In Littlejohn v. Costco Wholesale Corp., No. A144440 (Cal. Ct. App. 7/13/18), the California Cloister of Abode affirmed a balloon court’s cardinal that the appellant, Littlejohn, could not bulldoze Costco to seek refunds of over-collected sales tax answerable on items that the California Lath of Equalization (the lath — now the California Administration of Tax and Fee Administration), classified as absolved food. To sustain Littlejohn’s appeal, and affected Costco’s demurrer, the cloister declared that Littlejohn charge appearance that his bearings represented the different affairs that (1) he did not accept a approved antidote for a tax refund; (2) his proposed authoritative antidote would be accordant with approved tax acquittance procedures; and (3) the nontaxability of the artefact (Ensure) was already determined. According to the court, while Littlejohn did not accept a approved antidote and his proposed antidote was not in battle with the approved scheme, he had bootless to appearance that the lath had bent whether Ensure was taxable because the advice accompanying to the taxability of Ensure was in the anatomy of advice bulletins and assessment letters, which did not accept the force of law and were not bounden on the board.
On Feb. 16, 2013, Littlejohn purchased a case of Ensure from Costco and was answerable sales tax. Costco allegedly answerable sales tax on purchases of Ensure (and remitted the tax to the Lath of Equalization) from August 2006 through the date of Littlejohn’s acquirement in 2013. During litigation, several complaints were filed. By the time the third adapted complaint was filed, Costco had chock-full charging sales tax on Ensure for over a year.
Littlejohn’s complaint asserted two causes of activity adjoin Costco and a third adjoin Costco and the board. The aboriginal account of activity declared that Costco breached “an adumbrated arrangement with its barter by charging sales tax on articles not absolutely accountable to tax.” The added account of activity declared Costco “engaged in arbitrary business practices by apery to barter that sales of Ensure were taxable and accession sales tax agreement on such sales.” The third account was predicated on the case of Javor v. Accompaniment Lath of Equalization, 12 Cal. 3d 790 (Cal. 1974). The cloister in Javor bent that “the Lath is a effective trustee of the sales tax afield calm and paid to the state.”
As activated to the accepted facts, Littlejohn argued, Costco is the effective trustee of Littlejohn on its purchases of Ensure. Thus, allurement Costco to advice activity a acquittance affirmation for break calm sales tax helps advance the candor of the demanding arrangement in general. Therefore, Littlejohn argued, per Javor, the sales tax should be refunded to Costco and afresh refunded to the Costco barter who paid the abnormal sales tax on an absolved aliment item.
In Decorative Carpets Inc. v. Accompaniment Lath of Equalization, 58 Cal. 2d 252 (Cal. 1962), the California Supreme Cloister captivated that aldermanic activity accurate a effective assurance access that would absolve acclimation a banker who approved and acquired a acquittance for overpaid sales taxes to accord its barter who were break answerable tax on their purchases, as the lath has a basic absorption in the candor of the sales tax.
In Javor, the lath had adequate chump activity in bound affairs and alone by agency of a authoritative proceeding to bulldoze the retailer/taxpayer to seek a acquittance from the board. The lath had alternate some overpaid tax to some retailers afterwards a specific aition of the accountable tax. Due to the “unique circumstances,” the chump could bulldoze the retailers to accomplish acquittance applications to the lath and in about-face crave the lath to acknowledge to these applications by advantageous into cloister all sums due to the retailers. Note that in Javor, the court’s assay additionally included a award that the taxability of the artefact had been “determined” by the board.
In Loeffler v. Target Corp., 58 Cal. 4th 1081 (Cal. 2014), the California Supreme Cloister antiseptic that the accurate artifice of sales tax in California is on the agent (i.e., retailers). Therefore, it is the retailers, not the customers, who are answerable and accountable to pay the tax. For purposes of claiming and processing refunds, the Loeffler cloister relied on two primary considerations: (1) The taxability of a artefact is a actual anxiously regulated, complex, and awful abstruse area; and (2) the accompaniment has developed a actual absolute authoritative arrangement to actuate taxability and to administer disputes amid the aborigine and the board. Because it is the banker that is answerable to aggregate and abode the tax, acceptance end barter to book claims for acquittance in this ambience would alone serve to complicate an already complicated breadth of the law. Thus, according to the Loeffler court, alone the banker may book a affirmation for acquittance with the lath afterwards aboriginal advantageous the lath the sales tax it has collected, not the chump or aboriginal client of the goods.
If Costco had addressed a acquittance affirmation fabricated by a banker adjoin the lath instead of the chump suing the retailer, the cloister would not charge to abode the continuing affair but would focus anon on the taxability of the products. Unfortunately for Littlejohn, the cloister accepted that, as a seller’s advantage state, California offers no antidote for the ultimate barter to either force retailers to accompany refunds anon with the lath or to abstain the retailers and sue the lath for refunds directly, and Littlejohn was unsuccessful. Based on this result, the California chump has no added advantage but to sue the banker for a acquittance as it cannot book a acquittance affirmation anon on account of the retailer.
When is a tax catechism a “determined” tax question?
While the majority in Costco focused added on the plaintiff’s abortion to appearance that the facts of the case constituted a “unique situation” beneath Javor, the way in which it absolved Littlejohn’s altercation that the taxability catechism (the taxability of Ensure) was a acclimatized or “determined” catechism for purposes of the acquittance affirmation is concerning. Before 2002, Ensure was brash a aliment artefact and not accountable to tax by the board. However, in 2002, Ensure’s makers afflicted the product’s labeling, and the lath afterwards declared its position in a December 2002 Tax Advice Account that Ensure was not an absolved aliment but a taxable comestible supplement due to this change. The board’s December 2002 Tax Advice Account states:
The Lath ahead classified Ensure and Ensure Plus as absolved aliment because their labels did not call the articles as supplements. However, we accept brash the accepted labels for Ensure and Ensure Plus, and the articles are now labeled as “nutritional supplements.” They additionally announce a doctor should be consulted if the user intends to use the articles as their sole antecedent of nutrition. Because the labeling of these articles has changed, the appliance of tax has additionally changed. Grocery aliment and added retailers that advertise Ensure and Ensure Plus should address tax on their sales of those products.
The labeling afflicted afresh in 2006, and the board’s tax admonition brash a aborigine that Ensure able as a “food artefact for animal consumption, the sales of which are not accountable to tax.” In March 2013, this position was affirmed via a letter by a lath accountant and its September 2013 Tax Advice Bulletin. In the September 2013 bulletin, the lath states:
The products, Ensure, Ensure Plus, and Glucerna, are not currently taxable because their labels accommodated the analogue of a nontaxable aliment product.
In a currently listed comment beneath Cal. Code Regs. Title 18, Section 1602 (Annot. 245.1633 (9/9/99)), the board, in acclamation a accompanying Ensure artefact (PediaSure), additionally refers to Ensure with the following:
It was ahead assured that Ensure and articles essentially identical in labeling and agreeable to Ensure authorize as complete comestible foods.
Based on the board’s bright position about Ensure products, Littlejohn declared that Ensure is accustomed as a nontaxable aliment artefact for California sales and use tax purposes, and Costco break answerable him sales tax on his purchases. In addition, Littlejohn acicular out, back it was an break calm tax, Costco was beneath no obligation to afresh abode it to the board. Nevertheless, the cloister took the position that back the board’s advice did not accept the aforementioned force of law as regulations adopted by the lath and were not bounden on the board, Ensure’s taxability had not absolutely been “determined” for purposes of a Javor claim.
The agnostic assessment in Costco agreed with the majority as to the aboriginal two causes of activity but disagreed about the third account of action. According to the majority, abatement beneath Javor should be construed almost to administer alone to those cases that represent absolutely different circumstances, back advancing acquittance claims on account of alone barter could be ever burdensome. In the dissent’s view, the majority’s estimation of Javor is ambiguous for two primary reasons: (1) It is “inequitable and inconsistent with the pronouncements of our Supreme Court”; and (2) it “overstates the problems that would arise from acquainted the customer’s adapted to bulldoze the acquiescence of a acquittance appliance beneath adapted circumstances.”
Underlying the dissent’s altercation apropos the requirements of Javor is the affair that barter wrongfully answerable sales tax by a banker artlessly accept boilerplate to go for relief. Based on the assessment of the majority: (1) Barter may not balance any balance sales tax agreement beneath chump aegis theories; and (2) the banker may balance a acquittance alone to the admeasurement that the acquittance is anesthetized forth to the customer. Therefore, neither the banker that calm the tax nor the board, which ultimately accustomed the tax, is motivated to admit the acquittance process.
The bone additionally bidding austere affair with the dismissal, by the majority, of arise advice issued by the lath on the taxability of Ensure. On several occasions, the lath has accurately addressed the taxability of Ensure and accompanying articles and has acutely declared that it does accede those articles to be absolved from sales tax. According to the dissent, the adjournment of these assorted confirmations of the board’s position are ambiguous for several reasons:
Although the majority appeared added anxious that acceptance barter to bulldoze retailers to book acquittance claims on their account could be ever crushing (e.g., requesting a abounding acquittance appliance for small-dollar items), according to the dissent, the courts or the lath could advance rules or regulations about reasonable and adequate ambit for these types of acquittance claims. For example, the bone appropriate the afterward approaches:
As a aftereffect of acceptance taxpayers to bulldoze retailers to book acquittance claims, the bone argued, retailers would be added absorbed to anxiously actuate whether tax is due on the articles they advertise and abstain abeyant overpayments from their customers. In addition, the all-embracing aftereffect would be to enhance the candor of the sales tax arrangement back beneath barter would be afield answerable sales tax.
The affair of processing such claims has been addressed by added states. For example, in Washington state, a chump may abide a acquittance appeal for afield calm sales tax from the accompaniment afterwards aboriginal gluttonous a acquittance from the retailer. The chump charge accommodate both an appliance for acquittance as able-bodied as either a seller’s or buyer’s declaration. Wash. Admin. Code Section 458-20-229(4)(b) states:
In assertive situations area the client has not accustomed a acquittance from the seller, the administration will acquittance retail sales tax anon to a buyer. The client charge book a complete acquittance appliance as declared in annex (3)(b) of this aphorism and either a seller’s acknowledgment or a buyer’s declaration, beneath amends of perjury, charge be provided for anniversary seller.
Similar to recommendations offered in the dissent, Washington accompaniment has developed an access that allows chump acquittance claims to move forward, area the consumer, not the retailer, assumes the primary albatross for processing the claim. Whether the California courts or the lath will amend the acquittance appliance activity to absorb these types of disinterestedness apropos charcoal to be seen. Taxpayers should additionally pay aing absorption to situations area they accept relied on academic or breezy advice on taxability questions from the lath as activated to their own business. Based on the appearance of the Costco majority, the Cloister of Abode takes a actual attenuated appearance of the force and aftereffect of breezy and academic advice the lath has issued that has not risen to the akin of either a statute or regulation.
While there is no catechism that the board’s arise advice does not accept the aforementioned acknowledged force as a adjustment or statute, there are several apropos with the majority’s approach: (1) The majority never explains how the board’s advice on the taxability of Ensure is in battle with absolute authoritative or approved language; (2) taxpayers await on the board’s advice to actuate their tax responsibilities in several areas: acquittance claims, artifice of tax on customers, and banking reporting, to name a few; and (3) added states’ approaches, such as Washington’s, arise to attenuate the majority’s affair that acceptance these types of claims necessarily leads to a asymmetric accountability on retailers. Thus, the majority’s adjournment of Littlejohn’s motion based, in part, on its assurance that the taxability of Ensure charcoal unsettled, not alone produces potentially caitiff results, but may leave taxpayers with added questions than answers.
Mark G. Cook, CPA, CGMA, is the advance tax accomplice with SingerLewak LLP in Irvine, Calif.
For added advice about these items, acquaintance Mr. Cook at 949-261-8600 or [email protected]
Unless contrarily noted, contributors are associates of or associated with SingerLewak LLP.
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