Cold Class Action: Federal Judge in Alaska Rules State and Local Sales Tax Class Action Survives Motion to Dismiss/Strike

In Alaska, a state and local sales tax class action survived a motion to dismiss and motion to strike class allegations after a federal judge determined the plaintiff’s alleged claims were plausible. In Van v. LLR, INC., d/b/a LuLaRoe et al., the plaintiff—an Alaska resident and customer of the defendant retailer—alleged she was improperly charged sales tax on clothing purchased from the out-of-state retailer’s “remote consultants” and shipped to her residence in Anchorage, Alaska. With no state sales tax in Alaska and few local sales taxes, the plaintiff claimed defendant retailer unlawfully collected sales tax on transactions shipped to Alaska for over a year.

Defendant—a clothing retailer known for selling women’s leggings—moved to dismiss plaintiff’s complaint for failure to state a claim and also moved to strike the class allegations in the complaint, claiming the plaintiff’s alleged facts were insufficient to support a class action under the federal rules of civil procedure. In her complaint, plaintiff asserted two claims on behalf of herself and those similarly situated: (1) a claim under Alaska’s Unfair Trade Practices and Consumer Protection Act (UTPCPA); and (2) the tort of conversion. More specifically, plaintiff alleged defendant retailer violated the UTPCPA by knowingly charging and collecting unlawful sales tax, failing to disclose to customers that it was not authorized to collect such taxes, and actively misrepresenting to its customers, through defendant’s remote consultants and a purported 2016 company tax policy, that the sales tax collection was lawful. Plaintiff also claimed defendant retailer intentionally violated the UTPCPA by programming its point-of-sale system to collect sales tax on clothing sales when such collection was unlawful. The court granted defendant’s motion to dismiss in part because plaintiff’s UTPCPA claim was not pled with particularity, as required for allegations of fraud. But the court also granted plaintiff leave to amend her complaint, finding plaintiff could sufficiently plead the UTPCPA claim.

The court also reviewed and denied defendant retailer’s motion to strike class allegations. Defendant first argued that plaintiff could not meet the requirement that she could fairly and adequately protect the interests of the putative class because she personally received a refund of the overcharged sales tax. Defendant next argued that its ongoing refund program meant plaintiff could not meet the “superiority requirement” requisite for class actions. Specifically, defendant retailer argued the refund program was superior to the proposed class action because the program already provided a remedy to class members by refunding the sales tax automatically and without any proof of purchase required. The court rejected both arguments because plaintiff and the putative class also sought statutory damages under the UTPCPA ($500 per transaction), so a refund was not the only relief plaintiff and class members would be entitled to should they prevail.

Previously in 2017, a similar case was filed by the same firm in the Western District of Pennsylvania against the same defendant retailer, alleging claims on behalf of class members in eleven states with jurisdictions that had no sales tax on clothing that defendant retailer sold but where the class members were charged a “fraudulent tax.” In that case, class certification was denied, primarily because the laws of eleven different states would apply to the plaintiffs’ claims. The Alaska action, on the other hand, only concerns one state (Alaska), avoiding the class certification issues of the predecessor case.

This development serves as an unfortunate cautionary tale for taxpayers proactively taking measures to ensure they are not under-collecting state and local taxes, even when they grant full refunds in instances where tax has been inadvertently over-collected.