Appeals Court Finds Holes in Tax Case Against Dunkin’ Donuts

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By John Herzfeld

Plaintiffs alleging that Dunkin’ Donuts stores in New York improperly collected some $10 million in sales tax on prepackaged coffee fell short before a federal appeals court in their bid for a class action.

A three-judge panel of the U.S. Court of Appeals for the Second Circuit rejected May 23 an appeal of an October district court decision backing arguments by parent company Dunkin’ Brands Inc. that the plaintiffs had failed to exhaust their exclusive administrative remedies with the state Department of Taxation and Finance ( Estler v. Dunkin’ Brands, Inc. , 2017 BL 171119, 2d Cir., No. 16-3762, 5/23/17 ).

The lawsuit alleged Dunkin’ Donuts had collected the sales tax on prepackaged coffee in defiance of state requirements that the product be sold tax-free. The defendants included several franchise outlets in New York City, as well as the franchiser of “one of the largest baked goods and coffee stores in the world.”

The plaintiffs, in the appeal, argued that the state administrative procedures weren’t mandated in this case and that an independent claim under the state’s general business law was justified to the extent that the stores’ sales tax collection amounted to an unfair or deceptive practice.

However, the appeals court found that the damages claims were properly classified as sales tax refunds that belong with the state tax agency. It further found that state law and relevant precedent don’t distinguish between “taxes assessed in an improper amount from taxes improperly assessed on exempt products,” in this case, the prepackaged coffee.

Deceptive Practices Claim Nixed

The appeals court similarly rejected the deceptive practices claim, saying state tax law explicitly forecloses legal remedies other than the mandatory administrative procedure for recovering improperly collected sales taxes.

It found that while “additional conduct causing further injury might support” the deceptive practices claim under the general business law, “plaintiffs’ complaint alleges no actions beyond defendants’ continued practice of charging sales tax on pre-packaged coffee.”

The company welcomed the decision in a May 23 statement.

“Our franchisees are responsible for all pricing decisions, including setting their own sales tax,” said Jeff Karlin, director and legal counsel at Dunkin’ Brands. “While the tax laws concerning food items are sometimes quite complex, we are confident that our franchisees always strive to price and tax food items in strict accordance with state and federal law.”

Sitting on the panel were Judges Ralph K. Winter and Reena Raggi, as well as District Judge Alvin K. Hellerstein, by designation.

Representatives of the plaintiffs didn’t immediately respond to a request for comment.

To contact the reporter on this story: John Herzfeld in New York at jherzfeld@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

Text of the decision is at http://src.bna.com/o87.

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