AT&T Mobility customers who use a smartphone to connect to the internet got notice of an early holiday gift this year -- a class action settlement to compensate them for illegal taxes that the company has collected since 2005.
After looking at the settlement website and one of my wireless bills, I realized that this lawsuit provides a good reason to be thankful America's class action system in this season of consumer largesse.
The settlement is for a lawsuit that was filed on behalf of customers for AT&T Mobility's violation of The Internet Tax Freedom Act, passed by Congress in 1998. The Law prohibits states from taxing access to the Internet. In spite of the law, AT&T Mobility has been collecting state sales taxes on iPhone and Blackberry data access packages, and keeping a fee for collecting those taxes.
A monthly bill provides evidence of AT&T's overcharge. Suppose I have an iPhone and pay $25 per month for voice and text service and $30 for data. Because Internet taxes are illegal, my state can only tax me on my voice and text plan, which is $25. I live in Massachusetts, which has a 6.25% sales tax, so my telecommunications tax should be $1.87. But it's not. On my bill, next to "Massachusetts Telecom Tax," it says $3.52, which means that AT&T is assessing the tax based on $55.00. I lose $1.65 per month so that AT&T Mobility can help Massachusetts illegally tax my access to the Internet. The bigger the tax that AT&T Mobility collects, the bigger the fee they get to keep.
This practice demonstrates why class actions are so vital for holding companies accountable to their customers. Your state government has no interest in helping you, because they are benefiting from your tax revenues even though they are illegal under state and federal law. Congress can't help you because it doesn't enforce the laws it passes, and it has already spoken on the issue legislatively. Because a legislative battle would pit big telecom and state governments against unorganized, unfunded consumers, consumers would lose on Capitol Hill. Since the amount of money per person is only a few dollars per month, no individual has a strong enough interest in hiring a lawyer to his/her own lawsuit. But multiply those few dollars per month times several years for each subscriber, and multiply that by AT&T Mobility's 92.8 million customers, and we are talking about a gigantic sum of money that the company has stolen from the public.
Because of the class action system, the enterprising consumers who figured out this scheme can combine forces with every subscriber who has lost money by hiring a few lawyers to stop AT&T Mobility from collecting the illegal tax, disgorge its ill-gotten gains and compensate consumers. Instead of charging by the hour, the attorneys who represent the class will get a percentage of the total settlement. Consumers pay nothing if they get nothing, but lawyers take a massive risk by investing their time and resources if they lose. The parties have negotiated a settlement, and a federal court will determine its fairness in March. The usual arguments against class actions will surely surface: the lawyers have made a windfall, and the customers got comparatively little. But without our admittedly flawed system of civil justice, who else will prevent companies from ripping off their customers with impunity? Probably no one.
AT&T Mobility will take a costly hit, and the next time that they, or any other company, considers charging an illegal tax in order to profit at the expense of its customers, it will have to decide whether or not it's worth facing the consequences of America's class action system.
To collect your compensation, you do not have to do anything. Judging by the flurry of text messages that the court has sent to class members, someone will notify you when your claim is ready. So this holiday season, as you prepare to give and receive, to own and enjoy the fruits of American capitalism, you may rest easy, knowing that there is a class action lawyer out there who might be the only force between you and the company who is trying to rip you off.