The Los Angeles Court of Appeal issued a recent ruling clarifying a long-established — but often contested — rule of tax litigation procedure: to have standing (the right to raise a claim in court) to challenge a government revenue measure, you must be among the people who are legally obliged to pay it, not merely someone who ends up bearing its cost. So, for example, sales taxes are legally incident on sellers — it is a tax on selling. But, in most cases, buyers end up paying, except when sellers offer to pick up the tax during a “sales tax holiday.” Only sellers can sue for a refund. The California Supreme Court recently reaffirmed that rule in a case involving drug stores’ erroneous application of sales tax to diabetic supplies.

California’s County jails contract with telephone carriers to provide telephone services used by inmates and their families. Inmates have no alternatives to that service because possession of a cellphone in jail is illegal. The telephone carriers pay concession fees to the Counties for the right to provide these services and, as a result, inmates and their families pay much more than the going rate for telephony. The Legislature has not forbidden this practice, but did require the proceeds of these contracts to fund services to inmates, like job training, civilian clothes and a bit of pocket money on release, etc.

A class of inmates and their family members sued a number of Counties, alleging the increased telephone charges violate Proposition 26, a 1996 initiative amendment to the California Constitution making all local government revenues taxes requiring voter approval with seven stated, and two implied, exceptions. The exception relevant here limits service fees to the cost of service. They also sued for civil rights violations, alleging the telephone services charges had a disparate impact on African Americans and Latinos, who are over-represented in jail populations. The cases were consolidated for trial in Los Angeles County and the trial court sustained the counties’ demurrer without leave to amend — ending the case at the outset concluding that, even if the inmates could prove the facts they alleged (they very likely could), the law would still require a victory for the Counties. Because the case involved coordination of a number of underlying suits, it is labeled without a “v.” — County Inmate Telephone Services Cases.

The Court of Appeal affirmed, concluding that inmates did not pay the challenged commissions, but merely bore their economic impact, and therefore did not have standing to sue:

First, plaintiffs say they “actually paid the illegal tax, not the providers,” so “the ‘general rule’ requires that plaintiffs have standing to obtain a refund.” Plaintiffs paid nothing to the counties, and they had no legal responsibility to pay anything to the counties. Simply asserting that they effectively or indirectly “paid the illegal tax” does not make it true. Plaintiffs may have paid exorbitant charges to the telephone provider, but they did not make any payment to the county and they had no legal obligation to do so. Plaintiffs ask us in effect to find that a customer, who pays higher prices because of a tax on a vendor who raises prices in order to recover the amount of the tax from the customer, has standing to seek a refund. No legal authority supports that position.

This is a very strong statement of the rule that one must bear the legal duty to pay a charge to have standing to challenge it. It will be useful to governments defending a wide range of revenue measures.

On the civil rights claims, the Court of Appeal concluded that the relevant comparison to determine unlawful discrimination was not between disproportionately African American and Latino inmates and the general population of California, but between those inmates and all inmates and, even as plaintiffs alleged the case, all inmates paid the same, exorbitant telephone charges.

The plaintiffs sought review in the California Supreme Court on June 8, 2020, retaining a high-profile appellate boutique to assist. Decision on that petition is due in 60 days, although the Supreme Court commonly extends it to 90.

The case is in contrast to recent decisions involving franchise fees passed through by investor-owned utilities to their customers to compensate local governments for use of rights of way (Jacks v. Santa Barbara) and such fees on solid waste haulers who pay franchise fees to local governments, too (Zolly v. City of Oakland). Plaintiff customers were permitted to challenge those fees. How do we reconcile the two outcomes? The Court of Appeal distinguished them in the County Inmate Telephone Services Cases by noting neither case considered standing — cases are not binding authority on issues their facts raise but which the court did not discuss. [Disclosure: CH&W represents Santa Barbara in Jacks, which is pending on remand in the Ventura Court of Appeal.]

Perhaps a more satisfying answer is this: in both Jacks and Zolly, the plaintiffs alleged a conspiracy between government  and the vendor to collect revenue from the vendor‘s customers. In County Inmate Telephone Services Cases, the jails procured telephone services competitively — at arm’s length — but required the commissions. Jacks makes clear that the standard for one who alleges a conspiracy between government and a franchisee or other fee-collector faces a very difficult test — the fees survive review if they were negotiated at arms-length between government and the vendor or if the fees are even roughly proportionate to the value of the rights government confers on the vendor for the fee (like use of government rights-of-way).

Jacks is final, but Zolly is also the subject of a petition for review filed June 8, 2020 and is on the same 60- to 90-day schedule as the County Inmate Telephone Services Cases. We should know by late summer if the cases will be reviewed. We’ll keep an eye on them for you!