Multi-State Tax Law Blog
Few understand or even bring up sales tax issues when they order pizza. The next time you order pizza, take a look at the receipt and see if the pizza shop charges you for the delivery. Taking it a step further, what happens if you purchase an item and pay for shipping charges? Is tax due on just the item, or is it also due on the delivery charge as well? The answer depends largely on whether the delivery charge is separately stated and if it is optional. This issue will be in center stage for a recent class action filed in Broward County against Pizza Hut.
Lauren Minniti, the class representative, purchased a pizza from Pizza Hut and had it delivered. Pizza Hut allegedly charged her tax based on the charge for the pizza and for the separately stated delivery fee instead of tax on the pizza alone. Was this correct?
Under Florida law, if the delivery charge is separately stated and the charge can be avoided at the customer’s election then it is not subject to sales tax. If, the charge is lumped into the sales price or it cannot be avoided by the customer, it is subject to tax. Apparently, in this case, the charge is separately stated and it can be avoided by the customer picking up their pizza. Therefore it is not taxable. Pizza Hut erroneously charged tax and the class action ensued to recapture that tax that should have not been charged.
Rule 12A-1.045, Florida Administrative Code (“F.A.C.”), speaks to this concept. Aside from reiterating the analysis above, it also provides a couple of examples. One such example is as follows:
B is in the business of renting furniture and appliances. B rents a refrigerator to Customer C. B’s policy is to allow customers to elect whether to pick up the rental property at B’s place of business or to agree to a $25 delivery fee which B separately states on the customer’s invoice. Since the separately stated $25 delivery fee could be avoided by a decision or action on the part of C, the $25 delivery fee is not subject to tax.
While it seems like the sales tax on shipping is a relatively straightforward analysis, the class action component of the case is a bit more complex. If it were this easy, wouldn’t there be endless amounts of class actions and rich lawyers for every business that made a mistake in charging its customers too much tax?
In the Complaint of this case, the class alleged that Pizza Hut’s approach 1) violated Florida’s Deceptive and Unfair Practices Act, 2) was negligent, and 3) resulted in unjust enrichment. In response, Pizza Hut filed a motion to dismiss to have the case thrown out. Specifically, Pizza Hut countered by arguing that this action did not violate the Unfair Practices Act. Pizza Hut also argued that there was no claim for negligence because Pizza Hut had no duty to its customers. Finally, Pizza Hut also pointed out that there could be no class action because the customers failed to exhaust their administrative remedies.
Unfortunately for Pizza Hut, the standard to win on a motion to dismiss is like a mountain to overcome. Essentially, a motion to dismiss victory means that if you take all of the assertions of the other side as true, they still can’t win. The Court agreed with the class and stated that if all facts were taken as true, they could win, so the case would proceed. Whether the class can prove each or any of the causes of action is a different issue and remains to be seen.
It is also worth pointing out that while the class can be maintained against Pizza Hut, the customers or the lawyers likely could not file a class action against the state for sales tax. Florida prohibits an action against the state to refund improperly collected taxes. Instead, each individual taxpayer would have to file and fight their own refund action, which is likely relatively small. Therefore, an action for a tax refund is unlikely. However, this concept may present a significant hurdle for the class in successfully winning the case.
From a state and local tax perspective, this case presents a relatively simple concept in play. For consumers, if you see a separately stated delivery charge and it is optional, it is likely not taxable. For businesses, if you want to gain a competitive edge, then you should possibly consider making your delivery charges separately stated and optional. I encourage all readers to think about this next time they order a pizza or have their newspaper delivered. Is the optional delivery truly a customer convenience or a sales tax planning technique?
About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini obtained his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email JerryDonnini@Floridasalestax.com or phone at 954-642-9390.