Voluntary payment doctrine

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The voluntary payment doctrine bars a class-action suit by ratepayers who were charged sales tax on other taxes, as opposed to “telecommunication services,” the Wisconsin Court of Appeals held on Dec. 21.

Section 77.51(21m) requires that sales taxes be paid on “telecommunications services,” defined as follows:

“[S]ending messages and information transmitted through the use of local, toll and wide-area telephone service; channel services; telegraph services; teletypewriter; computer exchange services; cellular mobile telecommunications service; specialized mobile radio; stationary two-way radio; paging service; or any other form of mobile and portable one-way or two-way communications; or any other transmission of messages or information by electronic or similar means between or among points by wire, cable, fiber optics, laser, microwave, radio, satellite or similar facilities.”

Since the institution of the Federal Universal Service Fee (USF) — a federal tax that raises revenue to provide Internet access to schools — Wisconsin telephone customers have been paying sales tax on the federal tax.

Stephen Butcher and two others filed a class action on behalf of all similarly situated rate payers against Ameritech, Inc., and Wisconsin Bell, Inc., arguing that the USF is not a “telecommunications service” within the meaning of the statute, and thus, the sales tax on it is unlawful. The complaint sought monetary and injunctive relief. The complaint also named the Wisconsin Department of Revenue as a defendant.

The defendants unsuccessfully moved to dismiss the claims, but moved for reconsideration after the Wisconsin Supreme Court decided Putnam v. Time Warner Cable of Se. Wis., 2002 WI 108, 255 Wis.2d 447, 649 N.W.2d 626.

In Putnam, the court adopted the voluntary payment doctrine, which places, upon a party wishing to challenge the legality of a bill, the obligation to make a challenge either before voluntarily making the payment, or at the time of making the payment.

Citing Putnam, Dane County Circuit Court Judge Michael N. Nowakowski dismissed the complaint, holding that the doctrine barred the monetary claims, and holding that the injunctive claims must first go through an administrative challenge.

The plaintiffs appealed, but the court of appeals affirmed, in a decision by Judge Margaret J. Vergeront.

Putnam

The court began with a review of the Supreme Court’s decision in Putnam. In Putnam, the plaintiffs filed a class action against a cable TV company, Time Warner, alleging that the five-dollar late fee that it imposed constituted unlawful liquidated damages, because the actual cost to the defendant of late payments was only 38 to 48 cents.

The Supreme Court held that the voluntary payment doctrine barred the claim to the extent it sought recovery of late fees already paid.

The court recognized three exceptions to the doctrine — fraud, duress, and mistake of fact — but found none of them applicable.

The plaintiffs contended that mistake of fact did apply, because they paid the $5 fee, without knowing that the actual costs were much less. However, the Supreme Court concluded that this was a mistake of law, rather than a mistake of fact.

Sales Tax

Applying Putnam to the case at bar, the court of appeals held that none of the exceptions apply.

The plaintiffs contended that duress was present, because basic telephone service is a necessity, citing three Illinois cases: Getto v. City of Chicago, 426 N.E
.2d 844 (Ill. 1981); Russell v. Hertz Corp., 487 N.E.2d 630 (Ill. App. 1985); and Dreyfus v. Ameritech Mobile Comm., Inc., 700 N.E.2d 162 (Ill. App. 1998).

The court found that duress was not present, however, because there was no implicit or real threat that service would be shut off for nonpayment of the charge.

The court added that, if duress is to be inferred from the necessity of phone service, the Supreme Court is the proper court to create the exception: “The supreme court, not this court, is the proper court to decide if the services involved in this case, in themselves, warrant an exception to the voluntary payment doctrine.”

The court also found that the mistake of fact exception was not met.

The plaintiffs contended that, because the bills do not indicate which services are being taxed, they were not on notice of the facts and thus, should not be blamed for paying the assessed amounts.

However, the court concluded that the Supreme Court in Putnam had rejected what was “substantially the same argument,” when it wrote that the, “failure to know the precise factors underlying Time Warner’s decision to charge a $5.00 late fee cannot be held to be a mistake of fact as a basis for the payment made.”

The court concluded, “the bills show the charges for the services and the state tax computed at five percent on those services. If a customer knew what services were subject to a state tax, the customer could figure out whether the amount of tax being collected by Ameritech was more than that amount. As the Putnam court explained, every person is presumed to know the law and that is why a mistake of law is not an exception to the voluntary payment doctrine (emphasis in original).”

The court acknowledged that even knowledge of the law on what services are taxable might still not enable the customer to determine which items are being taxed.

However, it would still provide notice that he is being taxed more than the law permits. Under Putnam, however, the court concluded that the obligation is on the customer to make inquiry before paying.

Accordingly, the court held the mistake of fact exception did not apply.

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The court also held that public policy does not warrant an exception to the doctrine.

The court acknowledged that it may be unrealistic to require taxpayers to know the sales tax laws and analyze transactions to determine if the sales tax was correctly computed. Again however, the court concluded that such a policy judgment would have to be made by the Supreme Court.

Primary Jurisdiction

Finally, the court held that the plaintiffs’ remaining claims would have to be first considered by the Department of Revenue and the Tax Appeals Commission, under the primary jurisdiction doctrine.

The court reasoned, “the proper construction and application of Wis. Stat. sec. 77.51(21m) may require fact finding to determine what the disputed services entail; in addition, the question of how broadly or narrowly to construe the definition may involve policy judgments as well.”

Accordingly, the court affirmed the dismissal of the complaint.

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David Ziemer can be reached by email.