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Business Taxes Law Guide—Revision 2024

BTLG Table of Contents > Transactions And Use Tax Law > Chapter 4 > entire chapter

Transactions And Use Tax Law

Revenue and Taxation Code

Division 2. Other Taxes
Part 1.6. Transactions and Use Taxes

Chapter 4. Refunds of Unconstitutional Taxes*

* Chapter 4 was added by Stats. 1993, Ch. 1060, effective October 11, 1993.

7275. Unconstitutional taxes levied; disposition of revenues. (a) Where a tax levied in a county in conformity with Part 1.6 (commencing with Section 7251) has been determined to be unconstitutional in a final and nonappealable decision of a court of competent jurisdiction and the revenues derived from that unconstitutional tax are paid to the board and held in an impound account, the board shall administer refunds and reimbursements of those illegally collected taxes in accordance with the provisions of this chapter.

(b) (1) Notwithstanding any other provision of law, on and after the effective date of the act adding this chapter, the procedures for refund or reimbursement of unconstitutional taxes contained in this chapter constitute the sole remedies for refund or reimbursement of illegal taxes as described in subdivision (a).

(2) Claims for refund of illegally collected taxes as described in subdivision (a) that were filed prior to the effective date of the act adding this chapter that have not been paid before that date shall be processed and paid to purchasers in accordance with the provisions of this chapter, regardless of whether the purchaser or the retailer filed the claim. Nothing in the act adding this chapter shall be construed to require refiling of those previously filed claims for refund.

(c) Notwithstanding the provisions of Section 6902, the period of limitations specified in subparagraph (B) of paragraph (3) of subdivision (b) of Section 7277 shall apply to any claims for refund that are payable from any revenues paid to the board and held in an impound account which are derived from the unconstitutional tax.

(d) No later than 10 days from the date the decision determining the contested tax to be unconstitutional is final and nonappealable, the court shall order the entity that levied the unconstitutional tax to pay the impounded revenues to the board which shall immediately deposit them in a segregated impound account in the Retail Sales Tax Fund. The moneys so deposited, together with any interest thereon, shall be used as follows:

(1) To satisfy in full all valid claims for refund filed prior to the effective date of the act adding this chapter, in amounts as verified by audit of the records of the board.

(2) To fund a reserve account, in an amount to be determined by the board, with the approval of the Department of Finance, to fund refund and reimbursement of moneys from illegally collected taxes as described insubdivision (a), liability for which arises out of audit assessments occurring after the date of the act adding this chapter.

(A) Moneys derived from the unconstitutional tax described in subdivision (a) received by the board after the date the board receives the impounded revenues as provided in subdivision (d) shall be deposited in the reserve account provided by this subdivision.

(B) This reserve account shall be maintained for 10 years from the date the board deposits the revenues in the segregated account in the Retail Sales Tax Fund provided by this subdivision.

(i) Any amount deposited in the reserve account shall be used to pay other refunds or reimbursements to taxpayers within 12 months of deposit. Amounts not used for refunds or reimbursements within 12 months of deposit shall be transferred to the county in which the unconstitutional tax was levied for deposit in that county's general fund.

(ii) Upon termination of the 10-year period, any moneys remaining in this segregated account shall be transferred to the county in which the unconstitutional tax was levied for deposit in that county's general fund.

(3) To satisfy valid claims for refund filed after the effective date of the act adding this chapter as described in Section 7277.

(4) To reimburse the board's actual and reasonable costs of administering the refunds and reimbursements provided in this chapter, as approved by the Department of Finance.

(5) To reimburse losses resulting from the tax credit provided by Section 7276. In reimbursing those losses, the board may use its best estimates, based on historical allocation information, as to the amount of those losses. Any entity receiving the impounded moneys rather than the taxes being credited shall suffer no impairment of revenues and the timing and receipt as well as the amount of revenues shall not be adversely affected by the credit. Any security arrangement that the board has with any entity receiving impounded moneys, including, but not limited to, provisions requiring the transfer of revenues to a bond trustee, shall remain in full force and effect during the period of the credit, and any pledge of tax revenues shall apply with equal force and effect to the impounded moneys distributed to those entities by the board in lieu of the credited tax revenues, without any further action required by the entity of the board.

(e) Any impounded moneys subject to refund or reimbursement pursuant to this chapter that are not used for that purpose or not deposited in the reserve account described in subdivision (d) shall be transmitted to the county in which the unconstitutional tax was levied for deposit in that county's general fund.

(f) For the purposes of bringing an action against the board for recovery of the whole or any part of the amount claimed as an overpayment of unconstitutional taxes as described in subdivision (a), the six-month period provided in Section 6934 shall not commence until the one-year claim period provided by Section 7277 has expired pursuant to the terms of this chapter. Suits for refund shall be brought in accordance with the provisions of Article 2 (commencing with Section 6931) of Chapter 7 of Part 1.

Statutory refund scheme constitutional.—The court of appeal held that the legislative scheme for refunds of unconstitutional district taxes displaced the trial court's refund plan, and that such displacement did not violate the separation of powers doctrine. Kuykendall v. State Board of Equalization (1994) 22 Cal.App.4th 1194.

Statutory refund scheme constitutional.—The court of appeal held that the statutory scheme for refund of unconstitutional district taxes was constitutional and that it clearly prohibited retailers not meeting its requirements from filing claims. C.O.D. Gas and Oil Co., Inc. v. State Board of Equalization (1997) 59 Cal.App.4th 756.

7276. Tax credit procedures. Any taxpayers located in the jurisdiction in which an unconstitutional tax as described in subdivision (a) of Section 7275 was levied may claim a credit against their total amount of state and county sales or use tax as follows:

(a) An eligible taxpayer shall report sales and use taxes at the rates lawfully in effect in the county but may claim a credit against the total amount of state and local taxes, under rules to be promulgated by the board, in the amount of 0.75 percent. For the purpose of this section, "eligible taxpayer" means any person who resides in, or whose place of business is located in, the county in which the unconstitutional tax as described in subdivision (a) of Section 7275 was imposed, and who is required to report and pay sales tax under Chapter 2 (commencing with Section 6051) of Part 1 and any person required to report and pay or report and collect use tax under Chapter 3 (commencing with Section 6201) of Part 1.

(b) An eligible taxpayer who claims the credit provided in subdivision (a) shall remit to the board all reported tax moneys except those which represent the amount of the credit. Amounts reported, but not remitted under subdivision (a), shall be deemed to have been paid in full. Amounts not reported shall remain subject to assessment under Chapter 5 (commencing with Section 6451) of Part 1. The portion of those assessments representing this tax credit shall be paid from the reserve account provided by paragraph (2) of subdivision (d) of Section 7275.

(c) A taxpayer may not collect sales tax reimbursement pursuant to Section 1656.1 of the Civil Code nor use tax in an amount in excess of the amount required to be reported under subdivision (b) less amounts subject to credit under subdivision (a) during the period for which a credit is allowed. A receipt for use tax issued pursuant to Section 6202 in the amount of tax actually remitted to the board under subdivision (b) shall be sufficient to relieve the purchaser for further liability for the tax computed at the reporting rate.

(d) The tax credit provided by subdivision (a) may be claimed upon notice to eligible taxpayers by the board. That notice shall provide that the credit may be claimed commencing with those taxes due on the first day of the first calendar quarter commencing more than 120 days after the effective date of the act adding this section or after the court decision described in paragraph (a) of Section 7275 becomes final and unappealable, whichever occurs later.

(e) The tax credit shall continue until the board determines that the amount of impounded revenues held by the board and available to fund the revenue losses that result from the tax credit is insufficient to fund the tax credit for another full calendar quarter. Eligible taxpayers shall continue to take the credit on their returns until notified by the board that the credit is terminated.

7277. Claim for refund procedures. (a) In the event that any tax collected under this part is determined on the basis of Section 4 of Article XIII A of the California Constitution to be unconstitutional in a final and nonappealable decision of a court of competent jurisdiction, and the revenues derived from the unconstitutional tax are held by the board in an impound account, a person who has reimbursed a retailer for that payment of that tax or a person, other than in a capacity as a retailer, who has paid that tax may file with the board a claim for refund of the unconstitutional tax in accordance with the requirements and procedures set forth in subdivision (b).

(b) (1) The claim for refund shall be in writing, shall state the specific ground upon which the claim is founded, and shall be accompanied by proof of payment of the tax to a retailer or wholesaler, including, but not limited to, a copy of an invoice, bill of sale, or purchase contract, that indicates the following:

(A) The date upon which, and place at which, the purchase occurred.

(B) A description of the property purchased.

(C) The price paid for the property.

(D) The amount of the transactions and use tax collected with respect to the purchase, or if that amount is not separately stated, the amount of the purchase and the rate of tax from which the amount of transactions and use tax may be calculated.

(2) In the case of a purchaser that has self-reported use tax to the state, the claim for refund shall also indicate the amount of use tax paid and the period for which those taxes were remitted.

(3) (A) Only a claim for refund made with respect to a single purchase or aggregate purchases of five thousand dollars ($5,000) or more shall be eligible for refund pursuant to this section.

(B) A claim for refund shall be filed within one year of the first day of the first calendar quarter commencing after the effective date of this section or after the date upon which the court decision described in subdivision (a) becomes final and nonappealable, whichever occurs later. If that one-year period does not end on the last day of a calendar quarter, it shall end on the last day of the preceding calendar quarter or on the last day of the calendar quarter which is nearest to the date the one-year period ends.

(c) For purposes of this section, "purchaser" means any person or entity, other than in a capacity as a retailer, who purchased tangible personal property the sale or use of which was subject to the unconstitutional tax described in subdivision (a).

(d) Interest shall be paid on the refunds provided by this chapter pursuant to Section 6907.

7279. Interest on refunds; board's costs. (a) The total amount of refunds paid under this chapter shall be the amount of the impounded revenues derived from the unconstitutional tax plus any interest earned on that amount that remains after valid claims for refund filed prior to the effective date of the act adding this chapter are paid and the reserve amount described in paragraph (2) of subdivision (d) of Section 7275 is established.

(b) The board's actual and reasonable costs of administering refunds in accordance with this section and Section 7277, as approved by the Department of Finance, may be paid from the amount that is set aside for refunds under this chapter and may be paid prior to the payment of any claim for refund.

7279.5. Court review and procedures. A copy of the provisions of this chapter may be filed by the board with the court to demonstrate that implementation of the proposed plan of reimbursement, refund, or credit in accordance with the provisions of this chapter complies with any orders of the court requiring implementation of a refund plan by the board. Judicial notice of this chapter shall be taken by the court. In rendering a decision that the provisions of this chapter comply with any order of the court, the court shall order that any attorney's fees and costs incurred by the parties for the benefit of the persons seeking a refund be paid from the revenues collected pursuant to that tax plus any interest earned thereon.

7279.6. Arbitrary implementation reviewable by writ. An arbitrary and capricious action of the board in implementing the provisions of this chapter shall be reviewable by writ.

Note.—Section 3 of Ch. 1060, stated that the County of San Diego is authorized to pay all just debts and obligations that were accrued by the San Diego County Regional Justice Facility Financing Agency during the period of its existence.

Section 4 of Ch. 1060, stated the legislative findings and declarations of that act as follows: "(a) California courts of appellate jurisdiction have recently held that transactions and use taxes imposed by certain countywide taxing districts violate the California Constitution.

(b) Current law addresses refunds and overpayment of tax only on the assumption that the particular transaction in issue is not subject to tax, rather than on the premise that the tax itself is unconstitutional. Current law also provides that only persons who directly pay a tax to state taxing authorities may file claims for refund. Section 6902 of the Revenue and Taxation Code currently establishes a three-year limitation period with respect to the filing of claims for refund.

(c) As a result, under existing statutory provisions a substantial portion of the unconstitutional taxes would not be refunded to the ultimate consumers who bore the direct economic burden of paying those taxes. Moreover, in certain cases the revenues raised by the unconstitutional taxes were impounded by the levying entity and would, under the proper authority, be available for refund to the consumers who bore the economic burden of paying those taxes.

(d) Therefore, it is the intent of the Legislature in enacting this act, to alter the normal refund mechanism in the case where a transactions and use tax, imposed by a taxing district within a county pursuant to the Revenue and Taxation Code, has been found to be unconstitutional by a court of appellate jurisdiction, and the revenues derived from that tax have been impounded. The statutes added to the Revenue and Taxation Code by this act are intended to establish a comprehensive system of remedies that balances the right of persons who made purchases subject to the unconstitutional taxes to obtain a return of those taxes with the need of entities imposing valid taxes within the same county to obtain the revenues to which they are entitled. The provisions added by this act are intended to apply to all claims and actions for refund in the circumstances described herein, notwithstanding any other provision of law, but are not intended to in any way affect the normal refund statutes regarding claims and actions for refund on any other basis."

Section 5 of Ch. 1060, further stated the Legislature's findings and declarations that the system of tax credits provided by this act is adopted by the Legislature as the most efficient way to return revenues derived from the illegally collected taxes to the persons who bore the economic burden of those taxes. Nothing in this act may be construed to mean that the State of California assumes responsibility for the imposition of the illegal taxes at issue nor that there is any remedy for that illegal imposition of transactions and use taxes other than as provided in this act. There shall be no recovery against the State of California otherwise than as under this act in any action for refund of those illegally collected taxes.

Section 7 of Ch. 1060, provided, "If any provision of this act or the application thereof to any person or circumstances is held invalid, that invalidity shall not affect other provisions or applications of the act that can be given effect without the invalid provision or application, and to this end the provisions of this act are severable."