Instacart Sued by DC Attorney General Over Allegedly Deceiving Customers, Failing to Pay Taxes

August 27, 2020 Updated: August 27, 2020

Instacart, the popular grocery delivery startup valued at $14 billion, is being sued by District of Columbia Attorney General Karl Racine over allegedly deceiving customers with service fees, as well as failing to pay hundreds of thousands of dollars in District sales tax.

The complaint points to a since-changed Instacart policy in place from September 2016 until April 2018 under which, in addition to a delivery fee, the company charged its consumers a default 10 percent “service” fee that could be increased, decreased, or waived.

“To a reasonable consumer, this service fee looked like a tip,” according to the complaint, released by the Office of the Attorney General Thursday.

Despite framing the fee as a way to pay shoppers more consistently, the fee went to Instacart and had no impact on the compensation of its workers, the suit claims. Amid mounting backlash from Instacart workers—including a class action lawsuit by some workers that resulted in a $4.6 million settlement that required the company to change how it referred to the service fee—Instacart in April 2018 announced changes to its tipping and service fees, including lowering the service fee to a mandatory 5 percent, and suggesting a default 5 percent tip for workers.

“Instacart tricked District consumers into believing they were tipping grocery delivery workers when, in fact, the company was charging them extra fees and pocketing the money,” said Attorney General Racine in a statement.

In a statement to CNN Business, Instacart said that “customer transparency is incredibly important” to the company and that “we clearly indicate that service fees go towards our operations.”

“We believe the accusations made in this complaint are without merit. We’re disappointed with today’s action by D.C. Attorney General Racine’s office and we welcome the opportunity to continue an open dialogue on these matters,” the statement read.

The lawsuit also alleges that Instacart “failed to collect” District sales tax on the service and delivery fees during the entire time it transacted business in the District.

In his statement, Racine said: “Instacart used these deceptive fees to cover its operating costs while simultaneously failing to pay D.C. sales taxes. We filed suit to force Instacart to honor its legal obligations, pay D.C. the taxes it owes, and return millions of dollars to District consumers the company deceived.”

The Instacart lawsuit comes after the District’s Attorney General’s Office similarly sued on-demand startup DoorDash in November 2019 over allegedly deceiving customers with a controversial tipping policy. That lawsuit is ongoing.

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