Lawsuits against retailers that improperly charge sales tax on purchases made with coupons can get awfully complicated – and they don’t always end well for the customer filing the suit. But a New York Costco shopper believes his case will be different.

Mark Guterman has sued Costco in federal court, accusing the warehouse club of omitting important disclosures from its coupons, causing it to overcharge millions of coupon-using customers.

Now, he wants Costco to return the money and pay damages to all affected shoppers, in an amount that could “exceed tens of millions of dollars”.

Each state has its own laws about how and whether to tax purchases that are discounted with coupons. In Connecticut, Massachusetts, Missouri, Pennsylvania and Texas, all coupons of all types are exempt from sales tax. All other states charge sales tax on your total before manufacturer’s coupons are applied, but after store coupons are applied.

Additionally, in New York, if a retailer is reimbursed by a manufacturer for a store-issued coupon, it’s treated like a manufacturer’s coupon and taxed accordingly. If it’s not reimbursed by a manufacturer, it’s treated like a price discount and you’re only taxed on the amount you paid out of pocket.

But crucially, in this case, if the retailer doesn’t disclose whether a coupon is reimbursed by a manufacturer, then it’s automatically treated like a store coupon and not subject to sales tax.

And that’s where Guterman says Costco messed up.

Up until about four years ago, his lawsuit alleges, the coupons in the monthly booklets that Costco mails to members were labeled as being a “manufacturer’s coupon” or as providing “manufacturer’s savings”.

But in August 2013, Costco’s coupons went clipless. The booklets were redesigned to include a single “master bar code” that cashiers can scan to apply every applicable coupon, without the need to cut them out.

And the redesign also managed to omit any reference to who was funding the discounts. “These booklets and coupons eliminated any indication that the coupons are ‘manufacturers’ coupons,’ and lacked any disclosure that the reduced price is the result of a ‘manufacturer’s reimbursement’ to Costco,” Guterman’s lawsuit reads.


And Costco continued to collect sales tax on purchases made with its coupons, even though the law considered them store coupons not subject to taxation.

So Guterman sued to get back the excess sales tax that he – and millions of other Costco customers in his proposed class action – paid.

If it seems like a cut-and-dry case against Costco, consider what happened just a few months ago in another New York federal court. In that case, the judge threw out a shopper’s lawsuit against TJX Companies, the parent company of Marshalls, on something of a technicality. Instead of ruling on the merits of her complaint, the judge said New York state law required her to take her claim for a refund to the State Tax Commission, not demand it from the retailer.

So why would Guterman bring a similar case to another New York court, if he risks suffering the same fate?

Guterman argues that there is another state law that “entitles Costco’s New York customers to obtain repayment of the Sales Tax illegally collected by Costco without the need to first file a refund application with the tax commission”. That law states that a retailer must refund an overcharged customer if it wants to apply for a refund from the state for the amount of the sales tax it overpaid.

But Costco “has no incentive to repay these customers for the illegally charged Sales Tax and then file a refund application,” Guterman claims. Neither does the state “have an incentive to force Costco to repay its customers for the Sales Tax liability Costco has illegally shifted to and collected from them.”

So why should the burden be on Costco’s customers to seek a sales tax refund? That’s the question that led to the lawsuit.

If approved as a class action, Guterman’s suit seeks damages of up to $1,000 for each class member. So if you’ve used a coupon at Costco at any time over the past several years, you could be entitled to get some money back.

Unless, that is, this dispute doesn’t progress any further than the other shopper’s dispute with TJX. Then, retailers are essentially free to overcharge couponers, and couponers’ only recourse is to ask the state for a refund – each and every time they shop with coupons.

Using coupons is supposed to save you money. But in cases like these, they could end up costing you more than you anticipated.

Photo by JeepersMedia

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