Retailer not required to file sales tax refund claim for consumer

By Peter Seidel, Los Angeles; Kristie Yonemura, Irvine, Calif.; and Mona Shekarchi, Irvine, Calif.

Editor: Mark G. Cook, CPA, CGMA

In Littlejohn v. Costco Wholesale Corp., No. A144440 (Cal. Ct. App. 7/13/18), the California Court of Appeal affirmed a trial court's ruling that the appellant, Littlejohn, could not compel Costco to seek refunds of over-collected sales tax charged on items that the California Board of Equalization (the board — now the California Department of Tax and Fee Administration), classified as exempt food. To sustain Littlejohn's appeal, and overcome Costco's demurrer, the court stated that Littlejohn must show that his situation represented the unique circumstances that (1) he did not have a statutory remedy for a tax refund; (2) his proposed judicial remedy would be consonant with statutory tax refund procedures; and (3) the nontaxability of the product (Ensure) was already determined. According to the court, while Littlejohn did not have a statutory remedy and his proposed remedy was not in conflict with the statutory scheme, he had failed to show that the board had determined whether Ensure was taxable because the guidance related to the taxability of Ensure was in the form of information bulletins and opinion letters, which did not have the force of law and were not binding on the board.

On Feb. 16, 2013, Littlejohn purchased a case of Ensure from Costco and was charged sales tax. Costco allegedly charged sales tax on purchases of Ensure (and remitted the tax to the Board of Equalization) from August 2006 through the date of Littlejohn's purchase in 2013. During litigation, several complaints were filed. By the time the third amended complaint was filed, Costco had stopped charging sales tax on Ensure for over a year.

The complaint

Littlejohn's complaint asserted two causes of action against Costco and a third against Costco and the board. The first cause of action alleged that Costco breached "an implied contract with its customers by charging sales tax on products not actually subject to tax." The second cause of action alleged Costco "engaged in unfair business practices by representing to customers that sales of Ensure were taxable and collecting sales tax reimbursement on such sales." The third cause was predicated on the case of Javor v. State Board of Equalization, 12 Cal. 3d 790 (Cal. 1974). The court in Javor determined that "the Board is a constructive trustee of the sales tax erroneously collected and paid to the state."

As applied to the current facts, Littlejohn argued, Costco is the constructive trustee of Littlejohn on its purchases of Ensure. Thus, asking Costco to help process a refund claim for improperly collected sales tax helps maintain the integrity of the taxing system in general. Therefore, Littlejohn argued, per Javor, the sales tax should be refunded to Costco and then refunded to the Costco customers who paid the improper sales tax on an exempt food item.

Recovering overpaid sales tax in California: A brief history

In Decorative Carpets Inc. v. State Board of Equalization, 58 Cal. 2d 252 (Cal. 1962), the California Supreme Court held that legislative policy supported a constructive trust theory that would justify ordering a retailer who sought and obtained a refund for overpaid sales taxes to repay its customers who were improperly charged tax on their purchases, as the board has a vital interest in the integrity of the sales tax.

In Javor, the board had permitted customer intervention in limited circumstances and only by means of a judicial proceeding to compel the retailer/taxpayer to seek a refund from the board. The board had returned some overpaid tax to some retailers after a specific repeal of the subject tax. Due to the "unique circumstances," the customer could compel the retailers to make refund applications to the board and in turn require the board to respond to these applications by paying into court all sums due to the retailers. Note that in Javor, the court's analysis also included a finding that the taxability of the product had been "determined" by the board.

In Loeffler v. Target Corp., 58 Cal. 4th 1081 (Cal. 2014), the California Supreme Court clarified that the true imposition of sales tax in California is on the seller (i.e., retailers). Therefore, it is the retailers, not the customers, who are obligated and liable to pay the tax. For purposes of claiming and processing refunds, the Loeffler court relied on two primary considerations: (1) The taxability of a product is a very closely regulated, complex, and highly technical area; and (2) the state has developed a very comprehensive administrative scheme to determine taxability and to govern disputes between the taxpayer and the board. Because it is the retailer that is obligated to collect and remit the tax, allowing end customers to file claims for refund in this context would only serve to complicate an already complicated area of the law. Thus, according to the Loeffler court, only the retailer may file a claim for refund with the board after first paying the board the sales tax it has collected, not the customer or original purchaser of the goods.

If Costco had addressed a refund claim made by a retailer against the board instead of the customer suing the retailer, the court would not need to address the standing issue but would focus directly on the taxability of the products. Unfortunately for Littlejohn, the court confirmed that, as a seller's privilege state, California offers no remedy for the ultimate customers to either force retailers to pursue refunds directly with the board or to circumvent the retailers and sue the board for refunds directly, and Littlejohn was unsuccessful. Based on this result, the California customer has no other option but to sue the retailer for a refund as it cannot file a refund claim directly on behalf of the retailer.

A fair result? 'Determined' tax questions

When is a tax question a "determined" tax question?

While the majority in Costco focused more on the plaintiff's failure to show that the facts of the case constituted a "unique situation" under Javor, the way in which it dismissed Littlejohn's argument that the taxability question (the taxability of Ensure) was a settled or "determined" question for purposes of the refund claim is concerning. Before 2002, Ensure was considered a food product and not subject to tax by the board. However, in 2002, Ensure's makers changed the product's labeling, and the board subsequently stated its position in a December 2002 Tax Information Bulletin that Ensure was not an exempt food but a taxable nutritional supplement due to this change. The board's December 2002 Tax Information Bulletin states:

The Board previously classified Ensure and Ensure Plus as exempt food because their labels did not describe the products as supplements. However, we have examined the current labels for Ensure and Ensure Plus, and the products are now labeled as "nutritional supplements." They also indicate a doctor should be consulted if the user intends to use the products as their sole source of nutrition. Because the labeling of these products has changed, the application of tax has also changed. Grocery stores and other retailers that sell Ensure and Ensure Plus should report tax on their sales of those products.

The labeling changed again in 2006, and the board's tax counsel advised a taxpayer that Ensure qualified as a "food product for human consumption, the sales of which are not subject to tax." In March 2013, this position was affirmed via a letter by a board auditor and its September 2013 Tax Information Bulletin. In the September 2013 bulletin, the board states:

The products, Ensure, Ensure Plus, and Glucerna, are not currently taxable because their labels meet the definition of a nontaxable food product.

In a currently listed annotation under Cal. Code Regs. Title 18, Section 1602 (Annot. 245.1633 (9/9/99)), the board, in addressing a related Ensure product (PediaSure), also refers to Ensure with the following:

It was previously concluded that Ensure and products substantially identical in labeling and content to Ensure qualify as complete dietary foods.

Based on the board's clear position about Ensure products, Littlejohn alleged that Ensure is established as a nontaxable food product for California sales and use tax purposes, and Costco improperly charged him sales tax on his purchases. In addition, Littlejohn pointed out, since it was an improperly collected tax, Costco was under no obligation to then remit it to the board. Nevertheless, the court took the position that since the board's guidance did not have the same force of law as regulations adopted by the board and were not binding on the board, Ensure's taxability had not actually been "determined" for purposes of a Javor claim.

The Costco dissent

The dissenting opinion in Costco agreed with the majority as to the first two causes of action but disagreed about the third cause of action. According to the majority, relief under Javor should be construed narrowly to apply only to those cases that represent truly unique circumstances, since pursuing refund claims on behalf of individual customers could be overly burdensome. In the dissent's view, the majority's interpretation of Javor is problematic for two primary reasons: (1) It is "inequitable and inconsistent with the pronouncements of our Supreme Court"; and (2) it "overstates the problems that would arise from recognizing the customer's right to compel the submission of a refund application under appropriate circumstances."

Underlying the dissent's disagreement regarding the requirements of Javor is the concern that customers wrongfully charged sales tax by a retailer simply have nowhere to go for relief. Based on the opinion of the majority: (1) Customers may not recover any excess sales tax reimbursement under consumer protection theories; and (2) the retailer may recover a refund only to the extent that the refund is passed along to the customer. Therefore, neither the retailer that collected the tax nor the board, which ultimately received the tax, is motivated to initiate the refund process.

The dissent also expressed serious concern with the dismissal, by the majority, of published guidance issued by the board on the taxability of Ensure. On several occasions, the board has specifically addressed the taxability of Ensure and related products and has clearly stated that it does consider those products to be exempt from sales tax. According to the dissent, the dismissal of these multiple confirmations of the board's position are problematic for several reasons:

  • Although these opinions did not have the same force of law as regulations adopted by the board and were not binding on the board, the opinions relied upon in the case were "specific and unambiguous," as they referred specifically to the product at issue in the case (Ensure);
  • The opinion letters are written on the board's letterhead, and the tax bulletins are issued at regular intervals (quarterly) by the board;
  • These opinion letters and bulletins are issued with the board's approval; and
  • These opinion letters and bulletins are issued with the expectation that taxpayers will rely on them.

Although the majority appeared more concerned that allowing customers to compel retailers to file refund claims on their behalf could be overly burdensome (e.g., requesting a full refund application for small-dollar items), according to the dissent, the courts or the board could develop rules or regulations about reasonable and acceptable parameters for these types of refund claims. For example, the dissent suggested the following approaches:

  • The court could condition its order on the customer's performing the majority of the work necessary to prepare the refund application or reimbursing the taxpayer (i.e., retailer) for the costs incurred to submit the application.
  • If the action proceeds as a class action, the refund application might seek a refund only for the excess tax paid on sales to class members who submit evidence of their purchase and a refund request.
  • If not through a class action, it may be sufficient to apply for a refund of the excess tax paid on the sale to the individual requesting the refund. In such a case, according to the dissent, the court could consider factors such as the amount of the excess tax involved, the effort required to collect data and submit the application, and the reasonableness of the taxpayer having paid the excess tax given any notice of which the taxpayer was or should have been aware.

As a result of allowing taxpayers to compel retailers to file refund claims, the dissent argued, retailers would be more inclined to carefully determine whether tax is due on the products they sell and avoid potential overpayments from their customers. In addition, the overall effect would be to enhance the integrity of the sales tax system since fewer customers would be erroneously charged sales tax.

Additional guidance

The issue of processing such claims has been addressed by other states. For example, in Washington state, a consumer may submit a refund request for erroneously collected sales tax from the state after first seeking a refund from the retailer. The consumer must provide both an application for refund as well as either a seller's or buyer's declaration. Wash. Admin. Code Section 458-20-229(4)(b) states:

In certain situations where the buyer has not received a refund from the seller, the department will refund retail sales tax directly to a buyer. The buyer must file a complete refund application as described in subsection (3)(b) of this rule and either a seller's declaration or a buyer's declaration, under penalty of perjury, must be provided for each seller.

Similar to recommendations offered in the dissent, Washington state has developed an approach that allows consumer refund claims to move forward, where the consumer, not the retailer, assumes the primary responsibility for processing the claim. Whether the California courts or the board will reconsider the refund application process to incorporate these types of equity concerns remains to be seen. Taxpayers should also pay close attention to situations where they have relied on formal or informal guidance on taxability questions from the board as applied to their own business. Based on the view of the Costco majority, the Court of Appeal takes a very narrow view of the force and effect of informal and formal guidance the board has issued that has not risen to the level of either a statute or regulation.

While there is no question that the board's published guidance does not have the same legal force as a regulation or statute, there are several concerns with the majority's approach: (1) The majority never explains how the board's guidance on the taxability of Ensure is in conflict with existing regulatory or statutory language; (2) taxpayers rely on the board's guidance to determine their tax responsibilities in several areas: refund claims, imposition of tax on customers, and financial reporting, to name a few; and (3) other states' approaches, such as Washington's, appear to undercut the majority's concern that allowing these types of claims necessarily leads to a disproportionate burden on retailers. Thus, the majority's dismissal of Littlejohn's motion based, in part, on its determination that the taxability of Ensure remains unsettled, not only produces potentially inequitable results, but may leave taxpayers with more questions than answers.


Mark G. Cook, CPA, CGMA, is the lead tax partner with SingerLewak LLP in Irvine, Calif.

For additional information about these items, contact Mr. Cook at 949-261-8600 or

Unless otherwise noted, contributors are members of or associated with SingerLewak LLP.

Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.