United States: AT&T v. Allen: Oklahoma Decision More Than "O.K." For Class Action Attorneys, But Bad For Business And States

In AT&T Corp. v. Allen,¹ the Oklahoma Court of Civil Appeals granted nation-wide class certification in an unusual case that brought together the Multistate Tax Commission ("MTC") and the Counsel On State Taxation ("COST"), which are usually on opposite sides. The U.S. Supreme Court declined to grant certiorari even though the decision will likely have a grave impact on both states and businesses. Businesses loose because they must weigh the cost of litigating a class action suit for overcollecting taxes against the audit risk of penalties for undercollecting. States loose because the decision weakens state sovereign immunity, encourages courts to ignore state sales tax refund procedures, and creates an environment where businesses may choose to underpay local sales taxes. Given that the Oklahoma trial court may quickly get lost in the mire of applying the local sales tax laws of countless jurisdictions in 28 states, determining the proper municipal boundaries of hundreds of cities, and fact-collecting for millions of customers, the Oklahoma courts may rue the day of class certification.

Plaintiffs, Bobby Gene Allen and Deborah Jane Allen are customers of AT&T. AT&T provides the Allens with long-distance telephone services. The Allens live in an unincorporated area outside Muskogee, although they have a Muskogee zip code. The Allens maintain that AT&T erroneously collected municipal sales tax on their long distant bills. Plaintiffs allege that AT&T remitted the proper amount owed to the tax collecting authority and pocketed the improperly collected charges in order to enhance profits and reduce accounting costs. The Allens acknowledge that after contacting AT&T regarding the error, they received a one-month credit of 74 cents and were no longer charged the tax.

AT&T denies charging a flat rate per zip code to its customers but admits that a previouslyused software program resulted in the billing error. AT&T states that all taxes collected were remitted to the municipalities at issue, and that AT&T issued credits to all customers improperly billed. AT&T moved to dismiss on the grounds that the Allens failed to seek a refund from the Oklahoma Tax Commission. The trial court overruled AT&T’s motion and certified the class to include all AT&T customers, residing in one of 28 named states, that were charged city or municipal sales tax on long distance services made from a service location outside the incorporated boundaries of the city or municipality. AT&T appealed the class certification.

On appeal and rehearing of the appeal, the Oklahoma Court of Civil Appeals upheld the trial court’s finding of jurisdiction to hear the petition and its class certification.

The Oklahoma Court of Civil Appeals ruled that the trial court had jurisdiction to hear the Allens petition even though the Allens did not exhaust their administrative remedies before the Oklahoma Tax Commission. The appeals court reasoned that the administrative refund procedure provided for in Oklahoma’s statutes was not mandatory. Since the appeals court felt it would be "difficult, if not impossible" for the Allens to file a claim for refund because they might lack the information necessary to file such a claim, the court found their filing of a suit to be proper.

Although courts in other states have required taxpayers to exhaust their administrative remedies, the Oklahoma Court of Civil Appeals distinguished these cases since they either

(i) were based on state law that explicitly required administrative remedies to be exhausted first,

(ii) did not involve a class action,

(iii) or did not have plaintiffs seeking an injunction.

The Oklahoma Court of Civil Appeals appears to view these decisions as potentially persuasive decisions that do not bind an Oklahoma court. The court fails, however, to consider whether these other states would permit this suit to be brought in an Oklahoma court in the first place.

Accordingly, even if the Oklahoma courts correctly interpreted Oklahoma law on the issue of jurisdiction in regard to Oklahoma taxpayers, the Oklahoma courts did not grasp the reality that by granting a nation-wide class certification, they circumvented the laws of many states that do require administrative remedies be exhausted first.

The Oklahoma Court of Civil Appeals upheld the trial court’s class certification finding that the class met all the Oklahoma statutory requirements for certification. The appeals court disregarded AT&T’s concerns about the difficulty in determining whether a given customer is located inside or outside a municipality and the differing statutes of limitation, tax laws and tax rates of the various states. The appeals court indicated that if a sufficient number of such individualized issues emerge, the trial court has the option to modify or decertify the class at a later date.

Both COST and the MTC filed briefs of Amicus Curiae in support of AT&T’s petition seeking writ of certiorari. The MTC was primarily concerned that the decision violates state sovereignty since it undermines the sovereign right of states that condition their waiver of sovereign immunity upon the exhaustion of administrative procedures. The MTC maintained that tax administrative procedures of states are defeated by allowing customers to litigate tax disputes with vendors without the involvement of the administrative agencies.

COST’s primary focus was on unfairness to businesses. Given that current technology makes it virtually impossible for vendors to collect taxes from customers with absolute accuracy, this decision forces AT&T and other similar vendors to choose between the lesser of two evils:

(i) liability for over collection in a class action suit by customers, or

(ii) liability for under collection from state and local governments.

COST also argued that the decision fails to apply the laws of the state in which each individual claimant resides in certifying the class.

Despite the unprecedented joining of forces by COST and the MTC, the U.S. Supreme Court declined to grant certiorari.

State and local tax disputes should be poor candidates for nation-wide class actions given the vast differences in state and local tax laws. The decision in AT&T v. Allen may increase the likelihood that class action attorneys expand the volume of otherwise de minimis state tax disputes. These cases are bad for tax policy and bad for business. Businesses will be pressured to err on the side of undercollecting if small errors result in big class-action expenses.

Since the vendors are acting as agents in collecting sales tax, taxpayers should seek refunds from the taxing jurisdiction. As COST notes in its brief, the "hold harmless" provisions of the Streamlined Sales Tax Project address this concern. Vendors that use the state "zipplus- four database" are held harmless for errors in tax calculation and remittance. Customers apply to the states for refunds of erroneously collected taxes. Interestingly enough, Oklahoma has recently adopted the "hold harmless" provisions of the Streamlined Sales Tax Project, although too late to be of benefit to AT&T in the case at hand. Of the states named in the class action, all but two have adopted (or attempted to adopt) the Streamlined Sales Tax provisions. Even the critics of STTP have to agree that in light of AT&T v. Allen, it has some benefit for businesses.