The financial services industry knows well that California’s Unfair Competition Law (“UCL”) has an expansive scope, applying to any conduct that might be called a business practice and permitting courts to evaluate whether such conduct is “unfair” under subjective and uncertain standards. But the California Supreme Court’s recent decision in Loeffler v. Target Corp., 58 Cal. 4th 1081 (2014), reiterates that the UCL’s reach is not without limits.

Loeffler concerned the type of arcane question typical of many UCL claims: is hot coffee sold “to go” by a retailer exempt from California’s sales tax law? Plaintiffs alleged the coffee was subject to an exemption for takeout food and that they were thus wrongfully charged sales tax on their morning cups of joe. Plaintiffs filed a putative class action under the UCL and the Consumer Legal Remedies Act (“CLRA”), suing Target for a refund and seeking an injunction on further tax collection. The trial court sustained Target’s demurrer, and the Court of Appeal affirmed.

In a 4-3 decision written by Chief Justice Cantil-Sakauye, the Supreme Court affirmed. The court explained that under California’s sales tax law, the taxpayer is actually the retailer, not the consumer. While a consumer may pay the retailer an amount designated as sales tax on a receipt, that fee is only a reimbursement to the retailer for sales tax it pays. Once the retailer pays the reimbursement to the State Board of Equalization (“Board”), it is subject to a legislative “safe harbor” under Revenue and Taxation Code Section 6901.5 and has no further liability for any excess tax reimbursements collected.

The court held that neither the UCL nor the CLRA provided any basis to circumvent the safe harbor under the tax code. Even the UCL’s broad scope “may not be used to invade ‘safe harbors’ provided by other statutes.” The court also reasoned that permitting plaintiffs’ action to proceed would interfere with the legislature’s comprehensive scheme for determining taxability. Under the tax code, the Board is charged with making determinations of taxability in the first instance. As retailers are the taxpayers under California law, only they may seek a refund. Allowing consumers to sue retailers directly for a refund would require courts to adjudicate taxability without the Board’s involvement, thus undermining its authority.

Loeffler may prove useful to financial institutions defending similar claims based on or overlapping with tax issues. The tax questions raised in Loeffler are not unique. Plaintiffs’ counsel in recent class actions have asserted state-law claims against issuers of tax information returns, such as Forms 1098 or 1099-C. In a prior wave of class actions, plaintiffs asserted similar UCL claims against auto leasing companies based on their collection of use taxes. Though lessors are the payers of use taxes and so do not have the same standing problem as the Loeffler plaintiffs, these suits were felled by plaintiffs’ failure to pursue their remedies with the Board. Financial institutions defending these or similar claims should explore whether they are entitled to protection or immunity under applicable tax law or whether the tax question being presented has been charged to an executive or administrative agency. Though the UCL remains a broad and powerful tool for the plaintiffs’ bar, even it may not permit courts to decide complex questions of tax law delegated to other branches of government.

For more information about developments in auto finance law, contact Erik Kemp at