HOFFSTADT, J. —
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),
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.)
FACTS AND PROCEDURAL BACKGROUND
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,
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 Consumers 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 held that a customer could not seek a tax refund of sales tax from a retailer; that Javor, supra, 12 Cal.3d 790 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
2. Collection of sales tax reimbursement from the customer
3. Pertinent exemptions
The retail sale of many items of tangible personal property is exempt from the sales tax. (§§ 6351-6380 [exemptions from sales and use taxes], 6381-6396 [exemptions from sales tax].) Since 1961, the sale of "medicines" has been exempt from sales tax if "[p]rescribed for the treatment of a human being by a person authorized to prescribe the medicines, and dispensed on prescription filled by a registered pharmacist in accordance with law." (§ 6369, subd. (a)(1).) A few years later, in 1963, our Legislature declared "[i]nsulin and insulin syringes" exempt from the sales tax if they were "furnished by a registered pharmacist to a person for treatment of diabetes as directed by a physician." (Id., subd. (e).) On March 10, 2000, the Board promulgated Regulation 1591.1, which expanded this statutory exemption from the sales tax to reach "[g]lucose test strips and skin puncture lancets" if they were "furnished by a registered pharmacist [and] used by a diabetic patient to determine his or her own blood sugar level ... in accordance with a physician's instructions." (Reg. 1591.1, subd. (b)(5); see generally Rev. & Tax. Code, § 7051 [conferring upon Board the power to "prescribe, adopt, and enforce rules and regulations relating to the administration and enforcement" of the sales tax].) The Board expanded the sales tax exemption to these additional items because they "are an integral and necessary active part of the use of insulin and insulin syringes" expressly exempted by statute. (Reg. 1591.1, subd. (b)(5).)
B. Relevant statutory tax refund procedures
1. For retailers
First, the retailer can file an administrative claim with the Board for a refund of any amount "not required to be paid." (§ 6901.) It has three years from the last day of the quarter in which it is seeking a refund to file such an administrative claim. (§ 6902, subd. (a).) If and only if the Board declines to issue a refund, the retailer may challenge that denial in court if it files suit "[w]ithin 90 days" of the Board's mailing the notice of denial. (§ 6933; see § 6932; State Bd. of Equalization v. Superior Court (1980) 111 Cal.App.3d 568, 571 [169 Cal.Rptr. 3] (State Bd. of Equalization) ["pending completion of ... administrative proceedings [before the Board], [the] court lacks
Second, the retailer can elect to waive its right to a refund by declining to file a timely claim for administrative review. (§ 6905.)
2. For customers
C. Law governing demurrers and their review on appeal
In reviewing an order sustaining a demurrer without leave to amend, we must ask (1) whether the demurrer was properly sustained, and (2) whether leave to amend was properly denied. The first question requires us to "`"determine whether [that] complaint states facts sufficient to constitute a cause of action."'" (Centinela Freeman Emergency Medical Associates v. Health Net of California, Inc. (2016) 1 Cal.5th 994, 1010 [209 Cal.Rptr.3d 280, 382 P.3d 1116] (Centinela Freeman), quoting Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126 [119 Cal.Rptr.2d 709, 45 P.3d 1171].) In undertaking this task, we accept as true all "`"`material facts properly pleaded'"'" and consider any materials properly subject to judicial notice; we disregard any "`"`contentions, deductions or conclusions of fact or law'"'" set forth in the operative complaint. (Centinella Freeman, at p. 1010; see Mitchell v. State Dept. of Public Health (2016) 1 Cal.App.5th 1000, 1007 [205 Cal.Rptr.3d 261].) We independently review the operative complaint and independently decide whether it states viable causes of action.
II. The Demurrer Was Properly Sustained
The premise of every claim in the customers' operative complaint is that the retail pharmacies erred in collecting sales tax reimbursement on lancets and test strips at a time when they were exempt from sales tax. Accordingly, the customers cannot state a cause of action unless they can establish their entitlement to a refund. This raises the preliminary procedural question that lies at the heart of this case: Can the customers seek a refund of the amount they paid as sales tax reimbursement through the lawsuit they have filed?
Relying on Javor, supra, 12 Cal.3d 790, the customers argue that this lawsuit is a viable means for seeking a refund of the sales tax reimbursement they paid for lancets and test strips. Javor, they argue, held that customers who wrongly paid the sales tax reimbursement could obtain injunctive relief compelling retailers to file administrative claims with the Board to obtain a sales tax refund that could be passed back to the customers. (Id. at pp. 802-803.) This result, the customers urge, preserves the Board's ability to decide the taxability question in the first instance and prevents the state from being unjustly enriched by retaining sales tax to which it is not entitled. The retail pharmacies and the Board respond that the remedy sanctioned in Javor is limited to situations in which the Board has already determined that a refund is due and in which the newly created tax refund remedy would not create inconsistencies with existing tax refund statutes; both prerequisites, the retail pharmacies and Board urge, are absent. The availability of a judicially created remedy to supplement existing statutory remedies is a question of law that turns in part on questions of statutory interpretation; accordingly, our review is de novo. (City of San Diego v. Board of Trustees of California State University (2015) 61 Cal.4th 945, 956 [190 Cal.Rptr.3d 319, 352 P.3d 883] [questions of law reviewed de novo]; Department of Health Care Services v. Office of Administrative Hearings (2016) 6 Cal.App.5th 120, 140-141 [210 Cal.Rptr.3d 790] [statutory interpretation is a question of law].)
A. Governing law
This constitutional mandate has two necessarily implied corollaries. First, the "[a]dministrative tax refund procedures [enacted by the Legislature] are to be strictly enforced" (McCabe v. Snyder (1999) 75 Cal.App.4th 337, 344 [89 Cal.Rptr.2d 315]); "substantial compliance" with those procedures will not do. (Sprint Telephony, supra, 238 Cal.App.4th at p. 883; see IBM Personal Pension Plan v. City and County of San Francisco (2005) 131 Cal.App.4th 1291, 1299 [32 Cal.Rptr.3d 656] (IBM)). Second, and most pertinent here, courts may not "expand the methods for seeking tax refunds expressly provided by the Legislature." (Woosley, supra, 3 Cal.4th at p. 792; see Kuykendall v. State Bd. of Equalization (1994) 22 Cal.App.4th 1194, 1203 [27 Cal.Rptr.2d 783] (Kuykendall).)
However, this second corollary is not an absolute one and courts have on occasion recognized "equitable exception[s]" in "certain unique circumstances." (IBM, supra, 131 Cal.App.4th at p. 1305, fn. 16.)
The first case to do so was Decorative Carpets, supra, 58 Cal.2d 252. There, a retailer selling carpet sought a tax refund of the sales tax from the Board. It was determined in a tax refund suit between the retailer/taxpayer and the Board that the retailer was entitled to that refund. The retailer nevertheless declared its intention to keep the refund for itself and not to return it to its customers, even though the retailer had charged them a sales tax reimbursement. (Id. at pp. 253-254.) The Board balked at issuing the refund, arguing that it would "unjustly enrich" the retailer at its customers' expense. (Id. at p. 254.) Our Supreme Court in Decorative Carpets agreed, holding that the Board's "vital interest in the integrity of the sales tax" gave it the authority to "insist as a condition of refunding overpayments to [the retailer] that [the retailer] discharge its trust obligations to its customers" by refunding to them the corresponding sales tax reimbursement they had paid. (Id. at p. 255.)
Although Decorative Carpets dealt with a "greedy" retailer and Javor dealt with unmotivated retailers, both cases share three commonalities that, in our view, define the "unique circumstances" to which Javor alludes and that are prerequisites to the judicial recognition of any new tax refund remedy. First, in both Decorative Carpets and Javor, the customers had no available statutory tax refund remedy. (Decorative Carpets, supra, 58 Cal.2d at pp. 255-256; Javor, supra, 12 Cal.3d at p. 797; see also Loeffler, supra, 58 Cal.4th at p. 1114 [noting that customers in Javor had "no direct statutory provision for ... refunds"]; cf. State Bd. of Equalization, supra, 111 Cal.App.3d at p. 571 [declining to recognize new remedy because the "real party ... does not lack a [statutory tax refund] remedy"].) Second, in both Decorative Carpets and Javor, the judicially crafted remedies were "consonant" with the statutory tax refund procedures that our Legislature did provide. (Decorative Carpets, at p. 255; Javor, at pp. 800, 802; accord, Kuykendall, supra, 22 Cal.App.4th at pp. 1204 [noting that the "equity" of judicially created remedies "will defer to statute"].) Lastly, in both Decorative Carpets and Javor, there had been a precursor determination — either by the Board on its own volition or through its acquiescence to a court ruling in a tax refund action between the retailer/taxpayer and the Board — that a tax refund was due and owing. (Decorative Carpets, at p. 254; Javor, at pp. 794, 802.) Such a determination left no question that the court's refusal to fashion
The customers in this case do not dispute the necessity of the first two prerequisites, but dispute the third and offer several reasons why courts should have the power to fashion new tax refund remedies even when the entitlement to that refund is yet to be decided.
To begin, they assert that Javor itself disclaims any requirement of a prior determination that the tax refund is due and owing because, at one point, Javor explains that the customers there sought an order "to compel defendant retailers to make refund applications to the Board and in turn to require the Board to respond to these applications by paying into court all sums, if any, due defendant retailers." (Javor, supra, 12 Cal.3d at p. 802, italics added.) The customers argue that the phrase "if any" means that the retailers' entitlement to a refund was still an open question in Javor. They are wrong. Javor makes clear that "[t]he Board ha[d] admitted that it must pay these refunds to retailers" (ibid.); the court's use of the phrase "if any" simply acknowledged that some retailers might not have sold cars for which a refund is due — not that there were lingering questions about whether, as a legal matter, a refund was due.
Next, the customers argue that Javor's "unique circumstances" exist whenever a court is confronted with a situation involving a "legal taxpayer" who has the right but no incentive to seek a refund (here, the retail pharmacies) and an "economic taxpayer" who has the incentive but not the right to seek a refund (here, the customers). As the customers frankly acknowledge, however, this division of "taxpayer" status is an inherent feature of "the peculiar structure of California's retail sales tax" law, making that circumstance ubiquitous — not unique. More to the point, if courts could fashion new tax refund remedies simply because the Revenue and Taxation Code does not label the customer as the taxpayer, our Constitution's directive that the Legislature be the branch primarily charged with "provid[ing]" tax refund remedies would be rendered all but meaningless. (Cal. Const., art. XIII, § 32.) The customers urge that the risk to the state's coffers by virtue of new tax refund remedies is minimal given the statutory presumptions that customers agree to pay sales tax reimbursement (Civ. Code, § 1656.1, subd. (a)) and
The customers further cite a number of cases in which courts have allowed one party to file a derivative action for another. These cases fall into three broad categories, each of increasing irrelevance. The first is Delta, supra, 214 Cal.App.3d 518. There, the Court of Appeal held that an airline that paid sales tax reimbursement to a retailer for fuel could sue for a sales tax refund, even though it was not the taxpayer. (Id. at pp. 526-528.) In so holding, the court cited Javor and ruled that the case involved a "[unique] circumstance" authorizing judicial recognition of a new remedy of a direct lawsuit for a refund — namely, that California's tax statutes "regard common carriers such as Delta as retailers as well as purchasers." (Delta, at p. 528.) Indeed, Delta expressly distinguished common carriers from "ordinary purchasers or consumers." (Id. at p. 526.) The customers here are ordinary consumers, not common carriers. The second category involves cases in which a retailer who collected county or municipal taxes from consumers was held to have standing to sue for a refund, even though the retailer was not technically the taxpayer. (See Andal, supra, 137 Cal.App.4th at pp. 93-95; TracFone, supra, 163 Cal.App.4th at pp. 1364-1365; Sipple, supra, 225 Cal.App.4th at pp. 358-362.) In so holding, these cases declined to recognize a "sharp distinction between a `taxpayer' and a `tax collector'" or to follow a "strict rule denying standing in all circumstances to `tax collectors.'" (Sipple, at p. 359.) These cases are doubly irrelevant because they deal with the standing of a retailer who is a tax collector and not the standing of a consumer who is neither a tax collector nor a taxpayer, and because they deal with local taxes and thus are not constrained by California Constitution, article XIII, section 32's mandate which, as noted above, does require "strict" construction of tax refund statutes. (See Howard Jarvis Taxpayers Assn. v. City of La Habra (2001) 25 Cal.4th 809, 822, fn. 5 [107 Cal.Rptr.2d 369, 23 P.3d 601] [Cal. Const., art. XIII, § 32 does not apply to "local governments"]; City of Anaheim, supra, 179 Cal.App.4th at pp. 830-831 [same].) The last category involves the right of a limited partner to file a derivative action on behalf of a limited partnership. (Wallner v. Parry Professional Bldg., Ltd. (1994) 22 Cal.App.4th 1446, 1449-1450 [27 Cal.Rptr.2d 834].) Because it arises in a different context and involves a different statutory scheme, it is irrelevant.
As explained above, a court may create a new tax refund remedy — and, accordingly, Javor's "unique circumstances" exist — only if (1) the person seeking the new tax refund remedy has no statutory tax refund remedy available, (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. The trial court in this case ruled that it could not fashion a new judicial remedy to allow the customers to attack the Board's collection of sales tax on lancets and test strips. This ruling was correct because none of the three prerequisites is present in this case.
First, the customers do not have a statutory right to directly file for a refund of the sales tax from the Board or for a refund of sales tax reimbursement from the retailers, but they are not remedy-less. In fact, they have several other remedies available to them. They may urge the Board to initiate an audit of the retail pharmacies' practices in collecting sales tax or to conduct a deficiency determination of the retail pharmacies' sales tax payments (§§ 6481, 6483, 7054; Loeffler, supra, 58 Cal.4th at pp. 1103-1104, 1123 [noting that "consumers who believe they have been charged excess reimbursement ... may complain to the Board, which may in turn initiate an audit" or a "deficiency determination"].) They can, as "interested person[s],"
Second, judicial recognition of a right of customers to sue retailers and the Board for a sales tax refund when the Board has yet to determine whether any refund is due is inconsistent with at least two provisions of the Revenue and Taxation Code. It is inconsistent with section 6905. That section allows retailers to waive their right to seek a tax refund; if consumers can compel a retailer to seek a refund when it would rather waive it, the retailer's right to waiver would be negated. (Loeffler, supra, 58 Cal.4th at p. 1129 [so noting].) The consumers assert that the retailers' power to waive their right to a refund is irrelevant because the retailers' power to collect sales tax reimbursement from consumers is a matter of contract under Civil Code section 1656.1. But the contractual nature of the right to collect sales tax reimbursement in no way affects the fact that a judicial remedy compelling a retailer to seek a refund overrides a retailer's election not to seek one.
Third, the Board has yet to decide whether the retail pharmacies — and, by extension, the customers — are entitled to a refund. Regulation 1591.1 exempts the sales of lancets and test strips, but only when they are (1) "furnished by a registered pharmacist," and (2) "used by a diabetic patient... in accordance with a physician's instructions." (Reg. 1591.1, subd. (b)(5).) It has yet to be determined whether those two conditions are legally valid or were factually satisfied as to the customers' purchases. In their reply brief on appeal, the customers argue that the Board has conceded that a refund was due because the Board, in its brief on appeal, did not address the merits of the taxability issue and admitted that a 2003 opinion letter sent by a Board staff member arguably setting forth additional prerequisites to application of Regulation 1591.1's exemption was not a "binding determination of the Board." There was no concession. The Board did not address the merits of the taxability issue because the chief issue in this appeal is not the merits, but where and by whom they may be litigated. And the validity or invalidity of the 2003 opinion letter does not alter the undisputed fact that the Board has yet to determine that all of the sales the customers challenge fall within the ambit of Regulation 1591.1's exemption.
C. Customers' further arguments
The customers level two further categories of arguments at our conclusion.
We conclude that our refusal to craft a judicial tax refund remedy for consumers does not risk a due process violation. To begin, it is not precisely clear how due process applies to them. The payment of sales tax alleged in the operative complaint entails two sequential transactions: Consumers pay sales tax reimbursement to retailers, and retailers pay sales tax to the state. The first transaction is ostensibly outside the reach of due process because it reflects a contractual arrangement between two private parties (Civ. Code, § 1656.1; Coleman v. Department of Personnel Administration (1991) 52 Cal.3d 1102, 1112 [278 Cal.Rptr. 346, 805 P.2d 300] ["Only those actions that may fairly be attributed to the state ... are subject to due process protections"]), and the consumers are not parties to the second transaction. Further, our Supreme Court in Loeffler — although silent on this point — noted no constitutional impediment to its ruling that left consumers with no direct remedy for a refund and instead relegated them to urging Board inquiry and to filing claims or actions under the Administrative Procedure Act. (Loeffler, supra, 58 Cal.4th 1081.) Were we to come to a contrary conclusion, we would effectively overrule Loeffler, something we are not allowed to do except in narrow circumstances not present here. (Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 456 [20 Cal.Rptr. 321, 369 P.2d 937].)
Second, the customers assert that our ruling that we are powerless to craft a new judicial tax refund remedy does not warrant dismissal of their breach of contract claims or their second UCL claim. Specifically, the customers urge (1) that their breach of contract claims are grounded in Civil Code section 1656.1, which is effectively part of the Revenue and Taxation Code and is more specific than section 6901.5, and thus cannot be inconsistent with either the code or section 6901.5, (2) their second breach of contract claim is premised on allegations that one of the retailers who charged sales tax reimbursement sometimes did not mean to do so because its corporate policy did not call for it, and (3) that their second UCL claim is based upon allegations that the retail pharmacies should have informed them of the requirements to qualify for Regulation 1591.1's exemption.
III. Leave to Amend Was Properly Denied
The customers argue that the trial court erred in not allowing them to amend the operative complaint to add a claim that they were suffering an unconstitutional taking. Because, as explained above, such a claim lacks merit as a matter of law, the trial court's conclusion that there was no reasonable possibility the customers could amend their complaint to state a claim was correct.
* * * *
The result we reach in this case is not an entirely satisfying one. The retail pharmacies lack any financial incentive to challenge the Board's implementation of Regulation 1591.1 by seeking a refund, and the statutory remedies available to the customers — urging the Board to conduct an audit or filing a claim or lawsuit under the Administrative Procedure Act — while effective enough to satisfy due process, are nevertheless the practical equivalent of allowing them to tug (albeit persistently) at the Board's sleeve. However, this is the result we must reach because our Constitution chiefly assigns the task of creating tax refund remedies to our Legislature, and our Legislature has yet to address the situation that arises when the legal taxpayer has no incentive to seek a direct refund and the economic taxpayer has no right to do so. It is a topic worthy of legislative consideration. Because the prerequisites for making it a topic of judicial consideration are not present, we adhere to the statutes as they are written and affirm the order dismissing this case.
The judgment is affirmed. The Board and the retail pharmacies are entitled to their costs on appeal.
Chavez, Acting P. J., and Goodman, J.,