Dunkin’ Donuts Sales Tax Lawsuit Fried in New York

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By John Herzfeld

Oct. 4 — A federal judge dismissed a class action alleging that Dunkin’ Donuts stores in New York improperly collected some $10 million in sales tax on prepackaged coffee ( Estler v. Dunkin' Brands, Inc., S.D.N.Y., No. 1:16-cv-00932, 10/3/16 ).

The U.S. District Court for the Southern District of New York, in an Oct. 3 opinion and order, backed arguments by parent company Dunkin' Brands Inc. that the plaintiffs failed to exhaust their exclusive administrative remedies with the state Department of Taxation and Finance.

The lawsuit alleged that Dunkin’ Donuts stores in New York had collected the sales tax on prepackaged coffee in defiance of state guidance requiring that the product be sold tax-free .

The defendants included more than 500 Dunkin’ Donuts stores in New York, as well as the parent company of what the court called “one of the largest baked goods and coffee stores in the world.”

In finding that it had no subject matter jurisdiction over the lawsuit, the court said that the state department was the proper forum to seek a refund for a sales tax that the taxpayer believes was erroneously, illegally or unconstitutionally collected.

‘Subverts' Purpose of Class Actions

The lead attorney for the plaintiffs, Zachary Liszka of Liszka & Gray LLC in New York, said in an Oct. 4 e-mail that they plan to appeal.

The ruling “effectively subverts” the principles of efficiency and economy that the U.S. Supreme Court has identified as the principal purpose of class actions, he told Bloomberg BNA.

“The ruling means that potentially tens of thousands of consumers have to file individual petitions that will probably cost them more in first class mail charges than they are actually owed,” he said. “The result places an unnecessary burden on consumers, and needlessly clogs up the New York tax courts.”

Dunkin' Brands, in a statement, welcomed the ruling.

“The court recognized, appropriately, that the taxpayers' exclusive remedy is to make a claim under New York State's sales tax refund process,” the company said. “Our franchisees are responsible for all pricing decisions, including setting their own sales tax. 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.”

Rejects ‘Semantics.’

The court turned aside the plaintiffs' arguments that the parent company and the stores can be sued under the state’s General Business Law, saying that the plaintiffs can’t use the semantics of calling the collection a “surcharge” to change the basic legal premise that refund claims go to the state.

The plaintiffs’ “attempt to make an end run around the requirements of New York Tax Law fails,” the court said, rejecting the lawsuit’s claims of breach of contract, unjust enrichment, negligence, fraud and General Business Law violations.

A similar New Jersey lawsuit filed in tandem with the New York case was dismissed in June.

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/i86.

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