McClain v. Sav-On Drugs

Decision Date13 March 2017
Docket NumberB265029,B265011
CourtCalifornia Court of Appeals Court of Appeals
Parties Michael MCCLAIN et al., Plaintiffs and Appellants, v. SAV-ON DRUGS et al. Defendants and Respondents.

The Kick Law Firm, Taras P. Kick, G. James Strenio, Santa Monica; McKool Smith Hennigan, Bruce R. MacLeod and Shawna L. Ballard, Redwood Shores, for Plaintiffs and Appellants.

Reed Smith, Douglas C. Rawles, James C. Martin and Kasey J. Curtis ; Morgan Lewis & Bockius, Joseph Duffy and Joseph Bias, Los Angeles, for Defendants and Respondents Walgreen Co. and Rite Aid Corporation.

Berry & Silberberg, Robert P. Berry and Carol M. Silberberg for Defendant and Respondent Wal-Mart Stores, Inc.

Morrison & Foerster, David F. McDowell and Miriam A. Vogel, Los Angeles, for Defendant and Respondent Target Corporation.

Holland & Knight, Richard T. Williams and Shelley Hurwitz, Los Angeles, for Defendants and Respondents CVS Caremark Corporation, Longs Drug Stores Corporation and Longs Drug Stores California, Inc.

Safeway, Inc., Theodore Keith Bell for Defendants and Respondents The Vons Companies, Inc. and Vons Food Services, Inc.

Hunton & Williams, Phillip J. Eskenazi and Kirk A. Hornbeck, Los Angeles, for Defendants and Respondents Albertson's Inc. and Sav-On Drugs.

Kamala D. Harris, Attorney General, Stephen Lew, Supervising Deputy Attorney General, and Nhan T. Vu, Deputy Attorney General, for Defendant and Respondent California State Board of Equalization.


A customer buys skin puncture lancets and test strips used by diabetics to test blood glucose levels from a retail pharmacy store like CVS or Walgreens. The retail pharmacy is the one obligated to pay sales tax to the State of California (Rev. & Tax. Code, § 6051 ),1 and accordingly charges the customer a "sales tax reimbursement" to cover the cost of the sales tax and remits that amount to the state. If the retail pharmacy subsequently believes no sales tax is owed, it—as the taxpayer—can file an administrative claim for a refund with the state Board of Equalization (the Board) and challenge any adverse ruling in court. (§§ 6901 & 6932.) But the retail pharmacy usually has no financial incentive to pursue such a remedy because any refund it obtains from the Board must be passed back to the customer. (§ 6901.5; Decorative Carpets, Inc. v. State Board of Equalization (1962) 58 Cal.2d 252, 254-255, 23 Cal.Rptr. 589, 373 P.2d 637 (Decorative Carpets ).) What is more, and as our Supreme Court recently reaffirmed in Loeffler v. Target Corp. (2014) 58 Cal.4th 1081, 1123-1124, 171 Cal.Rptr.3d 189, 324 P.3d 50 (Loeffler ), the customer is not the taxpayer and thus cannot herself seek a refund from the Board.

May the customer obtain a court order compelling the retail pharmacy to file an administrative refund claim with the Board? Our Constitution strictly limits refund actions to those "provided by [our] Legislature" (Cal. Const., art. XIII, § 32 ), and no such statutory remedy exists. However, our Supreme Court in Javor v. State Board of Equalization (1974) 12 Cal.3d 790, 802, 117 Cal.Rptr. 305, 527 P.2d 1153 (Javor ) held that the Legislature's authority in this regard is not exclusive and that courts retain a residual power to fill remedial gaps by fashioning tax refund remedies in "unique circumstances." Loeffler had no occasion to define those "unique circumstances." (Loeffler , supra , 58 Cal.4th at pp. 1101, 1133-1134, 171 Cal.Rptr.3d 189, 324 P.3d 50.)

This case squarely presents this unanswered question. We conclude that a court may create a new tax refund remedy—and, accordingly, that the requisite "unique circumstances" exist—only if (1) the person seeking the new tax refund remedy has no statutory tax refund remedy available to it, (2) the tax refund remedy sought is not inconsistent with existing tax refund remedies, and (3) the Board has already determined that the person seeking the new tax refund remedy is entitled to a refund, such that the refusal to create that remedy will unjustly enrich either the taxpayer/retailer or the Board. Here, a group of customers filed a class action predicated on their ability to obtain an order compelling the retail pharmacies to file an administrative claim with the Board seeking a refund of the sales tax paid for skin puncture lancets and glucose test strips. Because the Revenue and Taxation Code does not provide for this remedy and because they have not established any of the three prerequisites to the exercise of the judicial residual power to fashion new remedies, the trial court correctly sustained demurrers to all of the claims in the customers' operative complaint without leave to amend. We consequently affirm the judgment below.

I. Facts

Plaintiffs and appellants Michael McClain, Avi Feigenblatt, and Gregory Fisher (collectively, customers) each bought skin puncture lancets and glucose test strips from retail pharmacy stores owned and/or operated by defendants and respondents Sav-On Drugs, Gavin Herbert Company, Longs Drug Stores Corporation, Longs Drug Stores California, Inc., Rite Aid Corporation, Walgreen Co., Target Corporation, Albertson's Inc., The Vons Companies, Inc., Vons Food Services, Inc., and Wal-Mart Stores, Inc. (collectively, the retail pharmacies). Skin puncture lancets (or lancets) and glucose test strips are used by persons living with diabetes

to draw their blood and test its glucose level, which is critical to knowing when to inject insulin to reduce their glucose levels. When the customers purchased lancets and test strips from the retail pharmacies, the retail pharmacies charged them "sales tax" on those items. The retail pharmacies subsequently remitted the money they collected as sales tax to the Board.

II. Procedural History

In the operative fourth amended complaint filed in 2014,2 the customers sued the retail pharmacies and the Board3 for a refund of the "sales tax" they paid for lancets and test strips, alleging that these items have been exempt from sales tax since March 10, 2000, the date on which the Board made effective California Code of Regulations, title 18, section 1591.1, subdivision (b)(5) (Regulation 1591.1). This complaint sought to certify a class comprised of "all persons who were charged by and paid one or more of the [retail pharmacies] a sales tax on glucose test strips or skin puncture lancets in California when such should not have been charged."

The operative complaint alleges that the retail pharmacies collected sales tax reimbursement for lancets and test strips when no sales tax was due on these items and that this conduct (1) breached an implied term of the contract that is deemed by statute to exist whenever a retailer collects a sales tax reimbursement from a customer under Civil Code section 1656.1 and also breached the implied covenant of good faith and fair dealing; (2) constituted an unlawful, unfair and/or fraudulent business practice and thereby violates the unfair competition law (UCL) (Bus. & Prof. Code, § 17200 et seq. ); (3) constituted negligence; and (4) violated the Consumer Legal Remedies Act (Civ. Code, § 1750 et seq. ) by misrepresenting the taxability of those items. The operative complaint further seeks declaratory and injunctive relief compelling the retail pharmacies to prosecute a tax refund claim with the Board and the Board to award such a refund.

The retail pharmacies and the Board demurred to the operative complaint. Following briefing, the trial court issued an oral ruling sustaining the demurrers to all of the claims in the operative complaint without leave to amend. The court reasoned that Loeffler , supra , 58 Cal.4th 1081, 171 Cal.Rptr.3d 189, 324 P.3d 50 held that a customer could not seek a tax refund of sales tax from a retailer; that Javor , supra , 12 Cal.3d 790, 117 Cal.Rptr. 305, 527 P.2d 1153 allowed a customer to seek a refund of sales tax where the Board had already decided the question of taxability and concluded that a refund was due; and that "[t]his case is more like Loeffler than Javor " because the taxability of lancets and test strips was "very hotly in dispute."

Following entry of judgment, the customers filed this timely appeal.

I. Pertinent Legal Principles
A. Relevant tax law

1. Sales tax generally

In California, retailers are generally required to pay the state a sales tax on any "tangible personal property" they sell "at retail." (§ 6051 ; Loeffler , supra , 58 Cal.4th at p. 1103, 171 Cal.Rptr.3d 189, 324 P.3d 50 ["under California's sales tax law, the taxpayer is the retailer, not the consumer" ]; De Aryan v. Akers (1939) 12 Cal.2d 781, 783, 87 P.2d 695 [same].) Retailers pay the sales tax as a percentage of their "gross receipts" (§ 6051 ), and it is rebuttably presumed that all "gross receipts" are subject to the tax (§ 6091). Retailers pay the sales tax they owe on a quarterly basis. (§§ 6451-6459; State Bd. of Equalization v. Superior Court (1985) 39 Cal.3d 633, 640, 217 Cal.Rptr. 238, 703 P.2d 1131.)

2. Collection of sales tax reimbursement from the customer

Although retailers were in the past required to collect the money they had to pay as sales tax from their customers (former § 6052),4 our Legislature altered that approach after the United States Supreme Court held that a retailer's mandatory collection of sales tax from customers rendered the customer the de facto taxpayer. (Diamond National v. State Equalization Bd. (1976) 425 U.S. 268, 268 [96 S.Ct. 1530, 47 L.Ed.2d 780].) Under our Legislature's current approach, it is up to each retailer to decide—as a matter of contract with its customers—whether to charge its customers a "sales tax reimbursement to the sales price" for items subject to the sales tax, or whether to pay the sales tax itself. (Civ. Code, § 1656.1, subd. (a).)5 If a retailer "show[s]" a charge for sales tax on the receipt or "other proof of sale," or otherwise notifies a...

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