We all know that charging too little sales tax can lead to an assessment of unpaid taxes and penalties, but charging too much tax could result in problems, too.
Popular fashion company LuLaRoe found out about these effects when they had a complaint filed against them by a customer from the state of Pennsylvania who alleges she was charged sales tax when she should not have been. Her class action lawsuit alleges that LuLaRoe’s point-of-sale (POS) system, Audrey, automated charges based on erroneous billing practices that should have been based on the customer’s shipping address rather than the location of the “consultant” who helped to sell the goods through a multi-level marketing (MLM) scheme.
Regardless of the outcome of the sales tax lawsuit, it is sure to send chills down the spine of e-commerce companies when it comes to their practices for taxing customers.
The Facts of the Rachael Webster v. LLR, Inc. Sales Tax Lawsuit
The plaintiff Rachael Webster filed a complaint against LLR, Inc. or “LuLaRoe” alleging that she had been charged sales tax on clothing items erroneously because her resident state of Pennsylvania does not apply sales tax to clothing items. Damages include charges of up to 10.25 percent of a clothing sale for each purchase delivered to a jurisdiction that does not charge a sales tax in general or on clothing items, specifically.
Since others are likely affected by the billing practices and the total amount of claimed damages will likely exceed $5,000, Webster has invoked a class action lawsuit on behalf of all others similarly situated.
Central to the plaintiff’s argument is the fact that LuLaRoe’s proprietary billing system, Audrey, automatically charges sales tax based on the location of the “consultant” conducting the transaction. When LuLaRoe was still in the process of creating Audrey, they stated that taxes would be applied based on the “ship to” address indicated by the customer. Instead, company CEO directly acknowledged that the final version of Audrey charged sales taxes based on the location of the consultant.
LuLaRoe then failed to remit this overcharge to the “taxing authority that governs the transaction.” In the case of the plaintiff, the Pennsylvania State Taxing Authority was not given notice of these supposed tax charges nor were they given the amount obtained from the tax.
The plaintiff maintains that this practice is not only erroneous but outright fraudulent. LuLaRoe would be obtaining “unjust enrichment” under the allegations put forth by the plaintiff. Had the sales tax erroneously collected been paid to the state taxing authorities, the plaintiff would have had to seek a refund from the State. However, because the plaintiff alleges that such money was never paid over to the state, can bring the suit against LuLaRoe. Plaintiffs seek damages in the amount they were overcharged in addition to “reasonable attorneys’ fees and/or other additional relief as this Court deems necessary and proper.”
Being Cautious About Tax Law in Light of the LuLaRoe Sales Tax Lawsuit
Until the case proceeds, we have no indication what evidence LuLaRoe might present in defense of their billing practices or in an effort to weaken the plaintiff’s argument. What we do know is this: companies should be very careful with sales tax practices when selling to people in different tax jurisdictions online.
If you are a company that wants to review your sales tax collection practices or someone who, like Rachael Webster, has been overcharged because of erroneously collected taxes, please contact me, Jeffrey Pittard, at 201-806-3364. I can examine the details of your situation and advise you on the best way to move forward.