Court: District Court, S.D. Illinois; September 24, 2018; Federal District Court
Mark A. Guterman filed a putative class action against Costco Wholesale Corporation for allegedly violating New York Tax Law and the New York General Business Law, as well as for unjust enrichment. Guterman claims that Costco improperly charged New York customers sales tax on the full price of items purchased with coupons instead of the reduced price, thereby requiring customers to cover Costco’s tax liability on the price difference. The class is defined as all Costco customers who paid sales tax on the full price for coupon-related purchases within three years prior to the action. Costco’s coupon booklets, which do not indicate that they are manufacturer coupons or disclose the basis for price reductions, are central to the complaint. Guterman asserts a private right of action under New York Tax Law, seeking reimbursement for the excess sales tax charged. Additionally, he raises claims under the General Business Law and for unjust enrichment. Costco has filed a Motion to Dismiss the Second Amended Complaint under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), which the court has granted.
Prior to August 8, 2013, Costco's coupon booklets featured store-issued coupons labeled as "manufacturer's coupons" and offered reduced prices on selected products, with terms such as "instant savings" and "no coupon necessary." These booklets included disclosures indicating that state sales tax might apply to the pre-discounted price upon redemption and outlined that certain offers required the original coupon to be presented at checkout. After August 8, 2013, the format of the coupon booklets changed significantly; they no longer referred to most offers as "manufacturers' coupons," eliminating references to "manufacturer's reimbursement." The new booklets introduced a scannable "Master Bar Code" and emphasized a streamlined savings approach without the need for clipping coupons. Offers displayed the discount alongside the original price and customer cost, while some required the presentation of the savings book or the Costco app. The new booklets maintained disclosures regarding tax liabilities but removed the language classifying non-online-only offers as manufacturer's coupons. Beginning October 3, 2013, an "Instant Savings" label was added above discounted amounts, but the accompanying terms and conditions were simplified, lacking the previous asterisked reference. No further changes were reported in the coupon booklets before the class period commenced.
On May 8, 2014, the format of Costco's coupon booklets changed, eliminating coupons that featured a blue arrow and the phrase "Book Or App Required," which meant that customers no longer needed to present these booklets or apps for price reductions, except for special items like tires, glasses, and ink refills. Price reductions became automatic at checkout. Similar to the coupon booklets introduced after August 8, 2013, offers not marked "online-only" did not reference "manufacturers' coupons" or involve "manufacturer's reimbursement." Online-only offers continued to clarify that most online coupons at Costco.com were manufacturers' coupons.
On May 5, 2016, the "instant savings" notation used since October 3, 2013, was removed. Some electronic coupons still displayed a format showing the "Warehouse Price," "Instant Savings," and the "your cost" after the discount. The sales receipts issued by Costco follow a structured data format, including item numbers, descriptions, and full prices, with taxable items indicating sales tax rates via letter codes. For example, "A" denotes full tax rate, while "F" indicates clothing eligible for tax exemption under certain conditions. The receipts summarize total sales tax charged without detailing state and county breakdowns.
Plaintiff alleges that customers must manually calculate the total price of "A" taxable items and adjust for coupon reductions to determine sales tax liability based on full prices rather than reduced prices. Each coupon's details appear directly below the corresponding item on the receipt, along with a total of "coupons tendered" at the bottom.
Costco has consistently referred to its coupon booklets as "coupon mailers" in SEC Form 10-K filings from 2007 to 2016. However, the Form 10-K for the fiscal year ending September 3, 2017, omits this term but includes in its audited financial statements that "vendor receivables include coupons, volume rebates, and other purchase discounts." Additionally, it details agreements with vendors regarding funds for coupons.
The plaintiff alleges that Costco does not charge sales tax on the full price of items in its coupon booklets in several states, only on the reduced price, based on state tax laws that govern coupon-related sales. The plaintiff believes Costco employs analysts to interpret these tax laws, indicating awareness of potential tax liabilities under New York Tax Law for coupon booklets not designated as "manufacturers' coupons."
The procedural history details that the plaintiff filed the initial complaint on June 26, 2017, followed by an amended complaint on July 28, 2017. A series of motions and responses ensued, including a motion to dismiss by the defendant, which led to a structured briefing schedule. The plaintiff later filed a second amended complaint (SAC) on March 7, 2018, requesting the court to treat the pending motion as applicable to the SAC, which the court granted.
The discussion section outlines the standard of review for a Rule 12(b)(6) motion to dismiss, emphasizing that while detailed factual allegations are not required, a plaintiff must provide sufficient grounds for relief beyond mere labels and conclusions, referencing relevant case law. A complaint must include factual enhancements rather than just bare assertions.
A complaint's factual allegations must surpass mere speculation to establish a right to relief, as outlined in Twombly and Iqbal. A claim is adequately stated if it is plausible on its face, meaning it must provide enough factual context to allow the court to infer misconduct; otherwise, it may be dismissed. Judicial experience and common sense guide this contextual evaluation. While Rule 8 permits a more lenient pleading standard compared to past practices, it does not allow for discovery based solely on conclusory statements. In assessing a motion to dismiss, courts must accept all factual allegations as true and draw reasonable inferences in the plaintiff's favor.
In the specific case concerning New York Tax Law, the defendant contends that the plaintiff's claim for a private right of action is unviable because New York Tax Law § 1140 designates the administrative remedies in § 1139 as exclusive for tax challenges. Conversely, the plaintiff asserts that under § 1139(a)(ii) and relevant regulations, customers of Costco in New York can claim repayment of improperly collected sales tax directly from Costco without filing a refund application with the New York Tax Commission. New York Tax Law § 1139 outlines the procedure for obtaining refunds for taxes deemed erroneously collected, stipulating that a refund for taxes collected from customers can only occur after the taxpayer proves that the tax has been repaid to those customers.
New York Tax Law § 1140 stipulates that the remedies specified in § 1139 are exclusive for reviewing tax liabilities. Specifically, it prohibits any actions for declaratory judgment or monetary claims regarding tax determinations or refund applications, mandating that disputes must be pursued through an Article 78 proceeding under the Civil Practice Law and Rules. Courts in the Second Circuit, including the Kupferstein and Estler cases, affirm that § 1139 provides an exclusive administrative remedy for taxpayers seeking refunds for taxes deemed to be collected "erroneously, illegally or unconstitutionally."
Plaintiffs' claims regarding improper sales tax collection on prepackaged coffee bags fall under this exclusive remedy framework. Courts have consistently interpreted § 1139 to require that such claims be addressed administratively, rejecting arguments that claimants can circumvent this requirement. The statute's explicit language underscores its intention for these remedies to be the sole avenue for tax liability review. The argument that sales tax collection was exempt cannot be raised outside this administrative context. Furthermore, any review of Tax Commission determinations is limited to Article 78 proceedings. The law views the collection of sales tax by entities like Costco as a ministerial act, indicating that any grievances should be directed toward the taxing authority rather than the tax collector. The appropriate oversight of tax collection compliance lies with the Department of Taxation.
Plaintiff has not pursued administrative relief under § 1139, arguing that the procedures outlined in 1139(a)(i) are too burdensome or futile. Plaintiff believes this allows for a lawsuit against Defendant, compelling it to seek a refund under 1139(ii). However, despite claims of lacking information from Costco, the Plaintiff's Second Amended Complaint (SAC) contains nearly all necessary details for a refund application, including the applicant's identification and the specifics of the claim. The regulations do not render it "impossible" for customers to gather this information, even if Costco also possesses it. While Defendant could have refunded excess taxes, arguments that it should proactively submit refund requests or that customers are unaware of the need to do so are deemed irrelevant to the mandatory nature of § 1139.
Plaintiff interprets 1139(a)(ii) to mean that Costco must repay customers before seeking a refund from the Tax Commission, but nothing in 1139 mandates repayment upon awareness of improperly collected taxes. Attempts to establish an implied private right of action under 1139(a)(ii) and its regulations are unsuccessful. Under New York law, the criteria for implying such rights include whether the plaintiff is part of the intended beneficiary class, if it would promote legislative intent, and if it aligns with the legislative framework. Despite potentially satisfying the first two criteria, the court concludes that a private right of action contradicts the exclusive remedy established by the statute, which explicitly outlines the process for refund claims in Tax Law sections 1138, 1139, and 1140.
Legislative intent aims to limit administrative and court review of challenges to state revenue practices, emphasizing the necessity for prompt and diligent claims to uphold public fiscal integrity. New York Tax Law Sections 1139 and 1140 establish that the statutory administrative remedies for tax liability are exclusive, barring other legal reviews of tax determinations. Consequently, the plaintiff's remedy for alleged illegal tax collection is to apply to the Tax Commission, not to the court. The court dismisses the plaintiff's claims under New York Tax Law and related regulations due to the failure to exhaust administrative remedies. Additionally, claims presented under New York General Business Law (GBL) Section 349 cannot circumvent the exclusive remedy provisions of the Tax Law, leading to their dismissal. Claims of fraud under GBL Section 349 related to sales tax overcharges are also dismissed. Similarly, the plaintiff's unjust enrichment claim fails as it attempts to evade the exclusive remedy outlined in the Tax Law, reinforcing that such claims must be addressed through the Tax Commission. Thus, the court grants the defendant's motions to dismiss all claims.
Defendant's Motion to Dismiss is granted, resulting in a dismissal with prejudice, as Plaintiff's prior amendment did not resolve the identified defects. The Clerk of Court is instructed to terminate the pending motion and close the case. The ruling references New York Tax Law § 1105, which governs sales tax computation when coupons are used. Specifically, it highlights that if a store issues a coupon with manufacturer reimbursement but does not disclose this to the purchaser, the vendor only collects tax on the reduced price while being liable for tax on the total receipt amount. Evidence presented includes a Costco webpage for "Warehouse Coupon Offers" that did not clarify the nature of the coupons as manufacturers' coupons. Additionally, Costco's customer service webpage explicitly stated that it does not accept general manufacturer coupons. The relevant coupon booklet also lacked "Terms and Conditions" regarding manufacturers' coupons. Defendant argues that New York Tax Law § 1139 is the exclusive remedy for Plaintiff's claims, noting varied judicial interpretations on whether such claims are jurisdictional or related to the failure to state a claim or exhaust administrative remedies.
The court addresses the distinction between subject matter jurisdiction and failure to state a claim, agreeing with courts that assert state power does not affect federal jurisdiction. The court considers the Defendant's Motion under Rule 12(b)(6), noting the outcome would be unchanged under Rule 12(b)(1). The excerpt details the refund application process under New York regulations, emphasizing that any person who has collected tax erroneously must repay it to the customer before seeking a refund from the Department of Taxation and Finance. The Plaintiff argues that Costco did not fail to remit taxes but rather correctly paid the full sales tax to the state, countering claims of overpayment. The court highlights that Costco has fulfilled its sales tax obligations and questions the basis for any refund claim. The Plaintiff's reliance on Federal Insurance Contribution Act cases is dismissed, clarifying that the Second Circuit's rulings do not support the idea that an employee can bypass statutory procedures to sue an employer for refunds. The court opts not to determine whether the mailers in question constituted "coupons" under New York Tax Law, as it is irrelevant to the Motion's outcome.
