LuLaRoe, a domestic retailer of women’s clothing, is coming under fire for allegedly “improperly and fraudulently add[ing] a surcharge to purchases disguised as a ‘sales tax’ that does not exist.” According to Plaintiff Rachael Webster’s lawsuit, which was filed last week in the United States District Court for the Western District of Pennsylvania, LuLaRoe is a unique brand in that it does not sell its garments directly to consumers, on its website, or in stores – it employs “consultants” across the U.S. (as of September, there were 35,000, per Business Insider) as sales representatives.
Webster alleges in her class action complaint that the company’s point-of-sale system “automatically charges customers sales tax based on the location of [LuLaRoe’s] consultant who made the sale, and not the laws of the taxing authority where [LuLaRoe] delivered the purchase.” As a result, LuLaRoe “overcharges buyers up to 10.25%” – the highest combined clothing sales tax as of January 2016 – “every time a consultant who lives in a jurisdiction that taxes clothing makes a sale where delivery is made to a jurisdiction that does not.”
In general, the delivery location of goods serves as the taxing authority for the transaction, dictating the appropriate sales tax. However, the company provided conflicting pieces of information regarding how they handle matters of taxation. According to the complaint, LuLaRoe explained to consultants that “all sales tax will be assessed against the ship to address” so that for each transaction, the system can “calculate the appropriate tax.” Alternatively, LuLaRoe CEO Mark Stidham is quoted as instructing the company’s consultants, “Your customers will be charged the sales tax from your state, city and/or county, not theirs.”
In fact, Webster argues that consultants actually have “no ability to control or adjust the sales tax” applied to each transaction, and instead, customers are charged sales tax based on the location of the seller. Her complaint further asserts that LuLaRoe’s “sales tax assessment practices, in effect, are improperly and fraudulently adding a surcharge to purchases, and are disguising those surcharges as a ‘sales tax’ that does not exist.”
In addition to seeking class action certification – which would enable other parties who were improperly charged sales tax in connection with LuLaRoe purchases to join in the suit and share in the settlement amount – Webster is seeking “actual damages, statutory damages, treble damages, costs and reasonable attorneys’ fees.” Such damages are being sought on behalf of Webster and “all persons who were or will be assessed sales tax on clothing purchases [from LuLaRose] … and whose purchases were or will be delivered to tax jurisdictions of the United States that do not authorize a collection of sales tax on the clothing Defendant sells.”
* The case is RACHAEL WEBSTER v. LLR, INC., d/b/a LuLaRoe, Civil Action No. 2:17-cv-00225-DSC (W.D. Pa.).
Nicole Malick is a student at the University of Pennsylvania Law School.