McClain v. Sav-on-Drugs
Background
In California, the sales tax treatment of diabetic supplies is a complicated. By statute, medicines are tax-exempt, while regulations provide that glucose test strips and skin puncture lancets are exempt only if they are furnished by a registered pharmacist for use by a diabetic patient in accordance with a physician’s instructions.3 In June of 2003, the California State Board of Equalization4 (Board) conducted a survey, which concluded retailers applied the exemption inconsistently. The Board issued an instructive letter that delineated the strict requirements for the exemption, stating that a diabetic patient must provide the retailer with a copy of the physician’s instructions and that the retailer must keep a copy of this document in its records.5 In addition, the test strips and lancets could not be sold directly off the shelf; instead, they must be held in a secure location and dispensed by the retailer’s pharmacist.6
Plaintiffs Michael McClain, Avi Feigenblatt, and Gregory Fisher allegedly purchased glucose test strips and skin puncture lancets off the shelf from various retail pharmacies across California. Plaintiffs alleged that each of the retail pharmacies collected sales tax reimbursements from Plaintiffs in connection with Plaintiffs’ purchases and remitted those reimbursements to the state. Plaintiffs filed a putative class action lawsuit against 10 major retailer operations that operated pharmacies in California. The final version of the complaint sought damages for what Plaintiffs alleged was an improper tax and to compel the retailers to seek a refund of the amounts paid in tax to the Board under past California Supreme Court precedent, Javor v. State Bd. of Equalization.7 In their lawsuit, Plaintiffs asserted that all sales of the test strips and lancets were exempt from sales tax and that the Board’s instructive letter was void.
Court’s decision and implications
In its unanimous opinion, the California Supreme Court upheld the trial court’s rejection of the Plaintiffs’ claims for damages and to compel retailers to seek sales tax refunds. Before the Supreme Court, Plaintiffs had relied principally on Javor, a 40-year-old case in which the Supreme Court endorsed a remedy by which consumers may compel retailers to pursue sales tax refund claims on their behalf. Plaintiffs argued that because they bore the economic burden of the sales tax and paid sales tax reimbursements, they should be permitted to pursue the same remedy allowed in Javor. Emphasizing the factual differences between the Plaintiffs’ case and Javor, the court rejected the argument. In particular, the court found significant that in Javor taxability was not in dispute as the Board had already determined a refund and adopted a regulation authorizing the return of the money collected as sales tax. The issue in Javor was that the retailers, who were the taxpayers, had no incentive to seek the refunds because the retailers were required to give any refund obtained to the purchasers. The Javor court simply provided plaintiffs with a judicial remedy to recover funds that the Board determined was due to the plaintiffs because there was no statutory or administrative remedy in place. In McClain, however, the court focused on the fact that the Board had not made a determination of the taxability of diabetic supplies, which was fatal to the Plaintiffs’ Javor claim:
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.
The court explained that the remedy provided in Javor is only available when the issue of taxability has already been resolved, and Javor cannot be expanded beyond its narrow application to allow a consumer to force a retailer to pursue an exemption for any good purchased when the taxability of the good is unresolved. It noted that consumers have other avenues to air their perceived grievances or seek relief, but they simply may not sue retailers in an attempt to force retailers to litigate taxability on their behalf. The court noted that consumers could request a determination regarding the validity of a regulation, such as the taxability of glucose test strips and skin puncture lancets. Once the threshold issue of taxability is decided and the Board determines that a refund is due, only then may consumers ask retailers to file refund claims on their behalf.
Significance and takeaways
McClain confirms that the equitable remedy from Javor is a limited one. It is only available when there is a conclusive determination a refund is owed and should not be used as a means to force retailers to seek sales tax refunds for sales consumers think are exempt without any determination from the Board. Instead, the proper avenue is for consumers to petition for administrative relief or challenge the validity of a sales tax regulation or statute in court. Assuming the consumer prevails in such a challenge and receives a legal determination that a sales tax refund is owed, the McClain decision suggests that a consumer may seek to compel a retailer to pursue a refund claim on its behalf under the confines of Javor. Even then, however, the McClain court cautioned that the legal determination is a threshold requirement, and that even when satisfied, “additional legal and equitable hurdles still may lie between a consumer and a Javor remedy.” This is because “a Javor remedy is available ‘in limited circumstances,’” and the question whether “any particular individual is entitled to a refund will require an evidentiary determination specific to that individual.”
- McClain v. Sav-On-Drugs, Opinion No. S241471 (Mar. 4, 2019).
- The authors would like to thank Akeen Patel, a law clerk with Reed Smith, for his contributions to the drafting of this alert.
- Cal. Code Regs., tit. 18, § 1591.1, subd. (b)(5).
- As of July 1, 2017, the California Department of Tax and Fee Administration took over the responsibilities of the California State Board of Equalization. For ease of reference and consistency, this alert refers to the administrative functions and being performed by “the Board.”
- Cal. State Board of Equalization Program Planning Manager Charlotte Paliani, letter to Albertson’s regarding regulation 1591.1 (June 18, 2003).
- Id.
- Javor v. State Bd. of Equalization, 12 Cal. 3d 790 (1974).
Client Alert 2019-063
