Heads You Lose/Tails You Still Lose Class Action and Qui Tam Cases

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1 COST ANNUAL MEETING Las Vegas, NV October 20, 2016 Heads You Lose/Tails You Still Lose Class Action and Qui Tam Cases SPEAKERS Jeremy Abrams Crowell & Moring Erica Horn Stoll Keenon Ogden Pat Reynolds Council On State Taxation Combs v. JD Quarter and Diamond v. JD Quarter State of Nirvana Civil Action Nos. 16-UOMe-$$$ and 16-IOU-$$$ Class Action Combs v. JD Quarter Customer: sues on behalf of class Assertion: customer was overcharged Qui Tam Diamond v. JD Quarter a/k/a False Claims Act or Whistleblower case Relator : sues on behalf of state Assertion: customer was undercharged & state was short-changed 1

2 Mock Trial CONSOLIDATED CASES: Combs v. JD Quarter Diamond v. JD Quarter Elizabeth Brushup ( Betty ) Class Action Attorney Hon. Stewart Guinness, III Judge Stewy Nirvana District Court Cubic Zirconia ( Bick ) Qui Tam Attorney Combs v. JDQ Law State of Nirvana Hotbed of Class Action/Qui Tam litigation Sales Tax Law exempts shipping silent regarding bundled charges like shipping & handling Consumer Protection Act unfair, false, misleading, or deceptive practices in the conduct of trade or commerce are unlawful unfair means unconscionable 2

3 JDQ and Its Handling of Sales Tax Taxpayer: JD Quarter (JDQ) Nationwide retailer nexus in Nirvana Orders placed online Ships customer orders into Nirvana $100M in sales annually shipped into Nirvana $10M in S&H charges annually Charges shipping and handling Doesn t know actual shipping charge at time of sale (charges vary depending on carrier load) Estimates based on past shipping costs: 80% of S&H is actual shipping costs 20% of S&H is handling portion Combs v. JDQ Facts & Claim Combs buys jacket on-line from JD Quarter Calculation: $100 sales price $10 Shipping & Handling 7% tax rate JD Quarter treats $2 (20%) of S&H as taxable Charges 7% sales tax on $2 = 14 Total = $ = $110 plus $7.14 tax Combs files class-action suit against JD Quarter Asserts none of the S&H is taxable she was overcharged by 14 Seeks refund for class (& contingent fee) $140K annually, $1.4M over last 10 years 3

4 Diamond v. JDQ Law State of Nirvana Hotbed of Class Action/Qui Tam litigation Same Sales Tax Law exempts shipping silent regarding bundled charges like shipping & handling False Claims Act knowingly makes a false record or statement material to an obligation to pay the state Diamond v. JDQ Facts & Claim Diamond buys same jacket on-line from JD Quarter Same Calculation: $100 sales price $10 Shipping & Handling 7% tax rate JD Quarter treats $2 (20%) of S&H as taxable Charges 7% sales tax on $2 = 14 Total = $ = $110 plus $7.14 tax Diamond files qui tax suit against JD Quarter Asserts all of the S&H is taxable JD Quarter undercollected tax by 56 Seeks recovery for Nirvana (& relator fee) $560K annually, $5.6M over last 10 years 4

5 Combs v. JDQ Affirmative Case JDQ collected sales tax from me when no tax was due Shipping exempt, shipping and handling exempt Handling must be exempt Collection of sales tax constitutes an unfair and deceptive act in violation of the consumer protection statute Unconscionable to collect tax in absence of statute authorizing collection Combs v. JDQ Affirmative Case Collection of sales tax is fraud unjustly enriches JDQ Millions affected so case should be certified as a class action (Rule of Civil Procedure 23(a)) so many people joinder of all is impracticable common questions of law and fact among class members representative s claims are typical of class claims representative will fairly and adequately represent the interests of the class 5

6 Combs v. JDQ Affirmative Case Relief sought compensatory damages punitive damages (equal to at least 1% of JDQ s revenue of each store in Nirvana during each year the violation occurred) an injunction against further overcharges attorney s fees, litigation expenses and costs of suit Diamond v. JDQ Affirmative Case JDQ knew it should have collected tax on the total shipping and handling charge, but acted in deliberate ignorance or reckless disregard of this fact. If it had any doubt, JDQ should have sought guidance from the taxing authority. 6

7 Diamond v. JDQ Affirmative Case Relief sought assessment of civil penalty of not less than $6,000 nor more than $12,000 treble damages payment of additional tax to taxing authority attorney s fees, litigation expenses and costs of suit Judge s Thinking Private parties shouldn t take on governmental functions You two are just in it for the money Taxpayer doing exactly as instructed by DOR Taxing authority should audit and assess or order refund claims 7

8 Combs v. JDQ: After deliberation, what verdict would you render? A. In favor of Combs B. In favor of JDQ C. In favor of Combs PLUS punitive damages, attorney s fees, and costs against JDQ D. In favor of JDQ PLUS awarding attorneys fees and costs to JDQ 25% 25% 25% 25% 15 Diamond v. JDQ: After deliberation, what verdict would you render? A. In favor of Diamond B. In favor of JDQ C. In favor of Diamond PLUS civil penalties, attorneys fees, and costs D. In favor of JDQ PLUS awarding attorneys fees and costs to JDQ 25% 25% 25% 25% 16 8

9 How Can You Protect Your Company? Know the law Stay up-to-date especially in class action/qui tam hot beds Gray Areas seek written guidance from DOR Be as accurate as possible Inform management of risks Be attentive to customer complaints We Hope You Enjoyed Today s Trial QUESTIONS? THANK YOU! 9

10 Speaker s Contact Information Jeremy Abrams jabrams@crowell.com Erica L. Horn erica.horn@skofirm.com Patrick J. Reynolds preynolds@cost.org