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Partner Objects to Volkswagen Class Action Settlement in Letter

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Many people experience sticker shock with respect to sales tax and other government-imposed fees (i.e., title fees) when it comes time to purchase or lease a new vehicle.

Recently, Volkswagen entered into a class action settlement of a complaint brought by the FTC alleging deceptive and unfair acts or practices with respect to their 2.0 liter diesel vehicles. Kent Roberts, a Hodgson Russ partner, was a member of the class and objected to the proposed class action settlement on several grounds, two of which are of particular interest to us New York tax nerds.

During the comments and objections period to the proposed settlement, Roberts, an original purchaser of one of the affected diesel-powered vehicles, wrote a letter to the U.S. District Court for the Northern District of California. In it, Roberts outlined two reasons for objecting to the proposed class action settlement on the basis of taxes he paid when he purchased his VW Passat.

First, Roberts objected to the fact that the proposed class action settlement didn’t take into account that some class members paid state sales tax in conjunction with their purchases of VW diesel vehicles, while others did not. Indeed, the proposed settlement indicated that sales tax paid by class members would not be a factor in determining the buyback amount to be paid by VW under the settlement. As a result, Roberts posited, the class members who paid state sales tax were not fairly compensated when it came to determining the buyback amount.

In New York, sales tax is paid at the time a vehicle is purchased or leased (if for a period of 12 months or more). And, since that tax is imposed at a rate of more than 8% of the sales price, it can be very a significant amount. Roberts, for example, paid more than $2,300 in sales tax when he purchased his VW Passat. On the other hand, a similarly-situated purchaser in Oregon would have paid no sales tax upon purchase of the exact same vehicle. If we assume the proposed settlement fully and fairly compensates the Oregon purchaser, how can the same be said for a New York purchaser like Roberts? In Roberts’ objection, he suggested that class members who paid sales tax and other government-imposed fees could only be fully and fairly compensated if those amounts were included in the proposed buyback amount.

Second, Roberts objected to the proposed class action settlement on the basis that it didn’t take into account that many members of the class would lose the sales tax benefit that comes along with trading-in their old vehicle at the time they purchase a new one. For instance, in New York, when the owner of a vehicle trades in that vehicle as part of the transaction to purchase a new one, sales tax due on the new purchase gets computed on the difference in price between the new vehicle and the trade-in value on the old vehicle. However, by opting to have VW buy back his or her vehicle under the settlement’s buyback option, class members would have no trade-in when it came time to purchase a replacement vehicle and therefore would pay sales tax on the full price of that new purchase. As a result, Roberts argued, if the proposed settlement was not modified to reimburse for the sales tax paid on their covered VW vehicle, many class members would effectively pay sales tax twice.

In his letter to the Court, Roberts requested that the Court modify its proposed settlement to include an additional amount equal to sales tax and other government-imposed fees paid by the class members in conjunction with their purchase or lease of covered vehicles.

Many others objected to the settlement and filed with the court compelling reasons that the proposed settlement was unfair to the class. For example, one class members noted that extended warranties purchased by VW owners were not recompensed under the buy-back option. However, the court refused to modify the settlement, preferring instead a speedy removal of the matter from the court’s docket and thereby favoring VW over the class members.

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