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A Taxpayer Conundrum

07/25/2014

What do Papa John’s Pizza, delivery charges and whistleblower lawsuits have in common?  When it comes to state sales tax, a lot it turns out.

Zachary Tucker is an Illinois resident who ordered a Papa John’s pizza for delivery one day.  Whether Mr. Tucker enjoyed the pizza is not known.  What is known is that Mr. Tucker did not appreciate the fact that Papa John’s charged him 16 cents in sales tax on the $2.39 delivery fee.  Mr. Tucker, on behalf of himself and other Papa John’s customers in Illinois, filed a class action lawsuit demanding that Papa John’s refund the sales tax they collected on the delivery fees.  According to the lawsuit, deliveries are a nontaxable service that are not subject to Illinois sales tax.

The Illinois sales tax rules on delivery charges are not as clear as Mr. Tucker and his class would like to think.  In general, Illinois does not (and cannot) tax services per se but it does tax all receipts received by a retailer, including receipts attributable to what might be a “service” (such as delivery), unless the retailer can establish that the service was a separately negotiated transaction unrelated to the underlying sale of tangible personal property.

Not only is the Illinois rule on delivery charges vague and difficult to apply in practice, but it puts retailers like Papa John’s in an impossible situation.  If a retailer collects tax on its delivery charges, it is subject to a potential class action such as the Papa John’s lawsuit.  Several years ago, Wal-Mart was also sued in a class action concerning sales tax on delivery charges.  If, however, a retailer chooses not to collect tax on delivery charges, it potentially opens itself up to a whistleblower action on the grounds that the retailer is defrauding the state by failing to collect a properly due tax.  This threat of a whistleblower action is more than theoretical.  For the last few years, a Chicago law firm has sued over 150 retailers, claiming that the retailers failed to collect tax on their shipping and delivery charges.  These whistleblower lawsuits raise a number of policy concerns for the state, including whistleblower awards and proper administration of the state’s tax laws.

The Catch 22 is clear.  A retailer who collects tax on delivery fees is possibly subject to a class action lawsuit while a retailer who does not collect tax is potentially subject to a whistleblower lawsuit.  This taxpayer conundrum has no clear solution in sight.

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