On Aug. 4, 2021, a Pennsylvania federal court dismissed a class action lawsuit against Walmart Stores, Inc. (Walmart) alleging the improper collection of Pennsylvania sales tax on sales of 5-Hour Energy drinks.1 On behalf of a class of taxpayers, the taxpayer asserted that Walmart’s collection of sales tax on dietary supplements violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL) and also amounted to conversion, unjust enrichment and breach of constructive trust under common-law claims. However, the Court dismissed the case for failure to state a claim upon which relief can be granted, finding that a retailer’s incorrect collection of sales tax is not conduct covered by the UTPCPL, and that the taxpayer could seek a sales tax refund through a state administrative process.
On two separate occasions in late 2019 and early 2020, taxpayer Christopher Lisowski purchased 5-Hour Energy drinks from a Walmart store in Pittsburgh, Pennsylvania. During both transactions, Walmart charged the taxpayer sales tax at a rate of 7%.2 The taxpayer argued that sales of 5-Hour Energy drinks are exempt from Pennsylvania sales and use tax because the drink is marketed as a dietary supplement. The taxpayer cited to Pennsylvania Department of Revenue (Department) guidance confirming that dietary supplements and substitutes, in any form, are exempt from sales tax.3 Walmart nonetheless charged sales tax on sales of the drinks, forming the basis of the taxpayer’s federal class action lawsuit.
Before the Court, Walmart filed a motion to dismiss the lawsuit for failure to state a claim upon which relief can be granted.4 In federal court, a motion to dismiss for failure to state a claim is a defense available under the Federal Rules of Civil Procedure.5 While the defense does not resolve the underlying questions of law, the court must determine whether the plaintiff has “plead a plausible claim for relief.”6
In his complaint, the taxpayer first argued that the UTPCPL protects consumers from the allegedly improper collection of Pennsylvania sales and use tax. Specifically, the taxpayer alleged that Walmart’s conduct violated the provision of the consumer protection law prohibiting unfair or deceptive activity “in the conduct of any trade or commerce.”7 In response, Walmart argued that the UTPCPL does not cover sales and use taxes because collection of sales and use taxes is not act in the conduct of “trade or commerce” regulated by the UTPCPL.
For purposes of the motion to dismiss, the court assumed that sales of 5-Hour Energy drinks are not taxable and that Walmart incorrectly collected sales tax.8 The UTPCPL protects consumers from unfair and deceptive practices in “trade or commerce,” defined as the advertising, sale or distribution of services or products.9 Although there was no question that Walmart engages in “trade or commerce,” the Court ultimately determined that Walmart’s collection of sales tax was not an act in the conduct of such commercial activity. Acknowledging that Pennsylvania courts have not directly addressed the UTPCPL’s “trade or commerce” limitation in the context of a case alleging improper collection of sales tax, the Court considered a recent federal court decision applying Pennsylvania law. In that case, the court ruled that the collection of sales tax did not qualify as “trade or commerce” under the UTPCPL.10 The court reasoned that retailers collect sales tax because they are required to do so by law and they receive no benefit or profit from collecting such taxes.
The Court also cited approvingly to several state court decisions which determined that similar state consumer protection laws – all based on the Federal Trade Commission Act – do not cover the collection of sales and use taxes.11 The Court found these decisions to be persuasive and consistent with the language of the UTPCPL. Based on these decisions, the Court concluded that the UTPCPL did not regulate activity disconnected from Walmart’s commercial interests, including tax collection.
The Court likewise rejected the taxpayer’s arguments that the Pennsylvania Fair Credit Extension Uniformity Act (FCEUA) allows enforcement under the UTPCPL, and that Walmart profited from the collection of sales and use taxes. The Court concluded that the FCEUA included no language indicating that the collection of sales taxes is actionable under the UTPCPL. Additionally, the Court concluded that any tax credits received by Walmart in collecting sales tax was in its capacity as a retailer collecting taxes for the state and was “motivated by a public duty rather than private gain.”12 For these reasons, the Court dismissed the taxpayer’s UTPCPL claim.
The taxpayer’s other claims were based in common law, a system of judicially created laws based on fairness principles. Here, the taxpayer alleged the common-law claims of conversion, unjust enrichment, and breach of constructive trust. In response, Walmart contended that a statutory remedy was available to the taxpayer under Pennsylvania law, thus barring his common-law claims.
The Court agreed that the taxpayer’s common-law claims were barred because Pennsylvania law provides an adequate remedy in the form of requesting a refund of improperly collected sales tax from the Department. Pursuant to the Pennsylvania Statutory Construction Act, where Pennsylvania law provides a statutory remedy, all common-law claims are barred.13
After determining that Pennsylvania’s statutory-remedy rule is substantive law that may be applied in federal court, the Court considered the issue of whether Pennsylvania law provides an exclusive and adequate remedy to the taxpayer. Under Pennsylvania’s law, taxpayers may petition the Department for a refund of overpaid tax to which the Commonwealth is not entitled.14 First, the Court found that the relevant statutory provisions established a “clear procedure” for taxpayers to obtain refunds of improperly collected sales tax. Next, the Court concluded that the available remedy was “exclusive” and “adequate” as supported by Pennsylvania case law.15 Accordingly, the Court concluded that the taxpayer was not permitted to any common-law relief and dismissed the remaining claims.
The dismissal of the Lisowski case is representative of a growing trend by federal courts to dismiss sales tax cases or deny injunctive relief where an alternative remedy is available to the taxpayer at the state level.16 In granting Walmart’s motion to dismiss, the court foreclosed any future possibility of a class action lawsuit in federal court.17 Reasoning that retailers collect sales tax as agents of the Commonwealth, the Court also refused to expand the scope of Pennsylvania’s consumer protection law to include sales tax collection. Ultimately, the Court’s decision is representative of the high bar that exists for sales tax cases to proceed in federal court, a forum that many consider to be more taxpayer-friendly with respect to state tax matters than state administrative tribunals or state courts.
Without an option to pursue their claims in federal court, impacted taxpayers are limited to filing refund petitions individually with the Department, which carries its own restrictions and drawbacks. Pennsylvania’s administrative petition process does not allow class actions and taxpayers must file refund petitions within a three-year period from the date which the tax was paid.18 Allowing taxpayers to sue under the UTPCPL or under common-law causes of action may have exposed Walmart and similar retailers to potentially large damage amounts if the taxpayers were ultimately successful on the merits of the lawsuit. From the taxpayer’s perspective, a federal court class action lawsuit would have been a more procedurally efficient process for seeking relief given the larger aggregate tax dollars at stake.
For smaller appeals where a relatively minor amount of sales tax is at issue, the costs of filing a refund petition would greatly exceed the amount of the potential refund sought on an individual basis. In theory, retailers may systematically charge sales tax on certain allegedly non-taxable products, which may not be revealed or addressed until a state audit, because individual taxpayers would lack the incentive to pursue such refunds. Likewise, states including Pennsylvania are not motivated to provide credits to vendors for over-collected sales tax under audit based on revenue collection considerations. From a consumer protection perspective, the practical issues presented in the Lisowski case may provide potential reasons for adjusting the administrative tax appeals process to allow for class action lawsuits and other reforms in order to facilitate greater retailer accountability without unduly burdening retailers.
1 Lisowski v. Walmart Stores, No. 2:20-cv-1729-NR, U.S. District Court for the Western District of Pennsylvania, Aug. 4, 2021.
2 The 7% sales tax rate consists of a 6% state rate plus an additional 1% local rate levied by Allegheny County.
3 See Form REV-717, Retailers’ Information Guide, Pennsylvania Department of Revenue, Feb. 2021; 72 PA. STAT. § 7204(29).
4 Walmart also argued that the taxpayer’s claims are barred by the voluntary-payment doctrine and because the taxpayer failed to allege deceptive conduct or justifiable reliance to support a UTPCPL claim, but the court did not consider these arguments since it dismissed the lawsuit on other grounds.
5 FED. R. CIV. P. 12(b)(6).
6 Citing Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1409 (3d Cir. 1991).
7 73 PA. STAT. § 201-3(a).
8 The Court did not address the question of whether sales of 5-Hour Energy drinks were in fact taxable under Pennsylvania law.
9 73 PA. STAT. § 201-2(3).
10 McLean v. Big Lots Inc., No. 20-2000, 2021 WL 2317417 (W.D. Pa. June 7, 2021).
11 Citing Feeney v. Dell, Inc., 908 N.E.2d 753, 770 (Mass. 2009); Blass v. Rite Aid of Connecticut, Inc., 16 A.3d 855, 863 (Conn. Super. Ct. 2009), aff’d, 16 A.3d 737 (Conn. App. 2011).
12 Prior to August 1, 2016, retailers received a tax credit equal to 1% of all sales tax collected from each consumer under Pennsylvania law. In August 2016, the law was changed to provide retailers with a flat $25-per-month tax credit, regardless of the amount of tax collected. 72 PA. STAT. § 7227.
13 1 PA. CONS. STAT. § 1504.
14 72 PA. STAT. §§ 7252; 10003.1(a).
15 Lilian v. Commonwealth, 354 A.2d 250 (Pa. 1976).
16 For example, another Pennsylvania federal court dismissed a sales tax lawsuit by the Online Merchants Guild against the Department seeking declaratory and injunctive relief over the Department’s sales tax registration demands of remote sellers. Online Merchants Guild v. Hassell, No. 1:21-CV-369, U.S. District Court for the Middle District of Pennsylvania, dismissed May 28, 2021. Earlier this year, an Illinois federal court refused to grant a temporary restraining order against California for pursuing back sales taxes from a Chicago-based online merchant, citing that the federal Tax Injunction Act constrains the court from enjoining a tax when a remedy is available in state court. Rubinas v. Maduros, No. 21-CV-96, U.S. District Court for the Northern District of Illinois, motion denied Jan. 18, 2021.
17 The taxpayer’s lawsuit was dismissed with prejudice, meaning that the taxpayer may not address the issues with its complaint or re-file the complaint. A dismissal with prejudice is typically reserved for a lawsuit in which the court determines there are no judiciable questions to resolve.
18 It should be noted that Pennsylvania provides retailers the first right to file refund claims for over-reported sales tax, but that right may be assigned to the customer. This provides a so-called “group refund” procedure whereby the retailer returns the over-collected sales tax to the applicable customers if successful on the refund claim. However, customers are forced to pursue sales tax refunds individually where retailers decline to do so and assign their rights to the customer.
Matthew D. Melinson
Matthew Melinson is a partner in Grant Thornton's Philadelphia office and the national leader of the SALT practice's indirect tax services. Melinson is responsible for all aspects of multistate tax consulting and planning and compliance related to income tax, franchise tax, sales and use tax, credits and incentives, real estate tax, and personal property tax.
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- Technology and telecommunications
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- Retail and consumer products
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Jerry Glynn is a State and Local Tax practice managing director. Prior to joining Grant Thornton, Glynn was a director of LECG/SMART’s tax practice with more than 24 years of state and local income, franchise and sales/use tax experience.
- Technology and telecommunications
- Retail and consumer products
- State and local tax
Jamie C. Yesnowitz
Jamie Yesnowitz, principal serving as the State and Local Tax (SALT) leader within Grant Thornton's Washington National Tax Office, is a national technical resource for Grant Thornton's SALT practice. He has 22 years of broad-based SALT consulting experience at the national and practice office levels in large public accounting firms.
Washington DC, Washington DC
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