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Quote of the Day - There is a certain inevitability to a couple of things. Death and taxes come to mind. However, death doesn't get worse every time the legislators come together. - Unknown

The City Ordered To Repay Macy's Overpaid Taxes, With Interest

Taxes can be very . . . well, taxing, to say the least.  Most of us don't like paying them, but then when we find out that we're paying taxes twice on the same thing, well, that's really frustrating. 

Macy's was so frustrated with San Francisco's tax system that it asked for a refund, and when The City refused, Macy's sued.  Here's how the tax system worked in San Fran:  businesses were required to calculate taxes based on both payroll expenses and gross receipts, and then pay the larger (you're not surprised, are you?) of the two calculated amounts. 

There was just one problem with that scheme.  If your business operated only in The City (which is coextensive with The County), then your payroll expenses would almost always outstrip your gross receipts.  On the other hand, if like Macy's, your business operated both in and outside of San Francisco, then your gross receipts would almost always be higher than your payroll taxes, and you would end up paying more than the businesses inside The City.

Macy's saving grace was based on the United States and the California Constitutions, which both prevent discriminatory tax schemes like this one, typically referred to as a "tandem tax."  After a one-day trial, Macy's was able to show that it paid 1.2% more in taxes than local, in-City businesses.  The trial court ordered The City to refund the taxes, and awarded Macy's its attorneys fees and costs. 

But hold on a moment, said The City.

The City appealed, claiming that to refund the taxes would put Macy's in a better position than businesses inside The City and County of San Francisco, and that just couldn't be allowed.  I guess The City missed the part that overtaxing business who operated outside The City wasn't allowed, either, buy hey, I'm just a lawyer.

The Appellate Court understood the argument, and understood the tax scheme much better than San Francisco did.  In the case entitled:  Macy's Department Stores v. City and County of San Francisco, it ordered The City to repay only the increased differential that The City had overcharged Macy's.  The Appellate Court also saw the case as more of a draw than a victory for either side, and ordered the trial court to reconsider its award of attorneys fees and costs to Macy's.  It did, however, uphold the trial court's award of interest on the overcharged taxes at seven percent. 

Call me silly, but an illegal tax scheme is an illegal tax scheme, and The City should be paying all of Macy's attorneys fees and costs, and also giving Macy's a kicker for standing up and fighting City Hall.

Posted by J. Craig Williams on Thursday, October 19, 2006

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