July 13-24, 2015
New York, NY
Join today’s leading national and international tax authorities, including McDermott partners Art Rosen, Peter Faber, Alysse McLoughlin and Mary Kay Martire, for the NYU SPS 2015 Summer Institute in Taxation. The institute will feature a series of in-depth sessions on state and local taxation, partnerships, consolidated returns, trusts and estates, federal wealth tax and international taxation.
To register or for more information, please click here.
On March 31, 2015, the Illinois Appellate Court issued an opinion affirming the dismissal of a qui tam lawsuit filed by a law firm acting as a whistleblower on behalf of the State of Illinois against QVC, Inc., under the Illinois False Claims Act. The opinion affirmed an important precedent previously set by the court regarding the standard for dismissal of such claims when the State moves for dismissal, and established favorable precedent for retailers by holding that use tax voluntarily paid after the filing of a qui tam action does not qualify as “proceeds” of the action within the meaning of the Illinois False Claims Act.
As many readers of this blog know, over the past 12 years the Circuit Court of Cook County, Illinois has been deluged with lawsuits filed by a Chicago law firm against internet retailers as a “whistleblower” under the Illinois False Claims Act. The factual support for the lawsuits comes solely from internet-based investigations, including purchases made on retailer websites. The lawsuits typically allege that the retailers have knowingly failed to collect and remit sales and use tax on some aspect of their internet sales shipped to Illinois. See 740 ILCS 175/1 et seq. Substantial damages are claimed, including up to three times the tax allegedly owed to the State, attorneys’ fees, and a penalty assessment for each tax filing that failed to disclose the tax due.
An initial wave of approximately 90 lawsuits was filed in 2003 and 2004 against retailers that did not collect Illinois tax on their internet sales. In 2011, the whistleblower firm began to file a second round of lawsuits against retailers that collected tax on their internet sales of merchandise, but not on the shipping and handling charges associated with those sales. To date, more than 200 of these “shipping and handling” tax lawsuits have been filed. Most recently, the whistleblower firm has filed claims against defendants in the liquor industry, alleging a failure to collect sales and use tax and, in some instances, the failure to remit Illinois’ gallonage tax on sales of alcohol.
The validity of these lawsuits is hotly contested. Many lawsuits have been dismissed, and at least two shipping and handling tax cases have resulted in trial rulings against the whistleblower firm and in favor of the retailer defendants. It remains to be seen how the courts will determine the viability of Relator’s most recent claims, which appear on their face to be flawed.
Many other cases, including those that raise only nuisance value damages, have been settled to avoid the cost of litigation. These settlements appear to have fueled the whistleblower firm’s continued voracious appetite for this type of litigation.
Although the State of Illinois has the right to intervene and lead the prosecution of these actions, for the past several years the Office of the Illinois Attorney General has generally declined to intervene in these actions. Unfortunately, when this occurs, the Illinois False Claims Act permits a whistleblower claimant to proceed on its own with the litigation. In almost all cases in which the State has declined to intervene, the whistleblower firm has elected to proceed on its own with its tax-related claims.
The continued activity in this area underscores the need for the Illinois General Assembly to address and pass House Bill 0074 – legislation carefully crafted, through negotiations with the Illinois Attorney General’s office, to modify the procedure for state tax-related False Claims Act litigation in Illinois. The legislation would vastly improve the current False Claims Act situation by modifying the law as follows:
Over the past decade we have seen a large increase in the number of third party tax enforcement claims against retailers involving transaction taxes (see Multistate Tax Commission Memorandum regarding survey of class action refund claims and false action claims, dated July 12, 2013, describing such actions). The lawsuits typically are brought either as proposed class actions, alleging an over-collection of tax, or as whistleblower claims on behalf of state governments, alleging a fraudulent under-collection of tax owed to the state or municipality. With respect to certain issues, including shipping and handling charges, retailers have been whipsawed with lawsuits alleging both under- and over-collection of tax.
On April 3, a proposed class action lawsuit was filed in Florida alleging that Papa John’s Pizza was improperly collecting tax on its delivery fees (Schojan v. Papa John’s International, Inc., No. 14-CA-003491 (Circuit Court Hillsboro County, Florida)). The lawsuit is similar to an action filed in Illinois that resulted in an Illinois Supreme Court ruling rejecting a proposed class action claim that a retailer was improperly collecting tax on its shipping charges (Kean v. Wal-Mart Stores, Inc., 919 N.E.2d 926 (Illinois 2009)).
Both Florida and Illinois impose sales tax on services that are inseparably linked to the sale of tangible personal property (see, e.g., 86 Ill. Admin. Code § 130.415(b) & Fla. Admin. Code Ann. r. 12A-1.045(2)). The regulations provide that whether a customer has separately contracted for shipping charges, or has an option to avoid shipping charges by picking up the property at the retailer’s location, can be used as a proxy to determine whether the services are separate and thus not taxable (86 Ill. Admin. Code § 130.415(d); Fla. Admin. Code Ann. r. 12A-1.045(4)(a), (b)).
In Kean, the Illinois Supreme Court held that shipping charges were a taxable part of an internet sale in which the customer had no option but to pay shipping charges. After the ruling, the Illinois Department of Revenue made no announced change to its commonly understood audit position that sales tax was not owed on separately stated shipping charges that were assessed at a retailer’s actual cost.
Seeking to capitalize on the Kean ruling, an Illinois law firm has filed upwards of 150 lawsuits under the Illinois False Claims Act against retailers that do not collect tax on the shipping and handling charges associated with their internet sales, alleging an intentional failure to collect tax and seeking treble damages, attorneys’ fees and associated penalties. The suits were filed without regard to whether the retailers had been audited and found not to owe tax on their shipping and handling charges. The State has declined to intervene in the majority of these cases, permitting the Relator to proceed with the prosecution. Because the amounts at issue are small (6.25 percent tax on shipping and handling charges), the lawsuits force many retailers to choose between paying an (entirely undeserved) settlement to resolve the litigation or bearing the expense of litigation. For reasons not entirely clear, the Illinois General Assembly [...]
Continue Reading
Subscribe
