Consumer class actions regarding the over-collection of state sales tax continue to be a thorn in the side of retailers. While the amounts of tax collected may be individually small, claims asserted on behalf of a class can expose large retailers to potentially millions of dollars in liability and, in some cases, investigatory action by state attorneys general under state consumer protection acts.
The types of tax at issue have included sales tax on computer hardware service contracts, see e.g. Feeney v. Dell Inc., 466 Mass. 1001 (2013); Long v. Dell Inc., 93 A.3d 988 (R.I. 2014), pizza delivery charges, Schojan v. Papa John’s International Inc., C.A. No. 14-cv-01218 (M.D. Fla.), grocery coupons, Wong v. Whole Foods Market Group Inc., C.A. No. 1:15-cv-00848 (N.D. Ill.), sale items, Bugliaro v. BJ’s Wholesale Club, Inc., (Fla. Cir. Ct.), and returned items, Brandewie v. Wal-Mart Stores, Inc., C.A. No. 14-cv-965 (N.D. Ohio). At least one state attorney general has pursued a claim based on use of an incorrect tax rate. See People ex rel. Hartigan v. Stianos, 131 Ill.App.3d 575 (1985).
In almost all cases, the class action plaintiffs have alleged that the retailers have violated a state consumer protection act without any allegation that the retailer has actually pocketed the allegedly over-collected tax or even violated an applicable tax regulation. At least one state supreme court has held that a retailer can be sued even without a showing of bad faith. See Long, 93 A.3d at 1002. Thus, retailers face considerable risk even where they believe in good faith they are in compliance with applicable tax laws and regulations. This is a classic case of “damned if you do, and damned if you don’t.” If a retailer incorrectly declines to collect tax it may be subject to fines and other penalties from the state revenue authorities, but if it wrongly collects, it may face enormous class action liability.
Some states have foreclosed a cause of action based on improper collection of tax by judicial decision, Loeffler v. Target Corp., 58 Cal. 4th 1081, 1100 & 1136-37 (2014). The American Bar Association has drafted, and its House of Delegates has endorsed, a Model Transactional Tax Overpayment Act. This model act provides in section 4(c) that the seller may not be named as a party in any action for overcollection of tax. Unfortunately, no state has as of yet adopted the model act.
There are, however, certain ways to mitigate the risks. First, retailers should continuously update their tax collection policies to ensure the policies comport with ever-changing and complex tax laws and regulations. Second, retailers operating in states that have adopted the Streamlined Sales and Use Tax Act (SSUTA) can take advantage of state-certified software to assist with tax collection. So long as the seller relies on the software in determining whether a product category is taxable, it cannot be held liable by the state for a failure to collect tax. However, even this is no guarantee because many products and services are unique and not really covered by the categories in a canned software tax program. Finally, and most important, if a retailer has any doubt at all about whether its sales tax collection policy complies with applicable rules and regulations, it should request a letter ruling from state revenue authorities. While not a guarantee against class claims, a letter ruling can be very helpful in demonstrating good faith collection.