be reduced by $74,076 and the unpaid taxes and penalties owed by Callaway would be
reduced by approximately $130,456. Other businesses impacted by this decision may also
request recalculations and refunds of their business license taxes.
If Taylor Made or Callaway appeal the City Council’s decision, the city will incur legal defense
expenses that cannot be estimated.
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Next Steps
If the City Council upholds the license collector’s decision, staff will invoice and collect unpaid
taxes and penalties from Taylor Made and Callaway. If the City Council grants the companies
whole or partial relief, staff will prepare and present resolutions incorporating the City Council’s
findings and decision for the City Council’s approval at a subsequent City Council meeting. Staff
will then implement the City Council’s decision. If Taylor Made or Callaway elect to file a lawsuit
challenging the City Council’s decision, the City Attorney’s Office will defend the lawsuit.
Environmental Evaluation (CEQA)
This informational report does not constitute a “project” within the meaning of the California
Environmental Quality Act under California Public Resources Code Section 21065 in that it has
no potential to cause either a direct physical change in the environment or a reasonably
foreseeable indirect physical change in the environment and therefore does not require
environmental review.
Public Notification
Public notice of this item was posted in keeping with the Ralph M. Brown Act and it was
available for public viewing and review at least 72 hours before the scheduled meeting date.
Notice of the hearing was also sent to Taylor Made, Callaway, and their counsel and was
published in a newspaper of general circulation at least 10 days before the hearing.
Exhibits
1. License collector’s decision – Taylor Made
2. Taylor Made notice of appeal
3. License collector’s decision – Callaway
4. Callaway notice of appeal
5. City Council resolution affirming license collector’s decision – Taylor Made
6. City Council resolution affirming license collector’s decision – Callaway
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EXHIBIT 1
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September 16, 2020
BY FEDERAL EXPRESS
Carlsbad City Council Through the Office of the City Clerk, City Manager 1200 Carlsbad Village Drive Carlsbad, CA 92008
Re: Appeal of Final Decision of License Collector Following Hearing on Business License Tax
Liability of TaylorMade Golf Company, Inc. for 2015-16 Through 2019-20 Tax Years Taxpayer Names: TaylorMade Golf Company Years at Issue: 2017-18, 2018-19, and 2019-20
Dear City Council Members:
Pursuant to Administrative Order No. 81 and Carlsbad Municipal Code sections 5.04.090 and 1.20.310, TaylorMade Golf Company, Inc. (“Taxpayer” or “Taylormade”) hereby appeals the portion of the Final Decision of the License Collector (“Final Decision”) dated July 20, 2020 that applies to the years 2017-18, 2018-19, and 2019-20 (the “Years at Issue”). The following additional information is provided in connection with this appeal.
A. NAME AND PRINCIPAL ADDRESS OF TAXPAYER
TaylorMade Golf Company, Inc.5545 Fermi Ct.Carlsbad, CA 92008-7324
B.TAXPAYER’S REPRESENTATIVES
Taxpayer will be represented in this Appeal by Charles J. Moll III and Elle Kaiser ofMcDermott Will & Emery LLP.
C. PROCEDURAL BACKGROUND
This is an appeal from the License Collector’s imposition of additional business licensetaxes and penalties upon TaylorMade for the 2017-18 through 2019-20 tax years. On December 2,
2019, the License Collector issued an Initial Determination that, pursuant to Administrative Order No. 81, TaylorMade is subject to the City's business license tax under Classification D of Carlsbad Municipal Code section 5.08.010, and that the method of calculating the business license under Code section 5.08.010 differed from the calculation method that TaylorMade had historically utilized. Among other things, the Initial Determination then found that TaylorMade owed the City additional business
EXHIBIT 2
May 4, 2021 Item #6 Page 24 of 92
license taxes and penalties for the 2017-18, 2018-19, and 2019-20 tax years. The Initial Determination also indicated that further penalties would begin to accrue on January 1, 2020.
TaylorMade timely requested a hearing on the Initial Determination, which was held on
February 27, 2020. On March 20, 2020, TaylorMade submitted additional information to supplement
the information and documents shared with the City during the hearing. Subsequently, TaylorMade agreed to extend the deadline several times for the License Collector to issue her Final Decision.
On July 20, 2020, the License Collector issued her Final Decision. For the 2017-18, 2018-19, and 2019-20 tax years, the Final Decision proposes the imposition of $145,474 in business
license taxes and additional penalties of $72,737 for a total of $218,211. Taxpayer appeals the
foregoing Decision, plus any and all additional interest and penalties that might be proposed in connection with the proposed deficiencies.
The City extended the time for Taylormade to file its appeal with the City Council to September 18, 2020. See attached correspondence from Benjamin Fay, outside counsel representing the
City in this matter, acknowledging the extension.
D. ISSUES RAISED
TaylorMade raises the following issues as part of this Appeal:
1. Should the new taxing scheme imposed pursuant to Administrative Order 81, which penalizes companies for investing in jobs and property in Carlsbad, be
applied?
2. If yes, should the new taxing scheme, including additional taxes and penalties, be applied retroactively (i.e., prior to January 16, 2019) or only prospectively?
E. GROUNDS FOR APPEAL/RESERVATION OF RIGHT TO SUPPLEMENT
TaylorMade appeals the Final Determination on the grounds that it is based on an
outdated and improper apportionment scheme, and is invalid. Moreover, TaylorMade further appeals on
the grounds that the imposition of retroactive taxes and penalties is unfair and impermissible. Finally, TaylorMade contends that the new taxing scheme, which is disfavored by California and many other states, should be rejected because it discriminates against Carlsbad businesses compared to non-Carlsbad businesses. TaylorMade reserves the right to raise additional issues or arguments during the
course of the Appeal.
F. HEARING REQUEST
TaylorMade hereby requests an oral hearing on its Appeal, as provided for in Carlsbad Municipal Code section 5.04.090. TaylorMade further requests that the hearing be conducted after the City Council has a full component of five members
In addition, TaylorMade intends, and reserves the right, to supplement this Appeal and to
submit further factual information and additional arguments in support of this Appeal.
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1
From: Benjamin Fay <bfay@jarvisfay.com>
Sent: Wednesday, August 5, 2020 12:17 PM
To: Moll, Charles <Cmoll@mwe.com>
Subject: Re: Callaway and Taylor Made
[ External Email ]
Hi Chuck,
Yes, the City agrees to an additional extension of 30 days of the time for Callaway or TaylorMade to file an
appeal with the City Council.
By my county that would extend the deadline from August 19 to September 18.
The City also asked me to convey to you that they will not give any more extensions.
Ben
On Tue, Aug 4, 2020 at 5:27 PM Benjamin Fay <bfay@jarvisfay.com> wrote:
Hi Chuck,
I will check and get back to you.
Ben
On Tue, Aug 4, 2020 at 5:03 PM Moll, Charles <Cmoll@mwe.com> wrote:
Hello Ben—I am going to have to request an additional extension for filing an appeal. To be safe, I am requesting an
additional 30 days for both taylor made and callaway.
Is that agreeable?
Best, chuck
May 4, 2021 Item #6 Page 27 of 92
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September 16, 2020
BY FEDERAL EXPRESS
Carlsbad City Council Through the Office of the City Clerk, City Manager 1200 Carlsbad Village Drive Carlsbad, CA 92008
Re: Appeal of Final Decision of License Collector Following Hearing on Business License Tax
Liability of Callaway Golf Company for 2015-16 Through 2019-20 Tax Years Taxpayer Names: Callaway Golf Company Years at Issue: 2017-18, 2018-19, and 2019-20
Dear City Council Members:
Pursuant to Administrative Order No. 81 and Carlsbad Municipal Code sections 5.04.090 and 1.20.310, Callaway Golf Company (“Taxpayer” or “Callaway”) hereby appeals the portion of the Final Decision of the License Collector (“Final Decision”) dated July 20, 2020 that applies to the years 2017-18, 2018-19, and 2019-20 (the “Years at Issue”). The following additional information is provided in connection with this appeal.
A. NAME AND PRINCIPAL ADDRESS OF TAXPAYER
Callaway Golf Company2180 Rutherford Rd.Carlsbad, CA 92008-7324
B.TAXPAYER’S REPRESENTATIVES
Taxpayer will be represented in this Appeal by Charles J. Moll III and Elle Kaiser ofMcDermott Will & Emery LLP.
C. PROCEDURAL BACKGROUND
This is an appeal from the License Collector’s imposition of additional business licensetaxes and penalties upon Callaway for the 2017-18 through 2019-20 tax years. On December 13, 2019,
the License Collector issued an Initial Determination that, pursuant to Administrative Order No. 81, Callaway is subject to the City's business license tax under Classification D of Carlsbad Municipal Code section 5.08.010, and that the method of calculating the business license under Code section 5.08.010 differed from the calculation method that Callaway had historically utilized. Among other things, the
EXHIBIT 4
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Initial Determination then found that Callaway owed the City additional business license taxes and penalties for the 2017-18, 2018-19, and 2019-20 tax years. The Initial Determination also indicated that further penalties would begin to accrue on January 1, 2020.
Callaway timely requested a hearing on the Initial Determination, which was held on
February 27, 2020. On March 19, 2020, Callaway submitted additional information to supplement the information and documents shared with the City during the hearing. Subsequently, Callaway agreed to extend the deadline several times for the License Collector to issue her Final Decision.
On July 20, 2020, the License Collector issued her Final Decision. For the 2017-18,
2018-19, and 2019-20 tax years, the Final Decision proposes the imposition of $362,986 in business
license taxes and additional penalties of $181,493 for a total of $544,479. Taxpayer appeals the foregoing Decision, plus any and all additional interest and penalties that might be proposed in connection with the proposed deficiencies.
The City extended the time for Callaway to file its appeal with the City Council to
September 18, 2020. See attached correspondence from Benjamin Fay, outside counsel representing the
City in this matter, acknowledging the extension.
D. ISSUES RAISED
Callaway raises the following issues as part of this Appeal:
1. Should the new taxing scheme imposed pursuant to Administrative Order 81, which
penalizes companies for investing in jobs and property in Carlsbad, be applied?
2. If yes, should the new taxing scheme, including additional taxes and penalties, be applied retroactively (i.e., prior to January 16, 2019) or only prospectively?
E. GROUNDS FOR APPEAL/RESERVATION OF RIGHT TO SUPPLEMENT
Callaway appeals the Final Determination on the grounds that it is based on an outdated
and improper apportionment scheme, and is invalid. Moreover, Callaway further appeals on the grounds
that the imposition of retroactive taxes and penalties is unfair and impermissible. Finally, Callaway contends that the new taxing scheme, which is disfavored by California and many other states, should be rejected because it discriminates against Carlsbad businesses compared to non-Carlsbad businesses. Callaway reserves the right to raise additional issues or arguments during the course of the Appeal.
F. HEARING REQUEST
Callaway hereby requests an oral hearing on its Appeal, as provided for in Carlsbad Municipal Code section 5.04.090. Callaway further requests that the hearing be conducted after the City Council has a full component of five members
In addition, Callaway intends, and reserves the right, to supplement this Appeal and to
submit further factual information and additional arguments in support of this Appeal.
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1
From: Benjamin Fay <bfay@jarvisfay.com>
Sent: Wednesday, August 5, 2020 12:17 PM
To: Moll, Charles <Cmoll@mwe.com>
Subject: Re: Callaway and Taylor Made
[ External Email ]
Hi Chuck,
Yes, the City agrees to an additional extension of 30 days of the time for Callaway or TaylorMade to file an
appeal with the City Council.
By my county that would extend the deadline from August 19 to September 18.
The City also asked me to convey to you that they will not give any more extensions.
Ben
On Tue, Aug 4, 2020 at 5:27 PM Benjamin Fay <bfay@jarvisfay.com> wrote:
Hi Chuck,
I will check and get back to you.
Ben
On Tue, Aug 4, 2020 at 5:03 PM Moll, Charles <Cmoll@mwe.com> wrote:
Hello Ben—I am going to have to request an additional extension for filing an appeal. To be safe, I am requesting an
additional 30 days for both taylor made and callaway.
Is that agreeable?
Best, chuck
May 4, 2021 Item #6 Page 51 of 92
RESOLUTION NO. .
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD,
CALIFORNIA, AFFIRMING THE LICENSE COLLECTOR’S FINAL
DETERMINATION OF UNPAID BUSINESS LICENSES TAXES AND PENALTIES
OWED BY TAYLOR MADE GOLF COMPANY, INC. FOR TAX YEARS ENDING
2018 THROUGH 2020
WHEREAS, on Jan. 16, 2019, the city manager signed Administrative Order No. 81 – Business
License Tax Procedures; and
WHEREAS, Administrative Order No. 81 adopted an apportionment formula based on three
factors: sales, payroll, and property (apportionment formula); and
WHEREAS, the apportionment formula calculates the percentage of a business's sales in
Carlsbad, the percentage of the business's payroll in Carlsbad, and the percentage of the business’s
property in Carlsbad, then adds these percentages together and divides them by three to determine
an apportionment percentage, which represents the business’s activity in Carlsbad; and
WHEREAS, the apportionment formula’s apportionment percentage is applied to the business’s
gross receipts to determine the portion of gross receipts taxable in Carlsbad; and
WHEREAS, the apportionment formula is derived from the Uniform Division of Income for Tax
Purposes Act formula, which the United States Supreme Court and the California Supreme Court have
determined is constitutional (Container Corporation of America v. Franchise Tax Board (1983) 463 U.S.
159, 170, 183-184; Microsoft Corporation v. Franchise Tax Board (2006) 39 Cal.4th 750, 756); and
WHEREAS, on Dec. 2, 2019, following an audit, the license collector issued an Initial
Determination finding Taylor Made Golf Company, Inc. (Taylor Made) owed unpaid business license
taxes and penalties of $350,332 for tax years ending 2016 through 2020; and
WHEREAS, on Dec. 11, 2019, Taylor Made requested a hearing on the Initial Determination; and
WHEREAS, on Feb. 27, 2020, the license collector conducted a hearing on the Initial
Determination, at which Taylor Made presented information and arguments in support of its position;
and
WHEREAS, on March 20, 2020, Taylor Made submitted supplemental information for the license
collector’s consideration; and
WHEREAS, on July 20, 2020, the license collector issued a Final Determination (Attachment A)
abating the Initial Determination as to business license taxes and penalties owed for tax years ending
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2016 through 2017 and finding Taylor Made owed unpaid business license taxes and penalties of
$218,211 for tax years ending 2018 through 2020; and
WHEREAS, on Sept. 16, 2020, Taylor Made filed a notice with the City Clerk’s Office appealing
the license collector’s Final Determination to the City Council; and
WHEREAS, on May 4, 2020, the City Council conducted a public hearing on Taylor Made’s appeal
and heard evidence and arguments from Taylor Made and the license collector.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California, as
follows:
1. The above recitations are true and correct.
2. The apportionment formula is valid and constitutional.
3. Applying the apportionment formula retroactively to the tax year ending 2018 was
reasonable and necessary to ensure business licenses taxes based on gross receipts are
constitutional and uniformly calculated.
4. The license collector’s Final Determination (Attachment A) is affirmed.
PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council of the City of
Carlsbad on the __ day of ________, 2021, by the following vote, to wit:
AYES:
NAYS:
ABSENT:
_________________________
MATT HALL, Mayor
_________________________
BARBARA ENGLESON, City Clerk
(SEAL)
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Attachment A
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RESOLUTION NO. .
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD,
CALIFORNIA, AFFIRMING THE LICENSE COLLECTOR’S FINAL
DETERMINATION OF UNPAID BUSINESS LICENSES TAXES AND PENALTIES
OWED BY CALLAWAY GOLF COMPANY FOR TAX YEARS ENDING 2018
THROUGH 2020
WHEREAS, on Jan. 16, 2019, the city manager signed Administrative Order No. 81 – Business
License Tax Procedures; and
WHEREAS, Administrative Order No. 81 adopted an apportionment formula based on three
factors: sales, payroll, and property (apportionment formula); and
WHEREAS, the apportionment formula calculates the percentage of a business's sales in
Carlsbad, the percentage of the business's payroll in Carlsbad, and the percentage of the business’s
property in Carlsbad, then adds these percentages together and divides them by three to determine
an apportionment percentage, which represents the business’s activity in Carlsbad; and
WHEREAS, the apportionment formula’s apportionment percentage is applied to the business’s
gross receipts to determine the portion of gross receipts taxable in Carlsbad; and
WHEREAS, the apportionment formula is derived from the Uniform Division of Income for Tax
Purposes Act formula, which the United States Supreme Court and the California Supreme Court have
determined is constitutional (Container Corporation of America v. Franchise Tax Board (1983) 463 U.S.
159, 170, 183-184; Microsoft Corporation v. Franchise Tax Board (2006) 39 Cal.4th 750, 756); and
WHEREAS, on Dec. 13, 2019, following an audit, the license collector issued an Initial
Determination finding Callaway Golf Company (Callaway) owed unpaid business license taxes and
penalties of $1,029,274 for tax years ending 2016 through 2020; and
WHEREAS, on Dec. 19, 2019, Callaway requested a hearing on the Initial Determination; and
WHEREAS, on Feb. 27, 2020, the license collector conducted a hearing on the Initial
Determination, at which Callaway presented information and arguments in support of its position; and
WHEREAS, on March 19, 2020, Callaway submitted supplemental information for the license
collector’s consideration; and
WHEREAS, on July 20, 2020, the license collector issued a Final Determination (Attachment A)
abating the Initial Determination as to business license taxes and penalties owed for tax years ending
May 4, 2021 Item #6 Page 71 of 92
2016 through 2017 and finding Callaway owed unpaid business license taxes and penalties of $544,479
for tax years ending 2018 through 2020; and
WHEREAS, on Sept. 16, 2020, Callaway filed a notice with the City Clerk’s Office appealing the
license collector’s Final Determination to the City Council; and
WHEREAS, on May 4, 2020, the City Council conducted a public hearing on Callaway’s appeal
and heard evidence and arguments from Callaway and the license collector.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California, as
follows:
1. The above recitations are true and correct.
2. The apportionment formula is valid and constitutional.
3. Applying the apportionment formula retroactively to the tax year ending 2018 was
reasonable and necessary to ensure business licenses taxes based on gross receipts are
constitutional and uniformly calculated.
4. The license collector’s Final Determination (Attachment A) is affirmed.
PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council of the City of
Carlsbad on the __ day of ________, 2021, by the following vote, to wit:
AYES:
NAYS:
ABSENT:
_________________________
MATT HALL, Mayor
_________________________
BARBARA ENGLESON, City Clerk
(SEAL)
May 4, 2021 Item #6 Page 72 of 92
Attachment A
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NOTICE OF PUBLIC HEARING
NOTICE IS HEREBY GIVEN, that the City Council of the City of Carlsbad will hold a public hearing on Tues.,
May 4, 2021 at 3 p.m., at the Council Chamber at 1200 Carlsbad Village Drive, Carlsbad, California, to hear
the business license tax appeals of Callaway Golf Company and Taylor Made Golf Company, Inc.
Copies of the staff report will be available on and after Friday, April 30, 2021. If you have any questions,
please contact Cheryl Gerhardt in the Finance Department at 760-602-2468, or at
cheryl.gerha rdt@carlsbadca.gov.
Per California Executive Order N-29-20, and in the interest of public health and safety, the city is temporarily
taking actions to prevent and mitigate the effects of the COVID-19 pandemic by holding City Council and
other public meetings online only. All public meetings will comply with public noticing requirements in the
Brown Act and will be made accessible electronically to all members of the public seeking to observeand
address the City Council. You may participate by phone or in writing. Participation by phone: sign upat
https://www.carlsbadca.govicityhall/clerk/meetings/default.asp by 2 p.m. the day of the meeting to
provide comments live by phone. You will receive a confirmation email with instructions about how to call
in. Participation in writing: email comments to clerk@carlsbadca.gov. Comments received by 2 p.m. the
day of the meeting will be shared with the City Council prior to the meeting. When e-mailing comments,
please identify in the subject line the agenda item to which your comments relate. All comments received
will be included as part of the official record. Written comments will not be read out loud.
If you challenge the results of the business license tax appeals in court, you may be limited to only raising
issues presented at the public hearing described in this notice or in written correspondence delivered
prior to the public hearing to the City of Carlsbad, Attn: City Clerk's Office, 1200 Carlsbad Village Drive,
Carlsbad, CA 92008.
PUBLISH DATE: APRIL 23, 2021
CITY OF CARLSBAD I CITY COUNCIL
Mia De Marzo
Subject:
Attachments:
FW: Callaway Golf Company - Hearing Statement
2021-05-03 - Callaway Golf Company - Hearing Statement.PDF All Receive - Agenda Item #
For the Information of the:
CITY COUNCIL
CDateMje
o
CA ')O CC
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Cittitavvat-en
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p
StAt
From: Sommars, Barbara <Bsommars@mwe.com>
Sent: Monday, May 3, 2021 4:58 PM
To: Cindie McMahon <Cindie.McMahon@carlsbadca.gov>
Cc: Moll, Charles <Cmoll@mwe.com>
Subject: Callaway Golf Company - Hearing Statement
Ms. McMahon:
Attached is a Hearing Statement for Callaway Golf Company that Chuck Moll asked me to forward to you today.
If you have any questions regarding the attached, please so not hesitate to contact Chuck at (628) 218-3842 or
cmoll@mwe.com.
Thank you.
BARBARA J. SOMMARS
Legal Secretary
McDermott Will & Emery LLP 415 Mission Street, Suite 5600, San Francisco, CA 94105-2533
Tel +1 628 218 3813 Email bsommars@mwe.com
Website I %/Card I Twitter I Linkedln
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Charles J. Moll HI (SBN: 98872)
cmoll@mwe.com
Elle Kaiser (SBN: 315345)
ekaiser@mwe.com
MCDERMOTT WILL & EMERY LLP
415 Mission Street, Suite 5600
San Francisco, CA 94105-2616
Telephone: +1 628 218 3800
Facsimile: +1 628 877 0107
Attorneys for Taxpayer
CALLAWAY GOLF COMPANY
CARLSBAD CITY COUNCIL HEARING
CALLAWAY GOLF COMPANY
INTRODUCTION
The primary issue in this dispute is the propriety of the new formula issued by the City
Manager to apportion gross receipts for Carlsbad's business license tax. It is undisputed that a city
can impose a tax upon the gross receipts of a business that are earned within the city. Where a
business, like Callaway here, conducts business both within and outside Carlsbad, the. City cannot
tax all of the gross receipts of the business, and must apply a method to fairly determine the taxable
gross receipts in the City, a process called apportionment.
The City of Carlsbad, like many cities, imposes a business license tax on specified
businesses operating in the City. (Carlsbad Municipal Code § 5.04.020(A).) However, the
Ordinance itself does not contain an apportionment formula. The City had been informed of this
infirmity over a decade ago, and was offered several solutions for bringing Carlsbad's ordinance
into conformance with constitutional requirements. Absent specific guidance, Callaway has utilized
a "point of sale" methodology to determine its Carlsbad gross receipts, which included sales from
Carlsbad, and sales into Carlsbad, for the measure of tax. This methodology historically has been
HEARING STATEMENT
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MAY 4, 2021
accepted by Carlsbad, and such acceptance was recently confirmed in an audit in 2017. This
methodology was well understood, and easy to administer both by the City and Callaway.
On January 16, 2019, the City Manager issued Administrative Order No. 81 stating that the
Carlsbad business license tax would incorporate, for the first time, a new "three factor" formula
apportionment scheme. The Order specified that the anachronistic formula used in the Uniform
Division of Income for Tax Purposes Act ("UDITPA") will be used as guidance by, but will not be
binding upon, the City. This "Act" was not a governmental legislative enactment, but was issued in
1957 by certain organizations and individuals. Many states, but not all, adopted some of the "Act's"
provisions, but the interpretations adopted varied widely between the states. Thus, there is no one
"UDITPA formula". Since 1957, most states have modified the original version in many ways,
ancUor have abandoned it entirely.'
The Order did not further explain how the many issues and different interpretations in the
implementation of this proposed formula would be resolved. Moreover, the License Collector
improperly applied this new taxing scheme retroactively back to 2015. The new tax methodology
was neither approved by this City Council, nor was it submitted to the electorate for approval.2
The original three factor formula referred to in the Order was a mathematical equation that
consists of three "factors"—the sales factor, property factor, and payroll factor. Each factor is a
fraction: the numerator of the fraction is the in-state amount of that factor, and the denominator is
the total amount of that factor. So, for example, the payroll factor would be a fraction consisting of
the in-state payroll amount in the numerator, and the companies' total payroll in the denominator.
The result would be a percentage of the payroll that was in the state. The same was done for the
sales factor and the property factor. These three resulting percentages were then added together and
divided by three, with the resulting average percentage multiplied by the company's net income to
determine the amount of that income attributable to the particular state.
The majority of states, including California, that originally followed a version of UDffPA, have
now rejected it in favor of a different methodology — the single sales factor methodology.
To the extent that this new taxing scheme imposes, extends, or increases any tax, as it certainly
does for Callaway and other businesses located in Carlsbad, it is not valid unless and until it is
submitted to the electorate and approved by a majority vote. Cal. Const. Art. XI11C, section 2(b).
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On December 13, 2019, the License Collector issued an Initial Determination that, pursuant
to this new method of calculating the business license tax, Callaway owed the City additional
business license taxes, and penalties thereon, for the 2015, 2016, 2017, 2018 and 2019 tax years.
The Initial Determination also stated that further penalties would begin to accrue on January 1,
2020. Callaway challenged this Initial Determination and filed a timely protest. The protest and
hearing presentation are attached hereto and incorporated as if set out in full herein.
Following a hearing on the Protest on February 27, 2020, the License Collector, on July 20,
2020, issued her decision denying taxpayers protest and generally upholding her Initial
Determination. However, the License Collector reduced the retroactive application of the tax to
start in 2017, rather than 2015.
1. DISCUSSION
A. To Satisfy Constitutional Requirements, A City's Business License Tax Must
provide for a Fair Apportionment, Without Which it is Unenforceable.
A state or local tax scheme is valid only if it "is applied to an activity with a substantial
nexus with the taxing State, is fairly apportioned, does not discriminate against interstate
commerce, and is fairly related to the services provided by the State." Complete Auto Transit,
Inc. v. Brady, 430 U.S. 274 at p. 279 (1977). Under the Commerce Clause of the United States
Constitution, a state may only tax income earned within its borders. Ilan.s Rees' Sons, Inc. v. North
Carolina ex rd. Maxwell, 283 U.S. 123 (1931). For a company doing business in more than one
state, the company's income must be apportioned between those states to reflect the amount of
income earned in and taxable by each state. Unapportioned taxes are invalid because their harm
arises from the taxing jurisdiction's overreaching. Thus, a fair apportionment methodology is the
solution to the prohibition against taxation of extra-territorial income.
This requirement of a fair apportionment also applies to cities in California. Just as states
cannot tax income earned outside of the state, it is well established that cities and towns in
California cannot tax activities outside of their borders. See, e.g., Volkswagen Pacific Inc. v. City of
Los Angeles 7 Ca1.3d 48, 58 (1972) ("the requirements of due process and equal protection compel
an apportionment of receipts attributable to the business carried on within and without the city.");
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City of Los Angeles v. Shell Oil Co. 4 Ca1.3d 108, 124 (1971) (the City's unapportioned business
license tax was "discriminatory and void."); Brabant v. City of South Gate, 66 Cal.App.3d 764
(1977) (a license tax imposed on real estate brokers and salespersons that was not apportioned was
"void as applied to each [taxpayer]" because it was "of extraterritorial effect.").
Thus, in City qfModesto v. National Med., Inc., 128 Cal.App.4th 518 (2005), the Court
observed:
Despite the absence of a specific "commerce clause" in the California
Constitution, the requirements of equal protection and due process proscribe local
taxes that operate to unfairly discriminate against intercity businesses by
subjecting them to a tax that is not fairly apportioned to reflect the percentage of
the business actually taking place within the taxing jurisdiction.
An invalid, unapportioned tax is not enforceable. In McKesson Corporation v. Division of
Alcoholic Beverages and Tobacco, 496 U.S. 18, 39 (1990), the United States Supreme Court
explained that where a tax is invalidly imposed, the only way for the state to "undo" the unlawful
deprivation is by refunding the entire tax previously paid. Specifically, the Court stated:
"Had the ... courts declared the [tax] invalid because ... it was beyond the [taxing
jurisdiction's power to impose, as was like the unapportioned tax in O'Conner....
the [taxing jurisdiction] would have had no choice but to "undo" the unlawful
deprivation by refunding the tax previously paid under duress, because allowing
the State to "collect these unlawful taxes by coercive means and not incur any
obligation to pay them back ... would be in contravention of the Fourteenth
Amendment."
See also Gwin, White & Prince, Inc. v. Ilennefbrd, 305 U.S. 434 (1939).
A. A well-established line of California cases is consistent with the principle that an
unapportioned tax is unenforceable. In City of Modesto, supra, the City similarly tried to revise its
unapportioned and therefor invalid tax and apply it retroactively. The courts in that case held that
the City could not do so. See City of Modesto v. National Med., Inc., 28 Cal.App.4th 518 (2005)
(unapportioned city license tax not enforceable against the taxpayer). See also Ferran v. City of
Palo Alto, 50 Cal.App.2d 374 (1942) (Palo Alto's unapportioned tax on intercity dry cleaners was
unconstitutional, and therefore the court enjoined the city from "enforcing or threatening to
enforce" this tax against such dry cleaners); General Motors Corporation v. City and County of San
Francisco, 69 Cal.App.4th 448, 452 (1999) (General Motors was entitled to a full refund of a
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previously paid business license tax that discriminated against out-of-city manufacturers); Security
Truck Line v. City of Monterey, 1 17 Cal.App.2d 441 (1953) (City Ordinance which imposed an
unapportioned license tax that had "no relation to taxable event occurring in city or quantum of
business carried on there" was void and thus the Court upheld an injunction prohibiting the city
from imposing the tax).
Although in her opinion the License Collector quibbled over whether McKesson requires a
complete, or only partial refund, this dispute does not involve a refund, but rather whether the
License Collector can impose and enforce an invalid tax. The cases, as discussed above, are quite
clear that she cannot.3
B. The Order Proposing a Three Factor Apportionment Formula is Impermissibly
Vague, Preventing Callaway from Complying.
The original UD1TPA formula itself may not be unconstitutional, rather the problem here is
that the Order's adoption of a three factor apportionment formula has left many unanswered
questions. As discussed above, there is no single three factor formula, but many historical iterations
among the various states. This is a complex formula that has spawned substantial litigation over the
decades, often with different and even conflicting results between the different states.
It is axiomatic, of course, that "the mere fact that a new statute [ordinance] requires
interpretation does not make it unconstitutionally vague." Garcia v. Four Points Sheraton LAX, 188
Cal.App.4th 364, 387 (2010). However a statute or ordinance
[M]ay be declared unconstitutionally vague under the due process clauses of the United
States Constitution and the California Constitution... "if it fails to provide people of
ordinary intelligence a reasonable opportunity to understand what conduct it prohibits [or]
if it authorizes or even encourages arbitrary and discriminatory enfOrcement." A tax law in
particular 'must prescribe a standard sufficient definite to be understandable to the
average person who desires to comply with it."'
Patel v. City of Gilroy, 97 Cal.App.46 483, 486 (2002) (emphasis added).
3 In the event, the License Collector confused a discriminatory tax, where the harm could by
corrected by simply reducing the injured parties tax to be equal to the tax upon the favored class,
with an invalid tax, where a hill refund is required. City of Modesto supra, at 525.
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Similarly, "a statute which either forbids or requires the doing of an act in terms so vague
that men of common intelligence must necessarily guess at its meaning and differ as to its
application, violates the first essential of due process of law." City of San Bernardino Hotel/Motel
Association v. City ofSan Bernardino, 59 Cal.App.4th 237, 250 (1997) (quoting People v.
Barksdale, 8 Ca1.3d 320, 327 (1972)). See also Britt v. City of Pomona, 223 Cal.App.3d. 265
(1990) (subject tax was too vague because it "established a conclusive presumption with respect to
the duty to pay the tax, without defining an important term used in the language of the ordinance
which established the presumption.") The United States Supreme Court has made similar
observations in discussing the void for vagueness doctrine, explaining that the requirement of fair
notice lies at the heart of due process - "regulated parties should know what is required of them so
they may act accordingly." Fox Television Stations, 132 S. Ct. at 2317. Thus, in Fox Television
Studios, the Court held that the FCC's indecency regulations were unconstitutionally vague because
they failed to give "sufficient notice of what [was] proscribed," in violation of the "fair notice"
requirement of "the Due Process Clause." 132 S. Ct. at 2317, 2320. In short, "[All persons] are
entitled to be informed as to what the State commands or forbids." Papachristou, 405 U.S. at 162
(quoting Lanzetta, 306 U.S. at 452) (alterations in Papachristou).)
Here, the implementations of the Order is rife with uncertainties, and has left Callaway
guessing as to how the new methodology would apply. As a result Callaway is required to guess at
what is included in the term "business" (e.g., include entire unitary business or worldwide business,
water's edge, affiliates included or not included, etc.). Similarly, the Order failed to include
guidance as to which of the differing state's interpretations should apply, whether and how to treat
intercompany transactions, and what should be included in the various factors. For example, the
UDITPA formula applied only to net income, not gross receipts, and the different types of
income—business income, non-business income, income from intangibles, income from services,
income from property—were treated differently. To compound the problem, states were
inconsistent in how to treat those different types of income.
Similarly, the Order leaves open how to determine the payroll factor. For example, what is
included for independent contractors, deferred compensation, fringe benefits, loaned employees,
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etc. And what methodology should be used to determine how to source that payroll — should the
taxpayer use cost of performance, where the benefit is received, some other method? Finally, many
unanswered questions involve the property factor, including how to determine the amount to be
included (some version of value, or accounting cost, or some other amount?), and how to classify
and source different types of property (real, personal, intangibles, mobile property.)
Consequently, because of these unanswered questions, Callaway has been unable to
calculate what the correct tax could be under a three factor formula. Callaway raised this issue at
the hearing below, but the License Collector did not offer any guidance to clarify these issues.
Rather, in her decision, she chastised Callaway for not being able to produce information showing
an alternative amount.4
The Order simply leaves unanswered too many questions. To make matters worse, the
Order merely vaguely states that it will look for non-binding guidance to UDITPA (without
specifying whose version of UDITPA), and otherwise states it will be applied "as appropriate". In
essence therefore, the Order leaves it up to the City to pick and choose which elements of the
UDITPA formula it deems to follow in various circumstances. Clearly this does not provide
sufficient notice for it does not explain to men of common intelligence as to how to apply it, but
provides for arbitrary enforcement and leaves taxpayers to guess at their peril. This is simply
insufficient clarity, and is invalid. Patel v City of Gilroy, supra; City of San Bernardino, supra, City
oftilodesto, supra.
C. The Order Improperly Applied the New Apportionment Formula
Retroactively.
The License Collector reduced the retroactive application of the Order from starting in 2015
to starting in 2017. But applying this new apportionment formula to Callaway retroactively is still
unreasonable and impermissible. This is particularly true since the City previously accepted
Callaway's use of a different methodology, and as recently as 2017. This retroactive application of
4 For example, depending upon how these questions are answered, Callaway estimates that the tax
liability would be in the range of $30,000 to $50,000 compared to the $88,000 to $143,000
determined by the License Collector. Unfortunately, due to the difficult exercise of searching for
the relevant information retroactively, Callaway has been unable to develop definitive data.
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the new formula would prejudice Callaway by requiring it to seek information not previously
required to be kept. For example, to properly determine the payroll factor, Callaway must account
for where each employee, contractor, etc. performed their duties. Because this information was not
required for Carlsbad previously, Callaway is unable to develop that specific information now.
The United States Supreme Court has held that retroactive tax legislation must comply with
due process requirements, including that the legislature must act promptly and establish a modest
period of retroactivity. United States v. Carlton, 512 U.S. 26 (1994). If those two requirements are
met, it may be that the United States Constitution is not violated by a one year retroactive
application. In Carlton, the internal Revenue Service ("RS") in January 1987 recognized a
loophole in legislation enacted just over two months earlier; Congress proposed an amendment in
February 1987 which was passed in December 1987. The Court found this period permissible.
Carlton, supra, 512 U.S. at p. 32.
But those two requirements are not satisfied here. First, the City's recent actions to establish
a tax apportionment methodology could hardly be considered prompt. The City was informed that
its gross receipts tax was unconstitutional because it did not provide for a fair apportionment as
early as 2009. This approximate decade delay to implement apportionment guidelines greatly
exceeds the 11 month period allowed in Carlton and does not meet the Supreme Court's
requirement of prompt action.
Second, the License Collector's decision also does not comply with the due process
requirement of no more than limited retroactivity. As Justice O'Connor's concurring opinion noted:
In every case in which we have upheld a retroactive federal tax statute against due
.process challenge ... the law applied retroactively for only a relatively short period
prior to enactment. A period of retroactivity longer than the year preceding the
legislative session in which the law was enacted would raise, in my view, serious
constitutional questions.
Carlton, supra, 512 U.S. at pp. 38-39 (emphasis added). Although the Order was issued in 2019, it
has been made retroactive to 2017.
Moreover, as is often the case, California's policy against retroactivity is more stringent
than what is allowed by the U.S. Constitution. As recently observed by the California court of
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appeals: "Generally, in California, courts have upheld the retroactive application of tax laws only
where such retroactivity was limited to the current tax year." City of Modesto, supra at 529.
Similarly, in Gutknecht v. City of Sausalito, 43 Cal.App.3d 269, 282 (1974), the Court upheld an
increase in the business license tax upon certain restaurants, but held it could not be applied
retroactively. The Court observed "Our courts have upheld retroactive application of tax laws only
where such retroactivity was limited to the current tax years." Id. at 290 (citations omitted). See
also Holmes v. McColgan, 17 Ca1.2d 426, 430 (1941) (permitting personal income tax enacted on
June 13, 1935 to be retroactively applied back through January 1, 1935); Fullerton Oil Co. v.
Johnson, 2 Ca1.2d 162, 176 (1934) (pennitting February 27, 1931 amendment to be applied
retroactively to January 1, 1931); W & S. Life Ins. Co. v. State Bd. of Equalization, 4 Cal.App.3d
21, 34 (1970) (denying retroactive application of a retaliatory tax amended in that same year;
Sunset Nut Shelling Co. v. Johnson, 49 Cal.App.2d 354, 356-359 (1942) (permitting tax rate
increase effective June 25, 1935 to be applied to all taxes paid in calendar year 1935); Am. States
Water Serv. Co. v. Johnson, 31 Cal.App.2d 606, 613-618 (1939) (same).)
Finally, even assuming, arguendo, that the new taxing scheme could be applied
retroactively, this Council should not do so here. "Our Supreme Court has held that there is a
"strong presumption" against applying a statute retroactively.... Generally, statutes operate
prospectively only... [T]he presumption against retroactive legislation is deeply rooted in our
jurisprudence, and embodies a legal doctrine centuries older than our Republic. Elementary
considerations of fairness dictate that individuals should have an opportunity to know what the law
is and to confirm their conduct accordingly .... For that reason, the "principle that the legal effect
of conduct should ordinarily be assessed under the law that existed when the conduct took place has
timeless and universal appeal."... "The presumption against statutory retroactively has consistently
been explained by reference to the unfairness of imposing new burdens on persons after the fact."
Franchise Tax Bd. v. Superior Court, 221Cal.App. 4th 647 (2013) (citations omitted) (rejecting
retroactive tax penalties against alleged abusive tax shelter promoters).
Our nation's long aversion to retroactivity reflects "elementary considerations of fairness"
and notice at the heart of our legal tradition. Landgrqf v. USI Film Prods., 511 U.S. 244, 265
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(1994). Indeed, as people cannot conform their actions to the law without knowing the law, the
right to be informed of the law is one of the suppositions entailed by the very concept of "[I]iving
under a rule of law."5 Papachristouv. City offacksonville, 405 U.S. 156, 162 (1972) (quoting
Lanzetta v. New Jersey, 306 U.S. 451, 453 (1939)).
It is for good reason that retroactive laws are antithetical to our legal tradition. Renowned
legal scholars and jurists have explained that laws that purport to change the legal effect of past
actions are fundamentally unjust. As Lon Fuller famously put it in The Morality of Law: "Law has
to do with the governance of human conduct by rules. To speak of governing or directing conduct
today by rules that will be enacted tomorrow is to talk in blank prose." Fuller, The Morality of Law
53.
Similarly, Justice Story warned that retroactive laws are "generally unjust; and, as has been
forcibly said, neither accord with sound legislation nor the fundamental principles of the social
compact." 2 J. Story, Commentaries on the Constitution § 1398 (5th ed. 1891).6 At bottom,
retroactive legislation is countes.to the "fundamental principle in our legal system that laws which
regulate persons or entities must give faii- notice of conduct that is forbidden or required." Fox
Television Stations, Inc.,132 S. Ct . at 2317 (emphasis added). As the Court put it in Landgraf
"Elementary considerations of fairness dictate that individuals should have an opportunity to know
what the law is and to conform their conduct accordingly; settled expectations should not be lightly
disrupted." 511 U.S. at 265.
Measured against the constitutional requirement of "fair notice," retroactive application of
this new taxing scheme is a measure worse than even the laws that have been invalidated as void
for vagueness. An unconstitutionally vague law fails to provide fair notice because it lacks
"sufficient definiteness that ordinary people can understand what conduct is prohibited" or
5 As the Supreme Court has noted, it "is therefore not surprising that the antiretroactivity
principle finds expression in several provisions of our Constitution." Lcmdg,raf; 511 U.S. at
266 (citing the Ex Post Facto Clause , the Contracts Clause, the Fifth Amendment's Takings
Clause, the prohibitions of Bills of Attainder, and the Due Process Clause).
6 https ://books.google.com/books?id=egY9AAAATAAJ&prin
tsee=fronteover&souree=gbs_ge_summary_r&cad=0#v=onepage&q&f=false (last visited
Oct. 10, 2016).
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required. SkiBing v. United States, 561 U.S. 358, 404 (2010). But a retroactive tax like that imposed
below — where the City is explicitly changing the effect of actions already taken-does far more than
fail to provide "sufficient definiteness." Those who rely on the prior taxing scheme act not just
without a "definite" understanding of the law in effect, but under an affirmative misrepresentation
of its meaning. Such bait-and-switch taxation is unfair, unconstitutional, and should be rejected by
this Council.
D. The Penalty Imposed Upon Callaway Should be Abated.
In addition to seeking additional taxes under the Order's new methodology, the License
Collector also has imposed substantial penalties upon Callaway. Even if the City declines to adopt
Callaway's proposed "point of sale" methodology, Callaway is entitled to an abatement of penalties
as its methodology was previously accepted by the City as part of prior audits.
Specifically, the Carlsbad business license ordinance imposes a penalty charge on persons
who fail to timely pay a license renewal tax. (See Carlsbad Municipal Code § 5.04.020(B) ("For all
previously licenses businesses the license tax shall be due and payable annually in advance on the
first day of the month in which the business was originally established. In the event any person fails
to pay a license renewal tax, the tax shall be increased by a penalty of 50% of the license tax 90
days after it is due.").)
Here, for all the years at issue, Callaway timely paid its business license tax prior to its
October due date. Callaway calculated its tax using the point of sale apportionment method
previously accepted by the City. Indeed, the License Collector's Final Decision acknowledged that
Callaway had paid the tax so calculated for all of the years at issue. See Final Decision at p. 4.
Nevertheless, despite Callavvay's timely tax payments the License Collector imposed a 50% failure
to timely pay penalty for each of the years at issue. Final Decision, Attachment B.
The License Collector's imposition of retroactive penalties is improper and should be
reversed. First, it is contrary to the express language of the business license ordinance. The
Ordinance does not impose a penalty for later determined underpayment; rather, the business
license tax ordinance provides that a penalty is imposed only when a person fails to pay the license
tax, which did not occur here as acknowledged by the License Collector.
HEARING STATEMENT
Moreover, as much as the retroactive application of the new tax is improper, it is even more
so with the penalty. It would be unfair to impose the penalty here, when the alleged underpayment
resulted solely from the retroactive application of the new vague tax apportionment scheme that
changed the amount of tax sought by the City. The fact that the City later determined — contrary to
a methodology it had accepted at the time of payment — that Callaway underpaid the tax is
insufficient justification, and the imposition of penalties is in these circumstances, arbitrary, a
denial of due process, and a prejudicial abuse of discretion that is illegal and invalid. See e.g.,
discussion, supra (and cases cited therein) at pages five to ten. See also Franchise Tax Bd. v.
Supreme Court, supra.
E. This Council Should Reject the Current Proposed Three Factor Formula as
Unwise Policy.
The goal of establishing a property apportionment methodology for the City of Carlsbad is
laudable, but the process and execution was not. Because of the overarching impacts that an
apportionment method causes, and the resulting important policy considerations raised, such a
method should not be unilaterally imposed by fiat by the City Manager, but should be developed in
partnership with the larger community, including the business community and other stakeholders,
and then thoughtfully considered by this Council, and even ratified by the electorate. Unfortunately,
none of that has occurred, and the proposed three factor apportionment formula is complicated,
outdated, overly burdensome, and promotes poor policy.
First, the three factor formula itself, initially proposed over sixty years ago, is outdated and
out of favor. Over the past half century, this formula proved to be complex, and generated a
substantial amount of controversy and continuous litigation involving its interpretation. As the
various states wrestled with these challenges, and various courts ruled on these challenges, a
patchwork of decisions and different interpretations arose so that the original formula was applied
differently in different states.
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California and most other states have moved away from this formula, recognizing the
ongoing decades of litigation and difficulties in administration.7 These states have further
recognized that this three factor formula had an unwanted, deleterious impact upon the labor force
in the state and other investment in the state. Thus, California and other states have found that the
three factor formula was an inappropriate penalty upon local businesses and labor, and a
disincentive for companies to invest in jobs and property in the state. The more payroll businesses
had in California, and the more property they had in California, the higher the California tax, all
other things being equal. At the same time, using the payroll and property factors in the formula
had the perverse result of lowering the taxes paid by out of state companies who did not invest in
the state or hire California labor.
For example, California has expressly observed that by including the payroll factor and the
property factor in the formula, California was discouraging companies from hiring California
residents, and from locating headquarters, factories, laboratories, and other places of business in
California. (Prop. 39 § 6, approved Nov. 6, 2012, eff. Nov. 7, 2012; operative Dec. 1, 2013.)
"Current tax law both discourages multistate companies from locating jobs in California, and puts
job-creating California companies at a competitive disadvantage. To address this problem, most
other states have changed their laws to tax multistate companies on the percent of sales in that state,
a tax approach referred to as the "single sales factor." (Prop. 39 § 1(2), (3), approved Nov. 6, 2012,
eff. Nov. 7, 2012; operative Dec. 1, 2013.)
Consequently, again led by California, states have been adopting a single sales factor
apportionment methodology.8 California and the other states recognize that this single sales factor
formula does not provide a disincentive for companies to locate in the state, hire in-state residents,
and establish business operations here. Accordingly, California and other states recognized that the
single sales factor formula would not penalize companies who chose to locate here and create jobs,
and any reduction in taxes for in-state companies was offset by the increased taxes paid by out-of-
7 Currently, only the following seven states continue to utilize that original standard three factor
formula: Alaska, Hawaii, Kansas, Montana. New Mexico. North Dakota, and Oklahoma.
Effective for tax year 2021, 25 states utilize a single sales factor apportionment methodology. The
"point of sell" methodology used by Callaway is a version of a single sales factor methodology.
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HEARING STATEIVIENT
state companies doing business in California. By adopting the single sales factor approach, the
independent Legislative Analyst's Office estimated that state revenues would increase by as much
as $1.1 billion per year and create a net gain of 40,000 California jobs. (Prop. 39 § 1(4), approved
Nov. 6, 2012, eff. Nov. 7, 2012; operative Dec. 1, 2013.)
Carlsbad has campaigned hard to present itself as a desirable location for businesses and
residents alike. And Callaway has readily volunteered to participate with the City in these
promotional campaigns. This new proposed formula contradicts those campaigns and acts to undo
their results, and certainly sends the wrong message to Carlsbad businesses, as well as to businesses
considering re-locating to Carlsbad.
The decision to apply a three factor apportionment formula will have real-life implications
for Carlsbad's residents and community fabric. As recognized by California and the growing body
of states who have turned towards a single sales factor methodology, this proposed new
apportionment scheme will discourage businesses from locating in Carlsbad, and hiring Carlsbad
residents. It also punishes those businesses already here, encouraging them to leave.
Because, under this new methodology, a business located, and providing jobs, in Carlsbad
will pay significantly more in tax than the same business selling into Carlsbad but who is located
out of Carlsbad, this extra burden will make it more difficult for Carlsbad companies to compete
against non-Carlsbad companies. In addition, because only a handful of states continue to use a
version of the original formula, this new scheme results in more expense for the taxpayer in
computing the tax just for Carlsbad. And, just as happened at the state level, because the Order has
left many unanswered questions about the proposed complex methodology, years of litigation is
likely to occur to resolve these myriad issues.
The License Collector acknowledged that the policy considerations are for this Council to
decide. A single sales factor methodology has a number of advantages from a policy perspective.
The single sales factor methodology removes the disincentive to hire Carlsbad labor and does not
penalize other investments in Carlsbad. It also evens the playing field against outside competitors
and removes the incentive for Carlsbad businesses to relocate. The single sales factor methodology
eases the administrative burden on both taxpayers and the City. Because California utilizes a single
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sales factor methodology, most of the information required to calculate the tax is already compiled
for state tax purposes. Similarly, Carlsbad can more easily administer the tax by leveraging off the
State, without expending scarce city resources on difficult audits and compliance.
Finally, contrary to the License Collector's assertion in her decision, use of the single sales
factor methodology would not be unconstitutional, as it was upheld by the United States Supreme
Court in Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978).
II. CONCLUSION
Callaway hereby respectfully requests that this Council (1) reverse and vacate
Administrative Order No. 81, (2) abate all additional tax claimed due and remove all penalties,
(3) reject the use of the three factor formula, and (4) adopt the single sales factor formula, or direct
the City Manager to develop, with Carlsbad businesses and other stakeholders, an appropriate
apportionment methodology to be applied on a prospective basis.
Respectfully submitted,
Dated: May 3, 2021 MCDERMOTT WILL & EMERY LLP
CHARLES J. ML III
ELLE KAISER
Attorneys for Taxpayer
Callaway Golf Company
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HEARING STATEMENT
mwe.com
Charles J. Moll III
Attorney at Law
cmoll@mwe.com
+1 628 218 3842
September 16, 2020
BY FEDERAL EXPRESS
Carlsbad City Council
Through the Office of the City Clerk, City Manager
1200 Carlsbad Village Drive
Carlsbad, CA 92008
Re: Appeal of Final Decision of License Collector Following Hearing on Business License Tax
Liability of Callaway Golf Company for 2015-16 Through 2019-20 Tax Years
Taxpayer Names: Callaway Golf Company
Years at Issue: 2017-18, 2018-19, and 2019-20
Dear City Council Members:
Pursuant to Administrative Order No. 81 and Carlsbad Municipal Code sections 5.04.090 and
1.20.310, Callaway Golf Company ("Taxpayer" or "Callaway") hereby appeals the portion of the Final
Decision of the License Collector ("Final Decision") dated July 20, 2020 that applies to the years 2017-
18, 2018-19, and 2019-20 (the "Years at Issue"). The following additional information is provided in
connection with this appeal.
A.NAME AND PRINCIPAL ADDRESS OF TAXPAYER
Callaway Golf Company
2180 Rutherford Rd.
Carlsbad, CA 92008-7324
B.TAXPAYER'S REPRESENTATIVES
Taxpayer will be represented in this Appeal by Charles J. Moll III and Elle Kaiser of
McDermott Will & Emery LLP.
C.PROCEDURAL BACKGROUND
This is an appeal from the License Collector's imposition of additional business license
taxes and penalties upon Callaway for the 2017-18 through 2019-20 tax years. On December 13, 2019,
the License Collector issued an Initial Determination that, pursuant to Administrative Order No. 81,
Callaway is subject to the City's business license tax under Classification D of Carlsbad Municipal Code
section 5.08.010, and that the method of calculating the business license under Code section 5.08.010
differed from the calculation method that Callaway had historically utilized. Among other things, the
McDermott
Will & Emery 415 Mission St Suite 5600 San Francisco CA 94105-2533 Tel +1 628 218 3800 Fax +1 628 877 0107
US practice conducted through McDermott Will & Emery LLP.
Carlsbad City Council
September 16, 2020
Page 2
Initial Determination then found that Callaway owed the City additional business license taxes and
penalties for the 2017-18, 2018-19, and 2019-20 tax years. The Initial Determination also indicated that
further penalties would begin to accrue on January 1, 2020.
Callaway timely requested a hearing on the Initial Determination, which was held on
February 27, 2020. On March 19, 2020, Callaway submitted additional information to supplement the
information and documents shared with the City during the hearing. Subsequently, Callaway agreed to
extend the deadline several times for the License Collector to issue her Final Decision.
On July 20, 2020, the License Collector issued her Final Decision. For the 2017-18,
2018-19, and 2019-20 tax years, the Final Decision proposes the imposition of $362,986 in business
license taxes and additional penalties of $181,493 for a total of $544,479. Taxpayer appeals the
foregoing Decision, plus any and all additional interest and penalties that might be proposed in
connection with the proposed deficiencies.
The City extended the time for Callaway to file its appeal with the City Council to
September 18, 2020. See attached correspondence from Benjamin Fay, outside counsel representing the
City in this matter, acknowledging the extension.
D. ISSUES RAISED
Callaway raises the following issues as part of this Appeal:
1.Should the new taxing scheme imposed pursuant to Administrative Order 81, which
penalizes companies for investing in jobs and property in Carlsbad, be applied?
2.If yes, should the new taxing scheme, including additional taxes and penalties, be
applied retroactively (i.e., prior to January 16, 2019) or only prospectively?
E. GROUNDS FOR APPEAL/RESERVATION OF RIGHT TO SUPPLEMENT
Callaway appeals the Final Determination on the grounds that it is based on an outdated
and improper apportionment scheme, and is invalid. Moreover, Callaway further appeals on the grounds
that the imposition of retroactive taxes and penalties is unfair and impermissible. Finally, Callaway
contends that the new taxing scheme, which is disfavored by California and many other states, should be
rejected because it discriminates against Carlsbad businesses compared to non-Carlsbad businesses.
Callaway reserves the right to raise additional issues or arguments during the course of the Appeal.
F. HEARING REQUEST
Callaway hereby requests an oral hearing on its Appeal, as provided for in Carlsbad
Municipal Code section 5.04.090. Callaway further requests that the hearing be conducted after the City
Council has a full component of five members
In addition, Callaway intends, and reserves the right, to supplement this Appeal and to
submit further factual information and additional arguments in support of this Appeal.
Carlsbad City Council
September 16, 2020
Page 3
G. CONCLUSION
For the reasons discussed above, Callaway respectfully request the instant Appeal be
granted.
Very truly yours,
7nsq
Charles J. Moll III
Attorney for Callaway Golf Company
From: Benjamin Fay <bfay@iarvisfay.com>
Sent: Wednesday, August 5, 2020 12:17 PM
To: Moll, Charles <Cmoll@mwe.com>
Subject: Re: Callaway and Taylor Made
Hi Chuck,
Yes, the City agrees to an additional extension of 30 days of the time for Callaway or TaylorMade to file an
appeal with the City Council.
By my county that would extend the deadline from August 19 to September 18.
The City also asked me to convey to you that they will not give any more extensions.
Ben
On Tue, Aug 4, 2020 at 5:27 PM Benjamin Fay <bfay@jarvisfay.com> wrote:
Hi Chuck,
I will check and get back to you.
Ben
On Tue, Aug 4, 2020 at 5:03 PM Moll, Charles <Cmolla,mwe.com> wrote:
Hello Ben—I am going to have to request an additional extension for filing an appeal. To be safe, I am requesting an
additional 30 days for both taylor made and callaway.
Is that agreeable?
Best, chuck
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CALLAWAY GOLF COMPANY
City of Carlsbad Business License Tax Audit
Hearing on Initial Determination
February 27, 2020
Charles J. Moll III - (628) 218-3842 - cmoll@mwe.com
TO SATISFY CONSTITUTIONAL REQUIREMENTS A CITY'S BUSINESS
LICENSE TAX MUST PROVIDE FOR A FAIR APPORTIONMENT
•A state or local tax scheme is valid only if it "is applied to an activity with
a substantial nexus with the taxing State, is fairly apportioned, does not
discriminate against interstate commerce, and is fairly related to the
services provided by the State." (Complete Auto Transit, Inc. v. Brady,
430 U.S. 274 at p. 279 (1977).)
Unapportioned, or improperly apportioned, taxes are invalid under the
second prong of Complete Auto because their harm arises from the
taxing jurisdiction's overreaching. Thus, a fair apportionment is the
solution to the prohibition against taxation of extra-territorial income.
•This requirement of a fair apportionment has long been held to apply to
cities in California. City of Los Angeles v. Shell Oil Co., 4 Cal. 3d 108,
124 (1971).
2 mwe.com
UNAPPORTIONED AND IMPROPERLY APPORTIONED TAXES ARE
VOID, AND THE REMEDY IS A REFUND OF ALL TAXES PAID
•In McKesson Corporation v. Division of Alcoholic Beverages and Tobacco,
496 U.S. 18 (1990), the United States Supreme Court stated:
Had the ... courts declared the [tax] invalid because ... it was
beyond the [taxing jurisdiction's power to impose, as
was like the unapportioned tax in CYConner.... the [taxing
jurisdiction] would have had no choice but to "undo" the
unlawful deprivation by refunding the tax previously paid
under duress, because allowing the State to "collect these
unlawful taxes by coercive means and not incur any
obligation to pay them back ... would be in contravention of
the Fourteenth Amendment.
3 mwe.com
UNAPPORTIONED AND IMPROPERLY APPORTIONED TAXES ARE VOID,
AND THE REMEDY IS A REFUND OF ALL TAXES PAID - CONTINUED
•This remedy, like all remedies for unconstitutional taxes, must be "clear and certain"
and provide harmed taxpayers with "meaningful backward-looking relief."
(McKesson at pp. 32, 40.)
—See also Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434, 442 (1939) (the State of
Washington's unapportioned receipts tax was unconstitutional and the taxpayer was
"exempted from past present and future payments of this tax);
—Hunt-Wesson, Inc. v. Franchise Tax Bd., 528 U.S. 458 (2000) (the taxpayer was entitled
to a full refund of taxes resulting from an unapportioned limitation on an interest expense
deduction, even though a portion of those taxes could have been constitutionally collected
if the denial of the deduction had been limited by reasonably apportioning the expense to
the income that it generated).
4 mwe.com
UNAPPORTIONED AND IMPROPERLY APPORTIONED TAXES ARE VOID,
AND THE REMEDY IS A REFUND OF ALL TAXES PAID - CONTINUED
A well-established line of California cases is consistent with these principles.
—See e.g., Ferran v. City of Palo Alto, 50 Cal. App. 2d 374 (1942), the court held that Palo
Alto's unapportioned tax on intercity dry cleaners was unconstitutional, and therefore the
court enjoined the city from "enforcing or threatening to enforce" this tax against such dry
cleaners;
—City of Modesto v. National Med., Inc., 28 Cal App. 4th 518 (2005) (unapportioned city
license tax not enforceable against the taxpayer);
General Motors Corporation v. City and County of San Francisco, 69 Cal. App. 4th 448,
452 (1999) (General Motors was entitled to a full refund of a previously paid business
license tax that discriminated against out-of-city manufacturers).
•The City's gross receipts tax, prior to January 2019, was unconstitutional because it did not
contain an apportionment methodology to prevent taxing companies in Carlsbad for activities
occurring outside of Carlsbad.
•Therefore, that tax under controlling case law cannot be enforced against Callaway.
5 mwe.com
THE CITY'S NEW PROPOSED APPORTIONMENT
FORMULA CANNOT BE IMPOSED RETROACTIVELY
•The United States Supreme Court has held that retroactive tax
legislation must have a legitimate legislative purpose furthered by
rational means, and must comply with due process requirements,
including the legislature must act promptly and establish a modest
period of retroactivity. United States v. Carlton, 512 U.S. 26 (1994).
•The new proposed apportionment formula violates both of these
requirements.
6 mwe.com
THE CITY'S NEW PROPOSED APPORTIONMENT FORMULA
CANNOT BE IMPOSED RETROACTIVELY - CONTINUED
•Promptness
—In Carlton, Congress passed an amendment to legislation 11 months after the IRS
brought to Congress' attention a problem with the legislation. Under these circumstances,
the Supreme Court found that "Congress had acted promptly."
—Here, the City's recent actions could hardly be considered prompt. The City was informed
that its gross receipts tax was unconstitutional because it did not provide for a fair
apportionment as early as 2009.
—This approximate decade delay to implement apportionment guidelines greatly exceeds
the 11 month period allowed in Carlton and does not meet the Supreme Court's
requirement that a legislature act promptly.
7 mwe.com
THE CITY'S NEW PROPOSED APPORTIONMENT FORMULA
CANNOT BE IMPOSED RETROACTIVELY - CONTINUED
•Modest Period of Retroactivity
—Although closely related, an even more significant factor is whether the period of
retroactivity runs afoul of due process requirements.
—In Carlton, Congress enacted its amendment and made the legislation retroactive for a 14
month period, which the Court found permissible, (Canton, supra, 512 U.S. at p. 32).
—Justice O'Connor's concurring opinion, noted, however:
In every case in which we have upheld a retroactive federal tax
statute against due process challenge ... the law applied
retroactively for only a relatively short period prior to enactment. A
period of retroactivity longer than the year preceding the
legislative session in which the law was enacted would raise,
in my view, serious constitutional questions.
(Canton, supra, 512 U.S. at pp. 38-39 (emphasis added).)
8 mwe.corn
THE CITY'S NEW PROPOSED APPORTIONMENT FORMULA
CANNOT BE IMPOSED RETROACTIVELY - CONTINUED
California case law is consistent with Justice O'Connor's views.
As recently observed by the court of appeals: "Generally, in California, courts have upheld
the retroactive application of tax laws only where such retroactivity was limited to the
current tax year." City of Modesto, supra at 529.
Here, retroactively applying the City's new apportionment guidelines would violate
Callaway's due process rights and deny it "clear and certain remedy," and is prohibited for
several reasons.
First, the City has been aware of its lack of an apportionment formula for over a decade, and thus has failed
the promptness requirement.
Second, the City also fails the limited retroactivity requirement. Here, the City is attempting to collect back
taxes for the period of over four years, far exceeding the period permitted by Carlton and long-standing
California law.
Third, Callaway and the City had previously agreed upon a "point of sale" methodology as early as 2000,
and recently confirmed upon audit in 2017.
Fourth, under Civil Procedure Code Section 338, the City is barred from seeking additional taxes prior to
2017-18 because the statute of limitations for so doing has expired.
9 mwe.com
CARLSBAD'S NEW APPORTIONMENT SCHEME IS BASED UPON THE
OUTDATED 3-FACTOR UDITPA (UNIFORM DIVISION OF INCOME FOR TAX
PURPOSES ACT) CREATED IN 1957.
•This outdated scheme is complicated, with many unanswered issues.
—City of San Bernardino Hotel v. City of San Bernardino, 59 Cal. App. 4th 237 (1997)
(Ordinance violated due process requirements because "hotel," "occupancy," "transient"
inadequately defined).
No state currently follows that original formula.
—Only a handful of states even consider all of the three unweighted factors in that formula.
•California has not followed this formula for decades, and completely abandoned two of the
three factors in that old UDITPA formula almost ten years ago, well before the years at issue.
•California, reflecting a growing trend among the states, has adopted a single sales factor
formula.
—California policy is to encourage businesses to locate in California and create jobs in
California.
10 mwe.com
CARLSBAD'S NEW APPORTIONMENT SCHEME IS BASED UPON THE
OUTDATED 3-FACTOR UDITPA (UNIFORM DIVISION OF INCOME FOR TAX
PURPOSES ACT) CREATED IN 1957. - CONTINUED.
Carlsbad's new apportionment scheme discourages businesses from
locating in Carlsbad, and punishes those businesses already located in
the City.
—All other things being equal, a business located, and providing jobs, in Carlsbad, will pay
significantly more in tax than the same business located out of Carlsbad, but selling into
Carlsbad.
As a consequence, this extra burden upon Carlsbad companies makes it more difficult to
compete against non-Carlsbad companies.
—This new scheme results in more expense and administrative difficulties in computing this
tax just for Carlsbad.
—This new scheme also will require more time and resources for the City to audit.
11 mwe.com
SOLUTIONS
Continue to use the previously agreed upon "point of sale" reporting apportionment
methodology which is contrary to the new apportionment scheme. The "point of sale"
methodology included sales from Carlsbad, and sales into Carlsbad, for the measure of tax.
— Advantages
This methodology has been followed by Carlsbad for over a decade and is well understood by
both parties.
Easy to administer.
Use the single sales factor methodology used by California and growing number of states.
— Advantages
Already compiled by Callaway, so less burdensome to prepare.
Audited by California, so Carlsbad can easily administer without expending scarce city
resources on audit and compliance.
Evens playing field against competitors.
Removes incentive for Carlsbad businesses to relocate.
12 mwe.com
THANK YOU.
Mia De Marzo
From:
Sent:
To:
Cc:
Subject:
Attachments:
Cindie McMahon
Tuesday, May 4, 2021 12:32 PM
Faviola Medina; Mia De Marzo
Sheila Cobian
Item 6 - Statement from Taylor Made
2021-05-04 - Taylormade Golf Company
All Receive - Agenda Item #
For the Information of the:
•CITY COUNCIL
DategiOtill:ACA )0 CC >0
CM \j() ACM )0 DCM (3) r
- Hearing Statennent.PDr
Favi,
Attached is a statement just received from Taylor Made for distribution to the City Council and posting on the city's website. It
relates to Item 6 on today's City Council agenda.
Cindie
(City of
Carlsbad
Cindie McMahon
Assistant City Attorney
City Attorney's Office
City of Carlsbad
1200 Carlsbad Village Drive
Carlsbad, CA 92008
www.carlsbadca.gov
760-434-28911 760-434-8367 fax 1 cindie.mcmahon@carlsbadca.gov
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1
Charles J. Moll 111 (SBN: 98872)
cmoll@mwe.com
Elle Kaiser (SBN: 315345)
ekaiser@mwe.com
MCDERMOTT WILL & EMERY LLP
415 Mission Street, Suite 5600
San Francisco, CA 94105-2616
Telephone: +1 628 218 3800
Facsimile: +1 628 877 0107
Attorneys for Taxpayer
TAYLORMADE GOLF COMPANY
CARLSBAD CITY COUNCIL HEARING
TAYLORMADE GOLF COMPANY
INTRODUCTION
The primary issue in this dispute is the propriety of the new formula issued by the City
Manager to apportion gross receipts for Carlsbad's bUsiness license tax. It is undisputed that a city
can impose a tax upon the gross receipts of a business that are earned within the city. Where a
business, like Taylormade here, conducts business both within and outside Carlsbad, the City
cannot tax all of the gross receipts of the business, and must apply a method to fairly determine the
taxable gross receipts in the City, a process called apportionment.
The City of Carlsbad, like many cities, imposes a business license tax on specified
businesses operating in the City. (Carlsbad Municipal Code § 5.04.020(A).) However, the
Ordinance itself does not contain an apportionment formula. Taylormade informed the City in
writing of this infirmity in 2009—over a decade ago—and offered several solutions for bringing
Carlsbad's ordinance into conformance with constitutional requirements. After many
communications with City officials, including at least one meeting with the then Finance Director,
Collette Wengenroth, and others, Taylormade proposed that the City adopt the apportionment
methodology used by the city of Los Angeles. Eventually Ms. VVengenroth informed Taylormade
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HEARING STATEMENT
MAY 4, 2021
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that there was no authority in the Ordinance for that. Consequently, absent specific guidance,
Taylormade has utilized a modified "point of sale" methodology to determine its Carlsbad gross
receipts. This methodology was well understood, and easy to administer both by the City and
Taylormade.
On January 16, 2019, the City Manager issued Administrative Order No. 81 stating that the
Carlsbad business license tax would incorporate, for the first time, a new "three factor" formula
apportionment scheme. The Order specified that an anachronistic formula used in the Uniform
Division of Income for Tax Purposes Act ("UDITPA") will be used as guidance by, but will not be
binding upon, the City. This "Act" was not a governmental legislative enactment, but was issued in
1957 by certain organizations and individuals. Many states, but not all, adopted some of the "Act's"
provisions, but the interpretations adopted varied widely between the states. Thus, there is no one
"UDITPA formula". Since 1957, most states have modified the original version in many ways,
and/or have abandoned it entirely.'
The Order did not further explain how the many issues and different interpretations in the
implementation of this proposed formula would be resolved. Moreover, the License Collector
improperly applied this new taxing scheme retroactively back to 2015. The new tax methodology
was neither approved by this City Council, nor was it submitted to the electorate for approval.2
The original three factor formula referred to in the Order was a mathematical equation that
consists of three "factors"—the sales factor, property factor, and payroll factor. Each factor is a
fraction: the numerator of the fraction is the in-state amount of that factor, and the denominator is
the total amount of that factor. So, for example, the payroll factor would be a fraction consisting of
the in-state payroll amount in the numerator, and the companies' total payroll in the denominator.
The result would be a percentage of the payroll that was in the state. The same was done for the
sales factor and the property factor. These three resulting percentages were then added together and
The majority of states, including California, that originally followed a version of UD1TPA, have
now rejected it in favor of a different methodology — the single sales factor methodology.
2 To the extent that this new taxing scheme imposes, extends, or increases any tax, as it certainly
does for Taylormade and other businesses located in Carlsbad, it is not valid unless and until it is
submitted to the electorate and approved by a majority vote. Cal. Const. Art. XIIIC, section 2(b).
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divided by three, with the resulting average percentage multiplied by the company's net income to
determine the amount of that income attributable to the particular state.
On December 13, 2019, the License Collector issued an Initial Determination that, pursuant
to this new method of calculating the business license tax, Taylormade owed the City additional
business license taxes, and penalties thereon, for the 2015, 2016, 2017, 2018 and 2019 tax years.
The Initial Determination also stated that further penalties would begin to accrue on January 1,
2020. Taylormade challenged this Initial Determination and filed a timely protest. The protest and
hearing presentation are attached hereto and incorporated as if set out in full herein.
Following a hearing on the Protest on February 27, 2020, the License Collector, on July 20,
2020, issued her decision denying taxpayers protest and generally upholding her Initial
Determination. However, the License Collector reduced the retroactive application of the tax to
start in 2017, rather than 2015.
I. DISCUSSION
A. To Satisfy Constitutional Requirements, A City's Business License Tax Must
provide for a Fair Apportionment, Without Which it is Unenforceable.
A state or local tax scheme is valid only if it "is applied to an activity with a substantial
nexus with the taxing State, is fairly apportioned, does not discriminate against interstate
commerce, and is fairly related to the services provided by the State." Complete Auto Transit,
Inc. v. Brady, 430 U.S. 274 at p. 279 (1977). Under the Commerce Clause of the United States
Constitution, a state may only tax income earned within its borders. Hans Rees' Sons, Inc. v. North
Carolina ex rel. Maxwell, 283 U.S. 123 (1931). For a company doing business in more than one
state, the company's income must be apportioned between those states to reflect the amount of
income earned in and taxable by each state. Unapportioned taxes are invalid because their harm
arises from the taxing jurisdiction's overreaching. Thus, a fair apportionment methodology is the
solution to the prohibition against taxation of extra-territorial income.
This requirement of a fair apportionment also applies to cities in California. Just as states
cannot tax income earned outside of the state, it is well established that cities and towns in
California cannot tax activities outside of their borders. See, e.g., Volkswagen Pacific Inc. v. City of
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Los Angeles 7 Ca1.3d 48, 58 (1972) ("the requirements of due process and equal protection compel
an apportionment of receipts attributable to the business carried on within and without the city.");
City of Los Angeles v. Shell Oil Co. 4 Ca1.3d 108, 124 (1971) (the City's unapportioned business
license tax was "discriminatory and void."); Brabant v. City of South Gate, 66 Cal.App.3d 764
(1977) (a license tax imposed on real estate brokers and salespersons that was not apportioned was
"void as applied to each [taxpayer]" because it was "of extraterritorial effect.").
Thus, in City of Modesto v. National Med., Inc., 128 Cal.App.4th 518 (2005), the Court
observed:
Despite the absence of a specific "commerce clause" in the California
Constitution, the requirements of equal protection and due process proscribe local
taxes that operate to unfairly discriminate against intercity businesses by
subjecting them to a tax that is not fairly apportioned to reflect the percentage of
the business actually taking place within the taxing jurisdiction.
An invalid, unapportioned tax is not enforceable. In McKesson Corporation v. Division of
Alcoholic Beverages and Tobacco, 496 U.S. 18, 39 (1990), the United States Supreme Court
explained that where a tax is invalidly imposed, the only way for the state to "undo" the unlawful
deprivation is by refunding the entire tax previously paid. Specifically, the Court stated:
"Had the ... courts declared the [tax] invalid because ... it was beyond the [taxing
jurisdiction's power to impose, as was like the unapportioned tax in O'Conner....
the [taxing jurisdiction] would have had no choice but to "undo" the unlawful
deprivation by refunding the tax previously paid under duress, because allowing
the State to "collect these unlawful taxes by coercive means and not incur any
obligation to pay them back ... would be in contravention of the Fourteenth
Amendment."
See also Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434 (1939).
A well-established line of California cases is consistent with the principle that an
unapportioned tax is unenforceable. In City of Modesto, supra, the City similarly tried to revise its
unapportioned and therefor invalid tax and apply it retroactively. The courts in that case held that
the City could not do so. See City of Modesto v. National Med., Inc., 28 Cal.App.4th 518 (2005)
(unapportioned city license tax not enforceable against the taxpayer). See also Ferran v. City of
Palo Alto, 50 Cal.App.2d 374 (1942) (Palo Alto's unapportioned tax on intercity dry cleaners was
unconstitutional, and therefore the court enjoined the city from "enforcing or threatening to
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enforce" this tax against such dry cleaners); General Motors Corporation v. City and County of San
Francisco, 69 Cal.App.4th 448, 452 (1999) (General Motors was entitled to a full refund of a
previously paid business license tax that discriminated against out-of-city manufacturers); Security
Truck Line v. City of Monterey, 117 Cal.App.2d 441 (1953) (City Ordinance which imposed an
unapportioned license tax that had "no relation to taxable event occurring in city or quantum of
business carried on there" was void and thus the Court upheld an injunction prohibiting the city
from imposing the tax).
Although in her opinion the License Collector quibbled over whether McKesson requires a
complete, or only partial refund, the matter before this Council does not involve a refund, but rather
whether the License Collector can impose and enforce an invalid tax. The cases, as discussed
above, are quite clear that she cannot.3
B. The Order Proposing a Three Factor Apportionment Formula is Impermissibly
Vague, Preventing Taylormade from Complying.
The original UDITPA formula itself may not be unconstitutional, rather the problem here is
that the Order's adoption of a three factor apportionment formula has left many unanswered
questions. As discussed above, there is no single three factor formula, but many historical iterations
among the various states. This is a complex formula that has spawned substantial litigation over the
decades, often with different and even conflicting results between the different states.
It is axiomatic, of course, that "the mere fact that a new statute [ordinance] requires
interpretation does not make it unconstitutionally vague." Garcia v. Four Points Sheraton LAX, 188
Cal.App.4th 364, 387 (2010). However a statute or ordinance
[M]ay be declared unconstitutionally vague under the due process clauses of the United
States Constitution and the California Constitution... "if it fails to provide people of
ordinary intelligence a reasonable opportunity to understand what conduct it prohibits irod
if it authorizes or even encourages arbitrary and discriminatory enforcement." A tax law in
particular 'must prescribe a standard sufficient dfinite to be understandable to the
average person who desires to comply with it."
3 In any event, the License Collector confused a discriminatory tax, where the harm could by
corrected by simply reducing the injured parties tax to be equal to the tax upon the favored class,
with an invalid tax, where a full refund is required. City of Modesto supra, at 525.
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Patel v. City of Gilroy; 97 Cal.App.4th 483, 486 (2002) (emphasis added).
Similarly, "a statute which either forbids or requires the doing of an act in terms so vague
that men of common intelligence must necessarily guess at its meaning and differ as to its
application, violates the first essential of due process of law." City of San Bernardino Hotel/Motel
Association v. City of San Bernardino, 59 Cal.App.4th 237, 250 (1997) (quoting People v.
Barksdale, 8 Ca1.3d 320, 327 (1972)). See also Britt v. City of Pomona, 223 Cal.App.3d. 265
(1990) (subject tax was too vague because it "established a conclusive presumption with respect to
the duty to pay the tax, without defining an important term used in the language of the ordinance
which established the presumption.") The United States Supreme Court has made similar
observations in discussing the void for vagueness doctrine, explaining that the requirement of fair
notice lies at the heart of due process - "regulated parties should know what is required of them so
they may act accordingly." Fox Television Stations, 132 S. Ct. at 2317. Thus, in Fox Television
Studios, the Court held that the FCC's indecency regulations were unconstitutionally vague because
they failed to give "sufficient notice of what [was] proscribed," in violation of the "fair notice"
requirement of "the Due Process Clause." 132 S. Ct. at 2317, 2320. In short, "[All persons] are
entitled to be informed as to what the State commands or forbids." Papachristou, 405 U.S. at 162
(quoting Lanzetta, 306 U.S. at 452) (alterations in Papachristou).)
Here, the implementations of the Order is rife with uncertainties, and has left Taylormade
guessing as to how the new methodology would apply. As a result Taylormade is required to guess
at what is included in the term "business" (e.g., include entire unitary business or worldwide
business, water's edge, affiliates included or not included, etc.). Similarly, the Order failed to
include guidance as to which of the differing state's interpretations should apply, whether and how
to treat intercompany transactions, and what should be included in the various factors. For example,
the UDITPA formula applied only to net income, not gross receipts, and the different types of
income—business income, non-business income, income from intangibles, income from services,
income from property—were treated differently. To compound the problem, states were
inconsistent in how to treat those different types of income.
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Similarly, the Order leaves open how to determine the payroll factor. For example, what is
included for independent contractors, deferred compensation, fringe benefits, loaned employees,
etc. And what methodology should be used to determine how to source that payroll — should the
taxpayer use cost of performance, where the benefit is received, some other method? Finally, many
unanswered questions involve the property factor, including how to determine the amount to be
included (some version of value, or accounting cost, or some other amount?), and how to classify
and source different types of property (real, personal, intangibles, mobile property.)
Consequently, because of these unanswered questions, Taylormade has been unable to
calculate what the correct tax could be under a three factor formula. Taylormade raised this issue at
the hearing below, but the License Collector did not offer any guidance to clarify these issues.
Taylormade provided some information in an attempt to comply with the City's request for
retroactive information. However, Taylormade was unable to obtain complete information for those
back years, and coupled with the uncertainty about the various unanswered issues with a three
factor formula, Taylormade believes that the License Collector's determined tax amounts were
overstated by two to three times.'
The Order simply leaves unanswered too many questions. To make matters worse, the
Order merely vaguely states that it will look for non-binding guidance to UD1TPA (without
specifying whose version of UDTTPA), and otherwise states it will be applied "as appropriate." In
essence therefore, the Order leaves it up to the City to pick and choose which elements of the
UD1TPA formula it deems to follow in various circumstances. Clearly this does not provide
sufficient notice for it does not explain to men of common intelligence as to how to apply it, but
provides for arbitrary enforcement and leaves taxpayers to guess at their peril. This is simply
insufficient clarity, and is invalid. Patel v City of Gilroy, supra; City of San Bernardino, supra, City
of Modesto, supra.
4 For example, Taylonnade was not able to obtain Carlsbad specific payroll information, but only
California-wide payroll. The License Collector's reliance upon California payroll as a substitute for
Carlsbad only payroll overstates the apportionment percentage attributable to Carlsbad. Similar
issues exist throughout the License Collector's calculations. Unfortunately, due to the difficulties
described above, Taylormade has been unable to develop definitive data for those back years.
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C. The Order Improperly Applied the New Apportionment Formula
Retroactively.
The License Collector reduced the retroactive application of the Order from starting in 2015
to starting in 2017. But applying this new apportionment formula to Taylormade retroactively is
still unreasonable and impermissible. This is particularly true since Taylormade first brought the
issue to the City over a decade ago, but had received no guidance in the interim. This retroactive
application of the new formula prejudices Taylormade by requiring it to seek information not
previously required to be kept. For example, to properly determine the payroll factor, Taylormade
must account for where each employee, contractor, etc. performed their duties. Because this
information was not required for Carlsbad previously, Taylormade is unable to develop that
specific information now, and could only obtain California-wide payroll information.
The United States Supreme Court has held that retroactive tax legislation must comply with
due process requirements, including that the legislature must act promptly and establish a modest
period of retroactivity. United States v. Carlton, 512 U.S. 26 (1994). If those two requirements are
met, it may be that the United States Constitution is not violated by a one year retroactive
application. In Carlton, the Internal Revenue Service ("IRS") in January 1987 recognized a
loophole in legislation enacted just over two months earlier; Congress proposed an amendment in
February 1987 which was passed in December 1987. The Court found this period permissible.
Carlton, supra, 512 U.S. at p. 32.
But those two requirements are not satisfied here. First, the City's recent actions to establish
a tax apportionment methodology could hardly be considered prompt. The City was informed that
its gross receipts tax was unconstitutional because it did not provide for a fair apportionment as
early as 2009. This approximate decade delay to implement apportionment guidelines greatly
exceeds the 11 month period allowed in Carlton and does not meet the Supreme Court's
requirement of prompt action.
Second, the License Collector's decision also does not comply with the due process
requirement of no more than limited retroactivity. As Justice O'Connor's concurring opinion noted:
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In every case in which we have upheld a retroactive federal tax statute against due
process challenge ... the law applied retroactively for only a relatively short period
prior to enactment. A period of retroactivity longer than the year preceding the
legislative session in which the law was enacted would raise, in my view, serious
constitutional questions.
Carlton, supra, 512 U.S. at pp. 38-39 (emphasis added). Although the Order was issued in 2019, it
has been made retroactive to 2017.
Moreover, as is often the case, California's policy against retroactivity is more stringent
than what is allowed by the U.S. Constitution. As recently observed by the California court of
appeals: "Generally, in California, courts have upheld the retroactive application of tax laws only
where such retroactivity was limited to the current tax year." City of Modesto, supra at 529.
Similarly, in Gutknecht v. City of Sausalito, 43 Cal.App.3d 269, 282 (1974), the Court upheld an
increase in the business license tax upon certain restaurants, but held it could not be applied
retroactively. The Court observed "Our courts have upheld retroactive application of tax laws only
where such retroactivity was limited to the current tax years." id. at 290 (citations omitted). See
also Holmes v. McColgan, 17 Ca1.2d 426, 430 (1941) (permitting personal income tax enacted on
June 13, 1935 to be retroactively applied back through January 1, 1935); Fullerton Oil Co. v.
Johnson, 2 Ca1.2d 162, 176 (1934) (permitting February 27, 1931 amendment to be applied •
retroactively to January 1, 1931); W & S. Life Ins. Co. v. State Bd. of Equalization, 4 Cal.App.3d
21, 34 (1970) (denying retroactive application of a retaliatory tax amended in that same year);
Sunset Nut Shelling Co. v. Johnson, 49 Cal.App.2d 354, 356-359 (1942) (permitting tax rate
increase effective June 25, 1935 to be applied to all taxes paid in calendar year 1935); Am. States
Water Serv. Co. v. Johnson, 31 Cal.App.2d 606, 613-618 (1939) (same).)
Finally, even assuming, arguendo, that the new taxing scheme could be applied
retroactively, this Council should not do so here. "Our Supreme Court has held that there is a
"strong presumption" against applying a statute retroactively.... Generally, statutes operate
prospectively only... `[T]he presumption against retroactive legislation is deeply rooted in our
jurisprudence, and embodies a legal doctrine centuries older than our Republic. Elementary
considerations of fairness dictate that individuals should have an opportunity to know what the law
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is and to confirm their conduct accordingly .... For that reason, the "principle that the legal effect
of conduct should ordinarily be assessed under the law that existed when the conduct took place has
timeless and universal appeal."... "The presumption against statutory retroactively has consistently
been explained by reference to the unfairness of imposing new burdens on persons after the fact."
Franchise Tax Bd. v. Superior Court, 221Cal.App. 4th 647 (2013) (citations omitted) (rejecting
retroactive tax penalties against alleged abusive tax shelter promoters).
Our nation's long aversion to retroactivity reflects "elementary considerations of fairness"
and notice at the heart of our legal tradition. Landgraf v. USI Film Prods., 511 U.S. 244, 265
(1994). Indeed, as people cannot conform their actions to the law without knowing the law, the
right to be informed of the law is one of the suppositions entailed by the very concept of
under a rule of law."5 Papachristou v. City of Jacksonville, 405 U.S. 156, 162 (1972) (quoting
Lanzetta v. New Jersey, 306 U.S. 451, 453 (1939)).
It is for good reason that retroactive laws are antithetical to our legal tradition. Renowned
legal scholars and jurists have explained that laws that purport to change the legal effect of past
actions are fundamentally unjust. As Lon. Fuller famously put it in The Morality of Law: "Law has
to do with the governance of human conduct by rules. To speak of governing or directing conduct
today by rules that will be enacted tomorrow is to talk in blank prose." Fuller, The Morality of Law
53 .6
Similarly, Justice Story warned that retroactive laws are "generally unjust; and, as has been
forcibly said, neither accord with sound legislation nor the fundamental principles of the social
compact." 2 J. Story, Commentaries on the Constitution § 1398 (5th ed. 1891).7 At bottom,
retroactive legislation is counter to the "fundamental principle in our legal system that laws which
5 As the Supreme Court has noted. it "is therefore not surprising that the antiretroactivity
principle fmds expression in several provisions of our Constitution." Landgraf 511 U.S. at
266 (citing the Ex Post Facto Clause , the Contracts Clause, the Fifth Amendment's Takings
Clause, the prohibitions of Bills of Attainder, and the Due Process Clause).
6 The License Collector points out that Taylormade was warned in 2018 that the City could be
adopting a three factor formula in the future. But this warning about a potential vague methodology
that has not been enacted yet is no warning at all.
https://books.google.com/books?id=cgY9AAAAIAAJ&prin •
tsec•=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&false (last visited
Oct. 10, 2016).
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regulate persons or entities must give fair notice of conduct that is forbidden or required." Fox
Television Stations, Inc.,132 S. Ct. at 2317 (emphasis added). As the Court put it in Landgraf,
"Elementary considerations of fairness dictate that individuals should have an opportunity to know
what the law is and to conform their conduct accordingly; settled expectations should not be lightly
disrupted." 511 U.S. at 265.
Measured against the constitutional requirement of "fair notice," retroactive application of
this new taxing scheme is a measure worse than even the laws that have been invalidated as void
for vagueness. An unconstitutionally vague law fails to provide fair notice because it lacks
"sufficient definiteness that ordinary people can understand what conduct is prohibited" or
required. Skilling v. United States, 561 U.S. 358, 404 (2010). But a retroactive tax like that imposed
below — where the City is explicitly changing the effect of actions already taken-does far more than
fail to provide "sufficient definiteness." Those who rely on the prior taxing scheme act not just
without a "definite" understanding of the law in effect, but under an affirmative misrepresentation
of its meaning. Such bait-and-switch taxation is unfair, unconstitutional, and should be rejected by
this Council.
D. The Penalties Imposed Upon Taylormade Should be Abated.
In addition to seeking additional taxes under the Order's new methodology, the License
Collector also has imposed substantial penalties upon Taylormade. Even if the City declines to
adopt Taylormade's "point of sale" methodology, Taylormade is entitled to an abatement of
penalties as its methodology was previously accepted by the City as part of prior audits.
Specifically, the Carlsbad business license ordinance imposes a penalty charge on persons
who fail to timely pay a license renewal tax. (See Carlsbad Municipal Code § 5.04.020(B) ("For all
previously licenses businesses the license tax shall be due and payable annually in advance on the
first day of the month in which the business was originally established. In the event any person fails
to pay a license renewal tax, the tax shall be increased by a penalty of 50% of the lkense tax 90
days after it is due.").)
Here, for all the years at issue, Taylormade timely paid its business license tax prior to its
October due date. Taylormade calculated its tax using a point of sale apportionment method.
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Indeed, the License Collector's Final Decision acknowledged that Taylormade had paid the tax so
calculated for all of the years at issue. See Final Decision at p. 4. Nevertheless, despite
Taylonnade's timely tax payments the License Collector imposed a 50% failure to timely pay
penalty for each of the years at issue. Final Decision, Attachment B.
The License Collector's imposition of retroactive penalties is improper and should be
reversed. First, it is contrary to the express language of the business license ordinance. The
Ordinance does not impose a penalty for later determined underpayment; rather, the business
license tax ordinance provides that a penalty is imposed only when a person fails to pay the license
tax, which did not occur here as acknowledged by the License Collector.
Moreover, as much as the retroactive application of the new tax is improper, it is even more
so with the penalty. It would be unfair to impose the penalty here, when the alleged underpayment
resulted solely from the retroactive application of the new vague tax apportionment scheme that
changed the amount of tax sought by the City. The fact that the City had declined to offer earlier
guidance despite having this issue brought to the City's attention, makes the retroactive imposition
of penalties in these circumstances, arbitrary, a denial of due process, and a prejudicial abuse of
discretion that is illegal and invalid. See e.g., discussion, supra (and cases cited therein) at pages
five to ten. See also Franchise Tax Bd. v. Supreme Court, supra.
E. This Council Should Reject the Current Proposed Three Factor Formula as
Unwise Policy.
The goal of establishing a property apportionment methodology for the City of Carlsbad is
laudable, but the process and execution was not. Because of the overarching impacts that an
apportionment method causes, and the resulting important policy considerations raised, such a
method should not be unilaterally imposed by fiat by the City Manager, but should be developed in
partnership with the larger community, including the business community and other stakeholders,
and then thoughtfully considered by this Council, and even ratified by the electorate. Unfortunately,
none of that has occurred, and the proposed three factor apportionment formula is complicated,
outdated, overly burdensome, and promotes poor policy.
- 12 -
HEARING STATEMENT
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First, the three factor formula itself, initially proposed over sixty years ago, is outdated and
out of favor. Over the past half century, this formula proved to be complex, and generated a
substantial amount of controversy and continuous litigation involving its interpretation. As the
various states wrestled with these challenges, and various courts ruled on these challenges, a
patchwork of decisions and different interpretations arose so that the original formula was applied
differently in different states.
California and most other states have moved away from this formula, recognizing the
ongoing decades of litigation and difficulties in administration.8 These states have further
recognized that this three factor formula had an unwanted, deleterious impact upon the labor force
in the state and other investment in the state. Thus, California and other states have found that the
three factor formula was an inappropriate penalty upon local businesses and labor, and a
disincentive for companies to invest in jobs and property in the state. The more payroll businesses
had in California, and the more property they had in California, the higher the California tax, all
other things being equal. At the same time, using the payroll and property factors in the formula
had the perverse result of lowering the taxes paid by out of state companies who did not invest in
the state or hire California labor.
For example, California has expressly observed that by including the payroll factor and the
property factor in the formula, California was discouraging companies from hiring California
residents, and from locating headquarters, factories, laboratories, and other places of business in
California. (Prop. 39 § 6, approved Nov. 6, 2012, eff. Nov. 7, 2012; operative Dec. 1, 2013.)
"Current tax law both discourages multistate companies from locating jobs in California, and puts
job-creating California companies at a competitive disadvantage. To address this problem, most
other states have changed their laws to tax multistate companies on the percent of sales in that state,
a tax approach referred to as the "single sales factor." (Prop. 39 § 1(2), (3), approved Nov. 6, 2012,
eff. Nov. 7, 2012; operative Dec. 1, 2013.)
8 Currently, only the following seven states continue to utilize that original standard three factor
formula: Alaska, Hawaii, Kansas, Montana, New Mexico, North Dakota, and Oklahoma.
- 13 -
HEARING STATEMENT
Consequently, again led by California, states have been adopting a single sales factor
apportionment methodology.' California and the other states recognize that this single sales factor
formula does not provide a disincentive for companies to locate in the state, hire in-state residents,
and establish business operations here. Accordingly, California and other states recognized that the
single sales factor formula would not penalize companies who chose to locate here and create jobs,
and any reduction in taxes for in-state companies was offset by the increased taxes paid by out-of-
state companies doing business in California. By adopting the single sales factor approach, the
independent Legislative Analyst's Office estimated that state revenues would increase by as much
as $1.1 billion per year and create a net gain of 40,000 California jobs.. (Prop. 39 § 1(4), approved
Nov. 6, 2012, eff. Nov. 7, 2012; operative Dec. 1, 2013.)
Carlsbad has campaigned hard to present itself as a desirable location for businesses and
residents alike. And Taylormade has readily volunteered to participate with the City in these
promotional campaigns. This new proposed formula contradicts those campaigns and acts to undo
their results, and certainly sends the wrong message to Carlsbad businesses, as well as to businesses
considering re-locating to Carlsbad.
The decision to apply a three factor apportionment formula will have real-life implications
for Carlsbad's residents and community fabric. As recognized by California and the growing body
of states who have turned towards a single sales factor methodology, this proposed new
apportionment scheme will discourage businesses from locating in Carlsbad, and hiring Carlsbad
residents. It also punishes those businesses already here, encouraging them to leave.
Because, under this new methodology, a business located, and providing jobs, in Carlsbad
will pay significantly more in tax than the same business selling into Carlsbad but who is located
out of Carlsbad, this extra burden will make it more difficult for Carlsbad companies to compete
against non-Carlsbad companies. In addition, because only a handful of states continue to use a
version of the original formula, this new scheme results in more expense for the taxpayer in
computing the tax just for Carlsbad. And, just as happened at the state level, because the Order has
9 Effective for tax year 2021, 25 states utilize a sinde sales factor apportionment methodoloay. The
"point of sell" methodology used by Taylormade is a version of a single sales factor methodology.
- 14 -
HEARING STATEMENT
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By:
CHARLES J. OL III
ELLE KAISER
Attorneys for Taxpayer
Taylonnade Golf Company
left many unanswered questions about the proposed complex methodology, years of litigation is
likely to occur to resolve these myriad issues.
The License Collector acknowledged that the policy considerations are for this Council to
decide. A single sales factor methodology has a number of advantages from a policy perspective.
The single sales factor methodology removes the disincentive to hire Carlsbad labor and does not
penalize other investments in Carlsbad. It also evens the playing field against outside competitors
and removes the incentive for Carlsbad businesses to relocate. The single sales factor methodology
eases the administrative burden on both taxpayers and the City. Because California utilizes a single
sales factor methodology, most of the information required to calculate the tax is already compiled
for state tax purposes. Similarly, Carlsbad can more easily administer the tax by leveraging off the
State, without expending scarce city resources on difficult audits and compliance.
Finally, contrary to the License Collector's assertion in her decision, use of the single sales
factor methodology would not be unconstitutional, as it was upheld by the United States Supreme
Court in Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978).
IL CONCLUSION
Taylonnade hereby respectfully requests that this Council (1) reverse and vacate
Administrative Order No. 81, (2) abate all additional tax claimed due and remove all penalties,
(3) reject the use of the three factor formula, and (4) adopt the single sales factor formula, or direct
the City Manager to develop, with Carlsbad businesses and other stakeholders, an appropriate
apportionment methodology to be applied on a prospective basis.
Respectfully submitted,
Dated: May 4, 2021 MCDERMOTT WILL & EMERY LLP
- 15 -
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TAYLORMADE GOLF COMPANY
City of Carlsbad Business License Tax Audit
Hearing on Initial Determination
February 27, 2020
Charles J. Moll Ill - (628) 218-3842 - cmoll@mwe.com
TO SATISFY CONSTITUTIONAL REQUIREMENTS A CITY'S BUSINESS
LICENSE TAX MUST PROVIDE FOR A FAIR APPORTIONMENT
•A state or local tax scheme is valid only if it "is applied to an activity with
a substantial nexus with the taxing State, is fairly apportioned, does not
discriminate against interstate commerce, and is fairly related to the
services provided by the State." (Complete Auto Transit, Inc. v. Brady,
430 U.S. 274 at p. 279 (1977).)
•Unapportioned, or improperly apportioned, taxes are invalid under the
second prong of Complete Auto because their harm arises from the
taxing jurisdiction's overreaching. Thus, a fair apportionment is the
solution to the prohibition against taxation of extra-territorial income.
•This requirement of a fair apportionment has long been held to apply to
cities in California. City of Los Angeles v. Shell Oil Co., 4 Cal. 3d 108,
124 (1971).
2 mwe.com
UNAPPORTIONED AND IMPROPERLY APPORTIONED TAXES ARE
VOID, AND THE REMEDY IS A REFUND OF ALL TAXES PAID
•In McKesson Corporation v. Division of Alcoholic Beverages and Tobacco,
496 U.S. 18 (1990), the United States Supreme Court stated:
Had the ... courts declared the [tax] invalid because ... it was
beyond the [taxing jurisdiction's power to impose, as
was like the unapportioned tax in O'Conner.... the (taxing
jurisdiction] would have had no choice but to "undo" the
unlawful deprivation by refunding the tax previously paid
under duress, because allowing the State to "collect these
unlawful taxes by coercive means and not incur any
obligation to pay them back ... would be in contravention of
the Fourteenth Amendment.
3 mwe.corri
UNAPPORTIONED AND IMPROPERLY APPORTIONED TAXES ARE VOID,
AND THE REMEDY IS A REFUND OF ALL TAXES PAID - CONTINUED
o This remedy, like all remedies for unconstitutional taxes, must be "clear and certain"
and provide harmed taxpayers with "meaningful backward-looking relief."
(McKesson at pp. 32, 40.)
— See also Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434, 442 (1939) (the State of
Washington's unapportioned receipts tax was unconstitutional and the taxpayer was
"exempted from past present and future payments of this tax);
— Hunt-Wesson, Inc. v. Franchise Tax Bd., 528 U.S. 458 (2000) (the taxpayer was entitled
to a full refund of taxes resulting from an unapportioned limitation on an interest expense
deduction, even though a portion of those taxes could have been constitutionally collected
if the denial of the deduction had been limited by reasonably apportioning the expense to
the income that it generated).
4 mwe.com
UNAPPORTIONED AND IMPROPERLY APPORTIONED TAXES ARE VOID,
AND THE REMEDY IS A REFUND OF ALL TAXES PAID - CONTINUED
-A well-established line of California cases is consistent with these principles.
—See e.g., Ferran v. City of Palo Afto, 50 Cal. App. 2d 374 (1942), the court held that Palo
Alto's unapportioned tax on intercity dry cleaners was unconstitutional, and therefore the
court enjoined the city from "enforcing or threatening to enforce" this tax against such dry
cleaners;
—City of Modesto v. National Med., Inc., 28 Cal App. 4th 518 (2005) (unapportioned city
license tax not enforceable against the taxpayer);
—General Motors Corporation v. City and County of San Francisco, 69 Cal. App. 4th 448,
452 (1999) (General Motors was entitled to a full refund of a previously paid business
license tax that discriminated against out-of-city manufacturers).
-The City's gross receipts tax, prior to January 2019, was unconstitutional because it did not
contain an apportionment methodology to prevent taxing companies in Carlsbad for activities
occurring outside of Carlsbad.
-Therefore, that tax under controlling case law cannot be enforced against Taylormade.
5 mwe.com
THE CITY'S NEW PROPOSED APPORTIONMENT
FORMULA CANNOT BE IMPOSED RETROACTIVELY
•The United States Supreme Court has held that retroactive tax
legislation must have a legitimate legislative purpose furthered by
rational means, and must comply with due process requirements,
including the legislature must act promptly and establish a modest
period of retroactivity. United States v. Carlton, 512 U.S. 26 (1994).
The new proposed apportionment formula violates both of these
requirements.
6 mwe.com
THE CITY'S NEW PROPOSED APPORTIONMENT FORMULA
CANNOT BE IMPOSED RETROACTIVELY - CONTINUED
•Promptness
—In Carlton, Congress passed an amendment to legislation 11 months after the IRS
brought to Congress' attention a problem with the legislation. Under these circumstances,
the Supreme Court found that "Congress had acted promptly."
—Here, the City's recent actions could hardly be considered prompt. The City was informed
that its gross receipts tax was unconstitutional because it did not provide for a fair
apportionment as early as 2009.
—This approximate decade delay to implement apportionment guidelines greatly exceeds
the 11 month period allowed in Carlton and does not meet the Supreme Court's
requirement that a legislature act promptly.
7 mvve.com
THE CITY'S NEW PROPOSED APPORTIONMENT FORMULA
CANNOT BE IMPOSED RETROACTIVELY - CONTINUED
•Modest Period of Retroactivity
—Although closely related, an even more significant factor is whether the period of
retroactivity runs afoul of due process requirements.
—In Carlton, Congress enacted its amendment and made the legislation retroactive for a 14
month period, which the Court found permissible, (Carlton, supra, 512 U.S. at p. 32).
—Justice O'Connor's concurring opinion, noted, however:
In every case in which we have upheld a retroactive federal tax
statute against due process challenge ... the law applied
retroactively for only a relatively short period prior to enactment. A
period of retroactivity longer than the year preceding the
legislative session in which the law was enacted would raise,
in my view, serious constitutional questions.
(Carlton, supra, 512 U.S. at pp. 38-39 (emphasis added).)
8 mwe.com
THE CITY'S NEW PROPOSED APPORTIONMENT FORMULA
CANNOT BE IMPOSED RETROACTIVELY - CONTINUED
California case law is consistent with Justice O'Connor's views.
As recently observed by the court of appeals: "Generally, in California, courts have upheld
the retroactive application of tax laws only where such retroactivity was limited to the
current tax year." City of Modesto, supra at 529.
— Here, retroactively applying the City's new apportionment guidelines would violate
Taylormade's due process rights and deny it "clear and certain remedy," and is prohibited
for several reasons.
First, the City has been aware of its lack of an apportionment formula for over a decade, and thus has failed
the promptness requirement.
Second, the City also fails the limited retroactivity requirement. Here, the City is attempting to collect back
taxes for the period of over four years, far exceeding the period permitted by Carlton and long-standing
California law.
Third, under Civil Procedure Code Section 338, the City is barred from seeking additional taxes prior to 2017-
18 because the statute of limitations for so doing has expired.
9 mwe.com
CARLSBAD'S NEW APPORTIONMENT SCHEME IS BASED UPON THE
OUTDATED 3-FACTOR UDITPA (UNIFORM DIVISION OF INCOME FOR TAX
PURPOSES ACT) CREATED IN 1957.
•This outdated scheme is complicated, with many unanswered issues.
—City of San Bernardino Hotel v. City of San Bernardino, 59 Cal. App. 4th 237 (1997)
(Ordinance violated due process requirements because "hotel," "occupancy," "transient"
inadequately defined).
•No state currently follows that original formula.
—Only a handful of states even consider all of the three unweighted factors in that formula.
•California has not followed this formula for decades, and completely abandoned two of the
three factors in that old UDITPA formula almost ten years ago, well before the years at issue.
•California, reflecting a growing trend among the states, has adopted a single sales factor
formula.
—California policy is to encourage businesses to locate in California and create jobs in
California.
10 mwe.com
CARLSBAD'S NEW APPORTIONMENT SCHEME IS BASED UPON THE
OUTDATED 3-FACTOR UDITPA (UNIFORM DIVISION OF INCOME FOR TAX
PURPOSES ACT) CREATED IN 1957. - CONTINUED.
•Carlsbad's new apportionment scheme discourages businesses from
locating in Carlsbad, and punishes those businesses already located in
the City.
—All other things being equal, a business located, and providing jobs, in Carlsbad, will pay
significantly more in tax than the same business located out of Carlsbad, but selling into
Carlsbad.
—As a consequence, this extra burden upon Carlsbad companies makes it more difficult to
compete against non-Carlsbad companies.
—This new scheme results in more expense and administrative difficulties in computing this
tax just for Carlsbad.
—This new scheme also will require more time and resources for the City to audit.
II mwe.com
SOLUTIONS
•Continue to use the previous "point of sale" reporting apportionment methodology which is
contrary to the new apportionment scheme. The "point of sale" methodology included all
internet sales, and sales into Carlsbad, for the measure of tax.
—Advantages
This methodology has been followed by Carlsbad for other companies for over a
decade and is well understood by both parties.
Easy to administer.
•Use the single sales factor methodology used by California and growing number of states.
—Advantages
r Already compiled by Taylormade, so less burdensome to prepare.
Audited by California, so Carlsbad can easily administer without expending scarce city
resources on audit and compliance.
Evens playing field against competitors.
Removes incentive for Carlsbad business to relocate.
12 mwe.corn
mwe.com
Charles J. Moll III
Attorney at Law
cmoll@mwe.com
+1 628 218 3842
September 16, 2020
BY FEDERAL EXPRESS
Carlsbad City Council
Through the Office of the City Clerk, City Manager
1200 Carlsbad Village Drive
Carlsbad, CA 92008
Re: Appeal of Final Decision of License Collector Following Hearing on Business License Tax
Liability of TaylorMade Golf Company, Inc. for 2015-16 Through 2019-20 Tax Years
Taxpayer Names: TaylorMade Golf Company
Years at Issue: 2017-18, 2018-19, and 2019-20
Dear City Council Members:
Pursuant to Administrative Order No. 81 and Carlsbad Municipal Code sections 5.04.090 and
1.20.310, TaylorMade Golf Company, Inc. ("Taxpayer" or "Taylormade") hereby appeals the portion of
the Final Decision of the License Collector ("Final Decision") dated July 20, 2020 that applies to the
years 2017-18, 2018-19, and 2019-20 (the "Years at Issue"). The following additional information is
provided in connection with this appeal.
A.NAME AND PRINCIPAL ADDRESS OF TAXPAYER
TaylorMade Golf Company, Inc.
5545 Fermi Ct.
Carlsbad, CA 92008-7324
B.TAXPAYER'S REPRESENTATIVES
Taxpayer will be represented in this Appeal by Charles J. Moll 111 and Elle Kaiser of
McDermott Will & Emery LLP.
C.PROCEDURAL BACKGROUND
This is an appeal from the License Collector's imposition of additional business license
taxes and penalties upon TaylorMade for the 2017-18 through 2019-20 tax years. On December 2,
2019, the License Collector issued an Initial Determination that, pursuant to Administrative Order
No. 81, TaylorMade is subject to the City's business license tax under Classification D of Carlsbad
Municipal Code section 5.08.010, and that the method of calculating the business license under Code
section 5.08.010 differed from the calculation method that TaylorMade had historically utilized. Among
other things, the Initial Determination then found that TaylorMade owed the City additional business
McDermott
Will & Emery 415 Mission St Suite 5600 San Francisco CA 94105-2533 Tel +1 628 218 3800 Fax +1 628 877 0107
US practice conducted through McDermott Will & Emery LIP.
Carlsbad City Council
September 16, 2020
Page 2
license taxes and penalties for the 2017-18, 2018-19, and 2019-20 tax years. The Initial Determination
also indicated that further penalties would begin to accrue on January 1, 2020.
TaylorMade timely requested a hearing on the Initial Determination, which was held on
February 27, 2020. On March 20, 2020, TaylorMade submitted additional information to supplement
the information and documents shared with the City during the hearing. Subsequently, TaylorMade
agreed to extend the deadline several times for the License Collector to issue her Final Decision.
On July 20, 2020, the License Collector issued her Final Decision. For the 2017-18,
2018-19, and 2019-20 tax years, the Final Decision proposes the imposition of $145,474 in business
license taxes and additional penalties of $72,737 for a total of $218,211. Taxpayer appeals the
foregoing Decision, plus any and all additional interest and penalties that might be proposed in
connection with the proposed deficiencies.
The City extended the time for Taylormade to file its appeal with the City Council to
September 18, 2020. See attached correspondence from Benjamin Fay, outside counsel representing the
City in this matter, acknowledging the extension.
D. ISSUES RAISED
TaylorMade raises the following issues as part of this Appeal:
1.Should the new taxing scheme imposed pursuant to Administrative Order 81,
which penalizes companies for investing in jobs and property in Carlsbad, be
applied?
2.If yes, should the new taxing scheme, including additional taxes and penalties, be
applied retroactively (i.e., prior to January 16, 2019) or only prospectively?
E. GROUNDS FOR APPEAL/RESERVATION OF RIGHT TO SUPPLEMENT
TaylorMade appeals the Final Determination on the grounds that it is based on an
outdated and improper apportionment scheme, and is invalid. Moreover, TaylorMade further appeals on
the grounds that the imposition of retroactive taxes and penalties is unfair and impermissible. Finally,
TaylorMade contends that the new taxing scheme, which is disfavored by California and many other
states, should be rejected because it discriminates against Carlsbad businesses compared to non-
Carlsbad businesses. TaylorMade reserves the right to raise additional issues or arguments during the
course of the Appeal.
F. HEARING REQUEST
TaylorMade hereby requests an oral hearing on its Appeal, as provided for in Carlsbad
Municipal Code section 5.04.090. TaylorMade further requests that the hearing be conducted after the
City Council has a full component of five members
In addition, TaylorMade intends, and reserves the right, to supplement this Appeal and to
submit further factual information and additional arguments in support of this Appeal.
Charles J. Moll III
Carlsbad City Council
September 16, 2020
Page 3
G. CONCLUSION
For the reasons discussed above, TaylorMade respectfully request the instant Appeal be
granted.
Very truly yours,
Attorney for Taylormade Golf Company
From: Benjamin Fay <bfay@iarvisfay.com>
Sent: Wednesday, August 5, 2020 12:17 PM
To: Moll, Charles <Cmoll@mwe.com>
Subject: Re: Callaway and Taylor Made
Hi Chuck,
Yes, the City agrees to an additional extension of 30 days of the time for Callaway or TaylorMade to file an
appeal with the City Council.
By my county that would extend the deadline from August 19 to September 18.
The City also asked me to convey to you that they will not give any more extensions.
Ben
On Tue, Aug 4, 2020 at 5:27 PM Benjamin Fay <bfav@jarvisfay.com> wrote:
Hi Chuck,
I will check and get back to you.
Ben
On Tue, Aug 4, 2020 at 5:03 PM Moll, Charles <Cmollinwe.com> wrote:
Hello Ben—I am going to have to request an additional extension for filing an appeal. To be safe, I am requesting an
additional 30 days for both taylor made and callaway.
Is that agreeable?
Best, chuck
Mia De Marzo
Subject: FW: Opposition to Staff Position on Business License Tax
Attachments: Letter of Support Callaway TaylorMade.pdf
From: Faviola Medina
Sent: Monday, May 3, 2021 7:40 AM
To: Tammy Cloud-McMinn <Tammy.McMinn@carlsbadca.gov>
Subject: FW: Opposition to Staff Position on Business License Tax
For correspondence.
(City of
Carlsbad
Faviola Medina, CMC
City Clerk Services Manager
Office of the City Clerk
P: 760-434-5989
All Receive - Agenda Item #
For the Information of the:
CITY COUNCIL
Datet103}11CA `-e CC ‘i°
CM y ACM V_DCM
From: Cindie McMahon <Cindie.McMahon@carlsbadca.gov>
Sent: Sunday, May 2, 2021 2:26 PM
To: Faviola Medina <Faviola.Medina@carlsbadca.gov>
Cc: Sheila Cobian <Sheila.Cobian@carlsbadca.gov>
Subject: FW: Opposition to Staff Position on Business License Tax
From: Bret Schanzenbach <Bret@carlsbad.org>
Date: April 30, 2021 at 4:27:43 PM PDT
To: Matthew Hall <Matt.Hall@carlsbadca.gov>, Teresa Acosta <Teresa.AcostaPcarlsbadca.gov>, Priya Bhat-Patel <Priva.Bhat-
Patel@carlsbadca.gov>, Scott Chadwick <Scott.Chadwick@carlsbadca.gov>
Cc: Keith Blackburn <Keith.Blackburn@carlsbadca.gov>, Cori Schumacher <Cori.Schumacher@carlsbadca.gov>
Subject: Opposition to Staff Position on Business License Tax
The Honorable Mayor Matt Hall
City of Carlsbad
Dear Mayor Hall:
I am writing regarding the business license tax appeals of Callaway Golf Company and Taylor Made
Golf Company, Inc. On behalf of the Board of Directors I urge you to not support the staff
recommendations and instead institute a more reasonable apportionment methodology.
The current policy that staff is promoting consists of using a three-factor apportionment formula. This is
a major deterrent for companies currently located, or considering locating in Carlsbad. The formula
penalizes businesses for every square foot they occupy and every staff member they add to their
Carlsbad facilities.
None of our neighboring cities use a formula like this. These two major employers could both move
literally 2-3 miles in almost any direction and save tens of thousands of dollars per year in business
license fees. It would not take too many years to recoup the costs of a new building at those savings.
1
The state of California recognized this formula was a disincentive for businesses to locate in California
and they switched to a one factor formula several decades ago. Please move to a one factor formula
based on sales, or go to a flat fee, like most of our neighbors have.
Sincerely,
2
CAnISBAD
CHAMBER OF COMMERCE
April 29, 2021
The Honorable Mayor Matt Hall
City of Carlsbad
Dear Mayor Hall:
I am writing regarding the business license tax appeals of Callaway Golf Company and Taylor
Made Golf Company, Inc. On behalf of the Board of Directors I urge you to not support the
staff recommendations and instead institute a more reasonable apportionment methodology.
The current policy that staff is promoting consists of using a three-factor apportionment formula.
This is a major deterrent for companies currently located, or considering locating in Carlsbad.
The formula penalizes businesses for every square foot they occupy and every staff member
they add to their Carlsbad facilities.
None of our neighboring cities use a formula like this. These two major employers could both
move literally 2-3 miles in almost any direction and save tens of thousands of dollars per year in
business license fees. It would not take too many years to recoup the costs of a new building at
those savings.
The state of California recognized this formula was a disincentive for businesses to locate in
California and they switched to a one factor formula several decades ago. Please move to a one
factor formula based on sales, or go to a flat fee, like most of our neighbors have.
Sincerely,
Bret Schanzenbach
President and CEO
cc. Mayor Pro Tern Keith Blackburn
Council Member Priya Bhat-Patel
Council Member Cod Schumacher
Council Member Teresa Acosta
City Manager Scott Chadwick
5934 Priestly Drive I Carlsbad, CA 92008 I 760.931.8400 T I 760.931.9153 F
www.carlsbad.org