Sales Tax Slice: Wal-Mart to Defend Sales Tax Practices in Federal Court?

In a case filed by two customers on behalf of themselves and a yet-uncertified class of others similarly aggrieved, Wal-Mart may be forced to defend its Ohio sales tax refund practices in federal court.  In the case of Brandewie v. Wal-Mart Stores Inc., No. 1:14-cv-00965 (N.D. Ohio filed May 2, 2014), plaintiffs Shaun Brandewie and John Newbrough are suing Wal-Mart for breach of contract claiming that the retailer has breached its 90-day refund policy by refusing to refund a portion of the county sales tax previously charged on returned items.  

In controversy are the plaintiffs’ purchases of merchandise in one Ohio county that they returned within 90 days to a Wal-Mart located in an Ohio county imposing a lower county sales tax.  Wal-Mart refused to refund the full amount of the state and local sales tax previously collected and instead refunded only the amount that would have been collected had the initial purchase been made in the county of return.  According to Brandewie and Newbrough, by doing so Wal-Mart breached its contract to refund the full amount previously paid.

Last Friday the U.S. District Court for the Northern District of Ohio denied Wal-Mart’s motion to dismiss the case, allowing it to move forward (for now) in federal court.  Wal-Mart claimed in support of dismissal that exclusive jurisdiction for such claims lies with the Ohio Tax Commissioner.  The court, however, disagreed, stating that a direct breach of contract claim may be brought in federal court if the disputed sales tax was not actually remitted to the Ohio Department of Taxation.  Because at the time of the court’s ruling it was unclear whether Wal-Mart had actually remitted the tax, the court denied the motion.   

This is not the first time that Wal-Mart has sparred with customers over the appropriate forum for sales tax related claims.  As recently as December 2013, in Farneth v. Wal-Mart Stores Inc., No. 2:13-cv-01062 (W.D. Pa. Dec. 30, 2013) the U.S. District Court for the Western District of Pennsylvania remanded a similar claim to state court.  In that case, Brian Farneth had sought a refund of sales tax allegedly over-collected by Wal-Mart on shaving gel he purchased using a “buy one, get one” coupon.  This case was initially removed to federal court.  However, finding that the state tax laws at issue were more appropriately addressed in state court, the district court remanded based on comity.  Notably, while it did cite the Tax Injunction Act in support of its ruling, the court favored the “more embracive” comity doctrine as the basis for its ruling.   
With possible implications for this and other cases involving the jurisdiction of federal courts to hear state tax law cases, the U.S. Supreme Court may issue its decision in Direct Marketing Association v. Brohl, No. 13-1032 (filed Feb. 25, 2014) as early as next Monday.  At issue in that case is whether the Tax Injunction Act’s removal of such cases from federal jurisdiction applies only to cases involving tax imposition or collection. 

by Ernst Hunter

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Was the court correct in denying Walmart’s motion to dismiss in Brandewie?  From a practical perspective, is the Ohio Tax Commissioner better positioned to apply Ohio’s tax law?  Should the court in Brandewie have applied a comity analysis similar to that in Farneth?     

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