Customers of Peleton, a major fitness company, have hit them with a class-action suit. They are accused of “knowingly and unlawfully” charging the plaintiffs sales taxes on their digital services.
Peleton sells subscriptions to streaming content for $39.00 a month. The customers who brought the suit live in New York, Virginia, and Massachusetts, states which don’t charge sales tax on this kind of subscription. Yet Peleton charged these customers sales tax. After the customers complained, Peleton stopped charging sales tax, but didn’t refund the amounts which had already been paid.
The plaintiffs are asking for compensation for undisclosed damages and expenses.
“Knowingly and unlawfully”?
The crux of the matter is this: did Peleton maliciously overcharge customers for profit?
Peleton hasn’t commented on the case, and their lawyers won’t say anything about pending litigation, naturally.
A Reddit discussion made an interesting point about Peleton’s sales tax practices in another context: “if Peloton only streamed live classes, then it would be considered ‘training’ which isn’t taxable, but because there’s also a library of on demand videos it falls into the ‘telecommunications’ category instead.”
Virginia has a 5% telecommunications sales tax.New York has varying taxes and fees in this category. Massachusetts has a 6.25% telecommunications tax.
We are not prepared to speculate on the specific case, but it does appear that there is at least some uncertainty about the sales tax position.
We wonder whether Peleton remitted the taxes they collected to the states involved. We wonder at what point in the proceedings they determined that they were not supposed to be collecting those taxes. We also wonder what kind of procedures they had in place for identifying cases of overpayment and refunding the amounts collected.
Without any additional information, we feel that there might have been more efficient ways for Peleton to make their subscriptions 5 or 6 percent more profitable than overcharging for sales taxes and skimming them off instead of sending them to the states.
Is this a danger?
Sales taxes are complicated. There are lots of competing definitions, lots of uncertainties about taxability in particular cases. Wee’ve talked with plenty of business owners who have been driven to take unusual steps in sales tax compliance:
- Charging the highest rate in the state for all cities and counties, because it’s too complicated to figure out the sales tax rate for a particular town
- Charging everyone the local sales tax rate in the business’s town, whether the state cargoes by origin or destination
- Not collecting sales taxes at all because the whole process is just too complex
Peleton is probably a more desirable company to sue than most small to medium-sized businesses, but their experience shows that it can happen.
How can you avoid problems?
Automating your sales tax compliance makes sense. You’ll have fewer errors and less to worry about.
Outsourcing your entire sales tax compliance system may be the best solution. Our skilled sales tax accountants can provide advisory and full services for your business.
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