Retailers in 45 states have the responsibility to collect sales taxes on most purchases made to consumers. In Connecticut, for instance, a consumer buying a new car must pay sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. on the purchase price to the dealer, who then forwards the money to the state.
If a consumer returns the purchased item to the store, they are refunded the full cost, including the sales taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. they paid. The retailer can then claim a refund of the sales tax money forwarded to the state, because the transaction has been cancelled.
Connecticut law requires that if car dealers sell a “lemon” to consumers (a defective vehicle that cannot be repaired), the consumer can return it and be refunded the full purchase price, including sales tax paid plus costs incurred. DaimlerChrysler, an auto manufacturer, did so and then applied to the state for a refund of the tax money that had been forwarded. Connecticut refused, and this week, the state supreme court upheld the refusal in DaimlerChrysler v. Law (No. 17892) (Ct. Dec. 18, 2007).
DaimlerChrysler was not seeking a windfall, but rather reimbursement for returning cancelled sales tax collections to consumers. The court denied this equitable relief, but the real problem is that the statute only allows tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. claims to be filed by “taxpayers,” and DaimlerChrysler merely collected and forwarded the tax.
So, Connecticut law requires that businesses forward sales tax revenue to the state, then refund the money to consumers. Perhaps DaimlerChrysler should re-file the suit because they are clearly paying the tax now—there’s no one else left.
Connecticut’s Attorney General just about admits that the decision creates a windfall for consumers by punishing businesses who comply with the law:
“Reimbursing sales tax to a manufacturer for a defective car would be giving undeserved lemonade for a lemon,” [Richard] Blumenthal said. “Returning money that a consumer paid to the state would undermine the entire purpose of our state’s lemon law.”
If Connecticut wants to punish the sale of defective cars, they should write it into the criminal code or fine companies after a fair hearing. Forcing businesses to pay tax refunds, and then refusing to reimburse businesses for them is bad tax policy and creates business uncertainty in Connecticut.
Home Depot faces a similar case in Rhode Island, involving sales taxes forwarded to the state on transactions with consumers later cancelled because they stop making payments on their Home Depot credit cards.
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