LuLaRoe Buyers Seek Cert. in Sales Tax Class Action Lawsuit

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Last week, the plaintiffs in a class action lawsuit challenging LuLaRoe’s sales tax calculation practices asked a judge to grant Class certification.

The plaintiffs, who are residents of 11 different states that do not tax the sale of clothing, allege that LLR Inc. d/b/a LuLaRoe used a point-of-sale system to charge a sales tax to consumers in states that did not impose a tax for those purchases.

They claim that they were wrongly required to pay sales tax when they purchased LuLaRoe clothing from retailers based in states that charge sales tax on clothing.

“LuLaRoe knew its ‘tax’ collection in these states was unlawful and actively misled consumers about the legality of this practice,” the plaintiffs argue in their motion for Class certification. “LuLaRoe’s fraudulent scheme converted more than $8.3 million from class members between April 2016 and June 1, 2017, and spanned over 2 million individual transactions, harming Plaintiffs and class members in precisely the same manner.”

LuLaRoe is a multi-level marketing clothing company that relies on independent contractors, called independent fashion retailers or consultants, to sell its merchandise to consumers. According to the LuLaRoe class action lawsuit, the company is worth about $2 billion.

In response to pressure from authorities to collect tax on its retailers’ sales, LuLaRoe implemented a point-of-sale system in 2014. This system, called “Audrey,” was designed to calculate sales tax based on the end consumer’s shipping address instead of the LuLaRoe retailer who made the sale.

At first, LuLaRoe retailers were able to turn off the sales tax for sales made to consumers who lived in jurisdictions that do not charge sales tax for clothing purchases.

In 2016, LuLaRoe allegedly became aware that the Audrey point-of-sale system was programmed so that LuLaRoe was paying tax on all sales, even if the tax was not charged to the end consumers. Essentially, LuLaRoe discovered that it was overpaying taxes to states on transactions sent to LuLaRoe consumers in states in which no sales tax was owed.

LuLaRoe subsequently changed its policy such that it would collect tax from end consumers based on the retailer’s location on every purchase, no matter where it was delivered. Audrey was updated to prevent retailers from turning off the tax feature when making sales delivered to other states that did not impose a sales tax.

“As a result of LuLaRoe’s new policy and the change in Audrey’s functionality, LuLaRoe automatically and systematically charged every consumer tax, even if consumers were not obligated to pay such tax, whenever LuLaRoe’s retailor responsible for the sale was located in a state that taxes clothing,” the motion seeking Class certification for the LuLaRoe class action lawsuit says.

“By way of example, if a consumer from Pennsylvania purchased a LuLaRoe product online from a consultant in a state with tax on clothes, such as Ohio, and had that product shipped into Pennsylvania, LuLaRoe improperly charged the Pennsylvania resident an Ohio tax on that purchase,” the plaintiffs explain. This practice results in the end consumer being allegedly overcharged for the LuLaRoe merchandise.

The plaintiffs seek to represent a Class of consumers who were assessed tax on clothing purchases processed through Audrey and whose purchases were (or will be) delivered to any of the following states: Pennsylvania, New York, Minnesota, New Hampshire, Delaware, Alaska, Oregon, Montana, New Jersey, Massachusetts or Vermont.

The plaintiffs are represented by R. Bruce Carlson, Gary F. Lynch, Kevin Abramowicz and Kevin W. Tucker of Carlson Lynch Sweet Kilpela & Carpenter LLP and by Kelly K. Iverson and Alex Lacey of Cohen & Grigsby PC.

The LuLaRoe Sales Tax Class Action Lawsuit is Webster v. LLR Inc., Case No. 2:17-cv-00225, in the U.S. District Court for the Western District of Pennsylvania.