In these troubled times, this seems like a not unreasonable sentiment and it is oft-expressed. Particularly when some heartless retailers charged Pennsylvania sales tax on face masks and other personal protective equipment that INNOCENT and VIRTUOUS CITIZENS acquired to protect THEMSELVES and OTHERS, truly ALL OTHERS, in this pandemic. And so, consistent with the sentiment above, SUE THE BASTARDS!!
Which is what has happened: Garcia v. American Eagle Outfitters Inc. et al., recently filed in the Court of Common Pleas for Allegheny County.
Garcia is not a tax case, strictly speaking. It was brought as a class action under the Pennsylvania Unfair Trade Practices and Consumer Protection Law (the “UTPCPL”). The claim is that the retail sellers of face masks and other PPE should have known that these items were (or had been declared) exempt from the sales tax (the substantive quality of this premise will be considered below), and thus when they charged sales tax they engaged in activity prohibited by the UTPCPL. Recoverable damages under the UTPCPL include $100 per violation (which may be trebled in extreme cases) and attorneys’ fees.
The UTPCPL specifies twenty acts defined as unfair trade practices. They all fall in the category of false, deceptive, misleading, or intentionally confusing claims. None of the specified acts can reasonably be stretched to cover a retailer that overcharges sales tax. However, the UTPCPL has a catch-all prohibition of “any other fraudulent or deceptive conduct which creates likelihood of confusion or of misunderstanding.”
At this point, I, a mere tax lawyer, have a little trouble completing a summary of the plaintiff’s claim that would begin “In other words….” I would think that the false, misleading, deceptive or confusing statements, in order to be actionable under the UTPCPL, would have to create some unfair advantage to the seller, to make a sale more likely than would have been the case had the consumer been fully and fairly informed. The argument has to be that the seller, knowing that sales tax was being overcharged, mislead the consumer by concealing this fact and thus made the sale more likely than if the consumer had been aware of the overcharging. But I still have trouble in figuring out what’s in it for the retailor in carrying out this deception. I assume that the retailor, having collected the sales tax, simply paid it over to the Department of Revenue in the ordinary course. If not, the retailor has a world of trouble with the Department, and we would be talking about a run-of-the-mill, grimy sales tax case. Surely, the retailor is marginally better off being truthful if the items are exempt from the sales tax, since the total price to the consumer would be less and thus the sale should be marginally more likely. But I am a mere tax lawyer.
What interests me, as a tax lawyer, is looking at it from the point of view of the duties that are imposed upon the “taxpayer” and how the law is administered. In the case of the sales tax, I had to put taxpayer in quotes because the consumer is the taxpayer, but all of the duties are imposed on the retailor. That’s where the action is. The retailor has to collect the tax, account for it and report to the Commonwealth, and pay the collected taxes over to the Department of Revenue. A misstep, mistake, or intentional malfeasance with respect to any of this results in the retailor (and perhaps its owners and others personally) being responsible for the tax, penalties, interest, possible loss of its sales tax license, banishment to outer darkness.
From the point of view of the consumer, the taxpayer, the sales tax is pretty simple. The consumer may have some vague understanding that certain purchases are sales tax exempt, but in general, the consumer simply has to pay the price for the desired goods, including the sales tax if any, or do without the desired goods.
From the point of view of the retailor, the tax collector, the sales tax can be mindlessly complicated. There are hundreds of published sales tax cases in the Pennsylvania law books, and few if any deal with the consumer. They all deal with the tax collector.
The sales tax applies to tens of millions of transactions in Pennsylvania annually. In the vast majority, it is easy to identify the transaction as a “sale at retail” (which is the legal incidence of the sales tax) and the only complication is whether only the state-level 6% rate applies, or there is an additional county-level tax. But when we get to exclusions it can get tricky. To navigate this trickiness, we obviously have to delve in to what the law (in its grand generality) provides, and we have to determine what we mean by “the law.” This may risk getting a little boring at times, you really were not expecting a civics lesson, but stick with me. I will try to keep it interesting. After all, if we are going to concede that the Government can impose duties on its citizens, we ought to be able to determine pretty clearly how, with reference to “the law,” that came to be. Throughout, try to keep focused on how the retailor keeps all this straight, how he attends to his administrative duties, since we have already discussed the potentially dire consequences of the retailor screwing up.
We start with the Pennsylvania Constitution. I am not an expert on the Pennsylvania Constitution, but trust me when I say it contains nothing pertinent on sales tax exclusions, let alone face masks and PPE.
Next stop, the sales tax statute, including all amendments to date, enacted by the Legislature and signed into law by the Governor. The sales tax statute specifies many, MANY, sales that are excluded from the sales tax. Buried in this literal mountain of verbiage is an exclusion for “… any other therapeutic, prosthetic or artificial device designed for the use of a particular person to correct or alleviate a physical infirmity, including but not limited to hospital beds, iron lungs, and kidney machines….” This may be the most pertinent provision in the statute bearing on whether sales tax should be charged on sales of face masks and PPE, but the sales tax statute also excludes most clothing: “… all vesture, wearing apparel, raiments, garments … and other articles of clothing worn or carried on or about the human body…” but not including “… accessories, ornamental wear, … [other exceptions] and sporting goods and [sports] clothing….”
The sales tax statute contains a general grant of authority to the Department of Revenue “… to prescribe, adopt, promulgate and enforce, rules and regulations not inconsistent with the …” sales tax statute, and the Department “… may prescribe the extent, if any, to which any of such rules and regulations shall be applied without retroactive effect.” There is a lot of potential controversy in these few lines, all going to the extent to which regulations may, or must, be regarded as “law”; or whether in a close or arguable case regulations should be regarded as merely the Department’s view of the law, not binding on taxpayers until a court says so. Suffice it to say, at this point, that the existing regulations on medical devices and clothing do not speak in any particular way to face masks and PPE.
Once we get beyond the regulations, which already may fit only uneasily into the definition of “the law”, we have all of the other things that the Department may do and issue that may, beyond providing information to taxpayers, have some binding or reliance effect, such as rulings, instructions to returns, notices, pronouncements, etc. In fact, such a document providing the Department’s guidance on the sales tax to retailors was most-recently revised in August 2020. Here, surely, the special considerations concerning face masks and PPE that became common only in March, but have been in the news and our collective consciousness every day since, are addressed by the Department. Unfortunately, though this pronouncement goes into excruciating detail about what items are taxable and non-taxable, there is not a whisper about face masks and PPE.
So, what are the plaintiffs in Garcia talking about? Well, here we have to dig even deeper into things that may or may not be “the law”. The reporting on the case says that plaintiffs allege that there was an Executive Order or proclamation in March excluding face masks and PPE from the sales tax. The Department has said “No such thing,” and I will bet that you can spend more time than I did trying to find anything and come up empty.
What if there was such an explicit Executive Order? Well, executive orders, proclamations and whatnot are extraordinarily controversial when it comes to determining their status as “law”. The Governor is the chief executive officer of the Commonwealth, but he is not empowered to be a law giver. He could presumably order the Department to issue a regulation, rule, or guidance, declaring masks and PPE to be free of the sales tax, and the Department, as part of the executive branch, would presumably comply and would be empowered to do so by statute so long as its regulation, rule or guidance was not inconsistent with the statute. And when you look at the laundry list of excluded medical items in the Department’s August 2020 guidance to retailors, it is hard to see how such a determination could be criticized as inconsistent with the statute. And after all, it would probably be the “right” result, if that has anything to do with it.
But let’s remember, again, the hapless retailor. How is he or she to know or guess, except from some advice, guidance or determination from the Department? Can the retailor just make up the law because it may be the right thing to do? What’s in it for the retailor in deciding not to charge sales tax when it might get whacked by the Department for failing to do so without any written guidance to rely upon?
Consider: Did the plaintiffs sue the Department to recover the sales tax? Nah, $100 per violation, maybe trebled, plus attorneys’ fees, is more than a couple of bucks of sales tax (and good luck trying to get the tax back from the Department, by the way). Did the plaintiffs sue the Department for failing to issue guidance that it arguably could have done? Nah. Did the plaintiffs sue the Governor for issuing a vague executive order, or failing to issue one at all? Nah.
But I’m just a tax lawyer.
Written by E. Morgan Maxwell
Since beginning his own firm, Mr. Maxwell has continued a tax-law oriented practice encompassing a wide range of transactions, planning and dispute resolution. His dispute resolution experience includes involvement at all levels of the Internal Revenue Service (Examinations, Appeals, Collections, Office of Professional Responsibility, the U.S. Tax Court), the Pennsylvania Department of Revenue, the Tax Litigation Section of the Pennsylvania Attorney General’s Office, Pennsylvania Commonwealth Court, Common Pleas Court and local taxing jurisdictions in southeastern Pennsylvania.
