A group of coffee drinkers in New York with a sales tax matter to grind had their efforts thwarted this week when the Second Circuit ruled that they could not litigate a proposed class action in federal court.
Plaintiffs Thomas Estler, Blake Ruehrwein, and Steven Park filed an action against Dunkin’ Brands, Inc., franchisor of the Dunkin’ Donuts fast-food chain, and several Dunkin’ Donuts franchisees in Manhattan, alleging that they had wrongfully been charged sales tax in violation of New York state law.
New York, like many other states, imposes sales tax on certain food items while exempting others. When it comes to coffee, you’ll pay sales tax if you buy it hot and ready-to-drink (the same goes for iced coffees though this author would argue those are neither coffee nor ready-to-drink) because food and beverage items sold for immediate consumption are taxable. In contrast, coffee that’s intended to be consumed off-premises is exempt from sales tax – that would include a pre-packaged bag of beans or coffee pods. The plaintiffs allege that Dunkin’ Donuts and its franchisees made no such distinction, charging for sales tax on all purchases of coffee.
The District Court originally dismissed the case, claiming that the plaintiffs must first exhaust their administrative remedies before heading to federal court. In this specific case, that means filing a refund claim with New York State’s Department of Taxation (N.Y. Tax Law § 1139(a)).
The plaintiffs appealed that ruling to the 2nd Circuit using three basic arguments:
- This isn’t a sales tax issue but a return of improper “surcharges.”
- The merchants broke the law by collecting sales tax when it was not proper which means that the merchants should not be exempt from liability under the law.
- Forcing them to comply with administrative procedures would violate their constitutional rights (these folks clearly take their coffee seriously).
The 2nd Circuit affirmed the District Court’s dismissal finding:
- It is a sales tax issue. The court did a little smackdown here, claiming the argument “merits little discussion.” The merchants called it sales tax, the merchants charged sales tax, and the merchants collected sales tax. Whether they did so in error doesn’t transform the sales tax to a surcharge.
- The whole point of the law, found the court, was to address the exact issue where a tax was collected “erroneously, illegally or unconstitutionally.” The resolution is to be found with the state, not the merchant, since the merchant no longer has the tax dollars in dispute (those were remitted to the state). “It could hardly be otherwise,” the court found “as there would be no dispute … if all parties agreed that collection of a sales tax were legal.”
- What constitutional rights violations? Generally, to raise an issue on appeal, it needs to be argued in the underlying case. That didn’t happen here which means, found the court, “we need not consider them here.”
Jeff Karlin, Director & Legal Counsel, Dunkin’ Brands, said about the ruling:
We’re very pleased with the decision from the Second Circuit affirming the dismissal of the case by the trial court. The Court recognized, appropriately, that the taxpayers’ exclusive remedy is to make a claim under New York State’s sales tax refund process and did not allow a class action lawsuit. Our franchisees are responsible for all pricing decisions, including setting their own sales tax. While the tax laws concerning food items are sometimes quite complex, we are confident that our franchisees always strive to price and tax food items in strict accordance with state and federal law.
What this means for Dunkin’ Donuts customers in New York who believe they were improperly charged sales tax is that they must apply for a refund through the state’s Department of Taxation if they want their money back. It might not be the sweetest result for the plaintiffs but it’s a good example of how complicated sales tax laws can be – and how tricky it can be to sort them all out.
The case is Thomas Estler, et al., Plaintiffs, v. Dunkin Brand Inc., et al., Defendants (0:16-cv-03762), Second Circuit U.S. Court of Appeals.
(Author’s note: The story has been updated to reflect a statement from Dunkin’ Brands.)