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Path Cleared for Class Tax Claims

Daily Journal
08/08/11

In a decision that resolves conflicting interpretations of the California Constitution and state statutes, the state Supreme Court has held that under certain circumstances a taxpayer may file a class action against a municipal entity for the refund of a local tax.   Ardon v. City of Los Angeles, 2011 DJDAR 11127 (July 25, 2011). The decision adopts the holding in City of San Jose v. Superior Court (1974) 12 Cal. 3d.447  that California Government Code Section 910 allows class action claims against local governments, and distinguishes a later decision, Woosley v. State of California (1992) 3 Cal. 4th 758. Woosley held that California Constitution Article XIII, Section 32 prohibited class action tax refund claims unless authorized by the Legislature.  The Ardon decision clarifies the status of some class action tax refund cases against local governments, potentially making it easier for taxpayers to challenge certain local tax impositions, but leaving open the possibility of a prohibition under other circumstances.

Ardon challenged a telephone users tax imposed by the city of Los Angeles, in which the complainant argued that a municipal prohibition against local excise taxes, to the extent the amounts were exempt from federal excise taxes, prohibited the tax.  The city, in response, claimed that Woosley required each member of the class to file an individual claim as a precondition to filing a class action.  The city prevailed in Superior Court on the issue of class action availability and an appeal was taken.  A divided appellate court affirmed the trial court decision, and the Supreme Court granted review in order to resolve a conflict in decisional authority.

Section 910 is a broad grant of authority to bring actions against local governments. It is not specific to claims for tax refunds.  Article XIII, Section 32, on the other hand, is a specific prohibition against claims seeking to prevent or enjoin the collection of a tax, requiring the claimant to first pay the tax and then sue for a refund.   In San Jose, which involved nuisance claims related to the operation of the municipal airport, the court concluded that the authority to file actions accorded to "claimants" under Section 910 included reference to the class itself and not just to individual class members.

Woosley involved a constitutional challenge to the state's vehicle license fee imposed on vehicles purchased outside the state.  In Woosley, the court noted that Article XIII, Section 32 of the Constitution directed that claims for refunds be brought in the manner directed by the Legislature, and concluded that the applicable statutes directing the procedures for making refund claims did not allow for class actions. 

The court in Woosley also concluded that the holding in San Jose should not be extended to tax refunds.  In Ardon, however, the court clarifies that Woosley only precludes tax refund class actions where the Legislature has established procedures that did not allow such class actions.  In so finding, the court distinguished several appellate decisions following Woosley that held that class action claims for tax refunds were prohibited absent specific statutory authority, e.g., Batt v. City and County of San Francisco (2007) 155 Cal. App. 4th 65, 74-75 (sustaining demurrer to plaintiff's class action challenging city transit occupancy tax); Howard Jarvis Taxpayers Assn. v. City of Los Angeles (2000) 79 Cal. App. 4th 242, 249 (taxpayer suit challenging municipal home occupation ordinance rejected); Neecke v. City of Mill Valley (1995) 39 Cal. App. 4th 946, 961-62 (property owner's action challenging city property tax rejected).  The court in Ardon noted that in each of these cases, there were applicable statutes or ordinances that provided specific procedures for filing tax claims.  The court also specifically rejected as overbroad, a finding in the Howard Jarvis decision that in order to maintain a tax refund class action, each member of the class must have first filed a separate administrative refund claim.

In Ardon, the appellate court had determined that the applicable statute was Section 910 and that Section 910's use of the term "claimant" should be broadly construed, as it was in San Jose, to include the class itself.  In seeking to harmonize the decisions in San Jose and Woosley, the court observed that San Jose merely concluded that Section 910 did not preclude tax refund class actions; in Woosley, the court merely concluded that a court should first determine whether the claims statute in question applicable to the claim permitted or prohibited class actions.  Woosley did not analyze Section 910.  Accordingly, the court concluded that Woosley should not be construed as preventing a class action where the claim in question was not subject to a prohibitive statute or ordinance.

While the Supreme Court's Ardon decision resolves the apparent conflict between the San Jose and Woosley decisions, it leaves for later determination whether, in fact, particular refund claims for a specific local tax would be allowed as a class action.  In making that determination, the first level of review would be to determine whether the Legislature or the applicable municipal governing body has adopted a relevant statute or ordinance that allows or is not prohibitive of a class action.  If there is an applicable statute or ordinance that prohibits class actions, then that option is probably not available. If the statute or ordinance allows class actions, or there is no specific requirement (in which case the claim would be subject to Section 910), then a class action should be permitted.

Stanley S. Taylor is a transactional partner with the San Francisco office of Nossaman LLP who specializes in local and regional transportation agencies governance and compliance, as well as the funding and financing of transportation projects.  He can be reached at (415) 438-7224 or staylor@nossaman.com.

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