Reed Smith Client Alerts

On March 4, 2019, Reed Smith Los Angeles attorneys Doug Rawles and Kasey Curtis, and Pittsburgh-based Jim Martin, secured a 7–0 decision in favor of clients Rite Aid and Walgreen Co. from the California Supreme Court in McClain v. Sav-on-Drugs.1 The California Supreme Court affirmed the dismissal of a consumer class action brought against various retailors, including Rite Aid and Walgreen Co., who collected sales tax reimbursements from customers that purchased diabetic-testing supplies. The Supreme Court held that although consumers paid sales tax reimbursements, the consumers cannot compel retailers to pursue tax refunds on their behalf unless and until there is a legal determination that no tax was owed. The court provided consumers with options in lieu of filing suit against retailers and seeking to compel them to litigate taxability on their behalf.2

Authors: Douglas C. Rawles Kasey J. Curtis Shail P. Shah

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.