By Bryan Koenig
Law360, Washington (July 24, 2017, 6:42 PM EDT) -- A Forever 21 customer hit the retail clothing chain with a proposed class action in New York federal court Monday accusing the company of collecting sales taxes from online New York City customers whose orders should have been tax-exempt.
Laura Togut wants to represent the thousands, "if not tens or hundreds of thousands," of customers she says were charged New York retail sales taxes for Forever 21 deliveries even though individual clothing items in the city and state are supposed to be exempt if they come in under $110.
"Defendants' sales tax assessment practices, in effect, are improperly and fraudulently adding a surcharge to purchases, and are disguising those surcharges as a 'sales tax' that does not exist, and for which defendants lack authority to collect or remit," Togut said.
According to the complaint, New York customers buying clothing cheaper than $110 should be exempt from the state's 4 percent retail sales tax, while New York City customers buying such clothing should also be free of the city's 4.5 percent sales tax and the 0.375 percent tax on the Metropolitan Commuter Transportation District.
The problem is not limited to the city, according to the complaint, which pointed to other jurisdictions that should be exempt from the MCTD tax but where customers were charged anyway.
"Defendants illegally overcharge buyers up to 8.875% every time a resident of New York City, or a resident of the counties of Chautauqua, Chenango (outside of the city of Norwich), Columbia, Delaware, Greene, Hamilton, Tioga, and Wayne, make an online purchase of clothing or footwear from defendants for less than $110 and have such purchase shipped to an address in their exempt jurisdiction," Togut said.
Togut wants to represent all New York state customers charged sales taxes that shouldn't have been collected, arguing that retail transactions only incur sales taxes for the point of delivery, not the source of the goods.
Togut contends Forever 21 knows about how the taxation rules work but has still collected "without regard to the laws of the taxing authority where defendants delivered the purchase."
The failure to calculate taxes based on where the clothes were going "is problematic," Togut said, because many jurisdictions either don't charge sales taxes or exempt clothing from those taxes when the purchases happen in those jurisdictions or are delivered there.
"As a result, if a consumer purchases defendants' clothing from defendants who, upon information and belief, are within a jurisdiction that charges sales tax, but the purchase is delivered into a jurisdiction that does not charge sales tax," Togut said, "defendants' payment system overcharges the consumer in the guise of a sales tax that does not exist in the jurisdiction governing that transaction."
Togut further alleged that the collected taxes never went to New York coffers, pointing to her own May 19 online purchase of more than 20 items of clothing all worth under $110, for which the pre-tax total came to $283.40 and for which she was charged another $22.90 in sales taxes.
"Instead, upon information and belief, defendants retained the fraudulently obtained $22.90, or remitted it to taxing authorities outside of New York, which authorities have no jurisdiction to assess sales tax on purchases shipped to the exempt jurisdictions in New York and New York City," she said.
An attorney for Togut, Bradley J. Bartolomeo, said Monday that it's unclear if the issue extends beyond New York state.
"However, we anticipate that this may be a broader issue and I, along with my team at McLaughlin & Stern LLP, are prepared to expand the case to a multidistrict lawsuit should such plaintiffs surface in the future," Bartolomeo told Law360 in an email.
Forever 21 declined to comment Monday.
Counsel information for Forever 21 was not available Monday.
The case is Togut v. Forever 21 Inc. et al., case number 1:17-cv-05616, in the U.S. District Court for the Southern District of New York.