Fashion company LuLaRoe has been hit with a federal lawsuit related to the collection of sales tax.
The LuLaRoe brand, founded by DeAnne and Mark Stidham, isn’t a traditional retailer. The company markets its knitwear, including dresses – and those famous leggings – using a mix of direct sales (approximately 80% in 2015) and multi-level marketing (MLM). Individual consultants get a piece of the profits (from selling inventory) as well as incentives for signing up new consultants. It’s vaguely reminiscent of Tupperware marketing – only product parties are typically conducted online via Facebook.
(For more on how LuLaRoe works, check out this Forbes article. You can read the company’s income disclosure statement here.)
The online marketing allows for a great deal of expansion but apparently also leads to confusion. According to a lawsuit filed in the U.S. District Court for Western Pennsylvania, LuLaRoe requires its consultants to process sales through a proprietary, online point-of-sale payment platform, called “Audrey.” The lawsuit alleges that the system automatically charges customers sales tax based on the location of the consultant and not the location of the customer.
The plaintiff in the case is Rachael Webster of Allegheny County, Pennsylvania. Webster was charged $35.16 for sales tax on approximately one dozen LuLaRoe purchases she made in 2016. The kicker? Pennsylvania doesn’t charge sales tax on clothing. That means, according to the plaintiff, she was overcharged. According to the lawsuit, those overcharges are not paid to the appropriate tax authorities.
Webster is seeking certification for class-action status for the suit “on behalf of herself and all others similarly situated to challenge Defendant’s unlawful, unjust, deceptive and fraudulent practice.” She is also seeking “damages, attorney’s fees and costs, restitution, and all other relief deemed appropriate under the statutory and common law causes of action asserted herein.”
Webster is represented by Kelly Iverson at Cohen & Grigsby, P.C., who referred me to her co-counsel, Bruce Carlson at Carlson Lynch, for comment. Carlson confirmed that “The recovery that we are seeking is disgorgement of the unlawfully collected sums, any applicable statutory amounts, fees and costs.”
Carlson couldn’t offer specific numbers of how many customers he thinks might have been impacted and therefore eligible to participate in the class action but did state that “I expect that the pool is substantial.”
A spokesperson for LuLaRoe admitted that there had been a problem with payments, telling me, “We have been aware of sporadic problems with our former payments vendor, which have increased over the past year with the fast growth of our company.”
However, the company disputes the notion that it has benefited from the problem. Since sales taxes collected from customers and ultimately remitted to the taxing authority, sales tax are considered “trust fund” taxes. Most companies keep those funds separate from their revenues and LuLaRoe maintains that it is no different. A representative for the company stated that “We have an independent, dedicated account of all sales tax payments. This account is segregated from the operating funds of the company.”
The company has, it claims, “invested significant funds and resources to develop an alternative point of sale system that corrects the issue.” The issue involved “our former payments vendor, which had a technology system failure that misidentified the accurate location of certain individuals.” Since that time, according to a company spokesperson, “We have immediately reimbursed any individual whom we could identify as having been improperly charged sales tax.” Further, the company says “We are proactively working to ensure that all affected individuals are refunded.”
According to the lawsuit, LuLaRoe is projecting $1 billion in sales in 2016, having grown over the last 24 months by approximately 600%.
The case is Rachael Webster, individually and on behalf of all others similarly situated, v. LLR, INC., d/b/a LuLaRoe, Civil Action No. 2:17-cv-00225-DSC (W.D. Pa.)
