In this diversity action, the United States District Court for the Northern District of Alabama found that, in determining the amount in controversy, the value of an injunction is measured based on the gains to the plaintiffs rather than losses to the defendants.
The plaintiffs brought a putative class action in the Circuit Court of Jefferson County alleging that the defendants engaged in the wrongful and systematic charging of sales tax in connection with their services. Such conduct is in violation of Alabama law, which levies sales tax only upon sellers engaging or continuing the business of selling goods at retail within the state of Alabama.
The defendants removed the action to the federal court asserting diversity jurisdiction pursuant to the CAFA. Upon removal, the plaintiffs moved to remand this action to state court on the ground that the district court lacks subject matter jurisdiction under the Tax Injunction Act (the “TIA”), which prohibits federal courts from interfering with the assessment, levy, or collection of a tax under state law.
While the district court found the plaintiffs’ argument to be unpersuasive, it nonetheless granted the motion to remand finding that the defendants’ basis for removal was improper because the amount in controversy was not satisfied. The defendants conceded that they were subject to potential monetary damages in the amount of $2,245,880.64, an amount which included both compensatory damages and the maximum punitive damages. The defendants asserted that the remainder of the jurisdictional threshold was satisfied because the cost of a permanent injunction would deprive them of collecting $248,183.84 annually. The defendants stated that they collected and remitted to the Alabama Department of Revenue $561,470.16 in sales tax revenue and thus, an injunction prohibiting the collection of the taxes at issue would have to remain in place for more than eleven years in order for the $5,000,000 threshold to be met.
The district court opined that it was unclear how injunctive relief prohibiting the collection of taxes would necessarily inure to the plaintiffs’ benefit for purposes of satisfying the jurisdictional threshold. The district court noted that it must consider injunctive relief’s effect on the amount in controversy from the perspective of gains by the plaintiffs, not the cost to the defendants. Here, it was unclear to what extent the plaintiffs would gain from the imposition of the injunctive relief they sought. The district court opined that any guess about the amount of future taxes that would not be collected as a result of an injunction would be wholly speculative. The district court thus concluded that the defendants had not made a sufficient showing that the amount in controversy exceeded the jurisdictional threshold under CAFA. Because the defendants had not met their burden of establishing that federal jurisdiction was proper, the district court granted the plaintiffs’ motion to remand.
The district court, however, rejected the plaintiffs’ argument that it should remand the case under the TIA. The district court found that the legislative history of the TIA does not support the notion that there is some sweeping prohibition that precludes any “federal court interference with all aspects of state tax administration.” Furthermore, the district court nevertheless found that it is sometimes appropriate to decline to exercise federal jurisdiction due to comity concerns even when the TIA does not deprive the court of subject matter jurisdiction.
The district court thus ruled that the defendants had not satisfied their burden of showing that the amount in controversy in the instant case satisfied the jurisdictional threshold under CAFA. The district court further held that, even if it had the power to entertain the instant action, it should not do so due to concerns about comity. Accordingly, the district court remanded the action to the state court.