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Target can tax coffee sold to go, Calif. SC rules

By Kyla Asbury | Jun 3, 2014

LOS ANGELES (Legal Newsline) - The Supreme Court of California has affirmed the Court of Appeals decision that Target was not at fault for charging sales tax on hot coffee sold "to go."

The plaintiffs, including Kimberly Loeffler, are consumers who contend that Target represented that it properly was charging them sales tax reimbursement on sales of hot coffee sold "to go," when, according to plaintiffs, the tax code rendered such sales exempt from sales tax.

Justices Tani Cantil-Sakauye, Marvin R. Baxter, Carol Corrigan and Ming Chin had the majority opinion.

Justices Goodwin Liu and Kathryn Werdegar and Court of Appeal-4th Appellate District, Division Three Justice Eileen C. Moore dissented.

"They brought an action against defendant retailer under two consumer protection statutes, seeking a refund of the assertedly unlawful charges, damages, and an injunction forbidding collection of sales tax reimbursement for such sales," the May 1 decision states. "The trial court sustained defendant's demurrer without leave to amend, and the Court of Appeal affirmed, concluding that plaintiffs' action was not authorized under the tax code and was barred by article XIII, section 32 of the California Constitution."

That provision limits the manner in which taxpayers may seek a refund of taxes from the taxing entity.

"We affirm the judgment of the Court of Appeal, although our analysis differs somewhat from that court's analysis," the decision states. "We conclude that the tax code provides the exclusive means by which plaintiffs' dispute over the taxability of a retail sale may be resolved and that their current lawsuit is inconsistent with tax code procedures."

The plaintiffs alleged that "the sale of hot coffee drinks 'to go' or for 'take-out' is not subject to sales tax" under section 6359 and a related regulation adopted by the state Board of Equalization.

The plaintiffs alleged that "[defendant] falsely and illegally represented to members of the general public that it had the legal right to charge the sales taxes described herein including, but not limited to, oral representations made by [its] agents, and on receipts and registers at [its] facilities."

The plaintiffs alleged that Target's actions constituted unlawful, unfair and fraudulent business acts and practices.

The defendant "argued that consumer remedies regarding sales taxes should be permitted only as specifically provided by the Legislature, asserting that the Board is responsible in the first instance for deciding whether retailers have collected too much sales tax reimbursement from consumers," the decision states.

"Plaintiffs responded that at the demurrer stage, there was no record of whether Target paid the sales tax it collected to the Board, nor need there be any such allegation in the complaint," the decision states.

Plaintiffs further asserted that the state constitutional limitation on lawsuits for tax refunds did not apply, and that the doctrine of primary jurisdiction should not apply.

"As for their UCL claim, plaintiffs argued that even if the tax code provided no private right of action, the UCL supplied a basis for their claim," the decision states. "They alleged that violation of section 6359... and the statute's related regulation, is 'unlawful' and therefore supports their UCL claim."

The plaintiffs requested leave to amend the complaint to "bring in the Board and then proceed in that manner..."

The plaintiffs filed a second amended complaint, but did not add the board as a defendant. It only added details concerning purchases and alleged Target never inquired whether coffee purchases were to go.

The defendant demurred and also "repeated its assertion that the court should decline to exercise its equitable power under the doctrine of primary jurisdiction," the decision states. "At the hearing on the demurrer, the trial court commented that the second amended complaint was 'déjà vu all over again.'"

The plaintiffs disputed the significance of the question of the board's jurisdiction over the claim and stated that what some courts have done in this circumstance was to stay the case, advise them to seek refund from the board and then if the answer is "no," go forward with the case.

The defendant countered that plaintiffs had chosen the wrong way to go about their claim and objected to the idea.

"The court sustained the demurrer to the second amended complaint without leave to amend and dismissed the case with prejudice, stating that it agreed with 'much' of defendant's argument and written pleadings," the decision states.

The plaintiffs appealed and the Court of Appeal affirmed the judgment in favor of Target.

"We reject plaintiffs' argument and find that a court may not directly or indirectly enjoin or prevent the collection of a sales tax," the decision states.

The minority filed a dissenting opinion.

"Whether Target may charge sales tax on a cup of coffee is probably not the most gripping issue before the California Supreme Court this term," the dissenting opinion states. "But this is not really a tax case. This is a case about the reach of consumer protection statutes that prohibit unfair business practices, including misrepresentations by a retailer as to what its customers are actually paying for."

Importantly, no law requires a retailer to recoup sales taxes from its customers, and no law requires customers to reimburse a retailer for sales taxes, according to the dissenting opinion.

"Whether a retailer may add sales tax reimbursement to the sales price of the tangible personal property sold at retail to a purchaser depends solely upon the terms of the agreement of sale," the dissenting opinion states.

As with any sales agreement, the terms must not misrepresent what the purchaser is paying for.

"Target could have avoided this lawsuit simply by advertising hot coffee to go at a higher (post-tax) price with a sign that says 'all prices include applicable sales tax.'" the dissenting opinion states.

"Such an approach would not misinform customers; it would tell them that the price they are paying includes any applicable sales tax, with no representation as to whether sales tax was applicable to a particular transaction. Indeed, the Board has informally advised Target to use this approach to avoid future problems."

But, according to the dissenting opinion, it is evident that this approach would eliminate the competitive advantage that Target enjoys from its current practice of advertising its coffee at a lower (pre-tax) price and then adding sales tax to each sale, whether or not each sale is actually subject to sales tax.

"Because of today's ruling, we may never know when hot coffee to go is actually subject to sales tax because neither a retailer nor the Board has any incentive to resolve the issue," the dissenting opinions states. "That in itself is no great travesty. But why should a retailer be allowed to misrepresent to consumers that all sales of a particular item are subject to sales tax when in fact they are not?

Los Angeles County Superior Court case number: BC360004

From Legal Newsline: Kyla Asbury can be reached at classactions@legalnewsline.com.

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