Metropolitan News-Enterprise


Tuesday, March 14, 2017


Page 1


C.A. Rejects Class Action Over Tax on Diabetic Supplies




Purchasers of disposable lancets and glucose test strips cannot compel their pharmacies to seek refunds of sales taxes paid on the items, the Court of Appeal for this district ruled yesterday.

Div. Two, in an opinion by Justice Brian Hoffstadt, upheld the dismissal of a class action complaint, saying the remedy the plaintiffs were seeking—an order compelling the pharmacies to apply to the State Board of Equalization for refunds—was not authorized by statute. Nor did the plaintiffs show that there were “unique circumstances” that would justify judicial creation of a new tax refund remedy, the court said.

 The plaintiffs sued 10 large pharmacy retailers, along with the State Board of Equalization. They alleged in the complaint that they have diabetes, and must test their blood sugar by using skin puncture lancets and glucose test strips in order to determine their glucose levels, enabling them to know when to inject insulin to reduce their glucose levels.

Board Regulation

Under a board regulation dating back to 2000, they alleged, lancets and test strips are exempt from sales tax, but the pharmacies have continued to collect it. The purchasers, however, are unable to make refund claims because the pharmacies, not the customers, pay the tax and the pharmacies have no incentive to make claims because they would have to pass the refunds back to the customers, the plaintiffs asserted.

The plaintiffs’ theories were that the pharmacies are breaching implied contracts with their customers by paying an illegal tax and not seeking refunds, and that doing so constitutes an unfair business practice. They also claim that the pharmacies commit negligence and violate the Consumer Legal Remedies Act by misrepresenting the items as taxable.

Los Angeles Superior Court Judge John S. Wiley Jr. sustained demurrers by all defendants to all causes of action. He cited Loeffler v. Target Corp. (2014) 58 Cal.4th 1081, which affirmed the principle that a customer cannot seek a refund of sales taxes paid by a retailer.

Hoffstadt, writing for the Court of Appeal, said the trial judge was correct.

He cited legislation that gives retailers the option of charging customers a “sales tax reimbursement to the sales price” for taxable items, or paying the sales tax itself. The law creates a rebuttable presumption that the retailer, by showing a sales tax charge on the receipt, has entered into an agreement with the customer allowing the retailer to collect reimbursement for sales tax.

A retailer that believes it has paid sales tax not legally owed has three years to file an administrative refund claim with the board. If the board rejects the claim, the retailer has 90 days to challenge the denial in court.

If the board or the court concludes that the tax was not owed, the retailer can either return the “reimbursement” to the customer or allow the state to keep the funds.

Case Distinguished

Hoffstadt distinguished Javor v. State Board of Equalization (1974) 12 Cal.3d 790, which allowed motor vehicle purchasers to sue dealers in order to enforce regulations that the board to ensure that the buyers obtained the benefit of a sales tax refund resulting from the retroactive repeal of the federal excise tax on motor vehicles.

The Javor court held that such actions were appropriate under the unique circumstances of the case.

Based on that and other cases, Hoffstadt wrote, there are three prerequisites to judicial recognition of a non-statutory remedy for the unauthorized collection or overpayment of a tax—the lack of a statutory remedy, a “consonan[ce]” between the remedy and statutory tax refund procedures, and a “precursor determination” that a refund was due and owing.

The jurist rejected the plaintiffs’ argument that a prior determination of the issue is unnecessary. Granting relief without such a determination, he wrote, would be an “affront” to the state Constitution, which commits to the Legislature the authority to establish remedies for taxpayers entitled to refunds.

Hoffstadt went on to conclude that the plaintiffs failed to show any of the three prerequisites.

The plaintiffs, he said, have other remedies—they can ask the board to audit the pharmacies, they can initiate rulemaking before the board, or they can sue the board for declaratory relief.

Consonance Requirement

The consonance requirement is not met, the justice said, because creation of the remedy sought by the plaintiffs would be inconsistent with a statute that expressly authorize a retailer to waive its right to a refund, as well as with the “safe harbor” provision that allows a retailer to choose between refunding tax to the consumer or leaving the money with the state.

The precursor-determination requirement, Hoffstadt said, was not met because “the Board has yet to decide whether the retail pharmacies—and by extension, the customers—are entitled to a refund.

He noted that the regulation exempting relied on by the plaintiffs only applies, by its terms, when the items are “furnished by a registered pharmacist” and “used by a diabetic patient…in accordance with a physician’s instructions.” There have been no determinations, he pointed out, as to the validity of those qualifiers or whether the plaintiffs’ purchases satisfied them.

The case is McClain v. Sav-On Drugs, 17 S.O.S. 1309.


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