SALT Blog - SALT Blawg

by Stewart Weintraub and Jennifer Weidler

On June 3^rd, a Federal judge approved a $1 billion class action settlement against AT&T.  The settlement relates to AT&T's collection of state and local taxes applied to its mobile device data plans, which the class action plaintiffs claimed were improperly collected pursuant to the Internet Tax Freedom Act ("IFTA") of 1998.  IFTA prohibits the imposition of state and local taxes upon Internet access through November 1, 2014.  Class action lawsuits were filed in all 50 states against AT&T alleging a violation of IFTA.  The cases were later consolidated into one case in the United States District Court for Northern District of Illinois.

Pursuant to the Settlement Agreement approved by Judge Amy J. St. Eve, the Settlement Class is defined as, "[a]ll persons or entities who are or were customers of AT&T Mobility and who were charged Internet Taxes on bills issued from November 1, 2005 through September 7, 2010."

Depending upon the rules of the state and local jurisdictions involved, the Settlement Agreement requires AT&T to either: (1) seek tax refunds directly from the state or local government for the Settlement Class; (2) jointly seek tax refunds directly from the state or local government for the Settlement Class; or (3) to provide the information reasonably necessary for the Settlement Class to prepare, file and process the tax refund claims.  The refunds to which the Settlement Class might be entitled could $1 billion.

Where only AT&T has standing to seek a refund of taxes collected, AT&T shall file refund claims with the appropriate taxing jurisdictions for the available period or periods for which refund claims may be filed pursuant to each jurisdiction's laws.  Those jurisdictions in which only AT&T has standing are:

STATE JURISDICTIONS:

• Arizona
• Nevada
• Illinois
• New Hampshire
• Kentucky
• New York(Excise Tax and Metropolitan Transportation Business Tax Surcharge)
• Massachusetts
• North Carolina
• Minnesota
• Puerto Rico(Sales Tax)
• Mississippi
• Tennessee
• Missouri
• Texas

LOCAL JURISDICTIONS*:

• Arizona
• New York
• Hawaii
• Oregon

*See Settlement Agreement Exhibits for specific local jurisdictions.

Where AT&T and the Class Plaintiffs jointly have standing to seek a refund of the taxes collected, AT&T shall file refund claims, joined by the Settlement Class, with the taxing jurisdictions for refunds of the taxes for the available period or periods for which refund claims may be filed pursuant to each jurisdiction's laws.  Those jurisdictions to which both AT&T and Class Plaintiffs have standing are:

STATE JURISDICTIONS:

• Alabama
• Maryland
• Arkansas
• Montana(Telecommunications Tax)
• California(Public Utilities Commission User Fee; PUC Public Policy Program End User Surcharge)
• New Jersey
• Connecticut
• New York(Sales Tax)
• District of Columbia
• Ohio
• Florida
• Oklahoma
• Georgia
• South Carolina(Sales Tax; Municipal Business License Tax)
• Hawaii(Public Service Tax; Public Utility Fee; TRS Fee)
• Utah
• Idaho
• Vermont
• Indiana
• Virginia
• Kansas
• Washington(Sales Tax)
• Maine
• Wyoming

LOCAL JURISDICTIONS*:

• Alaska
• Nebraska
• California
• Puerto Rico
• Illinois
• Washington
• Maryland
• West Virginia
• Missouri

*See Settlement Agreement Exhibits for specific local jurisdictions.

Where only the Settlement Class members have standing to seek a refund of the taxes collected and paid by AT&T, AT&T must prepare and provide: (1) a template for filing a claim for refund of the taxes; (2) documentation showing the aggregate taxes paid to each jurisdiction for the period(s) of the refund claim; and (3) other information reasonably necessary to prepare, file and process the refund claims.  Those jurisdictions to which only the Settlement Class Members have standing are:

STATE JURISDICTIONS:

• Colorado
• Nebraska
• Iowa
• Pennsylvania
• Louisiana
• Rhode Island
• Michigan

LOCAL JURISDICTIONS*:

• Colorado
• Nevada
• Mississippi

*See Settlement Agreement Exhibits for specific local jurisdictions.

(The information contained in these charts was obtained from Exhibits K, L and M of the Settlement     Agreement.  The charts contained herein, and the Exhibits from which they were derived, reference    all 50 states with the exception ofDelaware,North DakotaandSouth Dakota).

Furthermore, where applicable and permitted by statute, AT&T agreed to seek interest from the taxing jurisdictions with respect to the tax refund claims.

If a taxing jurisdiction alerts AT&T of its denial of a refund claim, pursuant to the Settlement Agreement, AT&T must notify Interim Settlement Class Counsel (Bartimus, Frickleton, Robertson & Gorny, P.C. and The Huge Law Firm PLLC), who will then notify AT&T as to whether the Settlement Class would like to appeal or otherwise contest the denial.  If the Settlement Class chooses to appeal, independent counsel will be appointed to prosecute the appeal, working at the direction of Interim Settlement Class Counsel.  Furthermore, if an appeal is taken, AT&T agrees to cooperate in the appeal, with the caveat that AT&T will have the right to review and comment upon any filings or positions taken with the particular taxing jurisdiction and to further prohibit the assertion of any filing positions inconsistent with the facts, contrary to the law, or damaging to the company.

Additionally, pursuant to the terms of the Settlement Agreement, AT&T did not admit to any wrongdoing, but agreed to stop charging and collecting the taxes.  However, AT&T reserved the right to reinstate the charge if federal, state or local laws, statutes, regulations or administrative decisions or pronouncements authorize or permit the collection and payments of the taxes.

Earlier this year, the American Bar Association ("ABA") House of Delegates adopted the Model Transactional Tax Overpayment Act ("Model Act") prepared by its Tax Section's State and Local Tax Committee and recommended its adoption by appropriate legislative bodies.  The Model Act attempts to address the underlying issue raised by the AT&T class action litigation, namely seller liability and purchaser remedy procedures for the claimed improper collection and remittance of state and local taxes.  According to the Report accompanying the Model Act, the taxing jurisdiction and the purchaser are the real parties at interest, not the seller, in a dispute relating to the claimed improper collection and remittance of state and local taxes, and as such, the seller should not be subject to claims or liability with respect to such claimed overpayments.  Thus, while nothing in the Model Act precludes a seller from refunding an overpayment or filing a refund claim, the Model Act places the onus of seeking a refund upon the purchaser.

The Superior Court of Pennsylvania recently came to a similar conclusion as the ABA in Stoloff v. The Neiman Marcus Group, Inc., Pa. Super 110 (2011). Stoloff involved a class action lawsuit against Neiman Marcus for its alleged regular collection of sales tax fromPennsylvania customers on clothing which was not subject to thePennsylvania tax.  The Court found that the doctrine of primary jurisdiction required any dispute involving the claimed overpayment of sales tax first must be resolved by the Pennsylvania Department of Revenue.  Furthermore, the court noted that, "once the consumer pays the tax, that amount effectively becomes Commonwealth property.  The Department is thus in the best position to determine whether Neiman Marcus appropriately taxes the instant consumers, as it customarily handles the overwhelming majority of, if not all, such claims."  Thus, similarly to the Model Act, the Court found that the purchaser and Department through the refund process, not the purchaser and seller through the courts, were the best parties and best method by which to initially handle the issue of an overpayment of state taxes.