California Supreme Court Orders Long Beach to Return Telephone Taxes

Published May 3, 2013

The California Supreme Court has given a victory to taxpayers in its unanimous ruling that the City of Long Beach must recognize class claims to refund illegally collected telephone taxes.

McWilliams v. City of Long Beach revolved around the city’s refusal to refund the tax except to individual taxpayers who demanded their money back. An earlier Court of Appeal ruling sided with Long Beach resident and plaintiff John W. McWilliams. In 2006 he filed a class action lawsuit on behalf of Long Beach telephone users who had been illegally assessed taxes on their telephone service. The State Supreme Court upheld the Court of Appeal decision.

McWilliams’s complaint arose out of Long Beach’s telephone users tax, which exempted from local taxation all amounts the federal government exempted from taxation. The federal government stopped collecting taxes on long distance and bundled services in 2003. For tax year 2006 the IRS offered a refund on long distance and bundled services taxes paid after February 28, 2003 and before August 1, 2006. The city kept collecting tax on those services and amended its telephone users tax to remove any reference to federal tax exemptions without consulting the city’s voters, which violated the California Constitution.

The lawsuit complained Long Beach had unlawfully collected and continued to collect the TUT “on services that have been conclusively determined to be non-taxable under the Federal Excise Tax.”

The city, for its part, argued class actions for tax refunds were barred under its municipal code.

“In the case now before us, the defendant local government entity asserts that its municipal code contains an ‘applicable governing claims statute’ barring class action claims for a tax refund. We find that a local ordinance is not a ‘statute’ within the meaning of the Government Claims Act and therefore affirm the Court of Appeal,” the State Supreme Court wrote.