Ambiguous receipts cost thrifty couponers

PA-lgSales tax rules often confuse customers and businesses alike. Perhaps the only thing more perplexing is the process of seeking a refund of sales taxes from the state when customers are overcharged. A group of Pennsylvania customers of the popular BJ’s Wholesale Club learned this lesson recently when a state appeals court threw out their lawsuit seeking such a refund.

The BJ’s customers purchased various items from the wholesaler using coupons. But BJ’s assessed state and local sales tax based on the non-discounted price of the items. The total sales tax paid was relatively low – about $3.50 per item – but the customers argued they should have paid less after taking the coupons into account.

The customers initially filed a class action against BJ’s in a Philadelphia court. But in Pennsylvania, customers must take their case for a refund of sales taxes directly to the state’s Department of Revenue. Although the customers initially asked for a hearing before the department, for some reason they withdrew this request and instead sent a letter to the agency’s chief counsel, seeking clarification of the applicable sales tax rules.refund of sales taxes

The chief counsel responded the customers were not entitled to a refund. Under department regulations, the chief counsel said, “amounts representing manufacturer’s coupons or discounts shall be excluded from the taxable purchase price of a product if both the items purchased and the coupons are described on the cash register tape.” In other words, the coupon had to be linked to a specific item; otherwise, the customer owed sales tax on the full purchase price of the item. Here, BJ’s receipts only listed a “scanned coupon” without linking it to any particular item.

The customers asked the Board of Finance and Revenue, another agency within the department, to review and reverse the chief counsel’s determination. The board replied it was powerless to do so, as the chief counsel’s letter was merely a statement of “the Department’s position on an issue,” not a final administrative order subject to appeal. The customers then appealed to the Pennsylvania courts, which were similarly unreceptive. The Commonwealth Court of Pennsylvania, in a November 24 opinion, agreed with the department and a lower court there was no procedure under state law “for an appeal of an advisory opinion.” This means the customers must begin anew and directly ask the department for a refund of sales taxes, which the agency is likely to deny given its advisory opinion.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info

Sales tax refund

Sales tax refund repayment case bounces around Minnesota courts

The only thing worse than owing sales tax is having to repay the same sales tax a second time. Several Minnesota electric cooperatives faced this scenario recently when the state’s Commissioner of Revenue said it “erroneously” provided a sales tax refund on taxes paid on their members’ monthly payments. The Minnesota Supreme Court ultimately sided with the commissioner’s re-interpretation of the law, although the justices said the change of heart may have come too late in some cases.

Connexus Energy v. Commissioner of Revenue

An electric cooperative is a membership association which purchases electricity from wholesale suppliers. Similar to a conventional utility, the cooperative bills each member monthly for their electric use. Where cooperatives differ is they distribute “capital credits” to members at the end of the year. These credits reflect any profits posted by the cooperative. The credits therefore represent the members’ equity in the cooperative.

Minnesota assesses sales tax on the purchase of electricity. The electric cooperatives in this case initially paid sales tax on the full amount billed to each member. But they later filed amended returns for the 2004, 2005 and 2006 tax years, claiming refunds for member payments later reclassified as capital credits.

At first, the commissioner agreed the cooperatives were entitled to refunds. But she later changed her mind and demanded the cooperatives return their refunds. The cooperatives appealed this action, first to Minnesota’s Tax Court and later the state’s supreme court. Both courts agreed the commissioner did not exceed her authority when she reassessed and rescinded the refunds.

Justice David Stras, writing for a unanimous Minnesota Supreme Court, said cooperative members’ monthly payments and their later receipt of any capital credits “were separate and distinct transactions.” In other words, when members paid their cooperative bill each month, that represented a single “retail sale of electricity” subject to sales tax. As Stras noted, the once-a-year allocation of capital credits “take place on different cycles and involve different subjects” than the monthly electricity usage bills.

That said, Stras added the commissioner waited too long before seeking repayment of some of the erroneous refunds. Under Minnesota law, “An assessment of a deficiency arising out of an erroneous refund may be made at any time within two years from the making of the refund.” Four of the cooperatives in this case said the commissioner waited until after this two-year period expired before making her assessment. In response, the commissioner noted state law also allows her to “assess additional taxes” within a 3 1/2-year period after a tax return is filed. Since she changed her mind within this time limit, she argued the four cooperatives still had to pay back the erroneous refunds.

On this point, the supreme court sided with the cooperatives. Stras explained while “either provision conceivably applies” here, the court must apply the “specific” rule over the “general” one. In this case, the 3 1/2-year limit is the general rule, as it applies to all tax assessments, while the two-year limit specifically applies to erroneous refunds.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info

How a taxpayer may obtain a sales tax refund or credit

The steps for claiming a sales tax refund or credit vary by state, but the most common procedures include adjusting the sales reported or tax due on the following return; amending the original return; or filing a separate refund claim either by letter or by a specific form.

sales tax refund methods

Methods various states allow for individual taxpayers to obtain a sales tax refund.

Traditionally, consumers were required to request sales tax refunds through the vendor they made the original purchase through. The vendor was then obliged to file a refund claim with the state on behalf of the customer. This method protected the state from duplicate refunds.

Today, with the growing popularity of reverse audits and sales and use tax recovery specialists, many vendors complained that filing refunds claims on behalf of the customer was overly time consuming. In response, many states have adopted procedures for the vendor to assign the right to receive the refund to the customer which, once awarded, allows the consumer to deal directly with the state in obtaining a refund of the sales taxes paid in error. Before filing a refund claim with a vendor, taxpayers should check with the state to determine if an assignment is feasible.

Source: CCH “Sales and Use Tax Answer Book” (2014)

Vendor sales tax refunds must be passed on to consumers

Vendors normally collect sales taxes from consumers on behalf of the state. States need to provide some method for the refund or crediting of over payments in the case of returned goods, repossessions, or simple errors in tax calculation or interpretation.

When a product is returned and the money is refunded, the sale is undone and the tax is appropriately returned to the vendor which returns it to the consumer. The same theory applies to the uncollected portion of the sales price on repossessions and bad debts if the sale and tax had been previously reported.

Most states will only refund sales tax when presented with evidence that the tax has been returned to the consumers. Courts have ruled that to allow the vendor to keep the tax collected from the purchaser is “unjust enrichment,” therefore, vendor sales tax refunds from the state must be passed on to the consumer.

To claim a sales tax refund, the vendor must be able to document that the tax has been remitted to the state or local jurisdiction, that the tax was wrongfully or erroneously collected and remitted, and that the tax has been returned to the consumer where appropriate.

Confusion over variable sales tax rates on returns make Ohio shoppers

confusion over variable sales tax ratesSales tax rates are generally not consistent throughout a given state. Most states allow county or other municipalities to add their own sales tax on top of the statewide rate. This often leads to confusion variable sales tax rates on returns among retailers and consumers, which can result in litigation.

Here is a recent example from Ohio. Two consumers filed a federal class action against Walmart. Their complaint arose from Walmart’s practice of basing customer refunds on the sales tax rate applicable to the store where the merchandise was returned. So if a customer bought an item from a Walmart in Sandusky County (where the sales tax is 7.25%) but later returned it to another store in Erie County (where the tax is only 6.75%), the customer’s refund was at the lower 6.75% rate. While this might only amount to a few cents for a single transaction, the class action argues it constitutes breach of contract, as the Wal-Mart guarantees “full refunds” for items returned within 90 days.

Walmart moved to dismiss the class action, arguing that under Ohio law, customers must seek any sales tax refunds directly from the Ohio Tax Commissioner. But in an opinion issued on January 16th, federal Judge James S. Gwin denied Walmart’s motion, allowing the class action to proceed for now. Consumers must only seek a refund from the Tax Commissioner when the tax in question has already been paid from the vendor to the state. “At this stage,” Gwin said, “it is not clear whether Walmart paid Ohio the sales tax that it did not refund to plaintiffs when they returned the merchandise.”

If Walmart simply kept the overpaid sales taxes, then Gwin said consumers do not have to go through the Tax Commissioner. The Ohio Supreme Court addressed such a situation in a 2010 decision. In that case, a hotel allegedly charged customers a non-existent local sales tax. The Supreme Court said customers could sue the hotel rather than the Tax Commissioner. The justices distinguished between “erroneously collected tax for which legislative authority does exist” and a “nonexistent tax” where “the vendor has no authority to collect or remit those funds to the taxing authority.” The basic idea is that the state is not responsible for refunding money it never had. As the plaintiffs in the Walmart class action allege, “Here, the money belongs to the consumers and is being held by Walmart solely for Walmart’s own benefit.”

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.

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