Direct Marketing Association, Inc. v. William M. Bennett Conway H. Collis Ernest J. Dronenburg, Jr. Paul Carpenter Gray Davis Cindy Rambo John Gibbs Lucian Khan Shiela J. Gustin

Citations: 916 F.2d 1451; 1990 U.S. App. LEXIS 18463Docket: 89-15716

Court: Court of Appeals for the Ninth Circuit; October 23, 1990; Federal Appellate Court

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Direct Marketing Association (DMA) appeals the dismissal of its lawsuit against members of the California State Board of Equalization, where the district court ruled that the Tax Injunction Act precluded federal jurisdiction over the case. DMA represents members engaged in direct mail advertising, many of whom are out-of-state retailers selling to California residents. Following a 1987 amendment to California's tax law requiring these retailers to collect use tax, the Board mandated registration for out-of-state sellers. DMA's lawsuit, filed in August 1988, argues that this requirement violates the commerce clause and due process clause of the U.S. Constitution, seeking injunctive and declaratory relief along with attorney's fees.

The district court dismissed the case, stating that DMA's members had an adequate state remedy—a process to pay the contested taxes and subsequently seek a refund. Consequently, it found federal court proceedings barred by the Tax Injunction Act. However, the court noted that a state remedy is not considered "plain" if there is uncertainty regarding its availability or effects. Prior case law indicates that ambiguities in state tax statutes can allow federal jurisdiction. The Ninth Circuit Court of Appeals, therefore, reversed the district court’s dismissal.

In Garrett v. Bamford, the court established that uncertainty regarding the availability of state remedies is sufficient for a finding of inadequacy. In California, the only legal remedy for tax disputes is a postpayment refund action, requiring a claim for refund to be filed before legal action can be taken. The case examines whether members of DMA can use the refund procedure for sales and use taxes under sections 6901 through 6908 of the California Revenue and Taxation Code. DMA argues that the remedy is unavailable because only taxpayers can file for a refund, as stated in California Revenue and Taxation Code Sec. 6902, which specifies that the use tax is levied on consumers, making retailers mere collectors without standing to seek refunds. Additionally, DMA claims that its members lack determinations, further complicating their ability to file for refunds. The court concurs, noting that section 6902 provides filing limitation periods exclusively for "taxpayers" and those who have received "determinations," categories that DMA's members do not fit. California law clarifies that the use tax is imposed on the purchaser, not the retailer, who is responsible for collecting and remitting the tax. Case law, including Bank of America v. State Board of Equalization, reinforces this distinction, emphasizing that the retailer's liability arises only from their duty to collect the tax, not from being the taxpayer. Thus, the use tax liability falls on the purchaser rather than the seller.

The Board claims that the distinction between taxpayer and nontaxpayer is irrelevant for initiating a refund claim under section 6902, asserting that any individual who files a tax return can make such a claim. However, the Board does not reference any statutory language supporting this assertion, noting only 'taxpayers filing returns' as eligible to file refund claims. California law clarifies that a 'taxpayer' is not merely the entity that pays the tax amount to the Board. The district court accepted the Board's position that retailers who voluntarily remit use taxes can file for refunds, yet all cited cases involved retailers who received formal determinations from the Board, neglecting DMA's argument that an outstanding assessment is essential for a non-taxpayer's claim.

DMA's argument is substantiated by other cases indicating that non-taxpayers, such as purchasers, cannot seek refunds since they are not recognized as 'taxpayers.' For example, in several rulings, California courts determined that the sales tax is imposed on retailers, not consumers, thereby barring customers from refund claims. The Board’s explanation of a previous case, which stated that purchasers cannot claim refunds because they do not remit the taxes, aligns with the principle that purchasers are not considered taxpayers. Furthermore, a similar ruling established that non-taxpayers lack the right to sue for refunds concerning California state income tax.

In Ashton v. Cory, the court addressed the situation of a vacation trust employer required to withhold employee wages for tax remittance to the California Franchise Tax Board, highlighting that while the trust is responsible for the remittance, it is not the actual taxpayer and thus lacks a plain remedy under California law. The court rejected the Board's argument that a distinction existed between the vacation trust and retailers, emphasizing that both are obligated to collect and remit tax but are not the taxpayers themselves. The legislative history of section 6902 raises further questions about the availability of a remedy for retailers who voluntarily remit use taxes, as previous provisions allowing for refund actions were removed in 1941 without any replacement. The Board failed to provide any case law supporting the claim that non-taxpayer retailers could seek refunds after voluntary remittance. The reliance on Holland Furnace v. State Board of Equalization was deemed misplaced due to differences in the current refund provision’s language and the prior absence of the term "taxpayer." Additionally, the court dismissed arguments regarding the necessity of a Board determination, stating that waiting for an assessment before invoking the refund procedure is inadequate, as it exposes the trust to potential penalties and interest.

The scheme under consideration is deemed inadequate due to the speculative nature of whether the state will issue an assessment. Citing case law, it is noted that requiring taxpayers to await state procedures to present federal claims is insufficient as a remedy. The risk of substantial penalties for DMA's members, stemming from their failure to file use tax returns, contributes to the uncertainty surrounding the availability of a remedy. The possibility of receiving determinations does not guarantee that a remedy is accessible, which is crucial for determining if a state court remedy can be considered 'plain.' 

Further analysis reveals uncertainty regarding whether retailers voluntarily remitting use taxes can file refund claims under section 6902, impacting the applicability of the Tax Injunction Act and allowing for federal jurisdiction. The excerpt cites section 6203(f), which outlines the obligations of retailers engaged in business in the state. Additionally, DMA's complaint references constitutional nexus principles established in National Bellas Hess, asserting that imposing tax collection responsibilities on retailers without physical presence in California is unconstitutional.

The prior court's ruling that the Tax Injunction Act barred federal jurisdiction prevented it from addressing the Board's argument about DMA's standing to sue on behalf of its members. Since standing was not the basis for dismissal, this issue should be remanded to the district court for consideration. Finally, the California Constitution prohibits lawsuits aimed at enjoining state tax collection but allows for recovery actions after payment of allegedly illegal taxes.

Section 6931 of the California Revenue and Taxation Code prohibits actions that seek to enjoin or prevent the collection of sales and use taxes, indicating that both declaratory judgment actions and injunctive relief are barred. Affected parties must first file a claim for refund or credit under Article 1 (Section 6901) before pursuing recovery of any alleged overpayment. The use tax applies to transactions occurring outside the state where sales tax cannot be applied, imposing a liability on purchasers for a tax equivalent to their home state's sales tax rate. The imposition of sales tax is defined as a tax on retailers for the privilege of selling tangible personal property. If the Franchise Tax Board identifies an overpayment by a taxpayer, the overpayment can be credited against any due amount, with the remaining balance refunded. Refund claims are subject to a three-year limitation from the end of the relevant quarterly period or six months from the date of overpayment, whichever is later. The Board's reliance on prior case law is rendered inappropriate, as earlier refund provisions did not specify 'taxpayers,' and the use tax collector involved had received an assessment. A 10 percent penalty is imposed for failure to file a tax return, as stated in Section 6511.