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Why You Shouldn’t Collect Taxes That Aren’t Owed

  • Jul 30, 2014 | Gail Cole

 What would you do if you had to reimburse more than $100 million in sales tax?

There is a law on the books in New York State stipulating this: a business that erroneously collects taxes from customers and remits them to the state is not entitled to a refund from the state until it can prove it has reimbursed the customers for the tax erroneously paid.

Put a different way: the money used to reimburse customers for over-collected (or wrongly-collected) taxes must come from your pocket.

Once the State of New York is sure that customers have been reimbursed the tax money, it will reimburse the business for the reimbursed tax. But not one minute sooner.

Sales tax reimbursement probably isn't too much of a financial strain for businesses that over-collect a fistful of dollars from a fistful of customers. However, that is often not how these situations go. More typically, a large business erroneously collects tax from a great many customers.

ATT&T and New York         

“In 2009, 54 separate class action lawsuits were filed on behalf of ATTM’s (Cingular Wireless PCS LLC) customers in 44 states alleging that ATTM had improperly charged them taxes on Internet access service. Those 54 lawsuits were consolidated as In re: AT&T Mobility Wireless Date Services Tax Litigation.” Ultimately, the company was found to have erroneously collected sales tax on certain wireless and internet charges between November 1, 2005 and September 7, 2010.

New York Tax Law § 1139(a) provides that:

“No refund or credit shall be made to any person of tax which he collected from a customer until he shall first establish to the satisfaction of the tax commission, under such regulation as it may prescribe, that he has repaid such tax to the customer.”

In other words, ATTM must “refund the erroneously collected tax to its customers prior to the [New York] taxing jurisdiction granting and/or paying a refund to ATTM….” Nonetheless, ATTM sought a refund from the Division of Taxation for $109,262,289.99. In 2012, the division denied it because ATTM could not “show that such sales tax was repaid” to the customers.

The New York Division of Taxation then petitioned the Division of Tax Appeals, alleging that ATTM “is not entitled to a refund of monies erroneously, illegally or unconstitutionally paid since it never refunded the tax paid to it by its customers or established a substantive right to a refund.” Administrative Law Judge Joseph W. Pinter, Jr upheld “the denial of [ATTM’s] refund application” on July 17, 2014. Read the determination in full here.

$110 million

ATTM is a huge corporation and it must now provide a huge tax refund to New York customers—almost $110 million. And that’s just New York customers, not customers in the other 43 states involved in the original class action suit.

Surely that’s a compelling reason to get sales tax right.

Sales tax automation software can help. Learn more.

photo credit: 401(K) 2013 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.