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3-year Lawsuit Over $3.76 in Interest Finally Settled

In 2017, multi-level marketing company LuLaRoe faced allegations of improperly assessing sales tax against certain customers. LuLaRoe sells clothing through “independent representatives.” According to a February 2017 report from CBS News, sales tax was collected based on where the sales representative lived, as opposed to the customer’s residence. This led to improper charges against customers who lived in states that do not assess sales tax on clothing purchases.


Faced with a potential class action, LuLaRoe admitted to the overcharges and provided refunds to customers. But that was not the end of the matter. A new class action complaint emerged in Alaska federal court–this time arguing LuLaRoe should have to pay interest on the sales tax funds it wrongfully collected in the first place.

Alaska Judge Rejects Customer’s Claims as “Inadequate” to Justify Legal Standing

The lead plaintiff in the Alaska lawsuit is an Anchorage woman, Katie Van. Van said she was charged $531.25 in sales tax on items that she purchased from LuLaRoe independent representatives in other states, even though Alaska itself has no statewide sales tax. And while Van later received a full refund of the sales tax she paid, she alleged the Alaska Unfair Trade Practices and Consumer Protection Act (UTCPA) entitled her to collect “interest” on her damages.


In March 2019, U.S. District Judge H. Russel Holland granted LuLaRoe’s motion to dismiss Van’s lawsuit. Holland concluded that the actual amount of interest Van seeks to collect, $3.76, was “inadequate” to sustain a federal lawsuit. Article III of the U.S. Constitution requires federal courts to establish a plaintiff’s “standing” to bring a lawsuit. Among other elements, standing requires “an injury in fact.”


In this case, Van could not allege the improper sales tax itself was her injury-in-fact, as she’d already received a full refund prior to filing her lawsuit. So her claim to Article III standing rested on the fact “she did not receive interest” on that refund. But Holland believed that this was not good enough–i.e., $3.76 in interest was “too little to support Article III standing.”

9th district sealNinth Circuit Joins Sister Courts in Adopting “Lost Time Value of Money” Rule

Van appealed Holland’s ruling. And on June 24, 2020, a three-judge panel of the U.S. Ninth Circuit Court of Appeals in San Francisco reversed Holland’s order dismissing the case. Without ruling on the merits of Van’s lawsuit, the Ninth Circuit said she had sufficiently pleaded an injury that met the requirements for Article III standing.


The unsigned opinion noted that Ninth Circuit law has previously established that even the loss of a “dollar or two” was enough to show an injury-in-fact. In other words, there was no basis for Holland’s reasoning that $3.76 fell below some minimum-injury threshold. Indeed, even LuLaRoe did not bother to defend Holland’s reasoning on that point.


Nevertheless, LuLaRoe maintained that since it gave Van a full refund, she could not maintain standing based solely on interest–or her “lost time value of money,” as it were. The Ninth Circuit disagreed, noting that several of its sister courts have already found that “the temporary loss of use of one’s money constitutes an injury in fact for purposes of Article III.” The Ninth Circuit said it found the reasoning of the other appeals courts persuasive and adopted the same standard here.


The Ninth Circuit further rejected LuLaRoe’s claim that Van had to “make specific allegations regarding how [she] would have earned interest on the money but for [LuLaRoe’s] wrongful conduct.” But as a matter of law, the issue was not whether or not Van would have received interest had she, say, put the improperly collected sales tax into a CD. Rather, the alleged injury was that she “lost the use of her money” during the period from when LuLaRoe improperly collected sales tax until the time it gave Van a refund. And while other appeals courts may have implied that a plaintiff must allege “specific plans to invest [their] money into an interest-bearing asset” to establish Article III standing, the Ninth Circuit expressly declined to adopt that rule here.


Are Discount Membership Cards Subject to Sales Tax?

SC Dept. of Revenue vs. Books-A-Million

Sales tax normally applies to the purchase of “tangible personal property.” On its face, the definition of “tangible” is fairly straightforward. For example, South Carolina law classifies tangible personal property as “personal property which may be seen, weighed, measured, felt, touched, or which is in any other manner perceptible to the senses.”

Books A Million logo

So if a person, say, walks into a bookstore and purchases a book, there is no question that is an item of tangible personal property subject to sales tax. But what if the customer previously purchased a discount card from the store entitling them to 10 percent off each book purchase? Is the discount card itself a form of tangible personal property that is also subject to sales tax? According to a recent decision from a South Carolina court, the answer is “yes.”

Court of Appeals: Discount Program the “Direct Result of the Sale of Tangible Personal Property”

In December 2014, the South Carolina Department of Revenue initiated a sales tax audit of Books-a-Million (BAM), the second-largest bookstore chain in the United States. The audit revealed that BAM did not collect or remit South Carolina sales tax on sales of its “membership fees.” Similar to its larger competitor, Barnes & Noble, BAM offers customers membership in a discount program that it calls the “Millionaire’s Club.” As presently offered, membership entitles customers to 10 percent off in-store purchases, free shipping on online orders, and other special sales and discounts.

The SC Department of Revenue sent BAM a total sales tax bill of $242,076.97!

During the period covered by the South Carolina audit, BAM charged a $25 annual fee for the Millionaire’s Club. This fee renewed automatically each year unless the customer opted out or canceled their membership. According to the Department of Revenue, BAM failed to collect over $200,000 in tax on both the initial sale and renewal of Millionaire’s Club memberships in South Carolina from January 2012 through August 2015. Adding interest and penalties, the Department sent BAM a total sales tax bill of $242,076.97.


BAM contested the assessment before South Carolina’s Administrative Law Court (ALC). The company argued its club memberships were not tangible personal property and therefore not subject to sales tax. The ALC disagreed and upheld the Department’s assessment.


The South Carolina Court of Appeals subsequently reviewed and affirmed the ALJ’s decision. Writing for a three-judge panel in an April 29 opinion, Judge Paula H. Thomas explained that while membership in the Millionaire’s Club itself may be intangible, the membership fees collected are the “direct result of the sale of tangible personal property because BAM would not be able to sell Club Memberships but for BAM’s sale of tangible personal property.” By this reasoning, Thomas said, the membership fees were subject to state sales tax, as were the automatic annual renewals.


Thomas and her colleagues declined to adopt a contrary decision from the Tennessee Court of Appeals, Barnes & Noble Superstores, Inc. v. Huddleston (1996). In that case, the Tennessee court held that Barnes & Noble’s membership program, which is similar in form to that of BAM, was not subject to that state’s tax because “true object of the subject transactions between [Barnes & Noble] and its customers is to bestow upon club members the intangible right to receive a discount on merchandise.” In other words, the Tennessee court saw the purchase of memberships as an intangible right to a discount, and not itself a sale of tangible personal property. But as Thomas noted, South Carolina courts are not required to “follow other states’ interpretations of their tax laws in interpreting our own tax laws.

Why Treat Members-Only Warehouse Clubs Differently?

Judge Thomas, however, may not have the last word in this case. On May 14, BAM filed a petition for rehearing. This is essentially a request for the three-judge panel to reconsider its decision. The full eight-judge Court of Appeals could also decide to rehear the case as a single group. And if the appeals court decides against rehearing, BAM can then ask the South Carolina Supreme Court to review the case.

sams club card

In its petition, BAM argued the panel’s decision gives an unfair “competitive advantage” to retailers like Sam’s Club and Costco, which also sell membership fees but are not subject to South Carolina sales tax. According to the Department of Revenue, “membership fees charged by a membership-only warehouse” are not taxable, provided “all membership types receive the same benefits.” Yet Sam’s Club and Costco “could not sell membership fees but for their sale of tangible personal property,” BAM pointed out. And while BAM’s Millionaire’s Club is optional, membership in a warehouse club is mandatory just to walk in the door. At the very least, BAM argued, the different treatment of memberships creates an “ambiguity” in South Carolina’s sales tax law, which must be resolved in favor of the taxpayer.


TN Extends Sales Tax Collection to Marketplace Facilitators

Tennessee is the most recent, and one of the last, state to adopt a new tax collection law to third-party TN Sealmarketplace facilitators.  On April 1, 2020, Gov. Bill Lee signed Senate Bill 2182, which takes effect on October 1, 2020.


Since the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc., most states have now moved to extend their local sales tax collection requirements to third-party marketplace facilitators.


SB 2182 defines a “marketplace facilitator” as any business that meets both of the following requirements:

  1. The business provides, for compensation, a “physical or electronic marketplace” to facilitate the sale of goods or services subject to Tennessee sales tax; and
  2. The business “directly or indirectly” collects payments from consumers on behalf of sellers who use the marketplace.

This definition excludes firms that only provide payment processing services. So for instance, if a seller receives payment from a customer through PayPal, that does not make PayPal a marketplace facilitator under SB 2182. But if the seller used eBay and PayPal in tandem to conduct the sale and process the customer’s payment, then eBay/PayPal would be responsible for collecting any Tennessee sales tax due.


Even if a business qualifies as a marketplace facilitator, the obligation to collect sales tax does not kick in unless the total sales made or “facilitated” involving Tennessee customers exceeds $500,000 during the previous 12-month period. The marketplace facilitator also does not have to collect sales tax in either of the following scenarios:


  • An individual seller with “gross sales” exceeding $1 billion per year signs a separate agreement with the marketplace facilitator in which the seller agrees to collect and remit sales tax; or
  • “Substantially” all of the sellers who use the marketplace facilitator’s platform are “registered dealers” required to collect and remit sales tax to Tennessee, which allows the state’s Department of Revenue to issue a waiver to the facilitator.

A marketplace facilitator will also not be held liable for any sales tax due if a seller provides “incorrect or inaccurate information,” so long as the facilitator “made a reasonable effort” to obtain the correct information. SB 2182 also forbids consumers from filing a class action lawsuit against a marketplace facilitator “relating to the over-collection of sale or use taxes.” Furthermore, if a marketplace facilitator fails to collect sales tax for any reason, consumers may still have to pay any applicable use tax on their purchases.

TN starballWill SB 2182 Help Make Up the Sales Tax Losses from COVID-19?

Krista Lee Carsner, the executive director of the Tennessee General Assembly’s Fiscal Review Committee, wrote in a revised March 2 fiscal note that requiring marketplace facilitators to start collecting sales tax would increase state revenues by approximately $84.8 million during the current fiscal year, and more than $113.1 million in subsequent years. Carsner said these estimates were based on a 2017 study from the U.S. Government Accountability Office, which found that approximately 38 percent of “collectible revenues” comes from online sales, with 46 percent involving a marketplace facilitator.


It’s worth noting Carsner’s note came just before the onset of the COVID-19 pandemic, which has already forced state and local officials throughout the country to revise their estimates of sales tax revenues, at least in the short term. For example, WBIR-TV in Knoxville, Tennessee, recently reported that city officials prepared their current budget assuming sales tax revenues of $174 million. But as COVID-19 has forced the temporary closure of many businesses, Knoxville officials now believe they could face a sales tax shortfall of as much as $18.2 million.


And while you might think collecting sales taxes from online marketplace facilitators would help make up this shortfall, keep in mind that SB 2182 will not take effect until October–so any new revenues may come too late to help state and local governments during their current fiscal year.

“Things of the Soil” Tax Exemption

Michigan Court: Use Tax Exemption for “Things of the Soil” Does Not Cover Lawn Care Businesses


Is lawn care a form of “agriculture”? After all, grass is a plant, so growing and caring for a lawn would seem to fit within the literal meaning of agriculture. Yet most of us associate “agriculture” with producing crops or raising livestock on dedicated farmland–now mowing a lawn in a residential suburb.


A Michigan appeals court recently addressed this subject in connection with a use tax dispute. The case, TruGreen Limited Partnership v. Department of Treasury, involved a state law dating back to the 1930s that, in its current form, exempts from taxation any sale of property to a person “engaged in a business enterprise that uses or consumes the property, directly or indirectly, for either the tilling, planting, draining, caring for, maintaining, or harvesting of things of the soil.”

The specific question before the Court was whether this language applied to a lawn care company–i.e., is grass a “thing of the soil”?

TruGreen Unsuccessfully Seeks Over $1.1 Million in Tax Refunds


The plaintiff in this case, TruGreen, provides seasonal lawn care and related services for customers. TruGreen does not service agricultural clients, such as farms or nurseries. Rather, its business is limited to “turf and ornamental plant care.”


In 2015, TruGreen requested a $4,745.39 use tax refund from the Michigan Department of Treasury. The requested refund was connected to TruGreen’s purchases of “fertilizer, grass seed, and other products” needed in its lawn care business. TruGreen insisted these purchases were exempt from use tax under Michigan’s “things of the soil” law described above.


The Department of Treasury rejected TruGreen’s interpretation of the law. TruGreen then doubled down, not only requesting a conference with a referee; a lawyer hired to advise the state treasurer on sales tax disputes; but also demanding a refund of more than $1.1 million in use taxes paid over a four-and-a-half year period. Although the referee agreed with TruGreen it was entitled to a refund, the state treasurer ultimately declined to issue one.

TruGreen then went to court.  The Michigan Court of Claims, a special trial court that hears civil lawsuits against state agencies, upheld the treasurer’s decision.


TruGreen then filed an appeal with the Michigan Court of Appeals.

In an April 10, 2020, decision, a divided three-judge panel of the Court of Appeals affirmed the Court of Claims. Writing for the two-judge majority, Judge Elizabeth L. Gleicher explained the “[s]tatutory vocabulary” of the state’s use tax exemption “describes a tax subsidy aimed at growing Michigan’s agricultural economy, not ornamental grass and shrubs.”

While grass and trees are technically “things of the soil,” as used in the tax law Gleicher said “that phrase is surrounded by words describing activities that take place on farms,” such as “tilling” and “harvesting.” So while TruGreen “plants grass and cares for it,” Gleicher said the company ‘s work “is unrelated to crop cultivation or agriculture in general.”

Is It OK to Use a Dictionary to Interpret Sales and Use Tax Laws?


The other two judges on the panel issued separate decisions in which they sparred over the proper use of the dictionary in interpreting the use tax exemption. Judge Brock A. Swartzle wrote the dissenting opinion. He said that “things of the soil” had a broader meaning than “agricultural products.”


More precisely, Swartzle said the 1933 edition of the Oxford English Dictionary provided the “most relevant definition” of the word “thing,” which was “ [a]n entity of any kind” and “[a]pplied (usually with qualifying word) to a living being or creature; occasionally to a plant.” Based on this, Swartzle said a “plain reading” of the use tax law clearly applied to grass, trees, and shrubs, as they were “plants” and thus “things of the soil.”

The third member of the appeals panel, Presiding Judge Douglas B. Shapiro, wrote a concurring opinion. He agreed with Judge Gleicher’s conclusion that the phrase “things of the soil” was a “term of art” was clearly intended to cover “crops grown for harvest and sale.”


Shaprio took exception to Judge Swartzle’s reliance on the dictionary to justify his contrary view. Shapiro noted the “use of dictionaries as sources of law is a very recent phenomenon” in the law, and relying on them to interpret the law “dispenses with the constitutional fact that the judiciary is an independent co-equal branch of government and ultimately responsible for the interpretation of statutes and their fair application in individual cases.”


MO Sales Tax Ruling: Furniture Sold to Hotels Is Taxable

Missouri Supreme Court: Furniture Sold to Hotels Is Not “Resold” to Guests

In the United States, sales tax is generally assessed only on the final “sale” of a good to a consumer or end-user. A “sale for resale” is therefore normally exempt from paying tax. But what qualifies as a “resale”? For example, if a hotel purchases furniture for its rooms, does it then “resell” that furniture every time it rents that room to a guest? Or must sales tax be collected on the initial sale of the furniture to that hotel?


The Missouri Supreme Court addressed these specific questions in a March 17, 2020, opinion, DI Supply I, LLC v. Director of Revenue. DI Supply I, LLC, sold more than $11 million in room furnishings–beds, chairs, desks, wall art, etc. to the Drury Hotels chain between 2012 and 2015. DI Supply did not collect or remit sales tax on any of these sales. The State of Missouri’s Director of Revenue subsequently conducted an audit, determined DI Supply was liable for sales tax, and made a total assessment of tax (plus interest) of $613,159.38.


DI Supply unsuccessfully challenged the Director’s decision at an administrative hearing. The company then appealed directly to Missouri’s Supreme Court, which has exclusive jurisdiction under that state’s constitution to interpret tax laws. In a 5-1 decision, the Court sided with the Director and held DI Supply was liable for the sales tax.


Judges Choose to Interpret Sales and Use Tax Laws Differently

DI Supply’s legal challenge centered on a specific clause in Missouri’s resale exemption statute that excludes “items of a non-reusable nature which are furnished to the guests in the guests’ rooms” from the state’s sales tax. As written, this exemption covers items like “soap, shampoo, tissue and other toiletries and food or confectionery items offered to the guests without charge.” DI Supply maintained this should also extend to the furniture in the room, as those items were also included in the “nightly rate for a hotel room.” In other words, DI Supply said that Drury Hotels was actually “reselling” the furniture each time it rented out the room.

While this argument might sound ludicrous – and indeed, was rejected by the Court –  there was some legal basis for DI Supply’s position. There are several past rulings from the Missouri courts, some dating back 25 years, that define a “resale” to include the transfer of the “right to use” tangible personal property, such as furniture. The problem, the Court said, was that these decisions interpreted Missouri’s use tax laws, not its sales tax laws.


Transfer of title from DI Supply to Drury

As far as the Court was concerned in 2020, a “sale at retail”– i.e., a sale subject to sales tax – requires a “transfer of title or ownership for the purchaser’s use or consumption.” A transaction that only transfers the “right to use,” such as a guest renting a hotel room for the night, does not count. When DI Supply sold its furniture, there was a transfer of title to Drury Hotels. Conversely, when Drury later rented its rooms with that furniture, there was no transfer of title to the individual guests. DI Supply therefore had to pay the sales tax bill.


One Dissenting Judge Claims Precedent

As noted above, the Supreme Court’s decision was not unanimous. One judge, Zel M. Fischer, authored a dissenting opinion. He argued that the Court’s prior rulings with respect to the use tax should apply to the sales tax as well. After all, Fischer observed, the sales and use tax statutes were meant to “complement each other,” so it only made sense that “their respective language must be harmonized to allow for identical application.”


Fischer argued that his colleagues were effectively overturning 25 years of precedent. This not only violated stare decisis–the doctrine that judges should stick to their previous rulings; it also made little sense to interpret the sales and use tax statues differently. Ultimately, Missouri’s General Assembly establishes tax policy. Fischer said if the legislature wanted to set different rules for sales and use taxes, it could do so.


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