2nd Circuit Affirms Dismissal of Class Action Over Costco Collection of State Taxes
The panel found the district court was right to dismiss the suit for the failure to state a claim, as state law provided the exclusive route for the tax claims made by the plaintiff.
June 12, 2019 at 04:12 PM
4 minute read
The U.S. Court of Appeals for the Second Circuit affirmed the dismissal of a lawsuit brought by a consumer against Costco over its collection of state taxes.
The appeals court in a per curiam order agreed that only procedures established under state law could be used to question a sellers method of collecting sales taxes.
The panel, composed of Circuit Judges Debra Ann Livingston, Gerard Lynch and Richard Sullivan, pointed to the “unanimous practice” by district courts within the circuit, as well as recent rulings by the appellate court itself, that backed up the dismissal by U.S. District Judge Kenneth Karas of the Southern District of New York.
The initial class action suit was brought against Costco by Mark Guterman in 2017. He claimed the retail company was essentially ripping off customers in New York through its process of collecting state sales tax.
Guterman alleged that Costco was taxing customers for the full price of products they were buying, when the company itself was receiving manufacturers' discounts on the items. New York law, according to Guterman, made Costco, not the consumer, liable for the difference in the tax.
In September 2018, Karas dismissed Guterman's second amended complaint for failure to state a claim. The district court determined the proper approach for such a claim was to go through a New York administrative proceeding, as defined under §1139 of state tax law. Karas found that state law “provides the exclusive remedy for claims that a 'tax, penalty or interest' was 'erroneously, illegally or unconstitutionally collected,'” the appellate panel noted.
On appeal, Guterman argued the district court erred in dismissing his claims because §1139 created an implied private right of action.
The panel pointed to the 2017 circuit decision Estler v. Dunkin' Brands, which also argued consumers were unlawfully charged sales tax, but chose to go the federal route rather than the state application process outlined in §1139. There, the circuit found “the §1139 application‐and‐refund process is the exclusive remedy available for claims of unlawfully charged sales tax,” the panel noted.
It added that the decision there was “consistent with the unanimous practice of the district courts in this Circuit,” before referring to three other decisions from the Eastern, Western and Southern Districts. New York courts, too, supported this practice, the panel stated.
“We see no reason to decide otherwise in this case,” the panel said.
It went on to discount Guterman's main argument that the two cases differ in how the tax was collected, which, in his case, effectively unjustly enriched Costco. The panel found that even accepting his argument, state law provides for the “exclusive” avenue for sales tax claims collected “illegally,” as Guterman claims Costco's actions amount to.
“The plain meaning of the statute governs here, just as it did in Estler,” the panel said.
Litigator William Weinstein represented Guterman on appeal. Sidley Austin of counsel James Arden handled the appeal for Costco. Neither attorney responded to a request for comment on the decision.
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