California Cell Phone Tax Challenge Belongs in State Court

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Laura Mahoney

A fight over the amount of California sales tax consumers must pay on cell phones is moving back to state trial court after a federal court found it lacked jurisdiction ( Bekkerman v. Calif. Board of Equalization , E.D. Cal., 2:16-cv- 00709, 3/21/17 ).

Ruling against phone carrier AT&T Inc., Judge Morrison C. England of the U.S. District Court for the Eastern District of California said March 21 the Tax Injunction Act bars lawsuits involving state taxes from federal court.

England granted motions from the State Board of Equalization and a group of plaintiffs who originally filed the class action in state trial court in 2016. His decision moves the case back to state court for trial almost one year after AT&T moved the case to federal court on the grounds that it falls under the Class Action Fairness Act because of the size of the class and amount of money at issue.

Tax Injunction Act

England said the federal Tax Injunction Act bars federal courts from considering lawsuits involving state taxes, including refund actions. Beyond the TIA, principles of comity between the federal government and states mandate that federal courts “should refrain from entertaining suits that risk disrupting state tax administration.”

Attorneys for AT&T didn’t respond to a request for comment March 23.

Other wireless phone companies involved in the lawsuits include Sprint Corp., Verizon Wireless, and T-Mobile USA Inc.

The class action is part of a larger effort to strike down the SBOE’s rules on the application of sales tax to cell phones. The same plaintiffs have another lawsuit pending in state trial court in Sacramento against the SBOE, claiming the tax board’s Regulation 1585 is invalid because it requires consumers to pay sales tax on the full price of cell phones even when they pay a discounted price as part of a bundle with service plans and contracts.

Hundreds of Millions

Consumers have improperly paid hundreds of millions of dollars in tax because the SBOE’s regulations illegally impose sales tax on imaginary commissions the carriers don’t pay retailers to offset the discount, the plaintiffs claim. A trial is set for Dec. 8 in the challenge to the SBOE’s regulations ( Bekkerman v. Calif. Board of Equalization , Cal. Super. Ct., 34-2015- 80002242, 11/19/15 ).

In the class action, the plaintiffs aren’t asking for money from the phone carriers. They are asking that the carriers be compelled to seek refunds from the SBOE on their behalf, that the SBOE to pay the refunds and that the carriers be barred from paying future sales taxes to the state based on the full price of the phones.

Daniel M. Hattis, an attorney in Bellevue, Wash., representing the plaintiffs in both cases, said AT&T’s efforts to move the class action to federal court delayed the case. However, it will likely be stayed in state court until the underlying case challenging the SBOE’s regulations is complete.

Hattis filed the lawsuits after the five-member SBOE rejected his petition to repeal the cell phone tax rules in 2015.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif. at LMahoney@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

Text of the federal district court opinion is at http://src.bna.com/njd.

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