McClain v. Sav-On Drugs: The California Supreme Court Explains that Javor Remedies Apply “Only Rarely”
In California sales tax is on the retailer making sales of tangible personal property; retailers are allowed to collect “sales tax reimbursement” from their customers. If a retailer pays more tax than is due, it may file a claim for refund with the California Department of Tax and Fee Administration (“CDTFA”) (the successor agency which recently inherited the sales and use tax responsibilities of the California State Board of Equalization (“Board”)). Excess sales tax reimbursement is to be returned to the customer or remitted to the state. No statutory remedy exists for a customer to obtain a refund directly from the CDTFA. However, in Javor v. State Board of Equalization (1974) 12 Cal.3d 790, the California Supreme Court authorized a customer suit compelling retailers to file claims for refund on behalf of taxpayers who had paid excess tax reimbursement.
The repeal of a federal excise tax on motor vehicles triggered the Javor case. The sales price of the cars, on which sales tax was assessed, included the excise tax. The repeal of the excise tax entitled the retailers to a partial refund of the sales tax they had paid on the cars. The Board agreed refunds were due and had promulgated rules to effectuate them; however, the retailers had no incentive to request refunds because any money they recovered would have to be turned over to their customers as excess tax reimbursement. The Supreme Court held that a customer suit against the retailers was an appropriate remedy, and allowed the customers to join the Board as a party, so that monies due the customers could be paid into the court. This judicially crafted remedy was based on equitable factors to protect the integrity of the sales tax by ensuring customers received their refunds and to ensure that neither the retailers nor the state were unjustly enriched. The case, which was based upon a very unique set of facts, opened Pandora’s Box for retailers, who have, since that time have faced class action and unfair competition/unfair business practice actions for collecting tax reimbursement on tangible personal property which customers believe are not subject to tax.
McClain v. Sav-On Drugs (Slip Opinion filed March 4, 2019) involved several pharmacies which collected sales tax reimbursement on their sales of lancets and diabetic blood test strips. Plaintiffs, a class comprised of pharmacy customers, alleged the sales of these products were exempt from tax. They filed a class action against the pharmacy defendants and the CDTFA seeking a refund of the sales tax reimbursement they paid as well as orders compelling the pharmacy defendants to file refund claims with the CDTFA and for the CDTFA to award refunds to be passed on to customers. Both the pharmacy defendants and the CDTFA objected and demurred to the complaint. (Like the automobile retailers in Javor, the pharmacy defendants had no financial incentive to file refund claims because, even assuming they obtained a refund, that money would have to be turned over to each customer that purchased lancets or blood test strips.) The trial court sustained the demurrers without leave to amend. The Court of Appeal affirmed noting that “the result ‘is not an entirely satisfying one. . . . [O]ur Constitution chiefly assigns the task of creating tax refund remedies to our Legislature, and our Legislature has yet to address the situation that arises when the legal taxpayer has no incentive to seek a direct refund and the economic taxpayer has no right to do so. It is a topic worthy of legislative consideration.” (McClain v. Sav-On Drugs (2017) 9 Cal.App.5th 684, 706.)
The Supreme Court emphasized that the key premise of Javor was that the Board had already determined that the consumers were entitled to a refund. The remedy was “designed to facilitate a refund to consumers of excessive sales tax reimbursement that all parties acknowledged was ‘erroneously collected’ [citation omitted]; it was not designed to facilitate resolution of whether sales tax reimbursement charged on a particular item was erroneously paid.” (McClain, Slip Opinion, p. 6-7.) It held: “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.” (Id. at p. 7.) (Emphasis Added.) To further underscore its holding, the Court stated: “This requirement means that a judicially created remedy is available only when the issue of taxability has already been resolved.” (Id.) (Emphasis Added.)
But the Court did not stop there. Even assuming a plaintiff can meet the threshold requirement of a prior legal determination, “additional legal and equitable hurdles still may lie between a consumer and a Javor remedy.” (Id.) It did not define what those “additional legal hurdles” may be, however. What the Court did define is its intention as to the availability of a Javor remedy: “It bears repeating that a Javor remedy is available ‘in limited circumstances’ [citation omitted] – in other words, only rarely.” (Emphasis Added.)
When Javor was decided some read it as a mechanism to open the door to consumers forcing refunds of excess tax reimbursement. The trend of recent cases suggests that the Supreme Court disagrees with this notion. In 2014, Loeffler v. Target Corporation, 58 Ca. 4th 1081, put an end to the use of consumer protection statutes such as the Unfair Competition Law or the Consumer Legal Remedies Act as a means to challenge the taxability of items and forcing refunds. (Loeffler was a case concerning the taxability of retail sales of hot coffee.) The Court observed that the sales tax law was exceedingly complex, subject to administrative exhaustion requirements to obtain the benefit of the Board’s expertise, and the use of consumer protection statutes to determine taxability was inconsistent with the integrity of the sales tax system. The Court held that questions of taxability must be brought before and resolved by the Board (now the CDTFA) pursuant to the Revenue and Taxation Code. McClain establishes that retailers cannot be forced to file refund claims for their customers. It further scales back the ambitious interpretations of Javor by creating the threshold requirement of a “prior legal determination” establishing a right to a refund, which will be very difficult to obtain; and even assuming it is obtained there is still no guarantee of a Javor remedy because of the additional undefined “legal and equitable hurdles” still lying between a consumer and a Javor remedy. Although the Court did not overrule Javor, it limited its application to its very unique set of facts, or to facts, if they exist, that are equally unique and rare.
Littlejohn v. Costco Wholesale Corporation (2018) 25 Cal.App.5th 251 is a similar case which concerns the taxability of Ensure nutrition shakes, and plaintiff sued Costco and the Board (now the CDTFA) to recover sales tax reimbursement he had paid on his Ensure purchases. The Court of Appeal concluded no facts had been stated justifying relief under Javor. The Supreme Court granted review pending its consideration of the McClain case. No decision has been announced since McClain was decided, but one would anticipate the case to be decided consistent with McClain.
Between Loeffler and McClain, the ability of consumers to bring these types of cases has been practically eliminated. It does not appear any consumer protection based case will succeed; and McClain makes it very clear that only the very rare case will qualify for a Javor-type remedy – which may mean that next to none will. It seems that the Court is saying that public policy is: (1) taxability will be decided by the Revenue and Taxation Code, (2) the Code clearly establishes who may file a refund claim (i.e. the retailer/taxpayer); and (3) Javor is a very rare case, limited to its unique facts, where the taxing body agreed a refund was owed, and a judicially crafted remedy is needed to facilitate that refund so the state will not be unjustly enriched.
McClain’s unsettling question is what exactly is a consumer’s recourse if a retailer fails to acknowledge or to refund excess tax reimbursement? Most of the time the amount is too small to be bothered with – it is just an annoyance to the consumer. The Court seemed to think that the consumer can complain to the CDTFA, which can initiate an audit of the retailer or issue a deficiency determination, which in theory could result in restitution. The Court also suggested that consumers may have the ability to obtain a judicial declaration as to the validity of a regulation promulgated by the CDTFA. However, the cost and time involved in doing this is prohibitive to the average consumer. The Court acknowledged that these remedies may only be “tugs on the CDTFA’s sleeve,” (McClain, Slip Opinion at p. 10) but it had no reason to comment further because the plaintiff elected to litigate rather than pursue these or other remedies.
The concurring opinion expressed concern that there is a fine line in determining when the state is unjustly enriched. It found no evidence of unjust enrichment in this case to justify a Javor remedy, but suggested that other claims of unjust enrichment in other cases might raise different administrative and other considerations that justify crafting a common law restitutionary remedy. This statement may be a crack in the door for future litigants.
Despite failing to answer question as to the consumer’s remedy, from a policy perspective, McClain eliminates the inventive cases Javor spawned from busy court dockets, keeping particular questions of taxability properly before the administrative body responsible for the administration of the law. (This is not to suggest that judicial review of those administrative determinations is inappropriate.) The legislature authorized refund actions by retailers which are subject to the sales tax. It is up to the legislature to authorize consumer refund actions; and so far it has not. The courts should honor that legislative inaction in all but the most egregious of circumstances. This is the essence of what the McClain court is saying.
A copy of the slip opinion of the McClain case is available by following the following link: