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Suing Over Sales Tax

  • Jul 31, 2013 | Gail Cole

 Sales tax: suing for pennies.

Does anyone like to pay sales tax? Probably not. Some people may even move to Alaska, Delaware, Montana, New Hampshire, or Oregon because they dislike sales tax so much. That’s their prerogative. If they prefer black files, snow and rain to sales tax, so be it.

Most people just pay it, grumbling only when considering the sales tax tacked on to big ticket items, like sofa-beds, cars, and candles at Whole Foods.

And then there are the people who sue over sales tax.

Suing for pennies

Who sues over pennies? More than one person, as it turns out. Periodically, businesses that have collected too much sales tax find themselves in court. The motivation for such lawsuits is hard to gauge. It may be a simple matter of civic-mindedness—citizens who don’t want to be taxed unfairly. It may stem from concerns that businesses are skimming the difference, therefore stealing from customers. No one likes to be robbed, even if the theft only amounts to a nickel or two. And it may be that some people, aware of sales tax law, see an opportunity to be rewarded damages by the courts.

Consider the following cases:

An Illinois man has filed a class action lawsuit against Quiktrip Corporation, which he alleges charged him 9 cents too much in sales tax on a purchase of Cheetos and water. He “believes that at least 100 other people have also paid too much in taxes on food purchases from the store,” and is asking for damages of more than $50,000, plus attorneys’ fees. That’s a lot of Cheetos and water.

A woman in New Jersey sued Sears Holding Corp, the parent of K-Mart, because she was charged sales tax on a variety of disposable paper products that New Jersey exempts. $2.61 worth of sales tax triggered this class action lawsuit.

Walmart is involved in a class action lawsuit filed by a Pittsburg man who alleges he was charged too much sales tax on a two-for-one coupon deal. How much too much? 21 cents. Last week, Walmart asked to have the class action lawsuit moved from state to federal court, which suggests that, although the case was filed over pennies, “potential damages are worth at least $5 million.”

Damned if you do, …

Retailers are required to collect sales tax and remit it to the state (except in the sales tax-free states listed above). They are damned if they collect too much sales tax, and they are damned if they fail to collect enough. Don’t pay enough sales tax to the state and the state will come after your business for the missing revenue, along with fines and penalties. Collect too much sales tax from customers and the customers will come after you, along with their attorneys.

In the Walmart case, it is possible the Pittsburg store has collected too much sales tax on two-for-one coupons for years. It is also possible that other Walmart stores in Pennsylvaina have done the same. Walmart may owe customers—lots of customers--a refund. Furthermore, “Walmart gets to keep 1 percent of the sales tax it collects as a collection fee….” So now “the chain is being accused of unjust enrichment from every coupon sale it has made since June 2007.” The move to federal court begins to make sense.

Walmart has not yet filed an official response to the allegations, but it has stated that “Walmart’s current systems, with respect to the collection and remittance of sales tax, are in compliance with Pennsylvania’s tax laws.” We shall see, eventually, what the court decides.

While malevolence is sometimes behind improper sales tax collections, more often the wrong amount is collected by error. In the K-Mart case above, the point of sale system did not include the exemption of paper products. The systems at several car rental agencies at the Sacramento International Airport in California were updated erroneously to charge the new Sacramento city sales tax rate of 8.5%, when in fact the businesses are located outside the city limits, where the rate is still 8.0%.

It helps when businesses acknowledge such errors and strive to correct them quickly. The car rental agencies at the Sacramento Airport did just that. Pep Boys, another retailer located outside the Sacramento city limits, was reportedly “evasive and defensive” when told by a customer that they had charged him too much sales tax.

Obnoxious class action law suits

“Class action lawsuits serve a social purpose… [but] some class action lawsuits are really obnoxious.” (Forbes.)

A recent court opinion in Illinois gives a nod to the above statement. Adrian Nava took Sears, Roebuck and Company to court, alleging that Sears “assessed sales tax on the entire amount of digital television converter box purchases, despite the fact that part of the retail cost of those devices was subsidized by federal vouchers distributed to consumers.” Mr. Nava believed he had been overcharged sales tax, “especially after comparing his receipt to a receipt for another converter box purchase he made that same day at a different, nearby store.” He filed a class action complaint less than two weeks later.

The court opinion concludes with, "The circumstantial evidence in the record points strongly to the conclusion that the plaintiff [Mr. Nava] was not actually deceived, because he knew or should have known that his milk run purchases of converter boxes at various retailers were merely shams to establish his standing to bring a lucrative class action lawsuit.”

What to do

Avoid a law suit, class action or otherwise. Collect the proper amount of sales tax. Automation can help.

photo credit: r-z via photopin cc

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.