Dell will refund tax on optional service contracts

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Case in Point

July 2, 2013

Dell will refund tax on optional service contracts 

Three consumers brought class actions against Dell, Inc., alleging it improperly collected sales tax on service contracts. After a California appellate court agreed that tax cannot be collected on intangible property, Dell and the state tax agency agreed to reimburse the consumers. Mohan v. Dell Inc.

Dell, Inc., and its affiliates sell personal computer systems. When consumers buy a computer, they can purchase one of several optional service contracts for repair and replacement of broken parts. For many years, Dell collected sales and use tax on the service contracts.

Three consumers brought class actions on behalf of California consumers, alleging that the service contracts are nontaxable intangible property and thus Dell violated California’s Consumer Legal Remedies Act and Unfair Competition Law. They also claimed fraud, intentional misrepresentation, and negligent misrepresentation. Dell filed a cross-complaint against the California State Board of Equalization (SBE), seeking a refund for taxes it remitted to the state tax agency.

At a bench trial, the court concluded that the service contracts were not subject to tax because only the retail sale and use of tangible property—not the performance of services—are taxable. A California appellate court affirmed.

The parties reached two settlements. The Dell settlement is between Dell and the plaintiffs, and the SBE settlement is between Dell, the SBE, and the plaintiffs. The settlements cover the same optional service contracts, but the Dell settlement involves mostly sales in 1999 and 2000, while the SBE settlement involves sales between 2000 and 2008, depending on the contract. Class members will receive a refund of the taxes they paid. SBE class members will also receive interest. Some class members will be eligible for both settlements.

The court has granted final approval.

Citation: Mohan v. Dell Inc., No. CJC-05-004442 (Cal., San Francisco Co. Super. June 12, 2013).

Plaintiff counsel: Charles M. Louderback, Stacey L. Pratt, and James T. Conley, all of Irvine, Calif.; and AAJ member Fredric L. Ellis and Edward D. Rapacki, both of Boston.

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