Class Action Defense Cases–Yabsley v. Cingular: California State Court Affirms Dismissal Of UCL Class Action Holding Administrative Regulation Created Safe Harbor For Class Action’s False Advertising Claims Against Cingular

Sep 9, 2008 | By: Michael J. Hassen

Class Action Challenging Wireless Phone Company’s Advertisements of Discounted Cell Phone Prices as False for Failing to Disclose that Sales Tax would be Calculated based on the Non-Discounted Price Falls within Safe Harbor Provision of State Administrative Regulation thereby Warranting Dismissal of Class Action Complaint California State Court Holds

Plaintiff filed a class action in California state court against Cingular Wireless alleging violations of the state’s unfair competition law (UCL): According to the class action complaint, Cingular advertises that it will give purchasers a 50% discount off the retail price of a wireless phone they enroll in a calling plan package. California’s Code of Regulations requires that Cingular compute the sales tax on the “non-sale price” of the phone, but does not require that this charge be passed on to the purchaser. Cingular does pass the sales tax on to its customers, but prior to sale does not advise them that the sales tax will be computed based on the full price of the phone. The class action alleged that Cingular engaged in false advertising “by failing to inform the consumer that the tax would be imposed on the full price of the cell phone.” Yabsley v. Cingular Wireless, LLC, ___ Cal.App.4th ___, 81 Cal.Rptr.3d 903 (Cal.App. August 18, 2008) [Slip Opn, at 1]. Defense attorneys demurred to the first amended class action complaint on the ground that the regulations provide a “safe harbor” for the payment of taxes such as the one underlying the class action’s UCL claim; the trial court sustained the demurrer without leave to amend. Id., at 1-2. The Court of Appeal affirmed.

The class action complaint alleges that Cingular “advertised a cell phone for $149.99, a 50 percent reduction in the phone’s retail price, if the purchaser enrolled in a Cingular wireless calling plan.” Yabsley, at 2. Plaintiff saw the advertisement and purchased the phone and enrolled in the plan: His sales receipt, however, disclosed that he had been taxed on the phone’s regular price of $299.99, rather than its discounted price, resulting in $11.62 more in sales tax. Id. Plaintiff filed his class action complaint against Cingular and the State Board of Equalization “asserting that Regulation 1585, governing taxation of sales of wireless communication devices, was invalid because it conflicted with Revenue and Taxation Code section 6051 imposing a sales tax on gross receipts.” Id. Plaintiff’s first amended class action complaint also named the Board and Cingular as defendants, but plaintiff dismissed the Board that same day. Id. The class action alleged that Cingular’s advertisements were deceptive because they “fail[ed] to apprise prospective customers that sales tax would be charged on the undiscounted price of the cell phone.” Id. Defense attorneys demurred, arguing that the safe harbor provided by Regulation 1585 (see Note) immunized Cingular against such claims: “This regulation requires that sales tax on a ‘bundled’ cell phone sale, i.e., a cell phone purchased with a call plan, be calculated based on the phone’s higher, unbundled price.” Id., at 3. The trial court agreed and dismissed the class action. Id.

After discussing the applicable law, see Yabsley, at 3-5, the appellate court turned to the safe harbor provision. Plaintiff argued that safe harbors in California may be provided only by statute, not by administrative regulations. Id., at 6. The appellate court disagreed, see id., at 7-8. The Court of Appeal noted that “[m]any cases…have upheld safe harbors created by administrative regulations.” Id., at 8 (citations omitted). The appellate court concluded at page 8, “Regulation 1585 has the ‘force and effect’ and the ‘dignity’ of a statute. Therefore, it may, and does, provide a safe harbor to Cingular.” Plaintiff alternatively argued that Regulation 1585 “does not immunize Cingular’s conduct in failing to disclose to purchasers that sales tax would be charged on the retail price of the phone.” Id. The Court noted that the regulation does not address whether a retailer owes a duty to disclose the amount of sales tax charged on a sale, and that plaintiff cited no authority in support of his theory. Id., at 8-9. California law creates a rebuttable presumption that a purchaser agrees to pay the sales tax shown on the sales receipt; the receipt Cingular provided to plaintiff disclosed the sales tax, and plaintiff could have “refuse[d] to enter into the contract for the price stated.” Id., at 9. Because it found that “Cingular complied with all applicable regulations,” the class action claims could not stand. Id., at 9-10. Accordingly, the trial court properly dismissed the class action complaint. Id., at 10.

NOTE: The regulation in question provides, “Application of Tax. [¶] (1) In General. Tax applies to the gross receipts from the retail sale of a wireless telecommunication device. The retailer of the wireless telecommunication device is required to report and pay the tax. [¶] … [¶] (3) Bundled Transactions. Tax applies to the gross receipts from the retail sale of a wireless telecommunication device sold in a bundled transaction, measured by the unbundled sales price of that device. Tax applies to the unbundled sales price whether the wireless telecommunication device and utility service are sold for a single price or are separately itemized in the context of a sale or on a sales invoice. The retailer of the wireless telecommunication device is required to report and pay tax measured by the unbundled sales price of the device and may collect tax or tax reimbursement from its customer measured by the unbundled sales price. Tax does not apply to the charges in excess of the unbundled sales price made for telecommunication services.” Yabsley, at 2 n.2 (quoting Regulation 1585 (b)).

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