State Supreme Court rules on illegal taxes

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The state Supreme Court made it easier this week for California taxpayers to seek refunds from cities and counties, ruling that a claim of an illegal local tax can be pursued as a class action on behalf of everyone who was overcharged.

The unanimous decision Monday in a Los Angeles case overturned lower-court rulings requiring local taxpayers to file individual refund claims.

In a class action, a representative can win damages that are distributed to an entire group of people affected by the same unlawful action. Class-action status often determines whether a tax can be effectively challenged, said Paul Heidenreich, a lawyer for consumer organizations in the case.

"When only one person can sue at a time, there's little incentive to do so" with small amounts at stake, he said.

The ruling may not affect San Francisco, however. Deputy City Attorney Peter Keith said the city has ordinances that set rules for tax refund claims and prohibit class actions. He said the court allowed class-wide suits only when a city or county has no laws of its own regulating tax refunds.

Francis Gregorek, lawyer for the plaintiff in the Los Angeles case, said a future ruling may be needed to determine whether a city can shield itself from class actions.

Class actions have become a hotly contested legal battleground. The U.S. Supreme Court restricted their use in two California cases earlier this year, refusing to allow as many as 1.5 million women to sue Wal-Mart Stores Inc. as a group over pay and promotion practices, and rejecting class-wide arbitration of a cell phone customer's overcharge claim against AT&T.

Gregorek's client, Estuardo Ardon, sued Los Angeles in 2006, claiming that a city telephone tax was illegal because it was linked to a federal excise tax that had been ruled invalid. Gregorek said the suit seeks millions of dollars in refunds for all phone customers in the city and has led to challenges against similar taxes in other communities.

The case has remained on hold while state courts determined whether Ardon can represent other customers. An appellate court said he could sue only as an individual, citing the state Supreme Court's 1992 ruling that rejected class-action status for a challenge to the state's taxes on vehicles bought by Californians in other states.

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