Union Supply Overcharges Sales Tax on Holiday Packages for TN Prisoners
Once a year, the Tennessee Department of Correction (TDOC) allows prisoners and their family members to order special holiday packages, consisting mainly of snacks, candy and other food items. The holiday packages can include items totaling up to $125, and each prisoner can receive only one package. Orders can be placed online or using paper forms provided by prison staff.
Upon reviewing the December 2014 holiday package list provided by Union Supply, a California-based company, PLN managing editor Alex Friedmann noticed that the sales tax ranged from 9.25% to 9.75%, reflecting the full 7% state sales tax plus a variable county sales tax. Under Tennessee law, however, food items (with the exception of candy and certain other specified items) are taxed at a lower state rate of 5% plus the county tax. Thus, Union Supply was charging prisoners and their families more sales tax than allowed by state law.
After contacting the Tennessee Department of Revenue and verifying that out-of-state companies must comply with Tennessee sales tax statutes, and that most of the food items in the holiday packages fell within the lower food tax rate, Friedmann brought this issue to the attention of Union Supply’s general counsel in April 2014. He noted that pursuant to its contract with the TDOC, the company was required to “[r]egister with the Tennessee Department of Revenue and adhere to all Tennessee sales tax laws.”
Specifically, he explained, “Tennessee’s general state sales tax rate is 7%. Tenn. Code Ann. § 67-6-202. The state sales tax rate for the sale of food and food ingredients for human consumption, however, is 5%. Tenn. Code Ann. § 67-6-228. The vast majority of the items available for purchase in Union Supply’s inmate holiday packages are considered food and food ingredients under the statute.”
Friedmann had standing to address the issue as he had ordered holiday packages for two TDOC prisoners and had paid the inflated tax rate. But after consulting with several attorneys, both in Tennessee and California, it was determined that litigation was not a viable option.
Union Supply initially responded that it would investigate the complaint, and eventually admitted that it had overcharged the Tennessee sales tax and would provide refunds. According to a June 16, 2015 email from Scott Schaldenbrand, the company’s chief financial officer, they agreed to issue 8,125 refunds totaling $12,611.31. That included $11,939.21 refunded to 7,510 friends and family members who placed holiday package orders, plus $672.10 to 615 TDOC prisoners. For family members, the vast majority of refunds were made via credits to customer credit cards.
The refunds to prisoners were handled differently according to the TDOC. In October 2015, in response to questions submitted by Friedmann, TDOC chief financial officer Wes Landers wrote that prisoners would receive credit toward future package orders; at that time he acknowledged the TDOC had “not informed the inmates of the credits,” but said they would be notified shortly. The credit was an interim measure, as prison officials were “working to apply the credits to each affected inmate account.”
Asked who was responsible for monitoring or overseeing the holiday package contract with Union Supply, Landers acknowledged it was his responsibility and said he “regret[ted] the error and will work to ensure no further issues occur.” Union Supply was not sanctioned for overcharging prisoners and their families; Landers noted that revenue contracts with the state “do not include provisions for sanctions or Liquidated Damages,” and the company had acted promptly once notified of the problem.
Friedmann investigated the TDOC holiday package sales tax issue and pursued refunds from Union Supply as part of the Human Rights Defense Center’s Stop Prison Profiteering project (www.stopprisonprofiteering.org). HRDC is the parent organization of Prison Legal News.
Although Union Supply’s contract with the TDOC initially required the company to add a 5% “handling fee” to each holiday package order, and to “make payment of 5% per order to the [TDOC] for reimbursement of salary and overtime costs used for this program,” that provision was not included in the final contract language.
Union Supply’s order form for the December 2015 holiday packages for TDOC prisoners included the correct state food sales tax of 5% plus the variable county tax.
Sources: Union Supply/TDOC 2014 holiday package contract; www.tninmatepackage.com; PLN letter to Union Supply (April 6, 2015)