MICHAEL MCCLAIN et al., Plaintiffs and Appellants, v. SAV-ON DRUGS et al., Defendants and Respondents.
S241471
IN THE SUPREME COURT OF CALIFORNIA
March 4, 2019
AND CONSOLIDATED CASE. Second Appellate District, Division Eight B265011 and B265029. Los Angeles County Superior Court BC325272 and BC327216.
Justice Liu authored the opinion of the court, in which Chief Justice Cantil-Sakauye and Justices Chin, Corrigan, Cuellar, Kruger, and O‘Leary* concurred.
Justice Kruger filed a concurring opinion in which Justices Chin, Corrigan, and O‘Leary concurred.
Counsel:
Chavez & Gertler and Mark A. Chavez for Public Citizen, Inc., as Amicus Curiae on behalf of Plaintiffs and Appellants.
Jonathan M. Coupal, Trevor A. Grimm, Timothy A. Bittle and Laura E. Murray for Howard Jarvis Taxpayers Foundation as Amicus Curiae on behalf of Plaintiffs and Appellants.
Law Office of Daniel Berko and Daniel Berko for Larry Littlejohn as Amicus Curiae on behalf of Plaintiffs and Appellants.
Law Office of Tony J. Tanke, Tony Jerome Tanke; Hattis Law and Daniel M. Hattis for A. Bekkerman, B. Griffith, J. Lee and C. Lisser as Amici Curiae on behalf of Plaintiffs and Appellants.
Reed Smith, Douglas C. Rawles, James C. Martin, Kasey J. Curtis; Morgan Lewis & Bockius, Joseph Duffy and Joseph Bias for Defendants and Respondents Walgreen Co. and Rite Aid Corporation.
Berry & Silberberg, Berry Silberberg Stokes, Robert P. Berry and Carol M. Silberberg for Defendant and Respondent Wal-Mart Stores, Inc.
Holland & Knight, Richard T. Williams, Alan Watson and Shelley Hurwitz for Defendants and Respondents CVS Caremark Corporation, Longs Drug Stores Corporation and Longs Drug Stores California, Inc.
Theodore Keith Bell for Defendants and Respondents The Vons Companies, Inc., and Vons Food Services, Inc.
Hunton & Williams, Hunton Andrews Kurth, Phillip J. Eskenazi and Kirk A. Hornbeck for Defendants and Respondents Albertson‘s, Inc., and Sav-On Drugs.
Kamala D. Harris and Xavier Becerra, Attorneys General, Edward C. DuMont, State Solicitor General, Janill L. Richards, Principal Deputy State Solicitor General, Diane S. Shaw, Assistant Attorney General, Max Carter-Oberstone, Associate Deputy State Solicitor General, Lisa W. Chao, Stephen Lew and Nhan T. Vu, Deputy Attorneys General, for Defendant and Respondent State Board of Equalization.
Colantuono, Highsmith & Whatley, Michael G. Colantuono and Andrew C. Rawcliffe for League of California Cities and California State Association of Counties as Amici Curiae.
Opinion of the Court by Liu, J.
California retailers are generally required to pay the state a sales tax on the retail sale of any “tangible personal property.” (
If a retailer believes it has paid sales tax in excess of the amount legally due, it can file an administrative claim with the Department for a refund of any amount not required to be paid. (
The question here is whether customers who have paid sales tax reimbursement on purchases they believe to be exempt from sales tax may file suit to compel the retailers to seek a tax refund from the Department when there has been no determination by the Department or a court that the purchases are exempt. In Javor, we authorized a customer suit where the Board, upon determining that certain retailers had collected excess sales tax reimbursement, had promulgated rules to provide refunds to overpaying customers. The trial court declined to extend Javor to authorize a similar judicial remedy in this case, and the Court of Appeal affirmed. (McClain v. Sav-On Drugs (2017) 9 Cal.App.5th 684, 700-702 (McClain).) We agree with the courts below in refusing to extend Javor and affirm the judgment sustaining defendants’ demurrer.
I.
In 2003, in response to “inconsistencies” in how regulation 1591.1(b)(5) was being applied, the Board‘s Program Planning Manager sent a letter to California retail pharmacies setting forth the conditions for when the sale of a test strip or lancet is exempt from tax. (State Bd. of Equalization Program Planning Manager Charlotte Paliani, letter to Albertson‘s re regulation 1591.1, June 18, 2003 (hereafter Paliani Letter).) The letter explained that the retailer must be provided with a copy of the patient‘s physician instructions, that the retailer must maintain a copy of the instructions in its records, and that the lancet or test strip must be kept in a secure location and dispensed by a registered pharmacist. Only then, according to the letter, is the sale exempt from tax. (Paliani Letter, supra [“However, if your customers are able to remove the items directly off the shelf and pay for them at your store‘s registers, without a pharmacist‘s intervention, the sales are subject to tax.“].)
Plaintiffs Michael McClain, Avi Feigenblatt, and Gregory Fisher bought glucose test strips and skin puncture lancets from retail pharmacies owned or operated by defendants Sav-On Drugs, Gavin Herbert Company, Longs Drug Stores Corporation, Longs Drug Stores California, Inc., Rite Aid Corporation, Walgreen Co., Target Corporation, Albertson‘s Inc., The Vons Companies, Inc., Vons Food Services, Inc., and Wal-Mart Stores, Inc. (collectively, pharmacy defendants). These defendants charged plaintiffs sales tax reimbursement on those sales and remitted the amounts they collected to the Department. Plaintiffs contended that their purchases of test strips and lancets were exempt from sales tax, and they filed a class complaint against the pharmacy defendants and the Department for a refund of the sales tax reimbursement they paid. In particular, plaintiffs maintained that all pharmacy sales of test strips and lancets were exempt and that the conditions for application of the exemption set forth in the Paliani Letter were void. In addition to claims alleging breach of contract, negligence, and violations of consumer protection statutes, the operative complaint sought declaratory and injunctive relief compelling the pharmacy defendants to file a tax refund claim with the Department and ordering the Department to award refunds to be passed on to consumers. The pharmacy defendants and the Department demurred.
The trial court sustained the demurrer without leave to amend. Rejecting plaintiffs’ reliance on Javor, the trial court said: “What was so unique about the Javor circumstance is, ‘The Board has admitted it must pay these refunds to retailers.’ That‘s something the Board has certainly not admitted in this case.” The court explained that “[t]his case is more like Loeffler than Javor” because whether the sales at issue met or had to meet the conditions for tax
We granted plaintiffs’ petition for review on the dismissal of their claims for breach of contract and relief under Javor.
II.
As noted, the Legislature has provided no mechanism for consumers to obtain directly from the Department a refund of excess sales taxes that retailers have paid and for which retailers have charged sales tax reimbursement to consumers. In Javor, supra, 12 Cal.3d 790, we addressed whether customers may bring suit to compel retailers to seek a refund of sales taxes paid in excess of the amount owed. In that case, the repeal of a federal excise tax on motor vehicles entitled retail car dealers to a partial refund of sales tax on cars sold because the excise tax had been included in the price of the cars on which sales tax had been assessed. (Id. at pp. 794, 801-802.) The Board agreed that a refund was due and promulgated rules to effectuate the refunds. (Id. at p. 794.) But retail car dealers had “no particular incentive to request the refund” since they would have been required to pass on any refunds to customers. (Id. at p. 801.) We held that a customer suit against the retailer was an appropriate remedy, and we allowed customers to join the Board as a party to such suits. (Id. at p. 802.) In so holding, we observed that the Legislature had “provide[d] no procedure by which [the customers] can claim the refund themselves” (id. at p. 797) and that allowing such a lawsuit was “consonant with existing statutory procedures” (id. at p. 800). We further
Javor authorized a judicial remedy in light of a prior determination by the Board that a refund was appropriate. As the Court of Appeal in this case correctly understood, the fact that the Board had already determined that consumers were entitled to a refund was a key premise of our reasoning in Javor. (McClain, supra, 9 Cal.App.5th at p. 700; see Javor, supra, 12 Cal.3d at p. 794.) The remedy we authorized in Javor was designed to facilitate a refund to consumers of excessive sales tax reimbursement that all parties acknowledged was “erroneously collected” (Javor, at p. 795); it was not designed to facilitate resolution of whether sales tax reimbursement charged on a particular item was erroneously paid. Although additional factors may be relevant in determining the availability of a Javor remedy, we hold that in order to be eligible for a Javor remedy, plaintiffs must show, as a threshold requirement, that a prior legal determination has established their entitlement to a refund.
This requirement means that a judicially created remedy is available only when the issue of taxability has already been resolved. In Javor, “[t]he Board ha[d] admitted that it must pay these refunds to retailers.” (Javor, supra, 12 Cal.3d at p. 802.) The customers were “unequivocally entitled” to the refunds; without a remedy, the state would have been unjustly enriched. (McClain, supra, 9 Cal.App.5th at p. 698.) “[I]t was the certainty of this unjust enrichment that offended the Board‘s ‘vital interest in the integrity of the sales tax’ and warranted judicial intervention.” (Ibid.) Further, our characterization of this prerequisite as a threshold requirement underscores that even when it has been satisfied, additional legal and equitable hurdles still may lie between a consumer and a Javor remedy. It bears repeating that a Javor remedy is available “in limited circumstances” (Loeffler, supra, 58 Cal.4th at p. 1122) — in other words, only rarely. (Cf. Javor, at p. 802 [noting “the unique circumstances” before the court that justified crafting a judicial remedy].) This said, eligibility to pursue a judicially created remedy as a matter of law does not depend on a finding at the outset that the particular person seeking the remedy is entitled to a refund. Whether any particular individual is entitled to a refund will require an evidentiary determination specific to that individual. (Cf. Javor, supra, 12 Cal.3d at p. 802 [recognizing the possibility that some retailers may have “already claimed and received a refund from the Board“]; id. at p. 794 [sales
Plaintiffs do not dispute that no prior legal determination has been made as to whether sales tax was owed on the goods at issue here. Instead, they contend that Javor should not be read to require such a prior determination because Javor authorized a remedy where it was not certain but only “very likely” that the Board would “become enriched at the expense of the customer.” (Javor, supra, 12 Cal.3d at p. 802.) But Javor‘s use of the term “very likely” in no way suggested that the underlying issue of taxability was an open question. We repeatedly observed that the Board had already determined that a refund was due. (Javor, at pp. 794, 802.) “All that plaintiffs [sought in Javor was] to compel defendant retailers to make refund applications to the Board and in turn to require the Board to respond to these applications by paying into court all sums, if any, due defendant retailers.” (Id. at p. 802.) The plaintiffs in Javor sought no ruling by the Board or the court on any taxability question. The terms “very likely” and “if any” simply signaled the possibility that some retailers “had already claimed and received a refund from the Board,” a factual issue that had not yet been determined in the suit. (Ibid.)
Plaintiffs further contend that foreclosing a Javor remedy where the taxability issue has not already been resolved is at odds with the Department‘s “duty to protect the integrity of the sales tax.” (Javor, supra, 12 Cal.3d at p. 802.) Without any means of obtaining a determination on the taxability question, plaintiffs argue, the state will be unjustly enriched to the extent that the purchases at issue actually are not subject to sales tax.
But it is not clear that plaintiffs have no other recourse. “[C]onsumers who believe they have been charged excess reimbursement ... may complain to the Board, which may in turn initiate an audit” or a “deficiency determination.” (Loeffler, supra, 58 Cal.4th at pp. 1103-1104; see
We have no occasion to express a definitive view on what qualifies as a prior legal determination for purposes of a Javor remedy because it is clear that no such determination has been made exempting the lancets and strips at issue here. We likewise have no occasion to consider what remedies might be available to a claimant who has been unable to obtain a determination about the taxability of particular transactions using the available avenues. The Court of Appeal here noted that many of the remedial options available to plaintiffs are “the practical equivalent of allowing them to tug ... at the Board‘s sleeve.” (McClain, supra, 9 Cal.App.5th at p. 706.) Even so, there is no indication in the record that plaintiffs have pursued any avenues other than this lawsuit for obtaining a resolution of the taxability question that underlies their claim for relief.
We see an important difference between circumstances like those in Javor, where the taxability issue had already been resolved, and the circumstances here, where the taxability issue remains disputed. Where the taxability issue has been resolved, the avoidance of unjust enrichment is the primary concern with respect to ensuring the integrity of the sales tax. (See Javor, supra, 12 Cal.3d at p. 802.) Where the taxability issue is disputed, the avoidance of unjust enrichment remains a concern, but there is a countervailing interest in the orderly administration of the sales tax. In Loeffler, a case concerning the taxability of retail sales of hot coffee, we said “[t]he taxability question lies at the center of the Board‘s function and authority.... [T]he sales tax law is exceedingly comprehensive and complex; its application to specific types of transactions is debatable in innumerable circumstances. The Legislature has subjected such questions to an administrative exhaustion requirement precisely to obtain the benefit of the Board‘s expertise, permit it to correct mistakes, and save judicial resources.” (Loeffler, supra, 58 Cal.4th at p. 1127.) We explained that allowing consumers to sue retailers under consumer protection statutes “based on a dispute over the taxability of a sale would require resolution of the taxability question in a manner inconsistent with this system, forfeiting these benefits.” (Ibid.) In light of Loeffler, we reject plaintiffs’ contention that limiting judicially created refund remedies to circumstances where the taxability issue has already been resolved would undermine the integrity of the sales tax.
Javor does not suggest otherwise. There we said that when the taxability issue has already been resolved (which is not the case here), a judicially created remedy is “clearly mandated by the Board‘s duty to protect the integrity of the sales tax” (Javor, supra, 12 Cal.3d at p. 802); we did not say the remedy was constitutionally compelled. In enacting a “comprehensive” law of exemptions “governing every imaginable type of sales transactions” (Loeffler, supra, 58 Cal.4th at p. 1105), the Legislature did not run afoul of due process by choosing to establish an administrative framework for ensuring that retailers claim exemptions and for resolving disputes over the applicability of exemptions — even if that framework relies on market mechanisms, agency initiative, and consumer influence short of lawsuits directly seeking sales tax reimbursement refunds. As the Attorney General explains, “the system is designed to ensure that, in general, the benefits of tax exemptions flow to consumers as a class (though not necessarily in a perfect manner, or in every possible transaction).” Given the competing interests involved in designing the system, due process does not require that tax exemptions flow to consumers in a more perfect manner.
Finally, plaintiffs contend that this tax refund system, by unjustly enriching the state at the expense of consumers, works an unconstitutional taking. But even if the state‘s retention of amounts that have been judicially or administratively determined to be excess sales tax reimbursement could be regarded as a taking, no such determination has been made here. And the absence of a legislatively or judicially created refund action to compel such a determination does not itself constitute a taking.
Plaintiffs’ complaint also alleged that the pharmacy defendants breached their contractual duties under
This argument is foreclosed by Loeffler. In that case, we held that consumers could not bring actions under the Unfair Competition Law or the Consumer Legal Remedies Act to challenge a retailer‘s alleged misrepresentation of the taxability of hot coffee. (Loeffler, supra, 58 Cal.4th at p. 1092.) We said “it is clear that a remedy that is directed at requiring the taxpayer to make a claim for refund from the Board, rather than one involving a direct claim by the consumer against the retailer, is the remedy that is consistent with the current governing statutory scheme.” (Id. at p. 1133.) We explained that “a Javor-type remedy for consumers,” which compels retailers to file a refund claim with the Department, is “an appropriate means to vindicate a consumer interest in a refund of a reimbursement charge” and that Javor “do[es] not suggest” that taxability issues “should be resolved in a consumer action” against the retailer. (Ibid.) Loeffler‘s reasoning does not convert the rebuttable presumption set forth in
CONCLUSION
We affirm the judgment of the Court of Appeal.
LIU, J.
We Concur:
CANTIL-SAKAUYE, C.J.
CHIN, J.
CORRIGAN, J.
CUÉLLAR, J.
KRUGER, J.
O‘LEARY, J.*
Concurring Opinion by Justice Kruger
I agree with the majority that plaintiffs in this case do not have an equitable cause of action to compel the retailers to seek a
I write separately to address the role that “taxability” determinations play in this analysis. (Maj. opn., ante, at p. 7.) As the majority notes, the law does provide avenues for plaintiffs to challenge the applicability of the sales tax to the transactions at issue here, such as seeking a judicial declaration of the validity of governing tax regulations. (Maj. opn., ante, at pp. 9-10.) The majority faults plaintiffs for failing to take that step, seeing “an important difference between circumstances like those in Javor, where the taxability issue had already been resolved, and the circumstances here, where the taxability issue remains disputed.” (Maj. opn., ante, at p. 10; see id. at p. 11.)
I agree that plaintiffs’ failure to pursue their available statutory options is relevant to the determination of whether to fashion an equitable remedy here. But while consumers may have alternative mechanisms to obtain an official determination that a transaction is exempt from sales tax (see maj. opn., ante, p. 9), I would not characterize these mechanisms as the functional equivalent of administrative remedies that plaintiffs must exhaust before pursuing a Javor action. The central difficulty with plaintiffs’ claim, as I see it, is not that they have skipped any particular set of procedural prerequisites to suit. It is, rather, that any cause of action to compel retailer refund suits will create a certain amount of tension with a statutory scheme that presumes goods are taxable (
Javor itself did not involve an official determination that a particular transaction was not taxable; it involved a determination that refunds were owed to consumers. Other claims of unjust enrichment, based on other types of determinations, might raise different administrative and other considerations. At present, however, given the policy choices embodied in the statutory scheme, plaintiffs have not demonstrated circumstances that counsel crafting a common law restitutionary remedy.
With these observations, I concur.
KRUGER, J.
We Concur:
CHIN, J.
CORRIGAN, J.
O‘LEARY, J.*