The California Supreme Court held that taxpayers may file a class action claim against a municipal government entity for the refund of the telephone users tax (TUT). Ardon v. City of Los Angeles, Case No. S174507 (Cal. July 25, 2011).

The City of Los Angeles imposes the TUT on customers who use telephone communications services in Los Angeles. However, many taxpayers are of the view that prior to March 2008, TUT did not apply to telecommunications services that were not also subject to the federal excise tax (FET) imposed under 26 U.S.C. 4251 (1967). (The FET only applied to telecommunications services which varied based on time and distance. Prior to March, 2008, the TUT imposition statute specifically defined its tax base by reference to the FET.) In 2006, the IRS issued Notice 2006-50 conceding that the FET did not apply to long-distance service billed based upon the duration of a call, but not the distance of the call. However, the City of Los Angeles continued to apply the TUT to virtually all communications services and directed telecommunications service providers to continue to collect the TUT from their customers and remit the tax to the City.

In October 2006, Ardon, a resident of Los Angeles, filed a class action lawsuit under Government Code section 910, challenging the City’s TUT and seeking refund of taxes he had paid from 2006-2008. The City of Los Angeles argued that Ardon lacked standing to present a tax refund claim on behalf of a class. The Supreme Court disagreed and held that according to City of San Jose v. Superior Court, 525 P.2d 701 (1974), class claims for tax refunds against local governmental entities are permissible under Government Code section 910 absent any specific tax refund procedure set forth in a governing claims statute.

This case has important implications for taxpayers who have filed TUT refund claims in Los Angeles and other California cities. Many of these refund claims (and tax assessments against telecommunications service providers that did not collect the tax) have been held in abeyance pending a decision in the Ardon case. Now that Ardon’s standing issue has been decided, the lower court can turn to the merits of the taxpayer’s refund claim.