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Business Taxes Law Guide—Revision 2024
Transactions And Use Tax Law
Revenue and Taxation Code
Division 2. Other Taxes
Part 1.6. Transactions and Use Taxes
Chapter 2. Imposition of Tax
Section 7267
7267. Unconstitutional or invalid taxes. (a) Except as provided in Chapter 4 (commencing with Section 7275), there shall be no recovery from the state for the imposition of any unconstitutional or otherwise invalid tax that is levied in conformity with this part.
(b) If a final and nonappealable decision of a court of competent jurisdiction determines that a district transactions and use tax is unconstitutional or otherwise invalid, the district, the county, or the city, as the case may be, shall transfer to the board the revenues derived from the unconstitutional or invalid transactions and use taxes necessary to reimburse claimants for the unconstitutional or invalid transactions and use taxes paid, including interest allowed under Section 6907. The board shall deposit these revenues in a segregated impound account in the Retail Sales Tax Fund, as described in Section 7275, and shall administer any refunds necessitated by the court's decision in accordance with the guidelines set forth in Chapter 4 (commencing with Section 7275) to the extent feasible and practical.
(c) After the refund process described in subdivision (b) is completed, any revenue from an unconstitutional or otherwise invalid tax described in subdivision (a) that is paid to the board shall be transmitted by the board to the district or its successor in accordance with Section 7271. However, unless the ordinance specifies otherwise, if at the time the board is making those transmittals the district that imposed the tax has no successor, or has disbanded, dissolved, or is otherwise no longer functioning, the board shall transmit those revenues in the following manner:
(1) If the tax levied by the district was imposed on a countywide basis, the revenues shall be transmitted to the county's general fund.
(2) If the tax levied by the district was imposed on a citywide basis, the revenues shall be transmitted to the city's general fund.
(3) If the tax levied by the district was imposed on a basis other than in paragraph (1) or (2), the revenues shall be transmitted to the general fund of each taxing jurisdiction located wholly within the district, based on each taxing jurisdiction's proportionate share of revenue from taxes imposed pursuant to the Bradley-Burns Uniform Local Sales and Use Tax Law allocated during the prior calendar year.
(d) The district, or any entity that participated in the formation of the district, shall reimburse the board for and hold the board harmless from any and all costs, losses, or refunds of any kind whatsoever, including preparatory costs incurred prior to implementation of the tax.
(e) In the case of any claim for refund of the transactions and use tax imposed by the San Francisco Educational Financing Authority, which was determined to be unconstitutional by the court in Hoogasian Flowers, Inc. v. State Bd. of Equalization, 23 Cal. App. 4th 1264, payment of any of those claims for refund shall be made from the revenues derived from the unconstitutional transactions and use tax collected by and in the possession of the board. When those funds and any other revenues derived from the unconstitutional tax still in the possession of the San Francisco Educational Financing Authority, the City and County of San Francisco, the San Francisco Unified School District, or the San Francisco Community College District are exhausted, any remaining payments of those claims for refund shall be paid from funds of the San Francisco Unified School District and the San Francisco Community College District which benefited from the illegal tax. The remaining payments shall be based on the method by which the San Francisco Educational Financing Authority distributed the proceeds of the tax to the San Francisco Unified School District and the San Francisco Community College District.
History—Added by Stats. 1995, Ch. 495, in effect January 1, 1996.
Note.—Sections 4 and 5 of Ch. 495, Stats. 1995, provide the following:
SEC. 4. The Legislature finds and declares that since transactions and use taxes are imposed by the taxing districts and not the state, the state has no interest in, and should not be a party in, any action to determine the validity of such a tax. It is the intent of the Legislature that the state not be made a party to those actions. However, where a refund claimant is contesting the application of sales or use taxes in general to a particular transaction, the claim should be filed with the State Board of Equalization under the normal refund rules, notwithstanding the fact one of the taxes the application of which is contested is a transactions or use tax which is alleged to be invalid.
SEC. 5. (a) It is the intent of the Legislature that this act be applied retroactively to the fullest extent permitted by the federal and state Constitutions.
(b) The Legislature finds and declares that when it enacted the second paragraph of Section 7270 (designated by this act as subdivision (b) of Section 7270) of the Revenue and Taxation Code, it intended to prevent the State of California from being made liable for refunds of any transactions and use tax which is declared to be unconstitutional or otherwise invalid. The language of that provision as enacted can, however, be interpreted as having the state assume primary liability for those refunds with the district reimbursing the state. It is the intent of the Legislature in enacting subdivision (a) of Section 7267 of the Revenue and Taxation Code to implement its original intent in this matter and clarify existing law that there shall be no recovery from the state for the imposition of any illegal tax except as specifically otherwise provided by statute. It is intended that the district which levied the illegal tax shall be solely liable for such refunds.
(c) (1) The Legislature enacted Chapter 1060 of the Statutes of 1993 in order to provide a remedy to persons who bore the economic burden of an illegal district tax in the situation where the revenues derived therefrom had been collected by the State Board of Equalization and distributed to the taxing district but had been retained by the district pending the outcome of the litigation over the validity of the latter's tax. The Legislature finds and declares that current law does not require the district to retain those revenues during the litigation and where the district does not do so there is no effective remedy for either taxpayers or those who bore the economic burden of the tax.
(2) The United States Supreme Court, in the case of McKesson v. Division of Alc. Bev., 110 L. Ed 2d 17, declared that the due process clause of the Fourteenth Amendment to the United States Constitution requires that a taxpayer who may only challenge the validity of a tax through a postpayment refund action must be provided meaningful retrospective relief for taxes already paid pursuant to a tax scheme ultimately found unconstitutional. It is the intent of the Legislature in adding subdivision (c) to Section 7270 of the Revenue and Taxation Code to ensure that effective relief is available, notwithstanding the provisions of Section 6931 of the Revenue and Taxation Code.