Lawsuit against Businesses Disallowed for Improper Collection of Ohio Sales Tax

August 20, 2008

Businesses faced with the task of collecting Ohio sales taxes have received some favorable news involving sales made in Ohio. The Sixth Circuit Court of Appeals recently held in Bergmoser v. Smart Document Solutions, LLC that consumers may not successfully sue businesses to recover improperly collected Ohio sales taxes. Instead, where a business is unwilling or unable to provide a refund the consumer’s sole remedy is to apply for a refund from the state.

The Bergmoser case is welcome relief to businesses in cases where the taxability of an Ohio transaction is less than clear. Class action lawsuits and other recent litigation have caused businesses to be concerned about these “gray areas.” Sales taxes on repeatable types of transactions can lead to “bet the business” exposure if a class action lawsuit is filed claiming taxes were improperly collected. Businesses now, however, appear to have a safe course of action in Ohio.

While businesses should carefully consider customer relationships in any business decision, Bergmoser seems to indicate that a business may legally collect sales taxes from consumers in situations where the business is unsure about whether the underlying transaction is taxable. If the consumer feels that tax should not have been collected, the business should now be able to direct the consumer to file for a refund without the concern of unfavorable liability exposure. The Bergmoser case may also be helpful in situations where sales taxes were inadvertently collected. Businesses with sales and operations in multiple states should also consider that Bergmoser interpreted Ohio law, and that similar facts in other states or jurisdictions may lead to different results.

The facts of the case are summarized below and the full text of the opinion can be viewed at:

In Bergmoser, the plaintiffs were customers of Smart Document, a medical records processing company that prepares copies of medical records under contracts with hospitals, clinics, and other healthcare providers at the request of patients and invoices the patients for the services. Smart Document’s customer invoices included several different fees, including a shipping and handling fee, and they also included sales taxes. The plaintiffs, on behalf of the putative class of similarly situated customers, accused Smart Document of charging them more than the actual cost for shipping and inappropriately assessing a sales tax on the services. The plaintiffs requested that the court award a refund of the improperly collected taxes.

Smart Document argued that the plaintiffs were not authorized to obtain relief in a private suit against vendors because such an action was prohibited by Ohio Administrative Code Section § 5703-9-07(B). Smart Document argued that that Administrative Code provision only permitted two methods of redress: (1) to file an application directly with the tax commissioner, or (2) to request a refund from a vendor.

The Court found for Smart Document on grounds that the Administrative Code specifically provides that, where a vendor denies a customer’s claim for a refund, the customer’s sole remedy is to apply for a refund from the tax commissioner. The Court concluded based on the language of the provision that the Administrative Code does not authorize private actions to recover sales tax.

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