Rhode Island court re-examines sales tax on extended warranties

Retailers do not usually charge customers more sales tax than the law requires. But that is precisely what Dell Computer did to at least two customers in Rhode Island when they collected sales tax on extended warranties. This led to more than ten years of litigation, and according to a June 27 decision by the Rhode Island Supreme Court, the case will not end anytime soon. The two customers purchased their computers from Dell in 2000. One was a business purchase, the other for personal use. Dell charged both customers Rhode Island sales tax not only on the computers, but also charged sales tax on extended warranties offered as a separate option. In 2003, the customers filed a class action against Dell, arguing they were improperly charged sales tax on “nontaxable services.” The customers alleged Dell was negligent in failing to calculate the correct sales tax, and the extra charges constituted an “unfair and deceptive trade practice” under Rhode Island law. In 2005, Rhode Island’s Division of Taxation advised Dell, “[t]he charge for the optional service, maintenance, or extended warranty contract is not subject to tax when such a charge is separately stated by the retailer to the purchaser.” As Dell did, in fact, separately charge each customer for their service contract, the division concluded the additional sales tax was improper. Meanwhile, it took nearly six years for the Rhode Island courts to resolve various preliminary issues surrounding the class action. In 2009, the Rhode Island Supreme Court issued a pair of decisions allowing the case to proceed. In 2012, a Superior Court judge granted summary judgment to Dell, finding there were no triable issues for a jury to decide. The Rhode Island Supreme Court partially reversed the Superior Court. The five-judge court unanimously held Dell should prevail on the negligence claim, as the company “did not owe a legal duty to plaintiffs regarding the collection of taxes.” The justices split 4 – 1 on the unfair and deceptive trade practices claim. The majority said a jury could find Dell’s improper sales tax charges “offended public policy, was immoral, unethical, oppressive, or unscrupulous, and caused substantial injury to consumers.” One justice dissented, arguing “it defies common sense” to say Dell, in a good-faith effort to collect Rhode Island’s sales tax, acted illegally. The majority’s decision only revives the claim of the customer who purchased a computer for individual use. Rhode Island’s unfair and deceptive trade practices law does not apply to business purchases. The two customers purchased their computers from Dell in 2000. One was a business purchase, the other for personal use. Dell charged both customers Rhode Island sales tax not only on the computers, but also charged sales tax on extended warranties offered as a separate option. In 2003, the customers filed a class action against Dell, arguing they were improperly charged sales tax on “nontaxable services.” The customers alleged Dell was negligent in failing to calculate the correct sales tax, and the extra charges constituted an “unfair and deceptive trade practice” under Rhode Island law. In 2005, Rhode Island’s Division of Taxation advised Dell, “[t]he charge for the optional service, maintenance, or extended warranty contract is not subject to tax when such a charge is separately stated by the retailer to the purchaser.” As Dell did, in fact, separately charge each customer for their service contract, the division concluded the additional sales tax was improper. Meanwhile, it took nearly six years for the Rhode Island courts to resolve various preliminary issues surrounding the class action. In 2009, the Rhode Island Supreme Court issued a pair of decisions allowing the case to proceed. In 2012, a Superior Court judge granted summary judgment to Dell, finding there were no triable issues for a jury to decide. The Rhode Island Supreme Court partially reversed the Superior Court. The five-judge court unanimously held Dell should prevail on the negligence claim, as the company “did not owe a legal duty to plaintiffs regarding the collection of taxes.” The justices split 4 – 1 on the unfair and deceptive trade practices claim. The majority said a jury could find Dell’s improper sales tax charges “offended public policy, was immoral, unethical, oppressive, or unscrupulous, and caused substantial injury to consumers.” One justice dissented, arguing “it defies common sense” to say Dell, in a good-faith effort to collect Rhode Island’s sales tax, acted illegally.