McCLAIN v. SAV-ON DRUGSAppellants’ Reply Brief on the MeritsCal.March 14, 2018Case No. 8241471 IN THE SUPREME COURT OF CALIFORNIA SUPREME COURT Michael McClain, Avi Feigenblatt FILED and Gregory Fisher, or we MAR 1 4 2018 Plaintiffs, Appellants and Petitioners, VS. Jorge Navarrete Clerk Sav-On Drugs,etal., Deputy Defendants and Respondents. PETITIONERS’ REPLY BRIEF ON THE MERITS After a Decision of the Court ofAppeal Second Appellate District, Division 2 Case Nos. B265011 and B265029 Affirming a Judgment OfDismissal Following An Order Sustaining Demurrer Without Leave to Amend Los Angeles County Superior Court, Case Nos. BC325272 and BC327216 Honorable John Shepard Wiley Service on the Attorney General and the Los Angeles District Attorney Required by Bus. & Prof. Code § 17209 and Cal. Rules of Court, Rule 8.29(a), (b), and (c)(1) *Taras Kick (SBN 143379) *Bruce R. Macleod (SBN 57674) Robert J. Dart (SBN 264060) ShawnaL. Ballard (SBN 155188) THE KICK LAW FIRM, APC MCKOOL SMITH HENNIGANP.C. 815 Moraga Drive 255 Shoreline Drive, Suite 510 Los Angeles, CA 90049 Redwood Shores, California 94065 Telephone: (310) 395 2988 Telephone: (650)394-1386 Facsimile: (310) 395 2088 Facsimile: (650) 394-1422 Email: Taras@kicklawfirm.com Email: bmacleod@mckoolsmith.com Attorneys for Plaintiffs and Petitioners Michael McClain, Avi Feigenblatt and Gregory Fisher Case No. 8241471 IN THE SUPREME COURT OF CALIFORNIA Michael McClain, Avi Feigenblatt and Gregory Fisher, Plaintiffs, Appellants and Petitioners, VS. Sav-On Drugs,et al., Defendants and Respondents. PETITIONERS’ REPLY BRIEF ON THE MERITS After a Decision of the Court of Appeal Second Appellate District, Division 2 Case Nos. B265011 and B265029 Affirming a Judgment OfDismissal Following An OrderSustaining Demurrer Without Leave to Amend Los Angeles County Superior Court, Case Nos. BC325272 and BC327216 Honorable John Shepard Wiley Service on the Attorney General and the Los Angeles District Attorney Required by Bus. & Prof. Code § 17209 and __ Cal. Rules of Court, Rule 8.29(a), (b), and (c)(1) *Taras Kick (SBN 143379) *Bruce R. Macleod (SBN 57674) Robert J. Dart (SBN 264060) ShawnaL.Ballard (SBN 155188) THE KICK LAW FIRM, APC MCKOOL SMITH HENNIGANP.C. 815 Moraga Drive 255 Shoreline Drive, Suite 510 Los Angeles, CA 90049 Redwood Shores, California 94065 Telephone: (310) 395 2988 Telephone: (650)394-1386 Facsimile: (310) 395 2088 - Facsimile: (650) 394-1422 Email: Taras@kicklawfirm.com Email: bmacleod@mckoolsmith.com Attorneys for Plaintiffs and Petitioners Michael McClain, Avi Feigenblatt and Gregory Fisher I. Il. TABLE OF CONTENTS REPLY TO RESPONDENTS’ ARGUMENTS REGARDING THE CONSTITUTIONALITY OF THE RULINGS BELOW.......... ] A. By Rewriting Civil Code §1656.1’s Rebuttable Presumption into an Irrebuttable Presumption, McClain and the Retailers’ Arguments Would Make the Collection of All Sales Tax Reimbursement Unconstitutional. 20.0.0... 2 ecceeccceessnceeessccceecneeenerseeeeseesneeensseees 1 By Denying Customers Any Recourse To Recover Excess Sales Tax Reimbursement From The State Agencies, McClain And Respondents’ Arguments Would Make Tax Code §6901.5 Unconstitutional. ..............4 1. Reply to the CDFTA’s Arguments Regarding the Takings Clause. ........ceeeeeeeeeeeee4 2. Reply to the Retailers’ Arguments Regarding the Takings Clause. ......0.eee8 3. Reply to Respondents’ Arguments Regarding The [Due Process Clause... ee eeeeeeees9 PETITIONERS FIRST CAUSE OF ACTION ALLEGES AN ACTIONABLE CLAIM AGAINST THE RETAILERS FOR BREACH OF THE CONTRACT SPECIFIED IN CIVIL CODE SLOS6.1.eceeececeeeneteneeenseee o cesesssneaeesseeeeesenseesessasseseiseeegenageessasenes 14 A. Reply to the Retailers’ Argument That Petitioners’ Breach of Contract Cause ofAction “Is Premised on the Claimed Existence of an Unwaivable Exemption.” .......ccccecee oe ceceeeseeeersneeeecneesseeenssaeesteeseeaeeenaeees 15 Reply To The Retailers ® Argument That Petitioners Seek To Have A Court “Make Taxability Determinations In The First Instance.” 2...eeeeeeees 16 Reply To The Retailers ® Argument ThatCustomers “Cannot Establish A Breach of Contract Claim Based Upon Unstated Dnntent.” oeeeceeeeesereneeeeees 17 D. Reply To The Retailers Argument That The Implied Covenant Cannot Be Used To Create Independent Rights Or Causes OfAction In Conflict With Controlling Law .0........ cccssseeseceseeeeeseecaceeceenersessreeseneeeenanes20 I. PETITIONERS FIFTH CAUSE OF ACTION ALLEGES AN ACTIONABLE CLAIM UNDERJAVOR TO REMEDY THE STATE’S UNJUST ENRICHMENT.......eeeceeeseccesreeeenneees22 A. Respondents Have Abandoned The First Ground Upon Which The Court OfAppeal BasedIts DECISION .......cceccscccessseee coeeseseseseeceeseecceseeeseeeceseseeseeaseceeeenneees23 B. Reply to the Retailers’ Argument That Application of the Javor Remedy Violates The “Safe Harbor.” ............24 C. Reply to the Retailers’ Argument That Application of the Javor Remedy Requires Them To Pursue Refund Claims In Conflict With The Tax Code.”’...............25 D. Reply To Respondents’ Argument That Application of the Javor Remedy s *‘Presents Serious Constitutional Concerns.” 0...ee eeeeceseecenereeenseeeeeeeenneeees29 E, Reply to the CDTFA Argument That The Javor Remedy May Not Be Applied Unless The State Agency Has Previously Determined That Such Sales Are Tax Exempt. 200.000... ceceeeesseneeessereeeneeecsssseeneeeeseesenesenes 3] F, Reply to Respondents’ Arguments That Customers Have Viable Alternatives By Which To Raise Taxability Disputes. 20... ...ecceeccccseceeeeeeececeeeeeeeeeeeteseeeeneenees 38 IV. PETITIONER’S ARGUMENTS WOULD NOT “OPEN THE FLOODGATESOF LITIGATION” BUT RATHER WOULD “PROMOTE THE ORDERLY ADMINISTRATION OF THE TAX LAWS.” Looeeeeereee e cneeeeeesseeeeeseuesseaeessaassaeessaseessueaeeersaas 39 CERTIFICATE OF WORD COUNT... .ooccceececceeceeeeeeeeeesnereseneteeeesnesseeeees43 TABLE OF AUTHORITIES Page(s) CASES Agnew v. SBE (1999) 21 Cal.4th 310eeecccesesee 2 seccsnecneceeseeeeseensesssserscsseaseseseseesnasreceesas4] Alpha Therapeutic v. Franchise Tax Bd. (2000) 84 Cal.App.4th 1 occccccee o setecsscessensecscecaeneessseanecnecnessetersaeesseeaeees4] Brown v. Legal Foundation (2003) 538 U.S. 216... ee ceecenccneeseene eo seseeensnessseseecraeensssersseessessscseseaeccsstonseentaaes 7 Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342oeeeeccseesee o nescresseseeesneeseseessssesseesceeseeenseeseeeseaees 21, 22 Cerajeski v. Zoeller (2013) 735 F.3d 577 (7th Cir., Posner J.) ..c.ceccceceececeecesseeeceeceseeteneeeesseeteesereee 5 Cohen vy. Beneficial Indus. Loan Corp. (1949) 337 U.S. S41eeeeeeceneeneesee osetesnesecsseseeseseersreceecesepeesaseeseeeseeeneenees26 Helene Curtis, Inc. v. Assessment Appeals Bd. (1999) 76 Cal.App.4th 124 oooecee ceccscseeseceeseeeeseeeeeeseeeeesaetsaeeeneeesseeeensenaee4] Hodelv. Irving (1987) 481 U.S. 704oeecceececccceseeeeene osesecneseeecaceaceesscesecaesseecesetserseeesaeonsenseeeeas 5 Hogan v. Ingold (1952) 38 Cal.2d 802 oo... ceceeccceceseeeee osesseiseeessssncessseesesseeseeeesseaseaeenaeesseseeteees26 Hotchkiss v. National City Bank (S.D.N.Y. 1911) 200 F. 287 ooo. eceeee oe ceteenreeceseseeesseeesessesseeeesenseeeesseeeenetateees 19 Javor v. SBE (1977) 73 Cal. App. 3d 939 occeeceee oceneseeetsecteeenesessenstaessanecaeserseaeeeeesenseeetaee 31 Javor v. State Bd. ofEqualization (1974) 12 Cal.3d 790 weceeeccesecceseeeee a sesseesneecsccesesenaeeeeeesaeeceseaeersaneeeeeeens passim Koontz v. St. Johns River Water Managem entDist. (2013) —_ US. _, 133 S.Ct. 2586 [collecting CaSCS] .oicceesccecseeceeeeseneeeteesneeenneeeneneteees7 McClain vy. Sav-On Drugs (2017) 9 Cal. App. Sth 684 oo...ee ee cceeeteeceeessrecteesaeeeseeaeneeteeseesaaetees passim National Ice & Cold Storage Co. v. Pacific Fruit Express Co. (1938) 11 Cab.2d 283 ooo.ce ccecccseceee eceteeceeseeeseeseneccaeeaneceeesseeaneeeeneteterss 1, 3, 20 Oksnerv. Superior Court ofLos Angeles County (1964) 229 Cal. App. 2d 672 ....ececcceecccscescescsseseeseeeececeneceeeecseeaeesesssseeseeesseeaaes2 Pacific Gas & E. Co. v. G. W. Thomas Drayageetc. Co. (1968) 69 Cal.2d 33 ooo. eccceceesceeesseeee a ceceeeeaecerseesseeeeeaeseeeesaeeeseesaeesesseeensenees 6, 19 Preston v. SBE (2001) 25 Cal4th 197 oo... cccccccseseceeecceseeecseeseeeeseesecaeeeseesaaeeseesseeesseesesseseseneesAl State v. Savings Union Bank & Trust Co. (1921) 186 Cal.294 ooocceccccsteeeeeceesenseesseeeseseeseceasessaesecsesensesesssseesasearees 12 Turner vy. Markham (1909) 155 Cal. 562 ooceeesseeeseeee eceeeeeeessecessenseceecesseeseecaeeeaeeessessesatteseaeens26 Wallner v. Parry Professional Bldg., Ltd. (1994) 22 CabApp.4th 1446cccccccccneteccnssseceeeeseesesetesseeesseeeeeeeeneees 27 Webb’s Fabulous Pharms. v. Beckwith 449 ULS. 155 (U.S. 1980). ecccesccecceeseesesseeseceseeseeeneeeensaeeeseeeeseseeecseesstenseese 5 Woosley v. SBE (1992) 3 Cal4th 758 ooo. eeececcsccsccceseceeeceseesseneeseeesesetenseseeeeeesseseeseesensesseeats 30, 31 STATUTES Civil Code § 1656.1 oo... ceccceeecceceeceseeeeeeeeeeceeeeaeceeerecesseeeeeaesesaseeseeeeseaeeeeneeaees passim Government Code § 11340.6 oo... cccccccccccsssesscesseesseessceeeseeseeeseseeeetaneesessecsssenseees 38 Government Code § 11350... cccccccccncessccssecesscccessececseeeeeeeeeceseeueeceseesstesstecenses 38 Retail Sales Tax Act of 1933, § 23 oe cececccescsscssesseceeesectensesesceeseaeserseasonsessseseeenee40 Tax Code § 6091.5 cc ccccccccsssssscessccssseeceeeeccssccseccsesseuccssecesseceeesesesesssasecensestessessaes9 Tax Code § 6901.5...eeveveceaeesaceeeaae caeeeceseesaeecesseseeseseetesasessaeesssaeeeeeets passim Tax Code § 6904 and 6932 oo... cccccccssccceee cccsseesecsssencseseeeessteeeeseseeerenes 25, 39, 30, 40 Tax Code § 6905.1 ..ececccescccesceseesesecereeseeee saaeeecsecseeecaeeeesesseseseaaeceeeeeasescsstessessesesees 11 Tax Code § 6933 ....ccecccccccescccessesesesscenseeseeeecseeseeseessaeenaeeesesecsneseeeeeeeeateveaes 30, 34, 41 Tax Code §§ 6933-6934... ccccccsecensesseee ceeesceeceensescesecenesseseeaeeeseeseressassateeaees 8, 26 ii Petitioners submit this reply to the AnswerBriefs on the Merits filed by RespondentRetailers and the California Department of Tax and Fee Administration (“CDTFA”). In this brief where a reference could be to either the CDTFA,the SBE, or both depending on the time frameatissue, they are sometimesreferred to as “the State Agency”or “the State Agencies.” Petitioners’ Opening Brief on the Merits in this Court is cited as “OBOM.”All citations to Respondents’ briefs are to their Answer Briefs on the Merits in this Court unless otherwise indicated. I. REPLY TO RESPONDENTS’ ARGUMENTS REGARDING THE CONSTITUTIONALITY OF THE RULINGS BELOW. Respondents relegate their constitutional arguments to the end of their Answer Briefs. (CDTFA at 43-50; Retailers at 53-57.) Petitioners will instead address the constitutional issues at the outset of this brief so they are clearly in mind when evaluating the parties’ divergent interpretations of Civil Code §1656.1, Tax Code §6901.5, and Javor v. State Bd. of Equalization (1974) 12 Cal.3d 790 (‘“Javor”). A. By Rewriting Civil Code §1656.1’s Rebuttable Presumption into an Irrebuttable Presumption, McClain and the Retailers’ Arguments Would Makethe Collection of All Sales Tax Reimbursement Unconstitutional. By way of background, Petitioners argued in their Opening Brief on the Merits that the Court Of Appeal’s decision (McClain v. Sav-On Drugs, (2017) 9 Cal. App. 5th 684 (“McClain’)) would makethe rebuttable presumption of Civil Code §1656.1 irrebuttable and would thereby destroy the consensualbasis for sales tax reimbursementthat this Court held was required in National Ice & Cold Storage Co. v. Pacific Fruit Express Co. (1938) 11 Cal.2d 283 (“National Ice”). (OBOMat 43.) The constitutionally-required consensual basis for retailer collection of sales tax reimbursement was subsequently statutorily required as well by Civil Code §1656.1. (OBOM at 10-11.) The Retailers’ counter-argumentisinstructive. The Retailers’ do not discuss or even cite this Court’s decision in National Ice which was the progenitor of Civil Code §1656.1. Muchless do the Retailers attempt to answer the question that troubled this Court in National Ice, which was “By whatlegal principle is it constitutional for the Tax Code to obligate a purchaser to reimbursea retailer for sales taxes that are legally levied upon the retailer alone?” (OBOMat 10.) See, e.g, Oksner v. Superior Court of Los Angeles County (1964) 229 Cal. App. 2d 672, 684 (“Dueprocess forbids the seizure of one man’s property for satisfaction of the debt of another.’”’) Instead, the only response of Respondents to this serious constitutional question is the following: Plaintiffs assert that dismissing their claim under section 1656.1 would renderthe entire tax system unconstitutional. (OBOM:43.) In fact, upholding Plaintiffs’ contract claim would do so. OK OK OF Plaintiffs’ contract claim under section 1656.1 would disrupt, not promote, the orderly tax collection process in California, thereby giving rise to an unconstitutional attempt to enjoin or interfere with the lawful collection of a tax. (Retailers at 49-50.) Obviously, the Retailers’ counter-argumentis not in any way a rebuttal to ‘Petitioners’ assert[ion] that dismissing their claim under section _ 1656.1 would renderthe entire tax system unconstitutional.” Rather, the Retailers’ counter-argumentis a transparent attempt to change the subject to a different constitutional argument that the CDTFA makesin its Answer Brief. (CDTFA at 38-39 [“Allowing such claims would undermine the fundamental purpose of Section 32: to “‘avoid unnecessary disruption of public services that are dependenton that revenue.”].)' Thus, the Respondents have no answerto the most basic question in this case. [fnot customer consent, then by whatlegal principle is it constitutional for the Tax Code to obligate customers to reimburseretailers for sales taxes that are legally levied upon theretailers alone? This Court answeredthat question 80 years ago in National Ice: there simply is no such legal principle other than customer consent. (See National Ice at 292 [“‘such declaration of [unconstitutionality] is not intendedto indicate the illegality of authority which may be lodgedin retailer to “pass on’ the tax to a purchaser with the latter’s consent thereto, either expressly or impliedly given.” (emphasis added)].) The Legislature reached the same conclusion 40 years ago whenit adopted Civil Code §1656.1 (“Whethera retailer may add sales tax reimbursementto the sales price of the tangible personal property sold at retail to a purchaser depends solely upon the terms of the agreement of sale.) (Emphasis added.) Perhapsrealizing that the statutory scheme would indeed be unconstitutional if Petitioners were not allowed at least to pursue the Retailer Defendants pursuant to §1656.1, the Board itself has stated it takes no position on whetherPetitioners can or cannot pursuetheretailers for breach of contract pursuant to §1656.1: The Department addressesplaintiffs’ sales tax reimbursement refund claim (Fifth Cause of Action), which names the Departmentanda set ofretailers as defendants. Plaintiffs did not name the Departmentas a defendantto their breach of contract claim (First Cause of Action); the Department therefore leaves the ' The CDFTA’s argument under California Constitution, article XHI, section 32, is refuted at pp. 46-49, infra. briefing on the viability of this claim largely to retailer defendants. (CDTFAat n.2, p.15.) B. By Denying Customers Any Recourse To Recover Excess Sales Tax Reimbursement From The State Agencies, McClain And Respondents’ Arguments Would Make Tax Code §6901.5 Unconstitutional. 1. Reply to the CDFTA’s Arguments Regarding the Takings Clause. The CDTFA’s entire argumentfor inapplicability of the Takings Clause to Tax Code §6901.5 is encapsulated in a single footnote on the last pageofits brief: [A] State’s exercise of its taxing power, standing alone, does not implicate the Takings Clause.” (Koontz v. St. Johns River Water ManagementDist. (2013) __ US. _, 133 S.Ct. 2586, 2600-2601 [collecting cases]; see also Houck v. Little River Drainage Dist. (1915) 239 U.S. 254, 264 [“the power of taxation should not be confused with the power of eminent domain”].) (CDTFAat n. 31, p.50, emphasis added.) The CDTFA’s argumenthasa glaring omission. The CDTFA does not even attempt to establish that excess sales tax re1mbursement remitted by retailers under Tax Code §6901.5 is a “tax.” In fact, the opening phrase of Tax Code §6901.5 says the opposite: When an amount represented by a person to a customeras constituting reimbursementfor taxes due underthis part is computed upon an amountthat is not taxable or is in excess of the taxable amount andis actually paid by the customer... (Tax Code §6901.5, emphasis added.) How can a paymentthat is “computed upon an amountthatis not taxable oris in excess of the taxable amount” possibly be a “tax”? The CDTFA’s brief does not offer even a clue as to how that might be possible. Additionally, under §6901.5 the excess sales tax reimbursement mustbe either “returned by the person[i.e. the retailer] to the customer” or “remitted by that personto this state.” If Tax Code §6901.5 were designed to raise tax revenue, there would be noreason to provideretailers with the option of returning the excess sales tax reimbursement to customers, since that would defeat the goal of raising tax revenue. Indeed, CDTFA admits §6901.5 is designed to prevent unjust enrichmentofretailers (an escheat function), rather to raise tax revenues: [S]ection 6901.5 ensures as a matter of equity that retailers do not in any circumstance retain andprofit from monies collected from consumersas sales tax reimbursementwith the representation and understanding that they would be paid overto the State. (CDTFAat 45, emphasis added.) It is well settled that permanent escheats are subject to the Takings Clause. (See, e.g., Hodel v. Irving, (1987) 481 U.S. 704, 706, 717 (“Hodel’’) [“The question presented is whether the original version of the ‘escheat’ provision of the Indian Land Consolidation Act of 1983 [citation omitted] effected a ‘taking’ of appellees’ decedents’ property withoutjust compensation .... Since the escheatable interests are not, as the United ~ States argues, necessarily de minimis. . . a total abrogation of theserights cannot be upheld.”]; Webb’s Fabulous Pharms. v. Beckwith, 449 U.S. 155 (U.S. 1980) (*Webb’s”) [Florida statute providing that interest accruing on interpleader monies deposited with the clerk shall be deemed income ofthe clerk’s office violates the Takings Clause]; Cerajeski v. Zoeller (2013) 735 F.3d 577 (7th Cir. , Posner J.) (“Cerajeski”) [Indiana’s escheat of interest on a small bank savings account violates the Takings Clause].) The CDTFA argues, however, that the “tax system will still operate to the public benefit” by “reading Javor narrowly”so asto “foreclose[] consumerclass action refundsuits challenging retailers’ routine, day-to-day decisions about the application of conditional sales tax exemptions.” (CDTFAat 29.) Indeed, “foreclose[ing] . . . refund suits” has been the State Agencies’ strategy for decades. Although the CDTFA admits that “information from customers could cause the Department to conduct an audit . . . [a]nd it can require a retailer to return already collected excess sales tax reimbursement to those consumers whopaid it” (id. at 41), the State Agencies never do so. For example, for decades the State Agencies did not voluntarily conduct an audit and rule on the taxability issues in Javor, Loeffler, the instant case, nor — to the best of Petitioners’ knowledge — on any other customerclaim for refund of excess sales tax reimbursement. Instead, the State Agencies waitfor retailers to file tax refund claims, which retailers never do owing to an “incentive problem” — a phrase which the CDTFA coined and acknowledgesto exist. (See CDTFA at 14 and 33 [“The Court in Javor stepped in only to correct an “incentive” problem; some percentageofretailers had failed to submit claimsto the Department for refunds clearly due, because they would not be entitled to retain the benefits of their efforts.’’] This case is a perfect example of the State Agencies’ refusal to address overchargesof sales tax reimbursementon legally tax exempt transactions. The SBE was broughtinto this case in February 2006 on Cross-Complaints filed by the Retailers on order of the Superior Court. (Retailers at 29.) It is now twelve years later, and the CDTFA admits that (1) neither the Paliani letter norits restrictive conditions for tax exemption have ever been considered by the Board, nor has the Board ever disagreed with Petitioners’ claim that all pharmacy sales oftest strips and lancets are exempt from the sales tax. (OBOMat 18-19.) Yet the State Agencies have neverinitiated an audit to examinethe legality of Paliani conditions, instead preferring to expend enormousresources to defend Petitioners’ Javor claim (which seeks to compel the State Agencies to perform their job and make a taxability determination). The CDTFA’sbrief attempts to excuse the State Agencies’ misfeasance bystating that they favor meansfor securing the “public benefit” other than refunds of excess sales tax reimbursement, such as by “operating a competitive marketplace” so that consumers can “exercise[e] their purchasing power.” (CDTFAat 29.) Apparently the CDFTAis unawarethat the State Agencies’ admitted practice of “reading Javor narrowly”so as to “foreclose[] consumerclass-action refund suits”is a per se violation of the Takings Clause. The “taking” of excess sales tax reimbursement under R&TC §6901.5 operates as a “physical taking” because the State ends up with physical possession of the money (rather than a “regulatory taking” such as enacting a land use regulation). Under Brown v. Legal Foundation (2003) 538 U.S. 216, 233-234 (“Brown”), physical takings amountto a per se taking for which victimsare entitled to just compensation without “complex factual assessments of the purposes and economic effects of government actions.” (Emphasis added.) In other words, as to physical takings, there is no balancing of the “public benefit” of the State paying “just compensation” versus other approachessuch as the State Agencies “operating a competitive marketplace.” Rather, the express language of the Takings Clause — “nor shall private property be taken for public use, without just compensation” — is strictly enforced with respect physical takings. See Koontz v.St. Johns River Water ManagementDist. (2013) _ U.S. __, 133 S.Ct. 2586 at 2600 [“Weare not here concerned with whether it would be ‘arbitrary or unfair’ for respondent to order a landowner to make improvements to public lands that are nearby. .. . Whatever the wisdom ofsucha policy,it would .. . amount to a per se taking similar to the taking of an easement or a lien.”’]. Here, however, the CDTFA admits that the State Agencies’ strategy has been to “foreclose [] consumerclass-action refund suits” in favor of other methodsto secure the “public benefit.” (CDFTA at29.) That is a per se violation of the Takings Clause that can only be cured by this Court reversing the Court of Appeal and adopting a robustinterpretation of the Javor remedy. To be constitutional, such interpretation must enable Petitioners to obtain a determination of the legality and enforceability of the Paliani conditions, first from the CDTFAand,if necessary, from the courts under Tax Code §§6933-6934. 2. Reply to the Retailers’ Arguments Regarding the Takings Clause. The Retailers attempt to rebut applicability of the Takings Clause on the ground thatthat there is “no state action.” (Retailers at 55-57.) Tellingly, the State itself does not argue that there has been “nostate action.” The Retailers cite three cases in support oftheir “state action” argument. (Retailers at 56.) Those cases, at most, hold that a Takings Clause claim requires “state action” and cannot be asserted against private parties. But here, Petitioners only argue that the State would be liable under the Takings Clause, and there is abundant proof of “state action” by the State Agencies. The mere fact that the State has escheated the funds andis unjustly enriched therebyis sufficient “state action”, as shownbyall of the escheat cases cited in Petitioners’ Opening Brief on the Merits. Moreover, there is abundant evidenceof other forms of “state action” here. The State enacted an escheat statute — Tax Code §6091.5 — without providing a statutory procedure by which customers who are charged excesssales tax reimbursement can makea claim for return their property. Through issuance of the Paliani letter in contravention of the Administrative Procedure Act (“APA”’) and without authority from the Board, the SBE staff commanded 13,000retailers to employ pointless and burdensome new conditions to the tax exemptionfortest strips and lancets. Since the SBE neverarticulated any public policy reason for applying new conditionsto test strips and lancets (but not to insulin and insulin syringes) , it appears that the new conditions were mandated for the sole purpose of discouraging retailers from honoring the tax exemption. Andfor fifteen years thereafter and counting, the State Agencies have accepted sales tax reimbursement without notifying California pharmacies and diabetics that the conditions for tax exemption stated in Paliani letter were unauthorized by the Board and void for lack of compliance with the APA. As result, the State has been unjustly enriched by tens of millions of dollars per year. It is difficult to imagine a deprivation of property without due process of law and a taking without just compensation that has more “state actions”than is presenthere. 3. Reply to Respondents’ Arguments Regarding The Due Process Clause. Aspreviously discussed, the CDTFA argues that Tax Code §6901.5 imposesa “tax”’ rather than an escheat, and that the Takings Clause does not apply to taxes. (See pp.4-5, supra.) Even if the CDTFA werecorrect that Tax Code §6901.5 imposes a “tax” rather than an escheat, that would not help the CDTFA here. Tax Code §6901.5 wouldstill be unconstitutional under the Due Process clause because the State does not afford “meaningful backward lookingrelief to rectify an unconstitutional deprivation.” (See OBOMat 33-35 and casescited therein). The CDTFA responds: Plaintiffs state that they too must be provided with “meaningful backward-lookingrelief”... . even though the Legislature (in section 6901.5) did not provide for this remedy. (OBM atpp. 33-35.) Due process doesnot require this result. (CDFTAat 45, emphasis added.) The CDTFAfails to recognize that the State Legislature does not determine the confines of Fifth Amendment Due Process, the Constitution does. The Due Process Clause (“No personshall... be deprived oflife, liberty, or property, without due process of law”) is not limited to “taxpayers” but runs to “persons” with respect to their “property:” Here, no one contendsthat customersare not “persons”or that excess sales tax reimbursement does not belong to them. (See Loeffler at 1115 quoting Javorat 802 [“We observed that the Board ‘is very likely to become enriched at the expense of the customer to whom the amountofthe excessive tax actually belongs.’”] (Emphasis added).) The CDTFA nextarguesthat as “nontaxpayers” under the Tax Code, Petitioners would have no standing to assert a Due Process challenge to Tax Code §6901.5. (CDFTAat 46.) Of course, it is Respondents who wants to characterize excess sales tax reimbursement as a “tax” rather than an escheat. But even if that characterization were true, Petitioners would have standing to bring a Due Process challenge to §6901.5 for failing to afford them any “meaningful backwardlookingrelief.” That is because §6901.5 itself expressly recognizes that customers have an ownership interest in excess sales tax reimbursement: When an amount represented by a person to a customer as constituting reimbursement for taxes due 10 underthis part is computed upon an amountthatis not taxable or is in excess of the taxable amount andis actually paid by the customerto the person, the amount so paid shall be returned by the personto the customer uponnotification by the Board of Equalization or by the customer that such excess has been ascertained. (Tax Code §6901.5, emphasis added.) Indeed, out of the three categories of involved parties (customers, retailers, and the State) it is only retailers who are forbidden by §6901.5 from retaining any excess sales tax reimbursement. (CDFTAat 45 [“[S]Jection 6901.5 ensures as a matter of equity that retailers do not in any circumstance retain and profit from monies collected from consumers sales tax reimbursement.”].) As the only real-parties-in-interest, customers therefore have standing to assert a Due Process challenge to Tax Code §6901.5. The CDTFAalso arguesthat there is no Due Processviolation because Tax Code §6905.1 does not create or recognize “a vested property interest held by consumers.” (CDTFAat 44-45.) That argumentis contrary to the CDTFA own admission. (CDTFAat 45 [“Of course, onceit has been conclusively ascertained through the processes established in the tax code that a retailer has paid excesssalestax . .[t]he Department will ensure that refunded tax payments are in turn passed back to the consumers whopaid sales tax reimbursement.”].) It is also contrary to the Retailers acknowledgmentthat the excess tales tax reimbursement“rightfully belongs” to customers. (Retailers at 22 [“this Court allowed the [Javor] suit to proceed—asit was unwilling to leave the Board with the excess revenue that rightfully belonged to the purchasers.”’].) The CDFTAapparently wants to draw distinction between that which “rightfully belongs” to customers and that in which they have “a il vested property interest.” But in doing so, the CDTFA merely assumesits own conclusion: that it can keep excess sales tax reimbursement without providing due process to customers to whomit rightfully belongs. Not surprisingly, the CDTFA cites no authority that supports such a circular argument. The Retailers’ argumentis equally circular. They arguethat: [R]etailers, as the taxpayers, are afforded the opportunity to file refund claims with the Board and, thus, are clearly afforded the constitutionally- mandated procedural due process. (Loeffler, supra, 58 Cal.4th at pp. 1107-1108 [retailers are permitted tofile refund claims with the Board].) Therefore, Plaintiffs do not derive any right to be heard from a statutory schemethat does not directly affect them. (Doyle v. Oklahoma Bar Ass’n (10th Cir. 1993) 998 F.2d 1559, 1567 [parties do not have due process interest merely because government’s taking of another’s substantive right may have a derivative impact on them].) (Retailers at 52, emphasis added.) The Retailers’ argument assumesthat onlyretailers are “afforded the constitutionally-mandated procedural due process” with respect to their “substantive right” to file a tax refund claim, so customers have no “due processinterest”in rights which “merely... may have a derivative impact on them.” That is the same argument as made by the CDTFA,just substituting the term “substantive right” for “vested right.” It assumesits own conclusion that customers have no “substantive right” to either due processor the excess sales tax reimbursement of which they were deprived. If, by contrast, one accepts that the rightful owners of escheated property have a “substantive right” to due process (as was held bythis Court in State v. Savings Union Bank & Trust Co. (1921) 186 Cal.294 (“State v. Savings”)) and “just compensation” under the Takings Clause (as washeld in cases such as Hodel, Webb’s, and Cerajeski), then the 12 Retailers’ circular argument unwinds. Becausethe rightful owners of escheated property have a Constitutional “substantive right” to procedures for the recovery of such property, the impact of a “statutory scheme”[Tax Code §6901.5] that confiscate such property does have a direct “impact on them”(rather than a “derivative impact on them”as the Retailers contend). The Retailers also argue that“Plaintiffs voluntarily paid sales tax reimbursement to the Retailers as a matter of implied contract, which does not implicate due process.” That is a straw man argument. Petitioners do not claim that their paymentof sales tax reimbursementto the retailers givesrise to any claim other than their First Cause of Action against the Retailers for breach of the contract specified in Civil Code §1656.1, including breach of the duty of good faith and fair dealing. Petitioners’ constitutional arguments, by contrast, arise from the State escheating under Tax Code §6901.5 the excess sales tax reimbursement from the Retailers’ custody and retaining such amounts without providing any procedures by which the rightful owners — the customers — can reclaim the property belonging to them. (See, e.g. State v, Savings, Hodel, Webb’s, and Cerajeski.) In the category of“no harm,no foul,” the Retailers argue that “(even if retailers opted not to collect sales tax reimbursement, but merely choseto increase the cost of the products to account for the sales tax paid, the economic effect would be the same on the consumer.” (Retailers at 51, emphasis added.) That argumentis true if the Retailers “assumed”the “sales tax paid” andraised their prices by a corresponding amount. But here the sales of test strips and lancets were legally tax exempt, so there wasno needfor the Retailers to pay sales tax, and therefore no needto raise prices. Indeed, the Retailers’ argument demonstrates how diabetics have been damagedbythe Retailers collecting sales tax reimbursement on tax- exemptsales oftest strips and lancets. 13 II. PETITIONERS FIRST CAUSE OF ACTION ALLEGES AN ACTIONABLE CLAIM AGAINST THE RETAILERS FOR BREACH OF THE CONTRACTSPECIFIED IN CIVIL CODE §1656.1. The Retailers’ brief addresses Petitioners’ First Cause of Action by paraphrasing at p. 46 three arguments from the Court of Appeal’s opinion: i.e. that the First Cause of Action (1) is “premised on the claimed existence of an unwaivable exemption” (See Op. at 701), (2) would “have a court make taxability determinations in the first instance” ( See Op. at 701) and (3) is “based upon unstated intent” of customers. (See Op. at 705). The substance of each of those arguments is rebutted in the sections below. More generally, the consequence of Respondents’ position would be that the Board could defeat any suit seeking to utilize Javor by adopting a contrived position that manufactured a dispute as to “taxability,” or by stating that it has not considered the issue. And that is what the Boardis, in fact, trying to do here. Specifically, despite convincing thetrial court that the issue of taxability was “hotly disputed” by the Board, the Board later admitted in its Respondent’s Brief before the appellate court that this was not trueat all; that despite knowing aboutthis issue at least since 2005, meaning for over 12 years,it still has not decidedit: Appellants interpret Regulation 1591.1 to meanthatall sales of glucosetest strips or skin puncture lancets are exemptfrom sales tax. However, there has been no binding determination by the Board that Appellants’ interpretation is correct. The Board could well come to a different conclusion, ruling that sales of skin puncture lancets and glucosetest strips are nontaxable only if the products are furnished by an individual registered pharmacist (and not picked up off the shelf or dispensed by an employee whois nota registered pharmacist) and only if the customer presents documentation to show that the products are purchased pursuantto the instructions of a physician to control diabetes (such as a prescription or a copy of the written 14 instructions). Because the taxability issue in this case has not been decided by the Board, the Superior Court properly dismissed the lawsuit.” (SBE’s Respondent’s Brief Before Appellate Court, p. 34) Respondents now argue before this Court that they can continue to collect millions of dollarsin unauthorized sales tax “reimbursement” from diabetic consumers, and that there is nothing consumersor the courts can do aboutit, so long as the Board never decides “taxability in the first instance.” This cannot bethe law. A. Reply to the Retailers’ Argument That Petitioners’ Breach of Contract Cause of Action “Is Premised on the Claimed Existence of an Unwaivable Exemption.” . The Retailers and the Court of Appeal contendthat “plaintiffs’ breach of contract cause of action is premised on the claimed existence of an unwaivable exemption.” (Retailers at 46, Op. at 701.) On the contrary, Petitioners acknowledgethatretailers can waive the tax exemption, but that does not meanthat retailers can both waive the tax exemption and charge customers excess sales tax reimbursement. As pointed out by this Court in Loeffler, the Legislature in adopting 1978 Senate Bill 472 added Civil Code section 1656.1 ..., permitting but not requiring the addition of reimbursement charges, designating the charges as a matter for a contractual agreement between seller and buyer, and permitting the retailer to absorb the tax. (Loeffler at 1117, emphasis added.) Thus, whether purchasers can be saddled with the cost of such a waiveris “a matter for a contractual agreement betweenseller and buyer.” Absent an agreement from the buyer, the retailer must “absorb the tax.” Indeed, the SBE’s Respondent’s Brief in the Court of Appeal admits (1) that the presumed agreement for customer reimbursementofthe sales 15 tax under Civil Code §1656.1 applies only to sales tax “that the retailer must pay to the Board”(i.e. not to excess sales tax reimbursement) and (2) that a retailers’ choice to waive the tax exemption meansthat the retailer must “absorb the cost of the sales tax itself”: The law doesallow the retailer and the consumer to agree that the consumerwill reimburse theretailer for sales tax that the retailer must pay to the Board. (Civ. Code, § 1656.1, subd. (a).) However, the law does not require that the consumerandretailer enter into such an agreement, and the retailer may choosenotto collect any sales tax reimbursement from the consumer and absorb the cost of the sales tax itself. (bid. ; Loeffler, supra, 58 Cal.4th at p. 1117.) (SBE RB at 20, emphasis added.) Thus, the consequenceofthe retailer waiving the exemptionis that the retailer must “absorb the cost of the salestax itself.” Petitioners’ First Cause of Action, however, only deals with situations wheretheretailer has not “absorb[ed] the cost of the sales tax itself,” but rather has charged diabetics excess sales tax reimbursement. That cause ofaction is not premised upon the exemption being “unwaivable,” but rather upon the Retailers waving the exemption withoutfulfilling their obligation to “absorb the cost of the sales tax itself.” B. Reply To The Retailers’ Argument That Petitioners Seek To Have A Court “Make Taxability Determinations In The First Instance.” The Retailers next contend with respect to Petitioners’ First Cause of Action that “the crux of this claim is to have a court make taxability determinations in the first instance.” (Retailers at 46, Op. at 701.) In Loeffler, this Court held that the consumers’ action against the retailer, Target, failed because “the taxability of a transaction must be resolvedin the first instance by the Board.” (Loeffler at 1134.) But there is 16 a critical difference between this case and Loeffler. In this case the State Agencies are defendants in Petitioners’ Fifth Cause of Action for an equitable remedy under Javor, whereasthe Loeffler plaintiff's declined the trial court’s invitation to join the SBEas a party. (See Loeffler at 1096 [““The court . . . .formally granted plaintiffs’ motion for leave to add the Board as a defendant. . . . Plaintiffs filed a second amended complaint, but this complaint did not add the Board as a defendant.” (emphasis added.)].) Thus, without the Board being namedas a defendant in Loeffler on a Javorclaim, there was no procedure by which the Loeffler plaintiffs could present the taxability issue to the Board for determination “‘in the first instance.” This Court therefore held in Loeffler that the action against the retailer could not be maintained. (Loeffler at 1134.) Here, by contrast, Petitioners accepted Javor’s invitation to join the Boardas a party. (See Javor at 802 [“allowing the Boardto be joined as a party for these purposesin the customer’s action against theretailer is an appropriate remedy entirely consonant with the statutory procedures providing for a customer’s recovery of erroneously overpaid sales tax” (emphasis added)].) By properly sequencing the Javor-compelled taxability decision by the CDTFA to occur before a decision on Petitioners’ claims regarding taxability, the Superior Court can easily guarantee that the CDTFAwill “make taxability determinationsin the first instance.” OF Reply To The Retailers’ Argument That Customers “Cannot Establish A Breach of Contract Claim Based Upon Unstated Intent.” The Retailers next contend customers “cannot establish a breach of contract claim based upon unstated intent” (Retailers at 46, Op. at 705); that “the terms of the contract are determinable by an external, not an internal standard”(id. at 48); that “uncommunicated subjective intentis irrelevant”(id.at 49); and that “mutual consent is gathered from the 17 reasonable meaning of the wordsandacts of the parties, and not from their unexpressed intentions or understanding (id. at 49). In the very next sentence the Retailers’ brief skips to its conclusion — “[t]herefore, beyond the prohibitions in Loeffler, Plaintiffs failed to state a claim”(id.). However, the Retailers omit an all-important step from their analysis. Contrary to their own authorities, the Retailers reach their conclusion without ever discussing “the reasonable meaning ofthe words and acts ofthe parties.” As anyone who has ever madea taxableretail purchase in California knows,the contractual “words ofthe parties” are shownon the sales check in the form of a dollar amountidentified as “sales tax.” By that singular express term of the sales agreement,the seller represents that the amountcollected as sales tax reimbursementis actually owed as “sales tax.” Thus, the statement quoted by the Retailers from Petitioners’ Opening Brief on the Merits (OBOMat 36 quotedin Retailers at 47.), while being an accurate statement of Petitioners’ intent, refers not to an “unstated intent,” but rather to an intent whichis “stated” in every sales check. Indeed,it is the Retailers — not Petitioners — whoare attempting to avoid the express terms of the sales checks by relying upontheir “unstated intent” to collect “reimbursement” for amounts that they voluntarily remit to the State, not as compulsory tax under the Tax Code and regulations, but as gifts to the State in response to the Palianiletter (which discovery will show to have been knownbythe Retailers to be unauthorized by the Board and issued in contravention of the APA). Moreover, the authorities cited by the Retailers for the ineffectiveness of “unstated intent” all concern situations where only one party is asserting an intent at variance with the “wordsofthe parties.” In the circumstance where both parties admit (or are found by a court) to have the same peculiar understanding of the contractual “wordsofthe parties,” 18 obviously that mutual meeting of the minds governs, regardless of whether it varies from the usualliteral meaning of the words used bythe parties. (See. e.g. Hotchkiss v. National City Bank (S.D.N.Y. 1911) 200 F. 287, 293 (LearnedHand opinion) [“‘if it appear by other words,oracts, of the parties, that they attribute a peculiar meaning to such wordsasthey use in the contract, that meaning will prevail, but only by virtue of the other words, and not because oftheir unexpressed intent.”]; Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co. (1968) 69 Cal.2d 33, 37 [A rule that would limit the determination of the meaning of a written instrumentto its four- corners merely because it seemsto the court to be clear and unambiguous, would either deny the relevance ofthe intention ofthe parties or presuppose a degree of verbal precision and stability our language hasnot attained.”’].) Here, the Retailers admit that “[p]laintiffs voluntarily paid sales tax reimbursementto the Retailers as a matter of implied contract.” (Retailers at 53, emphasis added.) The Retailers also admit to having understood that the contractual agreements were based on the “expectation” and “presumpti[on]” that any sales tax reimbursement charged to the customer would be of sums owed on the transaction by the retailer to the State as “sales tax.” (See Retailers at 55 [“Plaintiffs entered a contractual agreement to pay such monies for purposes ofsales tax reimbursement.. . And consistent with expectations, the Retailers eventually paid those sums as presumptively owed sales tax to the Board.” (emphasis added.)].) Indeed, the SBE’s Respondent’s Brief in the Court of Appeal admits that the presumed agreement for customer reimbursementofthe sales tax under Civil Code §1656.1 applies only to sales tax “that the retailer must pay to the Board”(i.e. not to excess sales tax reimbursement). (See p. 15, supra.) That coincides with this Court’s earliest decision on sales tax reimbursement, National Ice, which held that retailers could constitutionally “pass on’ the tax to purchasers with their consent. 19 (National Ice at 292 [“such declaration of the law is not intended to indicate the illegality of authority which maybe lodged in a retailer to ‘pass on’ the tax to a purchaser with the latter’s consent thereto, either expressly or impliedly given.].) Excess sales tax reimbursement, by contrast, cannot in any sense be characterized as the “pass-on”ofa “tax” that wasn’t owed. Moreover, there is nothing in the legislative history of Civil Code §1656.1 to suggest that the rebuttable presumption was intendedtorestrict this Court’s decision in Javor, which had been issued four years earlier. Of all the potential reasonslisted by the Javor Court for its holding, the “terms of the agreementof sale” are not mentioned. That is because no one doubted that an implied term of every retail sale was that “sales tax reimbursement,” as its name implies, would only cover “reimbursement” of amounts actually owed bytheretailer as “sales tax.” Enactment of Civil Code §1656.1 did nothing to changethat understanding. On the contrary, by encouraging the use of sales checks, agreements of sale, or posted signage documenting the addition of “sales tax’ to the price, §1656.1 assures that an express written agreement for the customer to reimburse “sales tax” virtually always exists to augment the implied term to the same effect that the courts, retailers and customers have always assumed and expected. And in the extremely rare circumstance where no such writing exists, there is also no presumption under §1656.1 that “the parties agreed to the addition of sales tax reimbursement.” D. Reply To The Retailers’ Argument That The Implied _ Covenant Cannot Be Used To Create Independent Rights Or Causes Of Action In Conflict With Controlling Law The Retailers next argue that “the implied covenant, however, is relied on, at best, to enforce obligations created bya contract. It cannot be used to create independent rights or implement private causes of action in conflict with controlling law.” (Retailers at n.8 p. 49 [citing Carma 20 Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 373-376].) Carma Developers does not, however, actually say that. For example, the phrases “independentrights” and “private causes of action” do not appear anywhere in Carma Developers. And rather than saying that the implied covenant is used to “enforce obligations created by contract,” Carma Developers says the opposite: To begin with, breach of a specific provision of the contract is not a necessary prerequisite. (citation omitted) Were it otherwise, the covenant would have no practical meaning, for any breach thereof would necessarily involve breach of some other term ofthe contract. Instead, the “implied covenant of good faith is read into contracts ‘in 399order to protect the express covenants or promises of the contract,’” not to enforce them. (Carma Developers at 373, emphasis added.) What Carma Developers doessay is the following: e The covenant of good faith finds particular application in situations where one party is invested with a discretionary poweraffecting the rights of another. Such power must be exercised in good faith. . . . e A party violates the covenantif it subjectively lacks belief in the validity ofits act or if its conduct is objectively unreasonable. e breach of a specific provision of the contract is not a necessary prerequisite. e the covenant of good faith can be breached for objectively unreasonable conduct, regardless of the actor’s motive. e the scope of conduct prohibited by the covenant of good faith is circumscribed by the purposes and express terms of the contract, and e asa general matter, implied terms should neverbe read to vary express terms. 21 W O Q U O A T RA R AS E L g (Carma Developers at 372-374.) Thus, the questions posed by Carma Developers are whetherthe implied covenant of good faith and fair dealing would (1) ’protect the express covenants or promises of the contract,” or (2) “vary the express terms”and, if the former, whether the Retailers (3) are “invested with a discretionary poweraffecting the rights of another’, (4) have failed to exercise that power in good faith, and/or (5) have engaged in conductthatis “objectively unreasonable.” Aspreviously discussed, the “express covenants or promises of the contract “ is shown on each sales check as a dollar amountidentified as “sales tax.” (See p.18-18, supra.) By that singular term the retailer represents that the amountcollected as sales tax reimbursementis actually owed as “sales tax.” However, such representation is not true with respect to excess sales tax reimbursementcollected on tax-exempt sales. Yet once the retailer remits the excess sales tax reimbursement to the State Agencies, there is no procedure for the customer to recoverit without the retailer filing a tax refund claim. Therefore the “implied covenant of good faith is read into contracts ‘in order to protect the express covenants or promises of 399the contract’” andtheretailer “is invested with a discretionary power affecting the rights of another.” Under Carma Developers “[s]uch power must be exercised in good faith,” but the Retailers have not done so, and instead have engaged in objectively unreasonable conduct including thatset forth in Petitioners’ Opening Brief on the Meritsat p. 38. Ill. PETITIONERS FIFTH CAUSE OF ACTION ALLEGES AN ACTIONABLE CLAIM UNDER JAVOR TO REMEDY THE STATE’S UNJUST ENRICHMENT. 22 A. Respondents Have Abandoned TheFirst Ground Upon Which The Court Of Appeal Based Its Decision The Court Of Appealheld that there are “three prerequisites”for utilizing the Javor remedy. However, these prerequisites can neverexist in any case regardless of its facts, and even did not exist in Javoritself. In other words, under the McClain Court’s Javor prerequisites, the Javor case itself could not have gone forward. If left to stand, McClain will have de facto “overruled”this higher Court’s opinions in Javor and Loeffler by makingit definitionally impossible for any consumerto ever pursue a Javor remedy regardless of the facts of the case. Neither Respondent deniesthis. In fact, the Board of Equalization (“Board”’) not only no longer denies this, but the Board now actually appears as if it might be joining with Petitioners in agreeing that McClain violates Loeffler’s and Javor’s holdings and must, at least to someextent, be reversed: And while plaintiffs complain that the decision below “effectively abolish[ed]” such a claim by imposing impossible prerequisites (OBM 28-32), the Departmentis not requesting that this Court disapprove Javor or impose any preconditions to asserting Javor-type relief beyond whatare set out in that case and discussed in Loeffler and in the previous sections ofthis brief.” (CDTFA at 45, emphasis added.) Thefirst “prerequisite” wasthat: “the person seeking the new tax refund remedyhasnostatutory tax refund remedy availabletoit.” (McClain v. Sav-On Drugs (2017) 9 Cal. App. 5th 684, 690 (“McClain”). Petitioners’ Opening Brief on the Merits pointed out that the supposed statutory remedies (1) were of no benefit to customers, and/or (2) were applicable to every excesssales tax reimbursement, so McClain would block every Javor claim, including that of the Javor plaintiffs themselves. 23 (OBOMat 25-27.) In light of the CDTFA’s concession, it appears that the Court of Appeal’s first basis for its decision is abandoned by Respondents. B. Reply to the Retailers’ Argument That Application of the JavorRemedyViolates The “Safe Harbor.” The Retailers argue that they are protected from liability on the Fifth Cause of Action by the “safe harbor”that this court recognized in Loeffler. (Retailers at 34-36; Loeffler at 1125-1126 quoting Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163 at 182-183. [“Whenspecific legislation provides a “safe harbor,”plaintiffs may not use the general unfair competition law to assault that harbor. ... Acts that the Legislature has determined to be lawful may not form the basis for an action under the unfair competition law . .”’].) The Retailers do not, however, maketheir “safe harbor” argument as to Petitioners’ First Cause of Action for breach of the contract specified in Civil Code §1656.1. (Retailers at 46-50.) That is because Petitioners’ Opening Brief on the Merits raised a compelling counter-argument:i.e. that utilizing the “safe harbor” to bar a cause of action for breach of a contract mandatedbythe Legislature in Civil Code §1656.1 “operates not to protect a statute enacted by the Legislature but to nullify it. That is a misuse of the ‘safe harbor’ and directly contrary to this court’s decision in Cel-Tech . . .and also directly contrary to this court’s decisions in Loeffler.” (OBOM at 41-42, emphasis added.)-The Retailers have no answerto Petitioners’ counter-argument, failing to even cite to Cel Tech. Instead, the Retailers concedethe point by not asserting the “safe harbor”as to Petitioners’ breach of contract cause of action. (See Retailers at 46-50.) Asto the Fifth Cause of Action, however, the Retailers do, argue that “[a]llowing a consumerto force a retailer to litigate taxability by pursuing a refund claim plainly is inconsistent with the ‘safe harbor.’” (Retailers at 35.) There is not the slightest hint in Loeffler that the “safe 24 harbor”protects retailers from their minimalobligations as nominal parties under the Javor remedy, and Javor would be effectively overruledifthe “safe harbor” did apply. Respondents’ argumentis therefore contrary to both Javor and Loeffler (to the extent it approves of the Javor remedy), and must berejected. Byeffectively overruling Javor, the Retailers argument would also make Tax Code §6901.5 unconstitutional under the Due Processclause. (OBOMat pp. 28-35.) C. Reply to the Retailers’ Argument That Application of the JavorRemedy Requires Them To Pursue Refund Claims In Conflict With The Tax Code.”. The Retailers argue that “[c]ompelling retailers to pursue a refund action in this case also would directly conflict with the code provision allowing them to elect not to do so” by “force[ing] retailers to incur the costs and expense of establishing the exemption and distributing the refunds—exactly what the tax code allows them to avoid.” (Retailers at 37- 38.) Thatis a straw man argument. Noone,leastofall Petitioners,is suggesting that retailers must “pursue a refund claim”or “incur the cost and expenseof establishing exemption and distributing the refunds.” But nor should retailers serve as roadblocksto legitimate taxability questions reaching the State Agencies for decision merely becauseretailers have no financial incentiveto lift a finger on behalf of their customers. Thefirst step in the Javor remedyis for the Superior Court to compelthe retailer to file a tax refund claim with the State Agencies under Tax Code §6904 (“Every claim shall be in writing and shall state the specific grounds upon whichthe claim is founded.”). That is a simple and | inexpensive process for which the customers whofile a Javor action would doubtless accept responsibility. Thereafter, it makes sense that prosecution 25 of the refund claim — including, if necessary, bringing a Superior Court action under Tax Code §§6933 and 6934 —shifts to the customers who brought the Javor action. The retailers become “nominalparties,” just like the corporation is a nominal party in a shareholder derivative action. The “incentive problem” which the CDTFA acknowledgesto exist with respect to retailers who charge excesssales tax reimbursement (CDTFAat 14 and 33) is akin to that which caused courts of equity to create shareholder derivative standing as a “remedy born of stockholder helplessness:” Equity cametothe relief of the stockholder, who had no standingto bring civil action at law against faithless directors and managers. Equity, however, allowed him to step into the corporation’s shoes and to seek in its right the restitution he could not demandin his own.It required him first to demand that the corporation vindicate its own rights but when, as was usual, those whoperpetrated the wrongs also were able to obstruct any remedy, equity would hear and adjudge the corporation’s cause throughits stockholder with the corporation as a defendant, albeit a rather nominal one. This remedy born of stockholder helplessness was long the chief regulator of corporate management and has afforded no small incentive to avoid at least grosser formsof betrayal of stockholders’ interests. It is argued, and not without reason, that withoutit there would belittle practical check on such abuses. . (Cohen v. Beneficial Indus. Loan Corp. (1949) 337 U.S. 541, 548.) In California, this Court recognized derivative standing for corporate shareholders by 1909, following precedents from other states and England. (Turner v. Markham (1909) 155 Cal. 562, 569-570.) The California Legislature did not codify the corporate derivative action or its procedural requirements until 1949. (Hogan v. Ingold (1952) 38 Cal.2d 802, 805.) Thus, for at least 40 years, this Court had sole responsibility for defining the parameters of the derivative action for California corporations. More 26 recently, the Court of Appeal recognized a limited partner’s common law and equitable standing to sue derivatively on the limited partnership’s claims. (Wallner v. Parry Professional Bldg., Ltd. (1994) 22 Cal.App.4th 1446 at 1450, n.4 [“[T]he courts have concludedthat a limited partner’s derivative action arises from both equitable as well as statutory grounds. ].) Because the Javor remedyis necessary in order for Tax Code §6901.5 to satisfy due process (OBOMat 28-35), the Javor remedy must itself be administered in a manner that comports with due process. Petitioners spelled out the procedures, including derivative standing, that they believe are required by the Javor remedy and due processin their Appellants’ Opening Brief in the Court Of Appealas follows: Indeed, there appears to be no dispute as to the procedures under Javor. Defendantretailers would be required to file a claim with the SBE for a refund of the total amountof sales tax paid on sales of test strips and lancets since March 10, 2000. The SBE then makes a determination. Ifthe SBE’s ruling allows a claim, the SBE interpleads the refund into the court for distribution to the class members. If the SBE disallowsthe claim, then an action against the SBEis brought in accordance with R&TC §§6933 and 6934 “for the recovery of the whole or any part of the amount with respect to which the claim has been disallowed.” The court would then resolve the claim. However, as the Supreme Court has twice noted, retailers have no financial interest in obtaining a tax refund that must be passed-through to their customers. (Javor at 795; Loeffler at 1115, 1122.) In such situations, where the party holding legal title to a claim has no interest in pursuing the claim, California common law recognizestheright of real-parties-in- interest to bring a derivative claim in the right of the title owner, whois relegated to the role of a nominal defendant. (Wallner v. Parry Professional Bldg., Ltd. (1994) 22 Cal.App.4th 1446.) 27 Here, Javor has already adoptedthe first step in the derivative process by holding that consumers can compelthe filing of tax refund claims by the holders of the legaltitle to those claims,the retailers. This Court should provide guidance that defendant retailers would be nominal defendants with respect to prosecuting the Javor-compelled refund claims before the Board and, if disallowed, before the Superior Court under R&TC §6933. Control over the prosecution should instead vest in plaintiffs. Indeed, the California Supreme Court has twice instructed that “i]t is still left to the courts to adopt appropriate remedies when excessive reimbursements have been collected by mistake and paid to the state.” (Decorative Carpets, supra, 58 Cal.2d at 256 and Javorat 799.) (AOBat 47-48, emphasis added.) Derivative standing is also consistent with the Retailers’ argument that they “have no dogin that fight” and should beleft “out of Plaintiffs’ taxability dispute with the Board.”(Retailers at 13.)’ However, to the extent the Retailers argue that being compelled to perform the minimal tasks of a nominal party conflicts with the Tax Code, the Retailers are rebuking this Court’s decision in Javor and Loeffler and threatening the constitutionality of Tax Code §6901.5. Such argument should therefore be rejected. * Ofcourse, here there is an independentbasis for the Retailers’ liability on Petitioners’ First Cause of Action for breach of the contract specified in Civil Code §1656.1, including breach of the duty of good faith and fair dealing. 28 D. Reply To Respondents’ Argument That Application of the Javor Remedys “Presents Serious Constitutional Concerns.” The Retailers argue that Javor “requiring retailers to pursue refund claims on the demand of consumers. . . presents serious constitutional concerns” under Article XIII, Section 32 “by “expanding the methodsfor seeking tax refunds expressly provided bythe legislature.” (Retailers at 38- 42.) The CDTFA arguesthat “[t]he Legislature has subjected [taxability] questions to an administrative exhaustion requirement” that would be overridden by application of the Javor remedy “presenting separation of powersconcerns.” (CDTFAat 36 and n.17.) In truth, Respondents’ arguments are an unvarnished direct constitutional attack on this Court’s decision in Javor (and Loeffler to the extent that Loeffler approvesofthe Javor remedy. See Loeffler at 1133, quoted at p. Error! Bookmarknot defined.-25 supra.) Asthe Attorney General of the State of California, now its Governor, wrote to this Court on April 1, 2010, as an amicus in support of the consumers’ position in Loeffler: Contrary to the reasoning put forth by Target Corporation (Target) and adopted by the Court of Appeal, the strictures of article XII, section 32 ofthe state Constitution (article XIII, section 32) and Revenue and Taxation Code section 6931 (section 6931) do not apply to the claimsat issue. Plaintiffs in this case are not attempting to impede, directly or indirectly, the state's collection of taxes; they are challenging Target's alleged unlawful and fraudulent practice of imposing a charge in the guise ofa tax. Nothing in the language ofarticle XIII, section 32 or the Revenue and Taxation Code suggests a prohibition on suits by private litigants alleging that a retaileris collecting money from consumersin a deceptive mannerby passing off charges as government mandates whenthey are not...[H]aving been given a 29 "get-out of lability-free" card, it is easy to imagine that someunethical retailers will impose bogus charges under the facade of charging a sales tax.” (AG Amicus Brief in Loeffler, at AA 374.) The CDTFA makesno attemptto identify the source ofthe “administrative exhaustion requirement” to which it refers. Presumably the CDTFAis referring to the statutory sequenceoffiling a tax refund claim (Tax Code §§6904 and 6932), obtaining a Board “determination” regarding that claim (§6901), and bringing a Superior Court action for “recovery of the whole or any part of the amount with respect to which the claim has been disallowed (§6933). Nor does the CDTFA explain how application of the Javor remedy would “override”that “administrative exhaustion requirement.” Presumably the CDFTAis just reiterating Respondents’ unfounded, but oft-repeated, claim that Petitioners seek to have a court “make taxability determinationsin the first instance.” But there is no merit whatsoeverto that contention. (See pp. 16-17, supra.) Similarly, the Retailers’ accuse Javor of “expanding the methods for seeking sales tax refunds” but never identify the supposed “‘expanded methods.” In fact, the methods for seeking sales tax refunds is exactly the same under Javor. (See Javor at 802 [““We think that allowing the Board to be joined as a party for these purposes in the customer’s action against the retailer is an appropriate remedy entirely consonant with the statutory procedures providing for a customer’s recovery of erroneously overpaid sales tax.” (emphasis added)].) The only difference is that under Javor the minimal actions required of the statutory “taxpayer”are performedas a nominal party at the direction of the court. The Retailers’ brief suggests that Javor may have somehow been overruled by Woosley v. SBE (1992) 3 Cal.4th 758. (Retailers at 39, n.7.) However, the SBE’s brief disagrees. (CDTFAat 45 [‘the CDTFAis not 30 requesting that this Court disapprove Javor or impose any preconditions to asserting Javor-type relief beyond whatare set out in that case and discussed in Loeffler and in the previoussectionsofthis brief.’’].) Moreover, the Retailers seriously misread Woosley, which actually approvedofthis Court’s decision in Javor. (See Woosley at 788 [“This court has held that a class action may be employed to seek refundsofsales and use taxes” citing Javor.].) Rather it was a follow-on Court of Appeal opinion in the Javor case — Javor v. SBE (1977) 73 Cal. App. 3d 939 — for which Woosley indicated possible disapproval (“to the extent they express viewsto the contrary”) on a groundnothere relevant. Finally, by effectively overruling Javor, Respondents’ affirmative constitutional arguments would make Tax Code §6901.5 unconstitutional under the Due Process clause. (See OBOMatpp. 28-35.) E. Reply to the CDTFA Argument That The JavorRemedy MayNotBe Applied Unless The State Agency Has Previously Determined That Such Sales Are Tax Exempt. The holding ofJavor is contained at the end of the opinion as follows: Wehold that under the unique circumstances ofthis case a customer, whohaserroneously paid an excessive sales tax reimbursementto his retailer who has in turn paid this money to the Board, may join the Board as a party to his suit for recovery against the retailer. (Javor at 802, emphasis added.) Petitioners and Respondents have engaged in a long-running debate about which circumstances of the Javor case were considered by the Court to be indispensable “unique circumstances”for application of the Javor remedy. Petitioners contend that the phrase “unique circumstances” was a cross-reference to the only other place in the Javor opinion in which the 31 word “unique” was used: i.e., in the Court’s description of the Javor plaintiffs’ winning contention: Plaintiffs contend that since the monies representing the sales tax overage rightfully belong to them, since the Revenue and Taxation Code provides no procedure by which they can claim the refund themselves, and since the retailers are neither mandated by statute nor prompted by financial interest to claim any refunds, the situation is a unique one for which the courts should fashion a remedy based on the broadprinciples of restitution. (Javor at 797, emphasis added.) Thus, Petitioners contendthat claims for refund of excess sales tax reimbursementcollectedfrom customers, unlike claims for other type of sales tax refunds (such as refunds of overpayments dueto retailer’s miscalculation of its sales tax liability), were deemed “unique” because(1) the retailers are neither statutorily nor financially motivated to seek a refund, and (2) the customers —whoarethe real parties in interest —have no standing under the Tax Codeto file a tax refund claim. It was those “unique circumstances” that made an equitable remedy necessary to “protect the integrity of the sales tax by ensuring”(1) “that customers receive their refunds”, (2) “that the retailers not be unjustly enriched,” and (3) “also that the state not be similarly unjustly enriched.” (Javor at 802.) Respondents contend, by contrast, argue that one of the necessary “unique circumstances”referred to by the Javor court wasthat “[t]he Board has admitted that it must pay these refundstoretailers.” (Javor at 802.)But State Agencies must frequently refund to retailers sales taxes that they overpaid as a result of miscalculating their sales tax obligation. The State Agency“admit[ting] that it must pay these refundsto retailers,” is hardly “unique.” 32 Overthe course of briefing the demurrers and the appeal, Respondents vacillated somewhatin their description of what a customer must show in order to qualify for the Javor remedy. Compare SBE’s Reply MemoofP&A in Support of Demurrer, AA 533 (“[A] Javor-remedy does not violate the Code and Loeffler only wherethere is clear authority — a statute, published appellate decision or regulation — which definitively decides the issue of taxability.”) with Respondent’s Brief of the California State Board of Equalization, 7/13/2016 at 34-35 (“[T]here has been no binding determination by the Board that Appellants’ interpretation is correct. ... Because the taxability issue in this case has not been decided by the Board, the Superior Court properly dismissed the lawsuit.”’) The Court of Appeal’s ruling, however, was more extreme than any position of Respondents | Weconcludethat a court may create a new tax refund remedy-and, accordingly, that the requisite “unique circumstances”exist- only if... . the Board has already determined that the person seeking the new tax refund remedyis entitled to a refund, such that the refusal to create that remedy will unjustly enrich either the taxpayer/retailer or the Board. (McClain at 690, emphasis added.) Thus, the Court of Appeal held that the Javor remedy dependsnot merely upon “taxability” having been decided by “clear authority - a statute, published appellate decision or regulation,” but rather the Board must have “already determined that the person seeking the new tax refund remedyis entitled to a refund.” There are three points that Petitioners wish to make about the court of Appeal’s ruling. First, it borders on being a non sequitur. It suggests that the refusal to create the Javor remedy will result in unjust enrichment only where “the Board has already determined that the person seeking the 33 new tax refund remedyis entitled to a refund,” but that clearly is not true. The Board is unjustly enriched whenevera retailer collects excess sales tax reimbursement and remits it to the Board, regardless of whetheror not “the Board hasalready determined that the person seeking the new tax refund remedyis entitled to a refund.” Second, while acknowledging that it was “unjust enrichment that offended the Board’s ‘vital interest in the integrity of the sales tax’ and warranted judicial intervention,” McClain held that the Javor Court was only concerned about unjust enrichmentif it was a “certainty” (McClain at 698,italics in original.) The Javor Court, however, held no suchthing, stating that “the Boardis very likely to become enriched.” (Javor at 802.) The Loeffler Court was even more emphatic, expressing concern about the mere “possibility” or “probability” of unjust enrichment. (Loffler at 1133- 34 [“Theintegrity of the tax system and avoidance of unjust enrichment, possibly ofthe retailer, but more probably ofthe state, in certain circumstances may support a Javor-type remedy for consumers.” (emphasis added).] Given this Court’s concern to avoid unjust enrichmentofthe State 99°66that would “likely,” “possibly,” “or “more probably” occur, what sense would it have made to condition the Javor remedy on the SBE having “already determined”that “the person seeking the new tax refund remedyis entitled to a refund”? Obviously, that would make nosense, becauseit would provide the SBE with a made-to-order method of evading the Javor remedy, thereby evading judicial review under Tax Code §6933, and perpetuating the State’s unjust enrichment, by the SBE simply failing to consider the customers’ entitlement to a refund (as the SBE admitted the Board has done here). (See OBOMat 18-19; 23-24.) The Court of Appeal, however, misinterpreted Javor as requiring a “certainty” of unjust 34 enrichment, and thereby adopted an interpretation ofJavor that would perpetuate just such misfeasance by the State Agencies. The Board attempts to take the phrase “unique circumstances” out- of-context and argue it means that the Board has already decided the issue in favor of the consumers. But the “unique circumstances” to which the Court refers are in the paragraph immediately above this holding, and state the following: Wethink that to require this minimal action from the Boardis clearly mandated by the Board's duty to protect the integrity of the sales tax by ensuring that the customersreceive their refunds. The integrity of the sales tax requires not only that the retailers not be unjustly enriched (Decorative Carpets, Inc. v. State BoardofEqualization, supra, 58 Cal.2d 252), but also that the state not be similarly unjustly enriched. (Javorat 802.) In other words, the policies underlying Javor are “protecting the integrity of the sales tax by ensuring that the customers receive their refunds,” “that the retailers not be unjustly enriched,” and “that the state not be similarly unjustly enriched.” (Id.) But Respondents skip over that paragraph which is immediately above the words “unique circumstances,” and instead jumpto a sentence in a paragraph further awayto try to argue that the “unique circumstances” in Javor were that the Board already had determined it must pay these refundstoretailers, .i.e, a Board admission of liability. However, as demonstrated above, that is not an honest reading of _ Javor. There is also another reason why Respondents’ argumentonthisis wrong; it is the two words“if any” which are found in that same paragraph in Javor: All that plaintiffs seek in this action is to compel defendantretailers to make refund applicationsto the 35 Board andin turn to require the Board to respond to these applications by paying into court all sums,if any, due defendantretailers.” (Javor at 802) (emphasis added) The words “if any” cannot be squared with Respondents’ proffered interpretation of “unique circumstances.” Under Respondents’ interpretation, the Javor style proceeding could only beinitiated if the Board had already determined that a refund wasdue. Butif that wereso, then there could never be an occasion when the SBE would not refund something(i.e. the refund that the Board had already determined was due). A refund of zero could not occur, but a refund of zero is precisely the circumstancethat the phrase “if any” is designed to cover. Finally, and most obviously, the Court of Appeal’s interpretation of Javoris unconstitutional under the Due Process Clause. (See OBOMat 28- 35 and pp.9-13, supra.) Just imagine how this Court would react if a Superior Court dismissed a new case (indeed,all new cases) on the ground that it only accepts cases in which it had “already determinedthat the person seeking [recovery] is entitled to [recovery].” The due process violation is so obviousthatit is difficult to believe that Respondents are still pressing this argumentin the California Supreme Court. The Court of Appeal respondedto Petitioners’ due process challenge to the Superior Court’s ruling by stating that it was following this Court’s decision in Loeffler: Further, our Supreme Court in Loeffler — although silent on this point — noted noconstitutional impedimentto its ruling that left consumers with no direct remedy for a refund andinstead relegated them to urging Board inquiry andto filing claimsor actions under the Administrative Procedure Act. (Loeffler, supra, 58 Cal.4th 1081.) Were we to cometo a contrary conclusion, we would effectively overrule Loeffler. ... 36 However,this Court’s decision in Loeffler was that Target’s customers had no independentclaim againstthe retailers under the UCL and CLRA becauseofthe “safe harbor” and the lack of any meansto obtain a taxability determination from the SBE “in the first instance.” Here, by contrast, neither of Petitioners’ causes of action are subject to the “safe harbor’’(see pp. 24-25, supra) and their Javor claim provides a means for Petitioners to obtain a taxability determination from the State Agencies “in the first instance.” (See pp. 16-17, supra.) There is a world of difference between Loeffler holding that the SBE gets to make a taxability . determination “in the first instance” (which the CDFTAcharacterizesas an” exhaustion of administrative remedies” requirement, see pp. 29-30, supra) and McClain’s holding (and Respondents’ arguments) that the SBE need never decide a Javor claim unless “the Board has already determined that the person seeking the new tax refund remedyis entitled to a refund.” (McClain at 690.) In sum, the Court of Appeal misunderstood Javor to require as a condition for its remedy a “certainty” that unjust enrichmentofthe State would otherwise occur, when in fact both Javor and Loeffler held the 99 66 29 66opposite: that unjust enrichment which “likely,” “possibly,” “or “more probably” would occur wassufficient. As a result, the Court of Appeal came to an erroneous conclusion that the test for application of the Javor remedy is whether the SBE had “already determined”that “the person seeking the new tax refund remedyis entitled to a refund.” That test, however, undercuts the very purpose ofJavor becauseit provides the State Agency with a made-to-order method of evading remedy by simply failing to ever consider the “taxability question” or the customers’ entitlement to a refund. Moreover,that test also blatantly violates Due Process and results in an unconstitutional taking of private property for public use withoutjust 37 compensation in violation of the Takings Clause. The Court Of Appeal’s ruling on the Fifth Cause of Action should therefore be reversed. F. Reply to Respondents’ Arguments That Customers Have Viable Alternatives By Which To Raise Taxability Disputes. The CDTFA nolonger contends that the existence of various statutes, regulations and proceduresidentified by the Court of Appeal bar the Javor remedy. (See pp.Error! Bookmarknotdefined.-Error! Bookmarknot defined., supra.) However, Respondents continueto rely upon someofthose statutes, regulations and procedures as supposedly “viable alternatives” by which customers canraise taxability disputes, claimingthat the alternatives are sufficient to satisfy Due Process. (Retailers at 53-54.). In fact none of those supposedalternatives is of any benefit to customers. The Retailers argue that “to the extent that Plaintiffs believe the Board’s interpretation of regulation 1591.1 is incorrect, they have the ability under Government Code section 11340.6 to petition the Board to amendthe regulation.” (Retailers at 44.) The Retailers also argue that “Plaintiffs could file a declaratory relief action under Government Code section 11350 to have the regulation declared invalid.” (id.) But Petitioners do not claim that Reg. 1591.1 is incorrect or invalid. On the contrary, Petitioners rely upon Reg. 1591.1 as the source of the tax exemption fortest strips and lancets.. Amendingor repealing Reg. 1591.1(b)(5)is not Petitioners’ strategy. | The Retailers argue that Plaintiffs could raise their taxability challenge in the contextoflitigation with the Board overtransactions subject to use tax. (Retailers at 45.) However,litigation over the transactions subject to use tax could be easily thwarted by the CDTFA. Anytest cases brought by a few customers for refund of the use tax could 38 be thwarted by the State Agency simply allowing a default judgmentto be taken against it, the only cost of which would be refunding the use tax that the test plaintiffs had paid. A class action could not be brought for refund of the use tax because Tax Code §6904 provides that “a claim filed for or on behalf of a class of taxpayers shall... be signed by each taxpayeror the taxpayer’s authorized representative.” As a practical matter that would doom anyclass-action seeking refund of a usetax.” Theretailers argue that” Consumers can, and often do, lodge complaints with the Board, which can lead to audits ofthe retailer.” No doubt the State Agencies do audit manyretailers when there is a complaint or suspicion that the retailer is underpaying the sales tax. Theissue, however, however, is whether the State Agencies ever audit retailer based on a complaint or suspicion that it has overpaid sales tax by collecting from customers and remitting excess sales tax reimbursement. Petitioners suspectthat the State Agencies do not audit retailers in those circumstances, but rather encourage such conduct(or direct it as the SBE did with the Paliani letter.) Moreover, even the Court of Appeal characterized lodging complaints with the Board as “the practical equivalent of allowing them to tug (albeit persistently) at the Board’s sleeve.” (McClain at 706.) IV. PETITIONER’S ARGUMENTS WOULD NOT “OPEN THE FLOODGATESOF LITIGATION” BUT RATHER WOULD “PROMOTE THE ORDERLY ADMINISTRATION OF THE TAX LAWS.” Without a shred of evidence, the Retailers state that “Plaintiffs’ contract claim under section 1656.1 would disrupt, not promote, the orderly * A Javoraction by contrast, is not “a claim filed “for or on behalf of a class of taxpayers ” but rather is a claim filed on behalf of a class of consumers to compel each individual retailer to make an claim for a sales tax refund, coveringall the sales tax the retailer itself paid to the State Agencyfor the subject transactions. 39 tax collection process in California” (Retailers at 50) and “would open the floodgatesof litigation by allowing any consumerto challenge the taxability of any transaction.” (Retailers at 43.) Likewise the CDTFA claimsthat “if these types of claims are allowed, we can expectsimilar, wide-ranging litigation ... . Such a result should be rejected as ‘undermining the ‘orderly administration of the tax laws.’” (CDFTCat 37.) In fact, the opposite is true. For 85 years it has been the law in California that, for the price of a postage stamp, any retailer may file a claim with the SBE for refund of excess sales tax reimbursement(Retail Sales Tax Act of 1933, §23; Tax Code §6904). Nevertheless, almost no such claims have everbeenfiled by retailers. Petitioners’ acknowledge this Court’s concern in Loeffler that “independent consumerclaims against retailers for restitution of reimbursement charges on nontaxable sales could form a huge volume of litigation over all the fine points of tax law as applied to millionsof daily commercial transactions in this state.” (Loeffler at 1130, emphasis added.) But Loeffler was speaking ofa situation that might arise absent its ruling that “the propriety of a reimbursementcharge that turns on the taxability of a transaction must be resolvedin the first instance by the Board” (Loeffler at 1134.) After that ruling, a customer’s suit against a retailer must in most circumstances be coupled with a Javor claim against the State Agency in order to provide a mechanism for securing the State Agency’s determination of taxability “in the first instance.” The Javor remedy hasbeen available to customers in this state for 44 years, yet during that time only a handful of cases have been brought seeking the Javor remedy. A Lexis search of California cases containing 99 66“sales tax,” “reimbursement,” and “Javor” yields only five cases where the customeractually sought a Javor remedy (including the instant case and 40 Javoritself). Only five reported decisions in 44 years strongly suggests that this Court need not fear that Javor coupled claims against retailers “would open the floodgates of litigation by allowing any consumer to challenge the taxability of any transaction.” (Retailers at 43.) Similarly unfounded is Respondents’ contention that Petitioners’ claims would “disrupt... the orderly tax collection process in California.” (Retailers at 50 and CDTFAat 37.) Nothing could be less orderly than State Agencies that consistently refuse to determine taxability questions with respect to excess sales tax retmbursementso as to avoid both making a refund and being subjected to judicial review under Tax Code §6933. Even less orderly is a State Agencystaff that issues an unpublished directive to 13,000 retailers without Board authority and in contravention of the Administrative Procedure Act, for the apparent purpose of generating excess sales tax reimbursement to unjustly enrich the State. Moreover,it is well knownthat the Board’s tax determinations are often determined to be wrongbythe courts, but of course, customerclaims for refund of excess sales tax reimbursementneverget that far. Numerous courts have rejected SBE interpretations that ignored the legislative history, intent and purpose ofa statute. (See, e.g., Preston v. SBE (2001) 25 Cal.4th 197, 215 [inconsistent with legislative history]; Agnew v.. SBE (1999) 21 Cal.4th 310, 314-15 [not supported by the legislative history]; Helene Curtis, Inc. v. Assessment Appeals Bd. (1999) 76 Cal.App.4th 124, 132 [misconstrued the legislative history]; Alpha Therapeutic v. Franchise Tax Bd. (2000) 84 Cal.App.4th 1, 10-11 [evidences no consideration of the legislative history”’].) Conversely, allowing Petitioners’ claims to proceed does not change important laws that protect the collection of taxes in California. For example, it will still be the law that the imposition of a tax can be challenged only after first paying the tax and then seeking a refund. And 4] Loeffler will still be the law with its assurance that State Agencies will determine taxability in the “first instance.” By allowing Petitioners’ claims, the Javor remedy will be preserved in a robust form so as perform its intended purpose ofprotecting the integrity of the sales tax by ensuring that neither retailers nor the State are unjustly enriched. A robust Javor remedy will also restore due process and judicial review to the State’s escheat of excess sales tax reimbursement, thereby preserving the constitutionality of a sales tax system in which the tax incidenceis placed onretailers rather than customers (whoarethe real parties in interest). DATED:March 2, 2018 Respectfully submitted, MCKOOL SMITH HENNIGAN,P.C. THE KICK LAW FIRM, APC By: /s/Bruce R. MacLeod Attorneys for Petitioners/Appellants 42 Certificate Of Word Count The undersignedcertifies, pursuant to California Rules of Court, Rule 14(c)(1), that this brief contains 12,566 words, including footnotes, as counted by Microsoft Word 2010, the word processing program used to preparethe brief. DATED: March 2, 2018 By: /s/Bruce R. MacLeod Attorneys for Petitioners/Appellants 43 PROOF OF SERVICE I declare as follows: I am a citizen ofthe United States and employed in San Mateo County, California. I am overthe age of eighteen years and not a party to the within action. My business address is 255 Shoreline Drive, Suite 510 Redwood Shores, CA 94065. On March2, 2018, I caused to be served the foregoing documents described as PETITIONERS' REPLY BRIEF ON THE MERITSin Case No. S2411471 onthe interested parties in this action by placing the documentslisted abovein a sealed envelope with postage thereon fully prepaid, in the United States mail at Redwood Shores, California addressed as set forth below, as well as by email addressed as set forth below Joseph Duffy(SBN 241854) Joseph Bias (SBN 257127) MORGANLEWIS & BOCKIUS, LLP 300 South Grand Ave., 22nd Floor: Los Angeles, CA 90071-3132 Tel: (213) 612 2500 Fax: (213) 612 2501 Email: jduffy@morganlewis.com Attorneys for Defendants and Respondents Walgreen Co. and Rite Aid Corporation Robert P. Berry (SBN 220271) Carol M.Silberberg (SBN217658) BERRY & SILBERBERG, LLC 16150 Main Circle Dr., Suite 120 St. Louis, Missouri 63017 Tel: (314) 480 5882 Fax: (314) 480 5884 Email: rberry@berrysilberberg.com Email: csilberberg@berrysilberberg.com Attorneys for Defendant and Respondent Wal-Mart Stores, Inc. Phillip J. Eskenazi (SBN 158976) Kirk A. Hornbeck (SBN 241708) HUNTON & WILLIAMS LLP 550 South HopeStreet, Ste. 2000 Los Angeles CA 90071 Telephone: (213) 532-2000 Facsimile: (213) 312-4769 Email: peskenazi@hunton.com Email: khornbeck@hunton.com Attorneys for Defendants and Respondents Albertson’s Inc. and Sav-On Drugs David F. McDowell (SBN 125806) Miriam A. Vogel (SBN 67822) MORRISON & FOERSTER, LLP 707 Wilshire Blvd., Suite 6000 Los Angeles, CA 90017-3543 Tel: (213) 892 5200 Fax: (213) 892 5454 Email: dmcdowell@mofo.com Email: mvogel@mofo.com Attorneys for Defendant and Respondent Target Corporation Richard T. Williams (SBN 52896) Shelley Hurwitz (SBN 217566) HOLLAND & KNIGHTLLP 400 S. HopeSt., 8th Floor Los Angeles, CA 90071 Tel: (213) 896 2400 Fax: (213) 896 2450 Email: shelly.hurwitz @hklaw.com Attorneys for Defendants and Respondents CVS Caremark Corporation, Longs Drug Stores Corporation and Longs Drug Stores California, Inc. Theodore Keith Bell (SBN 184289) Senior Corporate Counsel SAFEWAY, INC.Legal Division, Trial Group 5918 Stoneridge Mall Road Pleasanton, CA 94588 Tel: (925) 467 2422 Fax: (925) 467 3214 Email: tad.bell@safeway.com Attorneys for Defendants and Respondents The Vons Companies and Vons Food Services, Inc. Douglas C. Rawles (SBN 154791) James C. Martin (SBN 083719) Kasey J. Curtis (SBN 268173) REED SMITH LLP 355 South Grand Ave., Suite 2900 Los Angeles, CA 90071-1514 Telephone: (213) 457 8000 Facsimile: (213) 457 8080 Email: DRawles@ReedSmith.com Attorneys for Defendants and Respondents Walgreen Co. and Rite Aid Corporation Kamala D.Harris (SBN 146672) ATTORNEY GENERAL OF CALIFORNIA Lisa W. Chao (SBN 198536) Supervising Deputy Attorney General Nhan T. Vu (SBN 189508) Deputy Attorney General 300 South Spring Street, Suite 1702 Los. Angeles, CA 90013-1230 Tel: (213) 897 2484 Fax: (213) 897 5775 Email: nhan.vu@doj.ca.gov Attorneys for Defendant, Cross- Defendant and Respondent California State Board ofEqualization Taras P. Kick, Esq. (SBN 143379) James Strenio, Esq. (SBN 177624) THE KICK LAW FIRM, APC 815 MoragaDrive Los Angeles, CA 90049 Telephone: (310) 395-2988 Facsimile: (310) 395-2088 E-mail: taras@kicklawfirm.com Attorneys for Plaintiffs and Appellants Michael McClain, Avi Feigenblatt and Gregory Fisher Court ofAppeals, 2™ District Ronald Reagan State Building 300 S.Spring Street 2nd Floor, North Tower Los Angeles, CA 90013 Tel: (213) 830-7000 Office of the District Attorney Consumer Law Section Appellate Division 320 W. Temple St., #540 Los Angeles, CA 90012 Clerk, Honorable John Shepard Wiley Los Angeles County Superior Court CCW-Dept. 311 600 S. Commonwealth A venue Los Angeles, CA 90005 Office of the Attorney General Appellate Coordinator Consumer Law Section 300 South Spring Street North Tower, 5th Floor Los Angeles, CA 90013 I declare under penalty of perjury under the laws of the State of California that the above is true and correct. Executed on March 2, 2018, at Redwood Shor Adrian Corona
