Tax Refund Class Action Review

This month, I want to briefly examine a fairly significant decision that may have snuck under most people’s radar: Ardon v. City of Los Angeles (2011) 2 Cal.4th 241. In Ardon, the California Supreme Court answered the question of whether Government Code section 910 allows taxpayers to file a class action claim against a municipal governmental entity for the refund of local taxes. For those of you who don’t want to read all the way to the end to get the answer, the Supreme Court said (more or less) yes. The court unanimously held that tax refund class actions against municipal entities are authorized under the Government Code. At least, under most circumstances. I’ll get to that nuance in a bit, but first the basics.

In Ardon, the plaintiff filed a class action lawsuit challenging the City of Los Angelesʹ telephone users tax and seeking refund of the taxes collected over the previous two years. The City didn’t necessarily contest the legal basis for the claimed refund, but argued by way of a motion to strike all class allegations that the plaintiff lacked standing to present a claim on behalf of a class of people. Instead, the City contended that under Woosley v. State of California (1992) 3 Cal.4th 758, each claimant had to present his or her own claim individually.

The trial court granted the motion to strike. On appeal, a divided court of appeal affirmed the trial courtʹs order. Interestingly, in so doing, the panel specifically rejected its own reasoning and contrary holding in prior, nearly identical case, County of Los Angeles v. Superior Court (Oronoz) (2008) 159 Cal.App.4th 353. The Supreme Court granted review to resolve conflicting opinions in the appellate courts about the propriety of class claims in this context.

The main issue resolved in Ardon was the apparent clash between the holdings in City of San Jose v. Superior Court (1974) 12 Cal.3d 447, which authorized class claims against a public entity, and Woosley v. State of California (1992) 3 Cal.4th 758, which did not. In City of San Jose, the plaintiffs had filed a class claim against the City of San Jose, alleging that aircraft noise, dust, vapors, and vibration arising from operations at the San Jose Municipal Airport were a nuisance and diminished the market value of their property. City of San Jose, at pp. 453, 455. The City argued that a claim presented on behalf of a

class of people could not satisfy the requirements of Government Code section 910, but the Supreme Court disagreed.

In addressing the section 910 class claim, City of San Jose concluded that the word “claimant” referred to the class itself, not to an individual class member. The court “reject[ed] the suggested necessity for filing an individual claim for each member of the purported class…” City of San Jose, supra, 12 Cal.3d at p. 457. The court reasoned that “[t]o require such detailed information in advance of the complaint would severely restrict the maintenance of appropriate class actions,”contrary to recognized policy favoring them. Id. The court did not believe that section 910 was “intended to thwart class relief.” Id.

Woosley involved a constitutional challenge to the stateʹs vehicle license fees and use taxes imposed on passenger vehicles sold outside California. In addition to deciding the constitutionality of the fees (unconstitutional), the court also addressed whether the trial court had erred in certifying the claim as a class claim. The Woosley court concluded the class claim should not have been permitted. Id. at p. 789. The Court held that article XIII section 32 of the California Constitution required an action for tax refunds against the state to be brought in the manner that the Legislature specified under the statutes at issue. Id. And since statutes dictating the procedural requirements for obtaining refunds of vehicle license fees and use taxes did not authorize class action claims, a class claim was not permitted. Id. at p. 788.

In Ardon, the Supreme Court reconciled these two decisions in the context of a claim to recover local taxes. The court clarified that neither Woosley, which concerned the interpretation of statutes other than section 910, nor article XIII, section 32 of the California Constitution, bars class claims that seek the refund of local taxes. Instead, the court concluded that Government Code section 910, and the interpretation given to that section in City of San Jose, permits taxpayers to file such a claim.

In reaching its conclusion, the court set out a useful history of the Government Claims process. Before the enactment of the Government Claims Act, claims against the state, local, and municipal governments were governed by “myriad state statutes and local ordinances.” The Government Claims Act, passed in 1959, was a response to this unnecessary complexity and a means to create a standardized procedure for bringing claims against local governmental entities. The purpose of the claims statutes “is to provide the public entity sufficient information to enable it to adequately investigate claims and to settle them, if appropriate, without the expense of litigation.” Id. at p. 455.

Importantly, for the purpose of tax refund actions, when passing the Government Claims Act, the Legislature enacted former section 703, subdivision (a) (now § 905, subd. (a)), which exempted from section 910 “[c]laims under the Revenue and Taxation Code or other statute prescribing procedures for the refund … of any tax….” The key language here is “Revenue and Taxation code or other statute.” The claim in Ardon – a demand for a refund of use taxes imposed by the City of Los Angeles – was not governed by either the Revenue and Taxation code or any other statute. As such, section 905 did not apply, and the claim was governed by section 910.

The Ardon court also rejected or disagreed with several cases decided after Woosley that concluded that article XIII, section 32 of the California Constitution bars class claims and class actions for the refund of locally adopted taxes absent specific state statutory authority. See Howard Jarvis Taxpayers Assn. v. City of Los Angeles (2000) 79 Cal.App.4th 242, 249, [rejecting taxpayer suit challenging a municipal home occupation ordinance]; Neecke v. City of Mill Valley (1995) 39 Cal.App.4th 946, 961 [rejecting property ownerʹs action challenging a city property tax]. The Supreme Court emphatically stated that “we specifically disagree with the overbroad statement in Howard Jarvis Taxpayers Assn. that “class‐action‐type lawsuits seeking a refund of fees and taxes are barred unless each plaintiff has first filed an administrative refund claim with the City.” Ardon at p. 249.

In the end, the court agreed with the plaintiff’s position that the lower courts improperly extended the reach of article XIII, section 32 of the California Constitution

beyond state entities and their agents to a local government. Likewise, the court rejected the City’s claim that equating the term “claimant” with “the class itself” is

inconsistent with the strict compliance standard set forth in Woosley for tax refund claims. “All that Woosley demands is that a court first examine the claims statutes at issue in a claim for a taxpayer refund to determine whether the Legislature contemplated a class claim under the applicable California code.”

So if you have made it this far, you will recall at the beginning I said Ardon authorized class claims for refunds of local taxes in most cases. But here’s the wrinkle. In Ardon, the court was not confronted with a circumstance where the local municipal entity has enacted specific ordinances relating to claims for the refund of taxes. The City of Los Angeles does not have an ordinance prescribing the method of claiming refunds of the Telephone Users’ Tax, and therefore the Ardon court dodged having to decide the question of what happens when a local ordinance conflicts with section 910. But many other municipalities do have such ordinances, and many of those ordinances expressly prohibit class actions.

So what happens in those cases? Well, the California Supreme Court ultimately will decide that question in McWilliams v. City of Long Beach, S202037 (Los Angeles Sup. Ct. Case No. BC361469). In that case, the court will have to resolve the apparent conflict between Batt v. City and County of San Francisco (2007) 155 Cal.App.4th 65, and County of Los Angeles v. Superior Court (Oronoz), supra, 159 Cal.App.4th 353. Batt held that the local municipal ordinance governed; Oronoz held the Government Code prevailed over any conflicting municipal ordinance.

In my view, however, Ardon, Woosley, and City of San Jose compel the conclusion that section 910 prevails over any municipal ordinance to the contrary, and class claims must be allowed. Aside from the obvious fairness issues, the key point is the distinction between a statute and a local ordinance. Woosley commands deference only to statutes passed by the state Legislature, not local ordinances. And Government Code section 905, the only legislatively‐created exception for tax refund claims, speaks of following guidelines set out in the “Revenue and Taxation code or other statute.” Under these decisions, and the general reasoning of the court in Ardon, if follows that when a local ordinance conflicts with Government Code section 910 (a statute), the requirements of section 910 must prevail. Otherwise, local entities would be free to pass all measure of ordinances thwarting the unified claims process of the Government Claims Act and

defeating the legislative purpose behind the Act.