INSIDE SALT
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
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Illinois Appellate Court Affirms Dismissal of State Tax Qui Tam Lawsuit

by | Apr 14, 2015 | , ,

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.

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Retailers Caught in the Middle: To Tax or Not to Tax Delivery Fees

by | Jun 12, 2014 | , , , , , , , ,

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 [...]

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Retailers Should Examine Gift Card Practices in Light of a Recent Unclaimed Property False Claims Action

by | May 14, 2014 | , ,

A complaint in the Superior Court of Delaware alleges that numerous retailers “schemed to deprive the State of Delaware of hundreds of millions of dollars due to the State under the Abandoned Property Law” (emphasis added).  Delaware v. Card Compliant et al., Del. Sup. Ct (New Castle County), Case No. N13C-06-289 FS (6/2013).  The complaint asserts that the retailers were all incorporated in Delaware and, under the second priority rule, unclaimed gift card funds should have been remitted to Delaware after five years of inactivity.  According to the complaint, the defendants attempted to avoid this rule by setting up and using companies incorporated in states that exclude gift cards from the definition of unclaimed property for purposes of gift card issuance and management; however, the arrangements “are without substance as the value of all unredeemed gift cards remains within the possession, custody and control of the Delaware Defendants.”

The financial risk is considerable.  A qui tam lawsuit such as this one allows for triple damages plus a per violation civil penalty of $5,500 to $11,000. The defendants included 15 retailers, primarily restaurants, a third party gift card company and its affiliates, and a trade association that allegedly promoted the gift card company business.  As the action is under Delaware’s qui tam statute, it was filed under seal in June of 2013 and only recently became public.  The defendants are only now becoming aware of the suit.

The complaint is definitely worth reading for anyone involved in gift card unclaimed property issues.  There are several interesting points to note:

  • The original plaintiff bringing the suit (the relator) acted as controller and then vice president of client relations for the original gift card company offering the services to the defendants.  The business was operated out of the relator’s basement.  After the original gift card business was purchased by another company, the relator was a sales and support representative for the business.  The relator appears to have kept records of the company’s business arrangements with the retail defendants and now uses those records to bring a law suit against his former employer’s clients.
  • One of the law firms representing the relator is a well-known political powerhouse in Delaware.
  • The relator has asked for jury trial of this case.

Important take-away issues:   Any company involved in the use of gift cards should take a serious look at this complaint and initiate a review of gift card procedures.  This review should include consideration of the following:

  • If using a gift card company, verify that there is economic substance to the structure.  This applies both to the use of third party providers and captive gift card companies.  While there are certainly legal arguments regarding the level of economic substance necessary, it is better safe than sorry.  Furthermore, for any company relying on a captive gift card company, the risk of a piercing the corporate veil argument (or its equivalent) should be a consideration in how the relationship is structured.
  • Review and strengthen confidentiality [...]

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