A Rhode Island Superior Court decision may provide some comfort to retailers concerned about potential class actions for improper collection of sales and use tax. In Long v. Dell Computer Corp., No. PB 03-2636 (R.I. Sup. Ct., Apr. 2, 2012), the court determined that Dell’s improper collection of sales tax on optional service contracts lacked any evidence of “an intent to mislead the consumers” and did not violate Rhode Island’s Deceptive Trade Practices Act (DTPA). The court, in granting Dell’s motion for summary judgment, also rejected a negligence claim by the plaintiffs because Dell’s duty to properly collect sales and use tax was owed to the State of Rhode Island—not to the consumer plaintiffs.
The facts of the case are fairly simple: Dell collected sales tax on the full amount of its computer sales to customers, including amounts charged for optional service contracts and shipping and handling fees. Based on Dell’s interpretation of a 1991 response to its inquiry from the Rhode Island Division of Taxation, Dell collected sales tax on both the service contracts and transportation charges because such items were not separately stated in the sale to the purchaser. After the filing of the lawsuit in 2004, Dell sought and obtained letter rulings in 2005 and 2006 from the Division of Taxation, which again indicated that Rhode Island sales tax should be collected on the charges for service contracts and transportation chargers, which were not separately stated.
The court found that Dell improperly collected sales tax on those charges. However, the court rejected the plaintiffs’ cause of action, claiming that Dell was negligent. The court noted that a seller is liable to the Division of Taxation and subject to penalties when it fails to properly collect and remit sales tax. As a defense to the DTPA claim, Dell also asserted that even if the sales tax was improperly collected, Dell’s action did not rise to an “unfair or deceptive practice” required under the DTPA. The court accepted Dell’s argument that the charge of sales tax on optional service contracts was “a good faith, reasonable interpretation of the tax law and regulations.” Indeed, the court noted Dell’s effort to gain clarity on the taxability of such contracts in its correspondence with the Division of Taxation in 1991. The court concluded that “Dell’s honest misinterpretation of a delicate area of the state tax law cannot be held to be an unfair act” and that the plaintiff failed to present any admissible evidence that Dell acted “in an immoral or unethical manner at all.”