• Class Action Tax Litigation in Tennessee May No Longer Be a Risk for Retailers
  • April 4, 2008
  • Law Firm: Waller Lansden Dortch & Davis, LLP - Nashville Office
  • Recent changes in Tennessee law appear to have effectively eliminated the risk of retail vendors being subject to class action litigation for alleged over-collection of Tennessee sales tax. This has long been a concern of retailers who, under Tennessee tax law, are responsible for collecting sales tax and remitting it to the Department of Revenue. Fulfilling this statutory duty creates a double risk to vendors. First, there is the risk that an assessment for under-collected sales tax, as a practical matter, will have to be paid by the vendor, who may be unable to recoup the tax from its customers. Secondly, retailers also had to be careful not to collect too much sales tax, which could result in class action lawsuits from consumers seeking refunds of over-collected tax. In the past, automobile dealers have been the targets of numerous class action suits, and in 2002, Food Lion settled a class action lawsuit filed by a consumer alleging that the grocery store chain had charged too much sales tax on discounted products purchased with discount cards.

    The risk that retailers collecting Tennessee tax might be subject to class action lawsuits has been significantly reduced by two recent changes or clarifications in Tennessee law. First, the Tennessee Supreme Court ruled on Feb. 13, 2008, in Bill Walker v. Sunrise Pontiac-GMC Truck, that class certification is not available under the Tennessee Consumer Protection Act (TCPA). The Court held that class certification was also not appropriate for the plaintiff's fraud and misrepresentation claims due to the individual nature of those claims. Although this was not a tax case, the Court's ruling directly relates to tax class actions in that it prevents a consumer from relying on the TCPA or common law fraud and misrepresentation claims in seeking to challenge a retailer on the issue of whether tax was over-collected. By eliminating these causes of action from the tool bag of class action consumer groups, the ability to obtain treble or punitive damages is no longer an option. This severely limits a plaintiff's claim for attorney's fees and the potential upside for pursuing class action lawsuits for over-collected tax.

    The second significant change affecting tax class actions in Tennessee was the Legislature's passage of Tenn. Code Ann. ยง67-6-538 during the 2007 legislative session. The statute establishes procedures for a purchaser to seek a refund of over-collected sales or use taxes from a seller. The statute is particularly clear that "[a] cause of action against a seller for the over-collected sales or use taxes does not accrue until a purchaser has provided a written notice of the over collection and a request for a refund to the seller and the seller has had sixty days to respond." As a result, for a consumer to pursue a cause of action against a retailer, the purchaser must give the retailer notice and 60 days to refund the over-collected tax. For class action suits, this would have to be true of every party that would be a potential plaintiff in the class action suit. It is highly unlikely that consumer groups could organize an effort to make sure that this requirement is met without at the same time alerting the retailer that there is potential exposure.

    These two changes in Tennessee law likely signal the end of tax class action lawsuits in Tennessee. Retailers will want to establish procedures within their organizations to make sure that store managers and clerks are aware of the new procedure for purchasers to request refunds of over-collected sales tax and adjust compliance and reporting accordingly. There does not appear to be any legislation pending that will overturn the Bill Walker decision.