Florida Bar Journal

Getting Your Fair Share Back: Recovering Money Paid Pursuant to Unconstitutional Taxes and Fees

Jurisprudence in Florida concerning refund actions contains a rich history. Over the course of many decades, Florida courts have moderated decisions to deny refunds of unconstitutional taxes and fees. While administrative decisions denying refunds are consistent and fair, given the various statutory restrictions presented through this history, recent decisions concerning facially unconstitutional statutes have lead to progress in protecting taxpayers from the harsh results of unconstitutional taxation. While progress has been made, more could be done statutorily to achieve equity for those circumstances when an action is brought too late. For state tax practitioners, looking at the “sibling” class action decisions in State, Department of Revenue v. Bridger, 935 So. 2d 536 (Fla. 3d DCA 2006), and Florida Dept. of Revenue v. Leon, 824 So. 2d 197, 199 (Fla. 3d DCA 2002), through the prism of this history will help shed light on this complex area of Florida tax law.

An early Florida Supreme Court decision in Whitehurst v. Hernando County, 107 So. 627 (1926), established early precedent requiring exhaustion of remedies before seeking monetary relief through the courts. In Whitehurst, the plaintiff sued Hernando County over a wrongful deprivation of property. The court had before it a question concerning a claims statute against counties, enacted by the legislature in 1920.1 Unfortunately, the claim was not first presented to the county commission; as a result, the question arose as to whether Mr. Whitehurst could later seek relief in court. In 1926, Florida’s highest court answered in the negative, and in so doing, decided that administrative preconditions in such statutes had to be followed, stating, “[t]he statutory requirement is a prerequisite to the right of action against the county.”2 In the start of a shift of perspective nearly 20 years later, the court in State ex rel. Hardaway Contracting Co. v. Lee, 21 So. 2d 211 (1945), held a refund could be obtained when faced with an unconstitutional statute.3 The decision in Hardaway Contracting established an unconstitutional tax as a circumstance requiring a remedy; however, the factual circumstances were unusual because the refund statute at issue was enacted after the payment of tax.4

Over the next three years, the court’s decisions formed a pattern establishing the state’s refund statute as barrier to recovery of funds when the “non-claim” deadline had passed. In State, ex rel. Butlers Inc. v. Gay, 29 So. 2d 246 (1947), a claim for refund was denied relating to five previous years’ payments under a one-year statute of repose. Two years later, in State, ex rel. Tampa Electric Company v. Gay, 40 So. 2d 225 (Fla. 1949), the court found a mandamus action seeking recovery of intangible tax inappropriate because Tampa Electric failed to meet the one-year repose period.5 The court broke new ground five years later in State ex rel. Victor Chemical Works v. Gay, 74 So. 2d 560 (Fla. 1954), when the court eliminated a right to a refund resulting from either the misapplication of a valid statute (an “as applied” unconstitutional application), as well as refund right acquired under an unconstitutional statute. The court found: “unless there is some statute which authorizes a refund or the filing of a claim for a refund, money cannot be refunded or recovered once it has been paid although levied under the authority of an unconstitutional statute.”6

The Victor Chemical ruling retains vitality, although somewhat altered by Department of Revenue v. Nemeth, 733 So. 2d 970 (Fla. 1999), because it demonstrated the court would not go beyond legislative limitations when considering recovery from the state treasury. Thirteen years later, the court in Reynolds Fasteners, Inc. v. Wright, 197 So. 2d 295 (Fla. 1967), added the following comment underscoring its ruling: “A refund is a matter of grace and if the statute of non-claim is not complied with, the statute becomes an effective bar in law and in equity.”7

Indeed, the rulings from Florida’s highest court throughout this period viewed the language of the refund statute as “the exclusive procedure and remedy for refund claims….”8

Another relatively early development with real implications for taxpayers seeking refunds from their government is found in City of Miami Beach v. Tenney, 7 So. 2d 136 (Fla. 1942). This decision represents an early step forward in asserting the right to recover unconstitutional taxes through a class action.9 Thirty-two years later, in State ex rel. Devlin v. Dickinson, 305 So. 2d 848 (Fla. 1st DCA 1974), the issue of recovery through a class action was again addressed in an oft-quoted opinion. The Devlin decision focused on the administrative refund process and held, “only those who applied for this refund [from the Department of Revenue] are entitled to be represented in the class action herein.”10 The court’s opinion attributes its decision allowing a class recovery to the Florida Supreme Court opinion in Tenney. 11 The Devlin case, unlike the Tenney decision, did not involve an unconstitutional statute and, ultimately, this distinction not only proved important, but also caused the First District to recede from Devlin in part.12

The question of whether a facially unconstitutional statute would receive the same treatment as accorded the class in Devlin was directly addressed in Department of Revenue v. Kuhnlein, 646 So. 2d 717 (Fla. 1994), a case containing the “perfect storm” combination of facts and law absent in earlier cases. Kuhnlein was a class action based upon a facially unconstitutional statute.13 In this case the Florida Supreme Court created a court-made exception to the statutory scheme found in F.S. §215.26, and removed the need to file an administrative refund application, but not the need to file a lawsuit, to challenge a facially unconstitutional tax. The Florida Supreme Court returned to the Kuhnlein issues in Nemeth, 14 after conflict arose in district court opinions, when it answered the Fourth District’s certified question concerning the remaining validity of Victor Chemical. Following an initial ruling by the circuit court that the Nemeths, the named plaintiffs, failed to satisfy the requirements of F.S. §215.26, the Fourth District court relied upon Kuhnlein and reversed. Thereafter, the Florida Supreme Court answered the certified question in the negative, making the following qualification: “We answer the certified question in the negative except we expressly hold that a taxpayer’s claim based solely upon the tax being unconstitutional may be filed in the appropriate court rather than with the Comptroller.”15

The court harmonized its many prior exhaustion of remedies decisions with the futility of such a procedure in the context existing in Nemeth by also observing: “We recognize that the Comptroller cannot declare a tax unconstitutional, and thus, when the claim is solely that the refund is required because the tax is unconstitutional, to file the claim with the Comptroller would be a futile act.”16

Thus, Nemeth followed Kuhnlein ’s elimination of administrative remedies prior to seeking redress in court, but restricted this rule to those circumstances when the sole issue contested was whether the tax statute was facially unconstitutional. This court-made exception is referred to as the “direct file” rule because of the elimination of administrative compliance with F.S. §215.26(2).17 Plainly, the court appears committed to the principle of exhaustion of administrative remedies, unless such administrative action is futile. This would include an “as applied” challenge to the constitutionality of the taxing statute.18

Unfortunately, although the court recognized standing, the Nemeth decision itself did not ultimately give relief to the original named taxpayers. Although Nemeth followed Kuhnlein, neither decision eliminated the need to file suit within three years of the date the tax was paid, and for this reason relief, was limited in the class. After Kuhnlein, filing within three years seemed to be a clear requirement, at least in retrospect, but the recent Bridger decision provides an example of why this application was perhaps not so plain.

The “sibling” Bridger and Leon cases arose from a group of taxpayers who paid an unconstitutional tax on illegal drug trafficking during the eight-year period from its passage in 1986 until finally struck down by the Florida Supreme Court in 1994.19 Until the time of the Florida Supreme Court’s ruling, the Department of Revenue continued to enforce the provisions of the unconstitutional tax.20 After the decision finding the tax unconstitutional, the department stopped making assessments under the statute, but did not refund any monies collected prior to the decision.21 During the years the unconstitutional tax was in litigation, many drug seizures resulted in jeopardy assessments by the state, some resulting in payment of the tax more than three years before the statute was declared unconstitutional. The timing of the payments became important later in a class action seeking refunds, which resulted in the Leon decision.22

In Leon, the class plaintiffs consisted of taxpayers who had been assessed the unconstitutional tax and who sought refunds for the taxes and penalties already paid between 1986 and 1994.23 Notwithstanding the Kuhnlein and Nemeth decisions, the department moved to dismiss the case because the taxpayers had not previously filed administrative refund requests within 60 days and/or three years of payment, as required by F.S. §§72.011 and 215.26, respectively.24

The taxpayers, on the other hand, sought to have the court-made statutory exception of administrative filing in Kuhnlein extended to exempt taxpayers from meeting the three-year nonclaim requirement. The taxpayers, relying on McKesson Corp. v. Division of Alcoholic Beverages and Tobacco, 496 U.S. 18, 22 (1990), argued that federal constitutional law required Florida to afford “meaningful” relief in the form of refunds to taxpayers who had been coerced into paying taxes pursuant to a statute later declared unconstitutional. In McKesson, the Court held that when payment of tax is required to avoid a penalty, a backward looking remedy must be made available saying:
[I]f a [s]tate penalizes taxpayers for failure to remit their taxes in a timely fashion, thus requiring them to pay first and obtain review of the tax’s validity later in a refund action, the Due Process Clause requires the [s]tate to afford taxpayers a meaningful opportunity to secure postpayment relief for taxes already paid pursuant to a tax scheme ultimately found unconstitutional.25

However, in the opinion of the Third District, reliance in Leon upon McKesson proved to be mistaken for the reason described in Newsweek, Inc. v. Florida Dept. of Revenue, 522 U.S. 442 (1998), in which the U.S. Supreme Court appeared to recognize the historical adequacy of due process with regard to Florida’s tax procedures. The court in that case commented:

Under Florida law, there was a longstanding practice of permitting taxpayers to seek refunds under §215.26 for taxes paid under an unconstitutional statute. See, e.g., State ex rel. Hardaway Contracting Co. v. Lee, 155 Fla. 724, 21 So. 2d 211 (1945). At Florida’s urging, federal courts have dismissed taxpayer challenges, including constitutional challenges, because §215.26 appeared to provide an adequate postpayment remedy for refunds.26

Plainly, the U.S. Supreme Court seemed to suggest the federal courts had recognized the adequacy of Florida’s tax procedures for the purpose of satisfying due process. But this observation was made in the context of a case in which the court mandated refund to Newsweek, Inc., finding Florida’s courts had failed to apply its decision in Reich v. Collins, 513 U.S. 106 (1994). Notwithstanding the existence of both prepetition and postpetition statutory procedures to contest the jeopardy assessment, the class plaintiffs argued that state law did not provide “meaningful” relief under McKesson, because use of the procedures would have been legally futile.27 Further, the class action plaintiffs argued that a cause of action for tax refunds could not be deemed to have “accrued” in Leon until the Florida Supreme Court’s decision in Dept. of Revenue v. Herre, 636 So. 2d 618 (Fla. 1994), declaring the tax unconstitutional. In this context, this argument has more traction than would normally be the case because the offending statute, F.S. §212.0505(1988), was upheld by the First District in its Harris decision, before it was overturned by Herre.28 Because of these facts, such an argument has an intuitive appeal based upon a general concept of notice and equity. However, as the Third District recognized, the argument does not comport with Florida jurisprudence because accrual of a cause of action has long been recognized as the time of payment.29 In any case, based upon the precedence of Nemeth, the Third District in Leon and Bridger declined the plaintiff’s invitation to broaden its view of the direct file rule to eliminate the nonclaim bar in challenges to unconstitutional taxes.

In sum, the court recognized statutory exception reached its zenith in Kuhnlein, and courts will require compliance with the nonclaim provisions of the refund statute and only permit avoidance of administrative refund claims in the context of challenges to facially unconstitutional statutes. This will undoubtedly remain the case even though, in certain circumstances, such as those described by the Second District Court in PR Marketing Group v. GTE Florida, 747 So. 2d 962 (Fla. 2d DCA 1999), “DOR may be able to realize a windfall … without anyone knowing of a possible refund nor requesting a refund.”30 These words of warning by the Second DCA mandate close attention by counsel to the nature of the claims present in the case and the time elapsed, if any, since the tax was paid. Also, because litigation and review takes time, as demonstrated in the course of the Leon class action, efforts to enforce an unconstitutional tax scheme could have detrimental consequences to those who paid tax more than three years before (without contesting the assessment) the courts ultimately declare the statute unconstitutional. While this is a possible harsh consequence, which could be resolved by legislation, any remaining controversy seems to be settled by the Nemeth decision. In fact, footnote eight in Nemeth refers to Reynolds Fasteners, Inc. v. Wright, 197 So. 2d 295 (Fla. 1967),31 a decision relying upon a statute of limitations provision, but one which recognized F.S. §215.26 as a nonclaim provision.

For practitioners, administrative refund procedures remain necessary in all cases, except those challenging solely the facial constitutionality of a statute. In this narrow field of cases, direct file class action is available, but the Nemeth and Bridger decisions32 mandate that a challenger must qualify by filing suit within three years of payment to avoid the passage of the nonclaim bar date.

1 R.G.S. §2941 (1920). The statute provided that a claim must be presented to the county within one year from the time the claim becomes due and if not timely presented, it was barred. Whitehurst, 107 So. at 627.
2 Id. at 628. Early Florida jurisprudence drew a distinction in actions for recovery between “voluntary” and “involuntary” payments. “Voluntary” payments were not recoverable. North Miami v. Seaway Corp., 151 Fla. 301, 9 So. 705 (1942). In fact, unless a statute existed for refund, or, in the alternative, the plaintiff could prove the payments were made involuntarily; no refund was possible regardless of the equities involved. Brickell v. City of Miami, 103 So. 2d 206 (Fla. App. 1958). This distinction has lost any real meaning in modern Florida tax cases with the enactment of both pre- and post-payment remedies.
3 Ch. 22008 (Acts of 1943), enacted as Fla. Stat. §215.26 (1943), authorized refunds of tax based upon three different categories: a) In case of an overpayment of any tax, license, or account due; b) a payment when no tax, license, or account is due; and c) any payment made into the state treasury in error. Cf. Fla. Stat. §215.26(2006).
4 Ch. 17178, enacted as Fla. Stat. §205.36 (1935), imposed a license tax. The tax was declared unconstitutional in 1939. Ch. 220081, enacted in 1943, was recognized as a basis for refund in Hardaway Contracting, 21 So. 2d 211 (1945), but Ch. 220081 was enacted and Hardaway was decided many years after the imposition of the tax.
5 Laws 1943, c. 22008 §1; Fla. Stat. §§215.26(1)(a), (b), (c), (2) (1941), F.S.A., (Cum. Supp.).
6 Victor Chemical, 74 So. 2d at 562. Victor Chemical drew no distinction with respect to the limiting “nonclaim” effect of Fla. Stat. §215.26 between a taxpayer wrongfully coerced into payment under an unconstitutional statute and payment simply made in error under a valid taxing provision.
7 Reynolds, 197 So. 2d at 297; see also North Miami v. Seaway Corp., 9 So. 2d 705 (1942).
8 Fla. Stat. §215.26(4).
9 The court commented: “[W]here the illegality extends to the whole assessment, or where it affects in the same manner a number of persons, so that the question involved can be presented without confusion by one bill filed by all or any number of those thus affected, there seems to be no sufficient reason why a joint bill should not be permitted … it avoids the necessity of a multiplicity of suits, and the attendant trouble and expense; and the objection that the interests of complainants are several is sufficiently met by the fact that complete justice may be done to all in one suit on the single issue … Id. at 142.”
10 Devlin, 305 So. 2d at 850.
11 Port Royal, Inc. v. Conboy, 154 So. 2d 734 (Fla. 2d D.C.A. 1963). The First District’s restriction of class membership to persons having “common claims, issues and defenses” is grounded upon commonality requirements necessary for a class and the restrictions found in earlier jurisprudence from the Florida Supreme Court. Id. However, the Devlin decision, appears to extend the limitation beyond the facts which were presented in Tenney.
12 In Public Medical Assistance Trust Fund v. Hameroff, 689 So. 2d 358 (Fla. 1st D.C.A. 1997), the court recognized Dep’t of Revenue v. Kuhnlein, 646 So. 2d 717 (Fla. 1994), as creating an exception to its Devlin decision.
13 In 1991, §320.072(1)(b) was repealed and superseded by §319.231. Ch. 91-82,§9, Laws of Fla.
14 Nemeth, 733 So. 2d 970 (Fla. 1999). Nemeth was a class action challenging the constitutionality of Fla. Stat. §320.072(1)(b) (Supp. 1990) (A $295 impact fee on automobiles ruled unconstitutional and void from inception).
15 Nemeth, 733 So. 2d at 970.
16 It is well established that a challenge to the facial constitutionality of a statute cannot be resolved by an administrative agency. See Key Haven Associated Enterprises., Inc. v. Board of Trustees of Internal Improvement Trust Fund, 427 So. 2d 153, 157 (Fla. 1982).
17 In deciding the Nemeth case, the Florida Supreme Court returned to early precedent, citing Reynolds Fasteners, Inc. v. Wright, 197 So. 2d 295, 298 (Fla. 1967). The Reynolds case is interesting because it was decided based upon a general statute of limitations basis (Ch. 95) rather than a specific statute of nonclaim, such as Fla. Stat. §215.26.
18 The court distinguished Nemeth in Sarnoff v. Florida Department of Highway Safety & Motor Vehicles, 825 So. 2d 351 (Fla. 2002), finding that only facial constitutional challenges were permitted to direct file.
19 Florida Dept. of Revenue v. Herre, 634 So. 2d 618 (Fla. 1994).
20 Leon, 824 So. 2d at 199.
21 Id.
22 Id. at 197, 199 (Fla. 3d D.C.A. 2002).
23 The Third District noted that “[m]ost class members did not challenge the assessments or seek refunds within the short time periods prescribed by section 72.011, providing an administrative remedy, or section 215.26, for applications for refund. Those who risked waiving their Fifth Amendment rights by administratively challenging the constitutionality of section 212.0505 were uniformly denied relief by the Department on the theory that administrative agencies, such as the Department of Revenue, could not declare statutes unconstitutional.” Leon, 824 So. 2d at 199 (Fla. 3d D.C.A. 2002).
24 Id.
25 McKesson Corp., 496 U.S. at 26-27.
26 Newsweek, Inc., 555 U.S. at 444.
27 It is well-accepted that a challenge to the facial constitutionality of a statute cannot be resolved by an administrative agency. See Dep’t of Revenue v. Young Am. Builders, 330 So. 2d 864, 865 (Fla. 1st D.C.A. 1976); Key Haven Associated Enterprises., Inc. v. Board of Trustees of Internal Improvement Trust Fund, 427 So. 2d 153, 157 (Fla. 1982).
28 See Harris v. State, Department of Revenue, 563 So. 2d 97 (Fla 1st D.C.A.) rev. den., 574 So. 2d 141 (Fla. 1990).
29 In State ex rel. Tampa Electric Company v. Gay, 40 So. 2d 225 (Fla. 1949), the court held that accrual of the right to refund begins at the time of payment. See also Victor Chemical Works v. Gay, 74 So. 2d 560 (Fla. 1954).
30 PR Marketing Group, 747 So. 2d at 964.
31 Nemeth,733 So. 2d at 972, n. 8.
32The Florida Supreme Court declined review in Leon in 2002. Bridger has been appealed and jurisdictional review is pending in Case No. SC06-1943.

James F. McAuley is the chief counsel for the Florida Office of Financial Regulation. He was previously a chief assistant attorney general for the Medicaid Fraud Control Unit with the Florida Attorney General’s Office and an assistant general counsel for the Florida Department of Revenue. The author recognizes Eric Taylor for his contribution to the cases discussed in this article.

This column is submitted on behalf of the Tax Section, Mark E. Holcomb, chair, and Michael D. Miller and Benjamin Jablow, editors.