The California Supreme Court recently ruled that local tax refund claims may be pursued as class actions, even where a city has an existing ordinance prohibiting such claims. The ruling is broad enough to expose local governments to class action refund claims for many other types of local taxes, as well as for assessments, charges and fees. Without legislative amendments from Sacramento, local budgets could be seriously impacted by similar refund claims in the coming years. Local governments are advised to review their taxes, assessments and other revenue sources to ensure that they comply with applicable law, including Propositions 218 and 26.
In McWillams v. City of Long Beach, a class of plaintiffs sought a refund of the city’s local Telephone Users Tax (TUT) on grounds that from 2006 to 2008, the city’s TUT ordinance contained an exemption for telephone service that was also exempt from payment of Federal Excise Tax (FET). The FET exemption is outdated “landline-era” language resulting in a 21st Century loophole that has sparked class action refund litigation in several California cities. Cities with older TUT ordinances (which likely include the outdated FET exemption) should consider voter-approved updates to eliminate potential exposure to TUT refund claims.
In July, 2011, the California Supreme Court ruled on nearly the same issue in Ardon v. City of Los Angeles, where it also held that plaintiffs may bring a class action for a local TUT refund. As in McWilliams, plaintiffs were claiming a TUT refund based upon the outdated FET exemption in Los Angeles’ ordinance. The Ardon court held that class action refund claims are allowed under the California Government Claims Act (Act) absent a specific refund procedure set forth in any applicable governing claims “statute.” Because Los Angeles did not have a local ordinance prohibiting class action refund claims, the Court did not decide whether an ordinance may serve as a “statute” that can prohibit a class action. (Note that, in response to Ardon, Best Best & Krieger advised its clients at the time to adopt similar ordinances out of an abundance of caution.)
Because Long Beach had a local ordinance prohibiting class actions, the Court directly addressed this issue in McWilliams. Based upon the plain reading of the Act, the Court held that a “statute” governing claims must be a federal or state law, not a local ordinance. The Court further held that Long Beach’s status as a charter city did not alter this result. Therefore, a local ordinance prohibiting class actions (even for charter cities) is no longer effective. Absent a specific federal or state law governing the refund process, the Act applies and a class action for a refund is allowed.
Many forms of local taxes, assessments, fees and charges do not have a specific refund procedure under federal or state law. Therefore, McWilliams allowsthese revenue sources to be challenged by class action litigation. While each individual refund claim may only amount to a few dollars, the “economies of scale” of class actions may encourage more refund litigation.
If you have any questions regarding this case or its implications for your city or local government, please contact your BB&K attorney, Kelly Salt, Michael Mullins or William J. Priest.