The City of Anaheim, California instituted a “transient occupancy tax” assessment against a number of online companies such as Expedia and others, ultimately claiming taxes plus interest in an amount over $21 million.  When these online tax targets filed state court actions against the tax, the City defended based on California’s Constitutional “pay first” tax rule, that a taxpayer challenging the assessment of state tax must pay the disputed tax amount before seeking recourse in court for a refund.  The California Court of Appeal has now ruled that the Constitutional “pay first” rule applies only to taxpayer actions against the state or its officers, not in actions against cities.  The court noted however that the City may have the power to draft future tax ordinances to expressly require that City taxes be paid first before court relief is sought.  The court also expressly reserved judgment on possible “significant due process concerns that arise from the fact that the City seeks to impose [$21 million in tax] for a 7-year period in which the [taxpayers] had no notice that the City considered them subject to the tax.”  (Anaheim v. Superior Court ( Inc.), California Court of Appeal No. B216250, November 24, 2009)

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