Sometimes, it is not nearly as much fun to be a major corporation as those Occupy Wall Street folks seem to think. Take sales tax for example. The states are all over Amazon to collect sales tax from its customers. Funny that the states do not think that their citizens can be trusted to pay over use tax as they are instructed to do on many state income returns nowadays. Just not as convenient I guess. So you would think that a company that makes an extra effort to collect sales tax should get a medal or something. No such luck. What happens is they get sued. That is what happened to Dell in Rhode Island anyway. Here’s the story.
The plaintiffs in the case were Nicholas Long and Julianne Ricci. They wanted to make it a class action suit, but the class was not certified. Long and Ricci were complaining because Dell charged sales tax on shipping and handling and a bundled service contract:
In total, Ricci and Long were charged less than fifty dollars ($50) in sales tax that they contend Dell improperly collected. The Plaintiffs assert claims for negligence in collecting the tax and for violation of the DTPA (Deceptive Trade Practices Act) in their Complaint. The Plaintiffs seek statutory damages of two hundred dollars ($200) per person under the DTPA. Specifically, they claim that neither the optional service contracts nor the shipping and handling charges were subject to any tax imposed by the State of Rhode Island. Dell counters that the taxes were properly collected because the price of the service contracts were not separately stated and because shipping charges when combined with handling are taxable.
As it turns out, Dell should not have collected sales tax on the optional service contract. It was not a crystal clear issue. It turned on the definition of whether the charge was separately stated. That still leaves open the question as to whether Dell was negligent. It got pretty lawyerly. You will have to read the whole case if you want all the details. I will just give you a couple of high points.
I thought Dell’s best argument was Ricci’s “unclean hands”. Ricci was mad at Dell for charging sales tax on the service contract, which Dell thought it had to do, because the third party provider had Rhode Island nexus. Dell, since it did not have Rhode Island nexus itself, did not charge sales tax on the computer. So Ricci should have paid use tax, which, astoundingly, she did not. On the overall purchase, Ricci had paid a lot less in tax than she was supposed to and she is still suing Dell. Go figure. Seemed like Dell had a pretty good argument, but it did not work:
Defendants specifically argue that Ricci may not obtain a refund in equity of her $16.31 because she owes the State more than that (estimated to be approximately ninety-five dollars) in unpaid use tax on the computer. Ricci’s claims, however, are for common law negligence and statutory violation of the DTPA. It is clear to this Court that the unclean hands doctrine—as construed by Rhode Island courts—applies only in suits in equity
Dell did, however win and it was actually on a pretty commonsense argument. Dell has a duty to the State to collect sales tax. It does not have a duty to its customers to collect the least sales tax conceivable. The magic of the competitive marketplace will take care of that:
In light of the natural, competitive market forces, imposing a legal duty on a retailer to collect the minimum appropriate amount of tax or be subject to a potential class action lawsuit could very well make retailers prone to not collecting all taxes due to the State. This Court believes the vendor’s incentives should, if anything, be the opposite—to err on the side of collecting and remitting taxes to the State, rather than not. In the competitive marketplace (such as in retail computer sales) there already exists an incentive to minimize prices (including taxes) charged to consumers. Encouraging sellers when in doubt to not charge tax would foreseeably lead to an increase in uncollected taxes and would increase the burden on the Division of Taxation to ensure the State is receiving the proper amounts. Increasing the audit burden on the Division of Taxation and potentially decreasing the revenue generated by appropriately-levied sales taxes would be contrary to public policy.
Also, if a customer is overcharged they can always apply to the state for a refund, as long as they didn’t stiff the state on use tax.
Even with the penalties, there was less than $500 at stake in this case, so you wonder what the point was. I’m thinking the point was the class action aspect. $200 for every Dell computer with a service contract shipped to Rhode Island in the last however many years would presumably add up, even though it is a small state. It reminds me of a case about a year ago where a woman was suing Rite-Aid for overcharging her 12 cents in sales tax. When interviewed she said it was a matter of principle. Probably the fact that she worked for the law firm that was representing her, a law firm that specializes in class action lawsuits, was just one of those wild coincidences.
You can follow me on twitter @peterreillycpa.