`RYAN
`and
`SKILLERN
`BRANNON
`CORKEN, individually and on behalf of all
`others similarly situated,
`
`
`Plaintiffs,
`
`Case No. 1:21-cv-06808
`
`CLASS ACTION COMPLAINT
`
`JURY TRIAL DEMANDED
`
`
`
`Case 1:21-cv-06808 Document 1 Filed 08/12/21 Page 1 of 24
`
`
`
`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
`
`v.
`
`PELOTON INTERACTIVE, INC.,
`
`
`Defendant.
`
`
`
`
`
`
`
`Plaintiffs Brannon Skillern and Ryan Corken, individually and behalf of all others
`
`similarly situated (collectively, the “Classes”), bring this class action against defendant Peloton
`
`Interactive, Inc. (“Peloton”).
`
`NATURE OF THE ACTION
`
`1.
`
`This is a class action for breach of contract and consumer protection act violations
`
`arising from Peloton’s unlawful charge of a “sales tax” to Massachusetts, New York, and
`
`Virginia customers on their Peloton membership subscriptions, despite the tax-exempt status of
`
`such digital goods under state law.
`
`2.
`
`Peloton is an exercise equipment and media company that allows its customers to
`
`replicate the “boutique” studio-fitness experience at home by streaming live and on-demand
`
`exercise classes.1 Funded in 2012 and launched in 2013, Peloton offers for sale an internet-
`
`connected stationary bicycle (the “Peloton Bike” or “Bike”) and treadmill (the “Peloton Tread”
`
`or “Tread”) that monthly subscribers can use to participate remotely in exercise classes that are
`
`streamed to the Bike and Tread’s connected screens. In addition, Peloton’s class library includes
`
`
`1 Peloton, Our Story, https://www.onepeloton.com/company. All websites cited herein were last accessed on
`August 11, 2021.
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`
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`live and on-demand strength training, yoga, stretch, and meditation, which can be used without
`
`the Bike and Tread.
`
`3.
`
`Peloton describes itself as “the largest interactive fitness platform in the world”
`
`and boasts over 5.4 million members as of March 31, 2021.2 Peloton generated $1.8 billion in
`
`revenue in 2020 and $1.26 billion as of the third-quarter 2021.3
`
`4.
`
`With a $39/month All-Access Membership subscription, users can access
`
`Peloton’s full catalogue of classes along with real-time performance metric tracking when used
`
`with the Bike or Tread.4 Peloton also offers an individual-user Digital Membership (together
`
`with the All-Access Membership, “Peloton Membership”) for $12.99/month through the Peloton
`
`App, which grants subscribers with a compatible device access to Peloton’s live and on-demand
`
`class catalogue. Subscription to Peloton’s All Access Membership is required with the purchase
`
`of the Peloton Bike and Peloton Tread.
`
`5.
`
`By purchasing or using a Peloton Membership, subscribers agree to Peloton’s
`
`Membership Terms, which supplement and comprise part of Peloton’s Terms of Service. The
`
`Membership Terms provide that subscribers “agree to pay the monthly fee specified” at purchase
`
`“plus any applicable taxes and other charges.”5 Subscribers also provide a payment method that
`
`is saved and charged on a recurring, monthly basis at the beginning of the monthly membership
`
`cycle. The Membership Terms further provide that subscribers authorize Peloton to use that
`
`provided payment method “to pay any amounts described [in the Membership Terms] without
`
`requiring a signed receipt.”6
`
`
`2 Peloton, Investor Relations, https://investor.onepeloton.com/investor-relations.
`3 Id.
`4 Peloton, Bikes, https://www.onepeloton.com/bikes; Peloton, Treads, https://www.onepeloton.com/tread.
`5 Peloton, Membership Terms, https://www.onepeloton.com/membership-terms.
`6 Id.
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`
`
`6.
`
`In January and December 2019, plaintiffs Brannon Skillern and Ryan Corken,
`
`respectively, purchased the Peloton Bike and subscribed to Peloton’s All-Access Membership
`
`subscription for $39/month. Yet, Peloton charged them both an over-6% “sales tax” on their
`
`subscriptions every month through December 2020 even though no such tax was actually owed
`
`under state law, resulting in substantial overcharges in violation of Peloton’s Membership Terms
`
`and state law.
`
`7.
`
`Peloton’s unlawful practice has harmed plaintiffs and all Class members in
`
`precisely the same way. 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.
`
`Peloton has charged its customers, including plaintiffs, in at least Virginia, New York, and
`
`Massachusetts, an unlawful digital sales tax, collecting millions of dollars in overcharges.
`
`8.
`
`Furthermore, Peloton willfully and knowingly overcharged its subscribers a false
`
`and unlawful sales tax on their Peloton Memberships. When customers complained or inquired
`
`about the impermissible tax charge, Peloton assured them that its business practices comply with
`
`state and local tax requirements. And Peloton falsely represented that the tax charges imposed on
`
`Peloton Membership subscriptions were consistent with the practices of other digital subscription
`
`businesses. Although Peloton claims to regularly review its billing and collection practices for
`
`taxability compliance purposes, Peloton engaged in a uniform, years-long practice of charging a
`
`“sales tax” on its customers’ Peloton Memberships subscriptions in jurisdictions that do not
`
`permit the taxation of digital products.
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`
`
`9.
`
`Worse, Peloton admittedly has not remitted the unlawfully collected “sales tax” to
`
`state authorities, recouping these overcharges in an effort to maximize profits at their
`
`subscribers’ expense and under the guise of a state-imposed tax.
`
`10.
`
`Peloton eventually changed its taxation practices in at least Massachusetts, New
`
`York, and Virginia, effective January 1, 2021, despite knowing about the impropriety of its
`
`overcharge misconduct before that date. Peloton has not reimbursed plaintiffs or Class members
`
`for the unlawful taxes it collected before January 1, 2021.
`
`11.
`
`Plaintiffs bring this action on behalf of themselves individually and all others
`
`similarly situated to challenge Peloton’s breach of the membership contract and its willful and
`
`knowing unlawful, deceptive, and fraudulent overcharging practices. Plaintiffs seek all available
`
`compensatory, statutory, and punitive damages, and reasonable attorney’s fees and costs.
`
`THE PARTIES
`
`12.
`
`Plaintiff Brannon Skillern resides in Vienna, Virginia and is a citizen of Virginia.
`
`Skillern has owned a Peloton Bike and subscribed to Peloton’s All-Access Membership since
`
`January 2019, when she purchased the Bike while living in Brooklyn, New York. Skillern has
`
`lived in Vienna, Virginia since April 1, 2020.
`
`13.
`
`Plaintiff Ryan Corken resides in Reading, Massachusetts, and is a citizen of
`
`Massachusetts. Corken has owned a Peloton Bike and subscribed to Peloton’s All-Access
`
`Membership since December 2019.
`
`14.
`
`Defendant Peloton is a Delaware corporation with its corporate headquarters and
`
`principal place of business located in New York, New York. Peloton is therefore a citizen of
`
`Delaware and New York.
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`
`
`JURISDICTION AND VENUE
`
`15.
`
`Jurisdiction is proper in this Court pursuant to 28 U.S.C. § 1332(d)(2) because
`
`this is a class action in which at least one member of the class is a citizen of a state different from
`
`defendant, the amount in controversy exceeds $5 million, exclusive of interest and costs, and the
`
`proposed class contains more than 100 members.
`
`16.
`
`The Court has personal jurisdiction over Peloton because Peloton resides in and is
`
`subject to general jurisdiction in this District. The Court also has personal jurisdiction over
`
`Peloton because Peloton markets, distributes, offers, and sells the Peloton Bike, Peloton Tread,
`
`and Peloton Membership throughout the United States, including in this District, and the conduct
`
`complained of occurred in or was targeted at this District. Additionally, Peloton’s Terms of
`
`Service provide that all disputes not required to be arbitrated be adjudicated in New York, New
`
`York and are to be governed by New York law.
`
`17.
`
`Venue is proper in this District pursuant to 28 U.S.C. § 1391(b)(1)–(2) because
`
`Peloton resides in this District and a substantial portion of the events giving rise to plaintiffs’
`
`claims occurred in this judicial district.
`
`FACTUAL BACKGROUND
`
`A.
`
`Peloton & Plaintiffs’ Peloton Memberships
`
`18.
`
`Peloton allows its customers to replicate a high-end studio-fitness experience at
`
`home by streaming live and on-demand exercise classes from its Peloton Bike and Peloton Tread
`
`products as well as through the Peloton App that is compatible with a number of cell phones,
`
`tablets, and televisions and is available online.
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`
`
`19.
`
`Peloton’s popularity, success, and high membership numbers are well known.
`
`Peloton has been described as “a bonafide fitness phenomenon”7 and a “fitness unicorn,”8 and its
`
`members are known for their “rabid customer loyalty.”9 In addition to substantial membership
`
`and revenue numbers, Peloton boasts a 92% 12-month customer retention rate as of March 31,
`
`2021.10
`
`20.
`
`Peloton offers its users two types of Peloton Membership: the All-Access
`
`Membership for $39 per month (required with the Bike and Tread) and the Digital Membership
`
`for $12.99 per month. Peloton promotes these Memberships and Membership rates through its
`
`website, onepeloton.com,11 as well as in its physical showroom locations around the country,
`
`including in Massachusetts, New York, and Virginia.12
`
`21.
`
`Peloton markets the All-Access Membership as the “most value-packed Peloton
`
`membership” because a single membership includes unlimited household profiles.13 Access to
`
`the Peloton App is also included in the All-Access Membership.
`
`22.
`
`The Digital Membership offers subscribers, on a single-device, single-profile
`
`basis, access to Peloton’s live and on-demand class catalogue through the Peloton App.
`
`23.
`
`The Peloton App is free to download on all compatible devices, regardless of
`
`Membership status.
`
`
`7 CNBC, How Peloton exercise bikes became a $4 billion fitness start-up with a cult following (updated Feb. 12,
`2019), https://www.cnbc.com/2019/02/12/how-peloton-exercise-bikes-and-streaming-gained-a-cult-following.html;
`see also New York Times, Peloton
`It Last?
`(Aug. 28, 2019),
`Is a Phenomenon. Can
`https://www.theatlantic.com/magazine/archive/2019/12/the-tribe-of-peloton/600748/.
`8 Slate, Peloton Won
`the Reopening of Gyms? (Mar. 29, 2021),
`the Pandemic. Can It Survive
`https://slate.com/business/2021/03/peloton-pandemic-sales-comeback-gyms-reopening.html.
`9
`The
`Atlantic,
`Gang
`I
`Joined
`A
`Stationary-Biker
`https://www.theatlantic.com/magazine/archive/2019/12/the-tribe-of-peloton/600748/.
`10 Peloton, Investor Relations.
`11 See, e.g., Peloton, Membership, https://www.onepeloton.com/membership; see also Peloton, Bikes (promoting the
`$39/month All-Access Membership); Peloton, Treads (same).
`12 Peloton, Locations, https://www.onepeloton.com/showrooms (listing showroom locations in Natick, Dedham,
`Boston, and Chestnut Hill, Massachusetts; Manhasset, New York, White Plains, and Garden City, New York; and
`Tysons Corner and Richmond, Virginia).
`13 Peloton, Membership, https://www.onepeloton.com/membership.
`
`2019),
`
`(Dec.
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`
`
`24.
`
`On or about January 15, 2019, Skillern purchased a Peloton Bike and subscribed
`
`to Peloton’s All-Access Membership. Since becoming an All-Access Membership subscriber,
`
`Skillern has timely paid for her Peloton Membership each month. Skillern’s monthly payments
`
`are made automatically and electronically with a credit or debit card on file with Peloton.
`
`Skillern continues to subscribe to Peloton’s All-Access Membership today.
`
`25.
`
`On or about December 8, 2019, Corken purchased a Peloton Bike and subscribed
`
`to Peloton’s All-Access Membership. Beginning in December 2019, Corken has timely paid for
`
`his All-Access Membership every month. Corken’s monthly payments are made automatically
`
`and electronically with a credit or debit card on file with Peloton. Corken continues to subscribe
`
`to Peloton’s All-Access Membership today.
`
`B.
`
`Peloton’s Membership Terms & Terms of Service
`
`26.
`
`Peloton’s Terms of Service, which include and incorporate its Membership
`
`Terms, warranty, and other policies, are a form contract that govern Peloton’s relationship with
`
`its members.14
`
`27.
`
`Peloton’s Membership Terms provide that subscribers agree to pay the monthly
`
`Peloton Membership fee in addition to other charges, such as sales tax where applicable:
`
`Payment
`
`Amount to be Charged. Membership Holders agree to pay the monthly fee
`specified when you purchased your Membership (plus any applicable taxes and
`other charges). If the amount to be charged varies from the amount you pre-
`authorized (other than due to the imposition of, or change in, applicable sales tax),
`you have the right to receive, and we will provide, notice of the amount to be
`charged and the date of the charge before the scheduled date of the transaction,
`unless applicable law requires you to expressly consent to the change in price.
`Any agreement you have with your payment provider governs your use of your
`specified payment method. You agree that we may accumulate charges incurred
`and submit them as one or more aggregate charges during or at the end of each
`
`14 Peloton Terms of Service at 1, 21–22 ¶ 26 (updated Sept. 14, 2018), attached hereto as Exhibit 1. Emphasis is
`added unless otherwise indicated.
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`
`
`
`
`billing cycle. Your failure to terminate and/or continued use of your Membership
`reaffirms that we are authorized to charge you for that Membership. We may
`submit those charges for payment and you will be responsible for such charges.
`This does not waive our right to seek payment directly from you.15
`
`28.
`
`The Membership Terms also provide that Peloton Membership subscribers will be
`
`asked to provide a payment method that Peloton is authorized to charge each month. By
`
`accepting the Membership Terms, subscribers agree to pay “any amounts described herein
`
`without requiring a signed receipt” on a recurring, monthly basis at the beginning of the
`
`membership cycle.16 That up-front charge provides Peloton Membership access for one month
`
`thereafter.
`
`29.
`
`The Terms of Service also contain an arbitration clause, which requires the parties
`
`to arbitrate any claims or disputes through the American Arbitration Association (“AAA”)
`
`pursuant to AAA’s Consumer Arbitration Rules.17 This arbitration clause (including all
`
`provisions therein), however, is unenforceable.
`
`30.
`
`In November 2019, after Peloton refused to pay arbitration fees in connection
`
`with a mass arbitration in violation of AAA’s Consumer Arbitration Rules, the AAA wrote a
`
`letter to Peloton’s counsel stating that “the AAA will decline to accept future consumer matters
`
`submitted against or by the respondent [Peloton]” and requesting that Peloton “remove AAA
`
`from its consumer arbitration agreements so that there is no confusion to Peloton’s customers.”18
`
`31.
`
`Through at least December 23, 2019, despite AAA’s letter, Peloton refused to
`
`comply with AAA’s request to remove AAA from its arbitration agreements and continued to
`
`
`15 Peloton, Membership Terms (emphasis added).
`16 Id.
`17 See Ex. 1 at 17–18 ¶ 20(a), (c).
`18 Letter from AAA to Ashley Keller, Esq. & Steven Feldman, Esq., Counsel for Peloton (Nov. 14, 2019), attached
`hereto as Exhibit 2. Peloton’s refusal to pay arbitration fees was also a violation of its own Terms of Service. See
`Ex. 1 at 18 ¶ 20(d).
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`
`
`represent to its customers that they were subject to binding arbitration with AAA in an effort to
`
`deter litigation.
`
`32.
`
`As a result of Peloton’s failure to comply with AAA’s Consumer Arbitration
`
`Rules—and its own Terms of Service—the arbitration clause is invalid and unenforceable as to
`
`plaintiffs and the Class.
`
`C.
`
`Peloton Knowingly and Willfully Overcharges Membership Subscribers
`
`33.
`
`Digital goods, such as Peloton Memberships, are not taxable under the laws of
`
`several U.S. states. Yet, Peloton knowingly and unlawfully has charged, and subscribers have
`
`paid, sales tax on Peloton Membership subscriptions in states where digital goods are not
`
`taxable, including in Massachusetts, New York, and Virginia.
`
`34.
`
`Under Massachusetts
`
`law, “[d]igital products… delivered electronically,
`
`including but not limited to music, video, reading materials or ring tones” are expressly tax-
`
`exempt.19 At present, the Commonwealth subjects to taxation only one category of digital
`
`product, standardized computer software, whether delivered electronically online or otherwise.20
`
`35.
`
`“In New York, digital goods are not subject to sales tax.”21 Under New York law,
`
`any tax must be authorized by statute,22 and digital products are not included in the goods or
`
`services subject to either sales or use tax.23 In multiple advisory opinions, the New York State
`
`Commissioner of Taxation and Finance has clarified the tax-exempt status of digital goods and
`
`19 M.T.G. TIR 05-8 at VII.B.8 (July 14, 2005, as supplemented 2021).
`20 See id.; Citrix Sys., Inc. v. Comm’r of Rev., 139 N.E.3d 293 (Mass. Sup. Ct. 2020) (affirming Appellate Tax
`Board’s decision to uphold sales tax assessment against subscriptions for Citrix, a remote computer desktop
`software, and discussing taxation of online computer software).
`21 N.Y. State Dep’t of Taxation & Fin., Report on the Taxation of the Telecom. Indus. In N.Y. State (Oct. 2009) at
`24,
`https://www.tax.ny.gov/pdf/stats/policy_special/telecommunications/2009/taxation_of_the_telecommunications_ind
`ustry_in_ny_state_october_2009.pdf; see also id. at 13 (addressing nontaxable “internet video services”).
`22 E.g., Am. Cablevision of Rochester, Inc. v. Jacobs, 474 N.Y.S.2d 653, 655 (N.Y. App. Div. 1984).
`23 See N.Y. Tax L. §§ 1105 (outlining taxable goods under New York law), 1110 (outlining use tax); see also
`Catherine Chen, Taxation of Digital Goods & Servs., 70 N.Y.U. ANN. SURV. AM. L. 421, 452–53 & n.169 (2015)
`(identifying New York as among the U.S. states that “either do not affirmatively impose sales tax on digital content
`or expressly exempt it from taxation”).
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`
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`services similar to a Peloton Membership, such as monthly subscriptions to digital online video
`
`courses and the online video course library,24 the fee to access and stream online courses in the
`
`form of pre-recorded video lectures,25 and online audio and video driving instruction courses.26
`
`The Department of Taxation and Finance has also opined on the tax-exempt status of the
`
`electronic delivery of digital music27 and the online sale of music, photography, and video
`
`content that is delivered electronically.28
`
`36.
`
`Virginia excludes from taxation “digital products delivered electronically, such as
`
`software, downloaded music,
`
`ring
`
`tones, and
`
`reading materials” expressly
`
`in
`
`the
`
`commonwealth’s code.29 The Virginia Department of Taxation similarly explains on its website
`
`that such digital products are among the “telecommunications services [that] are not taxed.”30 In
`
`fact, the Virginia legislature rejected in February 2018 a measure to impose the commonwealth’s
`
`communications sales and use tax to streaming services.31
`
`37.
`
`Although plaintiffs’ All-Access Memberships cost $39/month, Peloton
`
`overcharged plaintiffs under the guise of a sales tax that is not actually applicable in their states
`
`of residence.
`
`(June
`
`16,
`
`2020),
`
`
`Fin., Advisory Op. TSB-A-20(18)S
`of Taxation &
`24 N.Y. Dep’t
`https://www.tax.ny.gov/pdf/advisory_opinions/sales/a20_18s.pdf.
`25 Id. No. TSB-A-20(33)S (July 14, 2020), https://www.tax.ny.gov/pdf/advisory_opinions/sales/a20_33s.pdf.
`26 Id. No. TSB-A-13(1)S (Jan. 8, 2013), https://www.tax.ny.gov/pdf/advisory_opinions/sales/a13_1s.pdf.
`27 Id. No. TSB-A-07(14)S (May 17, 2007), https://www.tax.ny.gov/pdf/advisory_opinions/sales/a07_14s.pdf; id. No.
`TSB-A-01(15)S (Apr. 18, 2001), https://www.tax.ny.gov/pdf/advisory_opinions/sales/a01_15s.pdf.
`28 Id. No. TSB-A-08(22)S (May 2, 2008), https://www.tax.ny.gov/pdf/advisory_opinions/sales/a08_22s.pdf; see also
`id. TSB-A-08(41), https://www.tax.ny.gov/pdf/advisory_opinions/sales/a08_41s.pdf (holding that “[i]n the same
`way that audio content (music) and visual content (photographs) delivered electronically are not subject to sales tax,
`sales of videos that are delivered to customers electronically over the Internet and downloaded for use on the
`customer’s computer or other device likewise are sales of an intangible and are not subject to sales or compensating
`use tax”).
`29 Va. Code Ann. § 58.1-648(C)
`30 Virginia Tax, Communications Taxes, https://www.tax.virginia.gov/communications-taxes.
`31
`Gail
`Cole,
`now
`(Feb.
`Virginia
`won’t
`be
`taxing
`Netflix
`for
`https://www.avalara.com/us/en/blog/2018/02/virginia-wont-be-taxing-netflix-for-
`now.html?CampaignID=7010b000001Dqep&lso=Social&lsmr=Social&adbsc=core_20190225_2703481&adbid=11
`00062910166888449&adbpl=tw&adbpr=19937859.
`
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`
`
`38.
`
`Beginning when Skillern purchased her Peloton Bike and subscribed to the
`
`$39/month All-Access Membership in January 2019, when Skillern lived in Brooklyn, New
`
`York, Peloton charged, and Skillern paid, an additional $3.47/month attributable to sales tax. As
`
`a result, Skillern paid a total of $42.47 each month, instead of $39.00. This overcharging conduct
`
`continued through the time when Skillern moved to Vienna, Virginia in April 2020. Thereafter,
`
`Peloton continued to overcharge Skillern a $3.47 false tax every month on her Peloton All-
`
`Access Membership while she was a resident of Virginia. As a result, Skillern paid a total of
`
`$42.47 each month, instead of $39.00. During the relevant period, Skillern paid the false tax on
`
`her Peloton Membership every month, on or around the 26th of each month.
`
`39.
`
`Beginning when Corken purchased his Peloton Bike and subscribed to the
`
`$39/month All-Access Membership in December 2019, Peloton charged, and Corken paid, an
`
`additional $2.44/month attributable to sales tax. As a result, Corken paid a total of $41.44 each
`
`month, instead of $39.00. During the relevant period, Corken paid the false tax on his Peloton
`
`Membership every month, on or around the 22nd of each month.
`
`40.
`
`Peloton has charged other customers in at least Massachusetts, New York, and
`
`Virginia for sales tax on their nontaxable Peloton Memberships despite the commonwealth or
`
`state’s tax exemption. For example, in New York and Virginia, Peloton Membership subscribers
`
`paid $42.47/month for their All-Access Membership subscription, with $3.47/month attributable
`
`to sales tax, while customers in Massachusetts paid $41.44/month for their All-Access
`
`Membership, with $2.44 attributable to sales tax.
`
`41. When Peloton Membership subscribers complained to Peloton that they should
`
`not be charged sales tax under state law, Peloton’s response was misleading:
`
`We aim for our business practices to be in line with state and local tax
`requirements and are adjusting our practices to remain compliant. Charging tax on
`
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`
`
`Digital Memberships is consistent with other subscription businesses like Netflix,
`Spotify, and Amazon, who also collect sales tax on their subscription services as
`required by state and local law.
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`This justification is particularly specious because subscription businesses such as Netflix and
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`Spotify do not charge sales tax in Virginia, Massachusetts, or New York for streaming
`
`services.32
`
`42.
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`Furthermore, Peloton represented to customers that it continuously reviewed its
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`billing practices in the ordinary course of business to ensure compliance with applicable state
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`and local laws: “As a normal part of our business, we review our practices concerning the
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`taxability of our products and services in order to ensure that we are in compliance with the
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`applicable laws in your state and city.”
`
`43.
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`Yet, despite its ongoing legal compliance review and the clear tax exemption for
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`digital goods in U.S. states such as Massachusetts, New York, and Virginia, Peloton knowingly
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`and willfully continued to overcharge Peloton Membership subscribers in those states on the
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`basis of a purported sales tax when no sales tax was in fact owed.
`
`44.
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`Peloton continued this overcharging practice through December 2020. Then,
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`despite there being no change in tax law in the relevant states, Peloton finally acknowledged the
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`wrongfulness of its taxation practices and changed its behavior. As of January 1, 2021, Peloton
`
`
`32 In fact, Massachusetts legislators introduced a bill, HD 4389, in August 2019 to impose taxes on digital streaming
`providers such as Netflix, Spotify, and Amazon. See, e.g., Law360, Mass. Bill Seeks 5% Streaming Tax On Digital
`Entertainment (Aug. 6, 2019), https://www.law360.com/articles/1185658/mass-bill-seeks-5-streaming-tax-on-
`digital-entertainment; Commonwealth Magazine, Bill would hit Netflix, Hulu with fees (Aug. 1, 2019),
`https://commonwealthmagazine.org/media/bill-would-hit-netflix-hulu-with-fees/; see also The Netflix and Spotify
`tax: States are making streaming services more expensive (Feb. 24, 2020), https://www.cnbc.com/2020/02/24/states-
`are-imposing-a-netflix-and-spotify-tax-to-raise-money.html (reporting Massachusetts lawmakers’ consideration of
`digital tax measures). As of the filing of this complaint, that bill has not passed or even come out of committee. See
`192nd Gen. Ct. of the Commw. Of Mass., Bill H.4045, https://malegislature.gov/Bills/191/HD4389 (providing the
`status of Bill H.D. 4389). As explained above, the Virginia legislature rejected a similar measure, which would have
`applied to subscription services providers such as Netflix and Spotify. See supra ¶ 36 & n.31.
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`stopped charging sales tax on Peloton Memberships in at least Massachusetts, New York, and
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`Virginia, and potentially other states where digital products are not taxable.
`
`45.
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`Beginning in January 2021, plaintiffs’ monthly All-Access Memberships dropped,
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`from $42.47/month for Skillern and $41.44 for Corken, to $39/month. Peloton has not
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`reimbursed plaintiffs for the unlawful taxes it collected.
`
`46.
`
`Likewise, Peloton has not reimbursed other Class members for the unlawful taxes
`
`it collected on their Peloton Memberships.
`
`47.
`
`Despite collecting an improper sales tax from its Massachusetts, New York, and
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`Virginia subscribers through December 2020, Peloton did not remit the tax collected to the
`
`commonwealth or state authorities. Rather, it recorded the collected sales tax liability as an
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`accrued expense on its balance sheets.
`
`48.
`
`Indeed, Peloton has acknowledged this in its SEC filings:
`
`[Peloton] has recorded an estimate of $5.7 million and $4.1 million as of June 30,
`2018 and 2019, respectively, for the potential sales tax liability associated with its
`subscription fees, which is included in accrued expenses in the accompanying
`consolidated balance sheets. [Peloton] continues to analyze possible sales tax
`exposure but does not currently believe that any individual claim or aggregate
`claims that might arise will ultimately have a material effect on its results of
`operations, financial position or cash flows.33
`
`49.
`
`Instead, Peloton overcharged subscribers under the guise of a “sales tax” for its
`
`
`
`own financial benefit and in order to increase its profits.
`
`50.
`
`Peloton’s overcharge was material to plaintiffs and all other Class members. For
`
`example, plaintiffs and all Class members expected to pay $39/month, plus any applicable taxes,
`
`for their All-Access Memberships, but Peloton charged them over 6% more each month when no
`
`additional taxes were in fact applicable. Moreover, because Peloton Membership charges occur
`
`
`33 Peloton Interactive, Inc. Form S-1 at F-24 (as filed with U.S. Sec. & Exch. Comm’n on Aug. 27, 2019),
`https://investor.onepeloton.com/node/6261/html.
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`automatically on a recurring, monthly basis, and such payment must be remitted at the beginning
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`of the monthly billing cycle, plaintiffs and all Class members were required to pay the improper
`
`overcharges in order to maintain their Peloton Membership.
`
`51.
`
`Further, plaintiffs and Class members did not expect Peloton to assess a “sales
`
`tax” on their Peloton Membership that is not actually required by law, and they would not have
`
`paid the sales tax on their Peloton Membership if such charge had not been included in their
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`monthly bills. Nor would plaintiffs and Class members have agreed to pay over 6% more each
`
`month for the same Peloton Membership if they had known that the purported sales tax collected
`
`was neither owed under state law nor remitted to state authorities.
`
`CLASS ACTION ALLEGATIONS
`
`52.
`
`This action is brought by plaintiffs individually and on behalf of a class pursuant
`
`to Federal Rules of Civil Procedure 23(b)(3). The class—referred to herein as the “Breach of
`
`Contract Class”—consists of:
`
`All persons or entities residing in Massachusetts, New York, and/or Virginia who paid
`tax on a Peloton Membership through December 31, 2020.
`
`53.
`
`Plaintiffs also bring this action individually and on behalf of the following
`
`subclasses:
`
`a.
`
`b.
`
`Virginia Subclass. All persons or entities residing in Virginia who paid
`tax on a Peloton Membership through December 31, 2020.
`
`New York Subclass. All persons or entities residing in New York who
`paid tax on a Peloton Membership through December 31, 2020.
`
`54.
`
`Excluded from the Classes are Peloton; any of its officers, directors, or
`
`
`
`
`
`employees; and its legal representatives, successors, and assigns.
`
`55.
`
`Plaintiffs reserve the right to expand, limit, modify, or amend the class
`
`definitions, including the addition of one or more subclasses, in connection with her motion for
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`class certification, or at any other time, based on, inter alia, changing circumstances and new
`
`facts obtained.
`
`56.
`
`Plaintiffs’ Classes satisfy
`
`the numerosity, ascertainability, commonality,
`
`predominance, typicality, adequacy, and superiority requirements of a class action under Rules
`
`23, as alleged more fully below.
`
`57.
`
`Numerosity. Plaintiffs do not know the exact number of Class members because
`
`that information is in the exclusive control of Peloton. However, Peloton claims to have over 5.4
`
`million subscribers and has sold thousands of Peloton Memberships to Massachusetts, New
`
`York, and Virginia customers that were assessed an improper tax in violation of state law.
`
`Consequently, members of each Class are so numerous that individual joinder of all Class
`
`members is impracticable. Class members and members of each Subclass may be informed of
`
`the pendency of this class action through recognized, Court-approved notice dissemination
`
`methods, including direct mail or other means based on Peloton’s records of its Peloton
`
`Membership subscribers.
`
`58.
`
`Ascertainability. The Classes are ascertainable through records kept by Peloton.
`
`Plaintiffs and Class members were required to provide Peloton with their personal and financial
`
`information to purchase Peloton products and subscribe to a Peloton Membership. On
`
`information and belief, Peloton