Senator Newman Introduces Legislation to End Double Taxation of Consumer Legal Fees
Sacramento, Calif. – State Senator Josh Newman (D-Fullerton) introduced legislation to relieve consumers of unjustified fees while reinforcing the right for Californians to sue for defective products or illegal business practices. SB 1377 will exempt attorneys’ fees awarded in a consumer protection legal settlement from being counted against a taxpayer’s adjusted gross income.
To remove cost barriers that may otherwise prevent everyday people from pursuing consumer protection lawsuits, California, like many other states, allows lawyers to represent clients without charging them directly for their legal services, known as “fee-shifting.” However, consumers who win settlements often face IRS 1099 forms that include attorney’s fees as personal income received by the individual plaintiff, despite those funds being paid directly to attorneys.
“In recent years, companies forced to settle consumer protection lawsuits have been treating court-approved attorneys’ fees as income received by consumers even though individual plaintiffs don’t generally receive any monetary benefit from those fees,” said Senator Newman. “That’s not only unfair, it often allows companies accused of harming consumers to use the threat of a big tax hit to intimidate people out of exercising their legal rights. By explicitly exempting such income, SB 1377 will strengthen consumer protections and empower consumers to pursue lawsuits without the threat of costly tax liabilities.”
In a consumer protection lawsuit against a car manufacturer, a California mother and Army veteran faced a tax on $58,257 worth of attorney’s fees, which had been counted as additional income. As a result, she was pushed into a higher tax bracket in 2021 and was no longer eligible for the Earned Income Tax Credit. The process to correct her case took six months.
“Some corporations are intimidating consumers who stand up for their rights by inappropriately trying to tax them. This practice is wrong and must be stopped. The Consumer Federation of California is pleased to co-sponsor this bill and thanks Senator Newman for authoring it,” remarked Robert Herrell, Executive Director of the Consumer Federation of California, cosponsor of SB 1377.
Beyond affecting an individual’s ability to qualify for benefits, attorneys also are taxed on their awards, resulting in the same settlement funds being taxed twice. Assigning tax liability for attorneys’ fees to individual plaintiffs in fee-shifted cases undermines the purpose of California’s consumer protection laws and may dissuade consumers from pursuing their cases.
"We applaud Senator Newman for championing this important tax fairness legislation. Victims harmed by defective products or illegal, predatory practices who fight back in court and win should not be unfairly taxed or penalized for funds they never receive, especially when their attorneys are already paying income tax on the same amounts," said Rosemary Shahan, President of Consumers for Auto Reliability and Safety, cosponsor of SB 1377.
To address this unfair taxation, SB 1377 will extend a 2004 federal amendment to the state tax code to provide a deduction for fee awards in consumer protection cases as it does in discrimination and whistleblower cases. Awarded attorneys’ fees no longer would count against an individual’s income on their state taxes.
To schedule an interview with Senator Newman, contact Lizzie Cootsona at 916.651.4029.
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State Senator Josh Newman represents the 29th Senate District, which is comprised of portions of Los Angeles County, Orange County, and San Bernardino County. The 29th District includes all or parts of the cities of Anaheim, Brea, Buena Park, Chino Hills, City of Industry, Cypress, Diamond Bar, Fullerton, La Habra, La Palma, Placentia, Rowland Heights, Stanton, Walnut, West Covina and Yorba Linda. Senator Newman is a former United States Army officer, businessperson, and veterans’ advocate, and lives in Fullerton with his wife and daughter.