Joseph J. Byron III v. California Department of Tax and Fee Administration

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘oO’ JS-6

Case No. 2:19-CV-06742-CAS-RAOx Date January 6, 2020

Title JOSEPH J. BYRON, III v. NICOLAS MADUROS

Present: The Honorable | CHRISTINA A-SNYDER

Catherine Jeang Laura Elias N/A

Deputy Clerk Court Reporter / Recorder Tape No.

Attorneys Present for Plaintiffs: Attorneys Present for Defendants:

J. David Nick Laura Robbins

Proceedings: MOTION TO DISMISS (ECF No. 13 filed Nov. 5, 2019)

I. INTRODUCTION

Plaintiff Joseph J. Byron III claims that defendant California Department of Tax and

Fee Administration (“the State”) violates his constitutional rights by attempting to collect

sales tax generated from his retail sales of medical marijuana, as well as related penalty

assessments issued after Byron failed to pay those taxes.

Byron filed this action on August 2, 2019. See ECF No. 1 (“Compl.”). On August

26, Byron filed a first amended complaint. See ECF No. 6 (“FAC”). The FAC alleges a

single claim for relief, pursuant to 42 U.S.C. § 1983, for violation of his Fifth and

Fourteenth Amendment rights. Id. 9] 15-17. Specifically, according to Byron, the State’s

collection proceedings (1) are arbitrary, because they are not supported by any law

authorizing the collection of the tax, (11) would require Byron to incriminate himself

because medical marijuana is a controlled substance, and (iii) fail to provide Byron a

“meaningful hearing” to challenge the validity of the tax. Id. 4] 7, 16-17.

The State moved to dismiss the FAC pursuant to Federal Rules of Civil Procedure

12(b)(1) and 12(b)(6) on November 5, 2019. See ECF No. 13 (“MTD”). Byron filed an

opposition on December 16, 2019. See ECF No. 18 (“Opp.”). The State filed a reply on

December 23, 2019. See ECF No. 19 (“Reply”).

The Court held a hearing on January 6, 2020. Having considered the allegations and

the parties’ arguments, the Court finds and concludes as follows.

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘Oo’ □□□□

Case No. 2:19-CV-06742-CAS-RAOx Date January 6, 2020

Title JOSEPH J. BYRON, III v. NICOLAS MADUROS

I. FACTUAL BACKGROUND

For the purpose of this motion, the Court accepts the truth of the following

allegations. Byron operated a marijuana dispensary in Long Beach, California during the

2008 and 2009 tax years. FAC {] 6-7. On November 26, 2012, the State served Byron

with a “Notice of Determination” stating that Byron owed unpaid sales taxes from his

operation of the marijuana dispensary during 2008 and 2009. Id. §[ 6-7, 9. Pursuant to

California law, Byron had 30 days to file a protest with the State. It is unclear what

happened in the three years that followed, but in “2015 and 2016,” Byron claims to have

attempted to negotiate a compromise to settle what the State claimed was his outstanding

tax liability. Id. { 10. These negotiations apparently failed, and the State insisted that

Byron “pay the entire amount due.” Id.

Two years later, on November 5, 2018, Byron filed a protest with the State

challenging the validity of the State’s tax assessment against him. See ECF No. 13-3,

Request for Judicial Notice (“RJN”) at Ex. A.! On November 14, 2018, the State informed

Byron that his protest was untimely because it was filed nearly six years after the 30-day

deadline had elapsed. Id. The State further explained to Byron that “to dispute the liability,

your next recourse is to pay the liability and file a claim for refund.” Id. In response, on

December 3, 2018, Byron stated that his failure to file a timely protest should be excused,

and the denial of his protest should be reconsidered. Id. On January 15, 2019, the State

denied Byron’s request for reconsideration, and again instructed Byron that “[i]f you

continue to dispute the liability, your next recourse is to pay the liability and file a claim

for refund.” Id. at Ex. B. Byron never paid the liability or filed a claim for refund. On

August 2, 2019, Byron filed this action. See Compl.

The Court takes judicial notice of the correspondence between Byron and the State,

attached as Exhibits A and B to the State’s request for judicial notice. This correspondence

forms the basis for Byron’s complaint, and is incorporated by reference into his allegations.

See United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003) (holding that, in

consideration of a motion to dismiss, courts may consider documents incorporated by

reference into a complaint, even if not attached to the complaint, if the documents form the

basis for the plaintiff's claim, or are referred to extensively). The State’s request for

judicial notice is accordingly GRANTED.

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘Oo’ □□□□

Case No. 2:19-CV-06742-CAS-RAOx Date January 6, 2020

Title JOSEPH J. BYRON, III v. NICOLAS MADUROS

Il. LEGAL STANDARDS

A. Rule 12(b)(1)

A motion to dismiss an action pursuant to Federal Rule of Civil Procedure 12(b)(1)

raises the objection that the federal court has no subject matter jurisdiction over the action.

This defect may exist despite the formal sufficiency of the allegations in the complaint.

When considering a Rule 12(b)(1) motion challenging the substance of jurisdictional

allegations, the Court is not restricted to the face of the pleadings, but may review any

evidence, such as declarations and testimony, to resolve any factual disputes concerning

the existence of jurisdiction. See McCarthy v. United States, 850 F.2d 558, 560 (9th Cir.

1988).

B. Rule 12(b)(6)

A motion pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the legal

sufficiency of the claims asserted in a complaint. Under this Rule, a district court properly

dismisses a claim if “there is a ‘lack of a cognizable legal theory or the absence of sufficient

facts alleged under a cognizable legal theory.”” Conservation Force v. Salazar, 646 F.3d

1240, 1242 (9th Cir. 2011) (quoting Balisteri v. Pacifica Police Dep’t, 901 F.2d 696, 699

(9th Cir. 1988)). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does

not need detailed factual allegations, a plaintiff's obligation to provide the ‘grounds’ of his

‘entitlement to relief’ requires more than labels and conclusions, and a formulaic recitation

of the elements of a cause of action will not do.” Bell Atlantic Corp. v. Twombly, 550

U.S. 544, 555 (2007) (internal citations omitted). “Factual allegations must be enough to

raise a right to relief above the speculative level.” Id. (internal citations omitted).

In considering a motion pursuant to Rule 12(b)(6), a court must accept as true all

material allegations in the complaint, as well as all reasonable inferences to be drawn from

them. Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998). The complaint must be read in

the light most favorable to the nonmoving party. Sprewell v. Golden State Warriors, 266

F.3d 979, 988 (9th Cir. 2001). However, “a court considering a motion to dismiss can

choose to begin by identifying pleadings that, because they are no more than conclusions,

are not entitled to the assumption of truth. While legal conclusions can provide the

framework of a complaint, they must be supported by factual allegations.” Ashcroft v.

Iqbal, 556 U.S. 662, 679 (2009); see Moss v. United States Secret Service, 572 F.3d 962,

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘Oo’ □□□□

Case No. 2:19-CV-06742-CAS-RAOx Date January 6, 2020

Title JOSEPH J. BYRON, III v. NICOLAS MADUROS

969 (9th Cir. 2009) (“[F]or a complaint to survive a motion to dismiss, the non-conclusory

“factual content,’ and reasonable inferences from that content, must be plausibly suggestive

of a claim entitling the plaintiff to relief.”). Ultimately, “[d]etermining whether a

complaint states a plausible claim for relief will . . . be a context-specific task that requires

the reviewing court to draw on its judicial experience and common sense.” Igbal, 556 U.S.

at 679.

Unless a court converts a Rule 12(b)(6) motion into a motion for summary judgment,

a court cannot consider material outside of the complaint (e.g., facts presented in briefs,

affidavits, or discovery materials). In re American Cont’! Corp./Lincoln Sav. & Loan Sec.

Litig., 102 F.3d 1524, 1537 (9th Cir. 1996), rev’d on other grounds sub nom Lexecon, Inc.

v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26 (1998). A court may, however,

consider exhibits submitted with or alleged in the complaint and matters that may be

judicially noticed pursuant to Federal Rule of Evidence 201. In re Silicon Graphics Inc.

Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999); Lee v. City of Los Angeles, 250 F.3d 668,

689 (9th Cir. 2001).

As a general rule, leave to amend a complaint which has been dismissed should be

freely granted. Fed. R. Civ. Proc. 15(a). However, leave to amend may be denied when

“the court determines that the allegation of other facts consistent with the challenged

pleading could not possibly cure the deficiency.” Schreiber Distrib. Co. v. Serv-Well

Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986): see also Eminence Capital, LLC v.

Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (holding dismissal with prejudice is

appropriate only when the complaint could not be saved by amendment).

IV. DISCUSSION

The State moves to dismiss principally on grounds that (i) the Court lacks subject

matter jurisdiction pursuant to the Tax Injunction Act (28 U.S.C. § 1341) (“TIA”). See

MTD at 5-7. Beyond that, the State argues that Byron fails to state a claim because his

allegations are barred by (11) the doctrine of comity, (im) the California constitution, and

(iv) the State’s sovereign immunity pursuant to the Eleventh Amendment. Id. at 5-12. The

State also argues that Byron fails to state a 42 U.S.C. § 1983 claim for relief because (v)

no defendant is a “person” covered by that statute, and that (vi) defendant Nicolas Maduros

should be dismissed as an improper defendant for 42 U.S.C. § 1983 liability. Id. at 12-14.

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘Oo’ □□□□

Case No. 2:19-CV-06742-CAS-RAOx Date January 6, 2020

Title JOSEPH J. BYRON, III v. NICOLAS MADUROS

“Federal courts are not courts of general jurisdiction: they have only the power that

is authorized by Article III of the Constitution and the statutes enacted by Congress

pursuant thereto.” Bender v. Williamsport Area Sch. Dist., 475 U.S. 534, 541, (1986). As

a result, the Court has no power to consider claims that Congress has excluded from federal

jurisdiction. See Lockerty v. Phillips, 319 U.S. 182, 187 (1943) (“The Congressional

power to ordain and establish inferior courts includes the power of . . . withholding

jurisdiction from them in the exact degrees and character which to Congress may seem

proper for the public good.”). The Court, for this reason, first considers whether the TIA

precludes it from considering Byron’s claim. See Price v. United States General Services

Admin., 894 F.2d 323, 324 (9th Cir. 1990) (“Before we may reach the merits,

we must first consider whether [the Court] ha[s] subject matter jurisdiction”). Because the

Court concludes that it lacks subject matter jurisdiction over the action, it does not reach

the State’s remaining arguments.

The TIA restricts the jurisdiction of the federal courts, providing that “district courts

shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under

State law where a plain, speedy and efficient remedy may be had in the courts of such

State.” 28 U.S.C. § 1341. The TIA both “prohibits a federal district court, in most

circumstances, from issuing an injunction enjoining the collection of state taxes” and also

“prohibits a district court from issuing a declaratory judgment holding state tax laws

unconstitutional.” California v. Grace Brethren Church, 457 U.S. 393, 408 (1982). “[T]he

principal purpose of the TIA was to ‘limit drastically’ federal-court interference with ‘the

collection of [state] taxes.” ” Hibbs v. Winn, 542 U.S. 88, 105 (2005) (quoting Grace

Brethren Church, 457 U.S. at 408-09 (1982)). The dispositive question in determining

whether the TIA’s jurisdictional bar applies to a given claim is whether the requested relief

will reduce the flow of state tax revenue. May Trucking Co. v. Oregon Dep’t of Transp.,

388 F.3d 1261, 1267 (9th Cir. 2004) (citing Hibbs, 542 at 92).

Byron’s 42 U.S.C. § 1983 clatm—which seeks a “permanent injunction prohibiting

the collection of the tax assessed” as well as a “declaratory judgment that [the State] may

not collect a sales on tax on marijuana,” FAC Prayer {{§| 1-2—1s a direct attempt to prevent

California from collecting sales taxes that falls squarely within the ambit of the TIA’s

jurisdictional bar. See Jerron W., Inc. v. Cal, State Bd. of Equalization, 129 F.3d 1334,

1337 (9th Cir. 1997) (holding that a “district court does not have jurisdiction over” an

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘Oo’ □□□□

Case No. 2:19-CV-06742-CAS-RAOx Date January 6, 2020

Title JOSEPH J. BYRON, III v. NICOLAS MADUROS

action “if it seeks district court interference with California’s tax assessment and collection

process”).?

The TIA applies even though Byron’s claim takes the form of a constitutional

challenge that seeks “prospective relief.” Cf, Opp. at 5-8. The Ninth Circuit has held that

the “TIA’s prohibition on federal court jurisdiction includes cases where the state or local

tax is alleged to violate the federal constitution.” Kadva Patidar 42 Gam Sama] v. Cty. of

Riverside, 777 F. App’x 215, 216 (9th Cir. 2019) (citing Jerron, 129 F.3d at 1336-1337).

Section 1983 claims like Byron’s are, in fact, “precisely the type[s] of case that Congress

wrote the Tax Injunction Act to address” because they seek a federal court order to avoid

paying local taxes. Id. (citing Hibbs, 542 U.S. at 107, and holding that the district court

“correctly held that it did not have subject matter jurisdiction” to consider a 42 U.S.C.

§ 1983 claim that Riverside County violated plaintiff's constitutional rights by attempting

to collect local taxes derived from its operations) (internal quotations omitted).

This is not a case that fits within the TIA’s narrow procedural exception. That

exception permits federal courts to consider tax collection challenges where the state

collection process does not afford a taxpayer “a plain, speedy and efficient remedy” to

contest a tax assessment under state law. See 28 U.S.C. § 1341. In California, taxpayers

who believe they were improperly assessed are required to pay the contested tax before

they can file a complaint for a refund with the state Board of Equalization. See Cal. Rev.

& Tax Code §§ 6901, et seq: see also RJN at Exs. A, B (demonstrating that the State twice

ordered Byron to comply with this process in order to challenge the assessment). The

? At oral argument, Byron’s counsel conceded that Byron requests an injunction

preventing the state from collecting taxes from Byron, but stated that the TIA should

nevertheless not apply because the requested injunction is merely “temporary” to afford

Byron an opportunity to defend himself. Even if that were true and plaintiff were to

abandon his claims for “a permanent injunction” and declaratory relief “that Defendants

may not collect” the challenged tax, cf. FAC Prayer { 1-2, this misses the point. Because

the operative question is whether the requested relief will tend to reduce the flow of state

tax revenue, May Trucking Co., 388 F.3d at 1267, the TIA prohibits federal jurisdiction

over any action that seek any “interference with California’s tax assessment and collection

process.” Jerron, 129 F. 3d at 1337. That includes actions where only preliminary or

declaratory relief is sought. Grace Brethren Church, 457 U.S. at 408.

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘Oo’ □□□□

Case No. 2:19-CV-06742-CAS-RAOx Date January 6, 2020

Title JOSEPH J. BYRON, III v. NICOLAS MADUROS

Supreme Court and the Ninth Circuit have repeatedly held that California’s tax challenge

process satisfies the TIA’s procedural requirements for a “plain, speedy and efficient

remedy.” See Jerron, 129 F.3d at 1338 (“The Supreme Court and this court have concluded

that California’s tax refund remedy is generally a “plain, speedy and efficient’ remedy”)

(citing Franchise Tax Bd. v. Alcan Aluminum, 493 U.S. 331, 338 (1989)): accord Kadiva

Patidar, 777 F. App’x at 216 (holding that California’s tax challenge remedy satisfies the

TIA “even though California requires taxpayers to pay first and then challenge the tax’)

(citing Grace Brethren Church, 457 U.S. at 416-17). There is, therefore, no apparent basis

to invoke the TIA’s procedural exception.

Notwithstanding that unbroken line of decisions, Byron argues—and emphasized at

oral argument—that compliance with California’s tax protest procedures would, in his

case, violate the very Fifth Amendment rights against self-incrimination he seeks to

vindicate since filing a tax return for claimed marijuana sales (even under protest) could

expose him to federal criminal liability pursuant to 18 U.S.C. § 3282 (which criminalizes

marijuana sales). See Opp. at 3-4. The Court disagrees. The Supreme Court has held that

“the fact that incriminating evidence may be the byproduct of obedience to a regulatory

requirement, such as filing an income tax return, . . . does not clothe such conduct with the

testimonial privilege.” United States v. Hubbell, 530 U.S. 27, 35 (2000) (citing United

States v. Sullivan, 274 U.S. 259 (1927)): see also Fisher v. United States, 425 U.S. 391,

409-10 (1976) (holding that a taxpayer could not rely on the Fifth Amendment to “avoid

compliance” with a tax regulation even if the “evidence which he is required to produce”

pursuant to that regulation “contains incriminating” material). For this reason, even

assuming that Byron could be threatened with a criminal action as a result of his alleged

marijuana business activities in 2008 and 2009—and the fact that 18 U.S.C. § 3282’s five

year statute of limitations has run on 2008 and 2009 conduct suggests that there is no such

credible threat—it would not spare Byron from complying with California’s tax protest

process.

The TIA accordingly applies to Byron’s claim for relief and it precludes this Court

from exercising jurisdiction.

Without jurisdiction, the Court cannot reach the merits of Byron’s 42 U.S.C. § 1983

allegations, so there is no need to address the State’s arguments that these allegations fail

to state a claim because they are barred by the doctrine of comity, the California

constitution, the State’s sovereign immunity pursuant to the Eleventh Amendment, and the

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘Oo’ □□□□

Case No. 2:19-CV-06742-CAS-RAOx Date January 6, 2020

Title JOSEPH J. BYRON, III v. NICOLAS MADUROS

substantive requirements of 42 U.S.C. § 1983. See Herman Family Revocable Tr. v. Teddy

Bear, 254 F.3d 802, 803 (9th Cir. 2001).

V. CONCLUSION

For the foregoing reasons, the action is dismissed for lack of subject matter

jurisdiction.

IT IS SO ORDERED.

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Initials of Preparer CM)

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