Reed Smith Client Alerts

Authors: James L. Rockney

On June 15, 2015, the United States District Court for the Northern District of Illinois, Eastern Division, partially granted Whole Foods’ motion to dismiss in the case of Wong v. Whole Foods Market Group, Inc.1 In that case, the plaintiff, Mr. Wong, sued Whole Foods for allegedly over-collecting sales tax on a purchase for which he used a coupon, leading to a purported over-collection of $1.39. Based on this one instance, Mr. Wong’s class action complaint accused Whole Foods of consumer fraud, common law fraud, and unjust enrichment. Mr. Wong requested compensatory damages, punitive damages equal to 1% of Whole Foods’ Illinois revenue for each year the purported violations occurred, an injunction against Whole Foods, and attorney’s fees. Recently, U.S. District Court Judge Kennelly dismissed Mr. Wong’s unjust enrichment charge for failure to state a claim.

Motion to Dismiss Whole Foods moved to dismiss Mr. Wong’s case, arguing that (1) the Voluntary Payment Doctrine barred the suit, (2) the claim failed to adequately allege a consumer fraud action under Illinois law, (3) the claim failed to allege the elements of common law fraud with the required particularity, (4) the unjust enrichment claim failed as a matter of law, and (5) the claims for punitive damages were unsupported by the complaint.

Court’s Order Judge Kennelly dismissed the unjust enrichment claim because Mr. Wong failed to allege that Whole Foods retained any part of the overpaid sales tax. Illinois law requires a plaintiff to allege that the defendant retained the unjust benefit for a valid unjust enrichment claim. Mr. Wong’s non-pleading of such a fact meant that the unjust enrichment claim must fail.

Judge Kennelly ruled that Mr. Wong’s consumer fraud and common law fraud claims were adequately pleaded and thus not dismissed. Furthermore, Judge Kennelly held that the Voluntary Payment Doctrine did not bar Mr. Wong’s claims against Whole Foods. In the sales tax context, the Voluntary Payment Doctrine generally holds that a person who voluntarily pays a tax is on notice about the amount of tax collected, and was not forced or otherwise compelled to make the purchase creating the tax liability, and thus, cannot recover the amounts paid.

Longstanding Illinois authority has held that when a retailer collects sales tax that is later determined erroneous, the customer may not bring a refund suit against the retailer as long as the retailer remitted the sales tax to the state.2 However, a question still may be raised as to the Illinois vendor discount, also known as the vendor collection allowance. The vendor collection allowance is the 1.75% portion of the sales tax collected on each transaction that an Illinois retailer is allowed to retain as reimbursement for the retailer’s costs of serving as the state’s sales tax collector.3 As an example, if a customer purchases $200 of goods and the state tax of 6.25% is applied, the retailer is allowed to keep $0.22 on this transaction (1.75% of the $12.50 in tax collected on the $200).

The Coupon Case Chronicles The crux of the issue in the Whole Foods case and similar cases around the country is whether, when a customer uses a coupon to attain a discounted price, sales tax should be collected on the full retail price or the discounted price. The 44 states (plus the District of Columbia) that levy sales taxes deal with this issue differently. Some states mandate that sales tax always be collected on the discounted price. A more common rule is to allow for collection of sales tax based on the discounted price when the coupon originates from the retailer itself. In most cases, when the coupon is a manufacturer’s coupon, i.e., a coupon issued by a third-party for which the retailer is reimbursed after it sells the product at the discounted price, sales tax must be collected on the full retail price.

Key terms such as “manufacturer’s coupon” are rarely defined in states’ statutes or regulations. Some coupons for which the retailers are reimbursed are distributed by wholesalers or other third-parties, not manufacturers. And not all manufacturers reimburse retailers for 100% of the discount allowed under their coupons. Furthermore, the reimbursement may not come in the form of cash; for instance, the manufacturer might agree to stock its product on the retailer’s shelves, saving the retailer labor costs. Hence, it will not always be clear whether a given coupon should be treated as a manufacturer’s coupon for sales tax purposes.

Even when the rules themselves are clear, it can be difficult in the real world to differentiate between retailers’ coupons and manufacturers’ coupons. Some states, like New York, require a notation on the face of the coupon explaining whether it was distributed by the manufacturer or the retailer. Many others have no such notice requirements. Moreover, it is impractical to expect a sales clerk, upon being handed a pile of coupons, to quickly differentiate between manufacturer and retailer coupons, and charge sales tax accordingly.

It is often suggested that computer software can make compliance easier, but the sales tax rules around coupons still cause thorny compliance problems. Software, in order to correctly apply sales tax, needs the proper inputs. Determining the proper inputs requires, among other things, determining what a particular jurisdiction’s sales tax rules are, and differentiating between manufacturers’ coupons and retailers’ coupons. So there is no getting around the fundamental factual and legal problems that plague sales tax rules that differentiate between manufacturer and retailer coupons.

With almost 10,000 state and local sales tax jurisdictions, multistate businesses face a Herculean compliance task. The coupon cases allege fraudulent activity and unjust enrichment, but since the retailers remit the collected sales tax to the state, these assertions defy both logic and common sense. The truth is that a combination of vague sales tax laws and the growing administrative burden of multistate taxation conspire to cause well-meaning businesses to, in some cases, inadvertently collect the wrong amount of tax on certain discounted sales.

Retailers Should Be Proactive In the Whole Foods case, Mr. Wong is claiming he was overcharged $1.39. But the law firm representing him hopes to make millions from the suit. Plaintiff’s law firms looking for a big payday are actively targeting large retailers. Such businesses should consider being proactive in light of the new tax risks posed by plaintiff’s law firms. Obtaining counsel experienced in litigating State Tax matters is the first step. Lawyers experienced in this area can examine your business practices for vulnerabilities, and offer advice for mitigating any risks before a lawsuit occurs. If such a suit does occur, an experienced State Tax lawyer or law firm can defend against the suit with the greatest efficacy.

  1. Case No. 15 C 848 (filed Jan. 28, 2015).
  2. See Lusinski v. Dominick’s, 136 Ill. App. 3d 640, 643 (1985).
  3. See 35 ILCS 20/3.


Client Alert 2015-169