Class Action Claims Peloton Charged Illegal Sales Tax on Digital Subscriptions in Mass., New York, Virginia

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Peloton Interactive has prior to this year unlawfully charged sales tax on digital membership subscriptions purchased by consumers in at least Massachusetts, New York and Virginia, a proposed class action claims. 

The 24-page lawsuit alleges Peloton has knowingly and willfully added tax to sales of monthly subscriptions for exercise classes and other content streamed on its popular stationary bikes and treadmills despite the fact that digital goods are sales tax-exempt in the three states and possibly others. The case contends that the Peloton sales tax, which the company reportedly stopped charging in January 2021, violated not only state laws but also the company’s own membership terms, which provide that subscribers agree to pay a monthly fee “plus any applicable taxes and other charges.” 

“Indeed, on a standard and uniform basis, Peloton charges users in several U.S. states a sales tax on their monthly subscription even though digital products in many of those states are not taxable, in violation of Peloton’s Membership Terms and state law,” the complaint says, claiming Peloton has collected “millions of dollars in overcharges” on its $39 and $12.99 per month membership tiers. 

Moreover, the lawsuit alleges Peloton has falsely represented that the taxes it imposes on memberships are consistent with the practices of other digital subscription services. The suit avers that although Peloton claims to regularly review its billing and collection practices for taxability compliance purposes, the company was nevertheless engaged in a “uniform, years-long practice” of charging impermissible sales tax on digital subscribers in certain states. 

Worse, Peloton, the lawsuit alleges, has not paid the sales tax to state authorities, and instead “recoup[ed] these overcharges in an effort to maximize profits” at the expense of subscribers. 

Although Peloton eventually changed its taxation practices in at least Massachusetts, New York and Virginia as of January 1, 2021, the company has not reimbursed digital subscribers for unlawful sales tax collected before that time, the complaint says.

The suit further contends that the mandatory arbitration provision contained in Peloton’s terms of service is invalid and unenforceable with regard to the subject matter of the lawsuit given the company “refused” to pay arbitration fees in November 2019 in connection with mass arbitration and then the following month refused to abide by the American Arbitration Association’s request to remove the AAA from its terms of service as a means to deter litigation. 

The case looks to represent all persons or entities in Massachusetts, New York and/or Virginia who paid a tax on a Peloton membership through December 31, 2020. 

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