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REPORT 6.3A -'age 1 To the Honorable Mayor and City Council From the City Attorney February 22, 2010 Subject Payment of City Taxes Prior to Seeking Judicial Relief Recommendation Introduce and then Adopt ordinance to add Article IX to Chapter 32 of the Municipal Code to require that a tax first be paid before litigation regarding its validity can be commenced. Background California Constitution Article XIII, Section 32 prohibits a taxpayer from seeking judicial relief with respect to a tax until that tax is paid. The purpose of the Constitutional provision is (1) to prevent a taxpayer from holding government hostage by not paying and then negotiating a lower amount because government is cash strapped and (2) to assure that government can predict revenues without first having to engage in what could be protracted litigation. California courts have long held that the Constitutional provision requiring "pay first, then litigate" applied to both the State and local entities. In a recent City of Anaheim case, however, in which Priceline, a large internet reseller of hotel rooms, argued that the City's $21 million transient occupancy tax was invalid as applied to Priceline, the Court of Appeal held that the Constitutional provision applied only to the State. Anaheim did not have a local "pay first, then litigate" provision and has been involved in lengthy litigation without having received the tax monies from Priceline. Adoption of a "pay first, then litigate" ordinance by Redwood City will continue in effect what has been the law for many years prior to the Anaheim case and will best assure the City that it will timely receive tax revenues. Alternative The City Council may decide not to adopt the ordinance. Conclusion Introduce and Adopt proposed ordinance. 2:J/!~af!/;c~ Interim City Attorney Bri~l!~ Finance Director p~ City Manager Attachment