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California cities can’t require taxpayers to navigate extra local procedures before seeking a tax refund in court, the California Supreme Court ruled Monday in a long-running lawsuit involving Marathon Petroleum, which operates the state’s largest refinery.
The decision gives Marathon a procedural victory in its tax battle with the City of Carson, which in 2022 told Marathon subsidiary Tesoro that it owed additional taxes under the city’s oil-industry business license tax. The Ohio-based Marathon acquired the Carson refinery in 2018.
Marathon operates its Carson and Wilmington refineries as one unit, the Los Angeles Refinery, comprising 27% of the state’s crude oil capacity.
The company did not answer questions about the decision, which comes as California drivers face the nation’s highest gasoline prices as the Iran war pushes up the global price of crude oil.
Carson, located south of downtown Los Angeles, is home to one of two refineries that have closed in recent years, a facility run by Phillips 66 that operated in both that city and nearby Wilmington. A spokesperson for Carson did not return a call or respond to an email from CalMatters.
The decision by the state’s top court doesn’t resolve the core of the dispute: the company’s claim that Carson attributed too much of the refinery’s business to Carson and taxed activity that actually took place in Wilmington and elsewhere. But hours after the ruling, the city took a key step toward finalizing a $370 million settlement with the company by rescinding a separate refinery tax proposal it had put on the ballot last week.
The top court only addressed whether Marathon had to seek a refund through Carson’s own process, or whether it could instead file a refund claim under state law.
Cities and counties backed Carson, arguing that taxpayers must finish local appeals before suing, and that letting Marathon skip that step would undercut local governments.
Marathon was supported by the Western States Petroleum Association, the state’s largest oil lobby, and two other business groups, which argued that the state law, the Government Claims Act, was meant to keep companies from navigating a “Byzantine claims system involving myriad state statutes and local ordinances.”
The refund question concerned a local tax on refineries that Carson voters approved in November 2017, levying a .25% tax on business conducted within the city.
Tesoro calculated the tax based on the business it believed actually took place inside Carson, the company said in its petition to the top court.
Carson audited those payments years later, telling the company it owed more money. Marathon disagreed but paid the additional amount and then filed for a refund under state law.
A Los Angeles County judge agreed with Carson that the oil company should have used its process. A state appeals court also agreed. The state supreme court overturned those decisions.
At its city council meeting last week, Carson approved an additional tax measure that would let Carson charge refineries up to $1 for every barrel of oil they process in the city. Jamal T. Kheiry, a spokesperson for Marathon, said the tax would have “significant implications for the facility” and lead it to rethink its operations in California, “one of the most costly business environments in the world.”
On Monday, the council conditionally rescinded that measure. That vote was contingent on finalizing its settlement with Tesoro.
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