Taxpayers who paid into Los Angeles’s illegally-imposed telephone user taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. will get their refunds, after a ruling today from the California Supreme Court ruling in Ardon v. City of Los Angeles. Echoing a friend-of-the-court brief filed by the Tax Foundation’s Center for Legal Reform, the Court ordered the city to certify a class-action lawsuit filed by taxpayer Estuardo Ardon to refund the tax’s proceeds.
The city had insisted that every taxpayer file their own refund claim (with the city keeping any unclaimed funds). The trial court and appeals court had agreed with the city, holding that no law permitted class-action procedure in tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. cases, and to allow it would threaten city operations. In its ruling today, however, the Court rejected that argument. Instead, they held that while governments should be permitted to collect challenged taxes before a final ruling, once a tax is declared illegal it should be refunded in any manner not precluded by state law.
This case is significant because class-action lawsuits are often the only way to ensure that illegally collected revenues are refunded to taxpayers. They offer efficiency and predictability; taxpayers need not file millions of redundant claims, and the courts can concentrate their resources on one case.
With this decision, California signals that providing taxpayers with due process is a priority. Los Angeles collects $270 million a year in telephone taxes; the exact amount that will be refunded is yet to be determined. Similar cases filed against other California cities were stayed pending the outcome of this case. Courts have held that telephone taxes based on the duration of the call without regard to distance are illegal, and in 2006, the Internal Revenue Service ceased collecting the federal tax. Los Angeles and other California cities continued to do so, leading to this litigation.
For more on the Tax Foundation’s involvement in the Ardon case, see here:
https://taxfoundation.org/legacy/show/26473.html.
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