SACRAMENTO (CN) - California allowed cellphone retailers to take hundreds of millions of dollars in "phantom taxes" from consumers, four cellphone owners say in a class action.
Lead plaintiff Alina Bekkerman sued the California Board of Equalization on Nov. 17 in Superior Court. She claims the state's tax authority has allowed major telecom companies to charge taxes on nonexistent commissions associated with cellphone sales since 1999.
The four named plaintiffs bought cellphones from AT&T, Verizon, T-Mobile and Sprint. The only defendant, however, is the Board of Equalization, and Does 1-20.
"Every Californian who has purchased a mobile phone with a service contract in a retail store owned or controlled by a major wireless carrier has been a victim," the complaint states. "Regulation 1585 essentially imposes sales tax on an imaginary commission payment that wireless carriers do not actually pay to their corporate-owned or -controlled stores."
Plaintiff Jenny Lee says she was charged $55 under "California Sales Tax Regulation 1585," when she bought an iPhone 5 from AT&T in 2012. She bought the iPhone at a discount for $200 when she signed a two-year contract with AT&T, but says the sales tax was calculated at the "'unbundled sales price,' i.e., the no-contract price of $649.99."
California adopted Regulation 1585 in 1999 to recover tax revenue from commissions service providers paid independent retailers for selling their cellphones.
The plaintiffs say that because they bought their phones directly from the service providers, Regulation 1585 was wrongly enforced and they were overcharged.
"Most Californians have paid too much for their mobile phones due to an unlawful sales tax invented by the Board of Equalization," plaintiffs' attorney Dan Hattis told Courthouse News. He said in a statement that his clients sued the state "to challenge and revoke the board's wrongfully enacted and illegal Regulation 1585, which has caused California consumers to overpay hundreds of millions of dollars in sales tax on their mobile phones."
The plaintiffs say California taxpayers have been overcharged more than $50 million a year for 15 years because the state lets retailers "simply pass the improper sales tax to consumers."
If true, that would come to more than three-quarters of a billion dollars.
The Board of Equalization declined to comment Tuesday on the lawsuit or on Regulation 1585.
The plaintiffs seek class certification and an injunction barring the board from enforcing Regulation 1585 and suspending statutes of limitations so consumers can recover their wrongfully assessed sales taxes.
Hattis said millions of California consumers could be owed refunds.
"Once the court revokes the regulation, we intend to pursue refunds on behalf of millions of California consumers who have been forced to bear the brunt of this unlawful tax," he said.
The Board of Equalization was criticized in a scathing audit last week from California State Controller Betty Yee, who said the agency had mismanaged nearly $50 million in retail sales taxes.
Yee said the board, which collects $60 billion a year in business taxes, incorrectly sent tax revenue to the state's general fund that were meant for other sources.
"The [board] lacks adequate internal accounting and administrative controls over the retail sales tax fund,]" the report states. "Specifically, the board lacks controls to ensure that revenue is appropriately allocated to the various funds and complies with state laws, regulations and policies."
Attorney Hattis's office is in Bellevue, Wash. He is assisted by Tony Tanke in Davis, Calif., and Jeffrey Burke of Menlo Park.
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