On July 28, 2015, on behalf of the Wine Institute and its members, Reed Smith filed an action in the Circuit Court of Cook County, Illinois against the Illinois Attorney General (the “Attorney General”) and the Illinois Department of Revenue (the “Department”) to stop the use of the Illinois False Claims Act (“IFCA”) against Internet vendors in ways that violate the Dormant Commerce Clause of the United States Constitution, the Federal Internet Tax Freedom Act, and the Separation of Powers Clause of the Illinois Constitution. The action also seeks to facilitate the Department’s use of the Taxpayers’ Bill of Rights to abate use tax payments that have been coerced through the qui tam prosecutions of vendors on positions contrary to the Department’s regulations.
The Illinois qui tam experience For at least the last decade, the Attorney General has authorized civil IFCA prosecutions by private plaintiffs alleging violations of the Illinois Use Tax Act. Starting out with allegations that Use Tax was not being collected by Internet vendors with Illinois nexus, the Attorney General progressed in the last few years to authorize actions against Internet vendors registered to collect Use Tax, but alleged not to have collected tax on shipping charges.1 The Illinois experience with these cases generated nationwide interest on whether states should allow qui tam2 actions in cases involving the enforcement of tax laws. These cases also fueled so-far unsuccessful efforts in Illinois to amend the Illinois False Claims Act. Such efforts included a rare subject-matter hearing of the House Revenue and Finance Committee in 2012, where testimony was received from taxpayers, business organizations, and the director and other staff of the Department, against the current use of qui tam prosecutions in Illinois. Despite the extensive negative testimony, the qui tam filings continued, in the hundreds, with intense focus in the past two years on Internet vendors of wine, principally those in California, many of whom are members of the Wine Institute. In addition to the Wine Institute, Reed Smith’s complaint is filed on behalf of three California wineries: Chimney Rock Winery, LLC, The Miner Family Winery, LLC, and Staglin Family Vineyard, LLC (the “Wineries”), who are among the hundreds of Internet vendors that have been targeted by a common private plaintiff and the Attorney General.
IFCA “shipping” cases The “shipping” IFCA claims against the Wineries are based on a private plaintiff’s claim that the Wineries should have charged tax on the shipping fees for his online purchases delivered to Illinois, as part of the selling price of the wine, because an inseparable link was created between the delivery of the item and the sale of the merchandise. In 2009, the Illinois Supreme Court decided Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351 (2009). In that decision, the court determined that in an online sale, in which the purchaser had no option but to pay for delivery, an inseparable link was created between the sale and the delivery. As a consequence, the court held that in such circumstances the delivery charges were taxable. As a consequence, the court held that in such circumstances the delivery charges were taxable. Since the decision in Kean, there has been an unresolved conflict between the case law on the tax treatment of shipping charges and the Department’s regulation, which provides that a separately stated shipping charge is “deemed” to be separately negotiated, and, thus, not taxable if it is reflective of the actual costs of shipping, and therefore is not taxable.3 To date, the Department’s regulation has not been amended to reconcile its application with the Kean decision.
The Department’s regulation also provides that delivery charges are not taxable if they are agreed upon separately from the selling price of the tangible personal property, or if documentation demonstrates that the purchaser had the option of taking delivery of the property at the seller’s location. However, the Attorney General has authorized IFCA prosecutions based on the allegation in many of the complaints that, “It would be impossible or nonsensical for an Illinois customer to travel to the seller’s location to make a pick-up.” The Attorney General has not only allowed prosecutions based on such allegations, but has also participated in settlements of and partaken in the statutory share of the proceeds of cases making such allegations. The Wine Institute and the Wineries’ complaint contends that such a position is not only directly contrary to the Department’s regulation, but it also discriminates against interstate commerce in violation of the Dormant Commerce Clause.
Role of the Attorney General in the IFCA Cases Prior to authorizing several of the IFCA prosecutions of the Internet wine vendors, the Attorney General was advised that: (i) there were prior sales and use tax audits of some of the vendors facing IFCA prosecutions, in which the auditor found no liability on the delivery charge issue; (ii) some of the vendors were already under audit on the issue, thus defeating the purpose of the IFCA prosecutions, because there was no original matter for the private plaintiff to bring forward to the state; (iii) there were other vendors that had previously paid the Illinois use tax on the delivery charges for wine, despite the Department’s regulation stating that the charges were not taxable, and the Department did not assess penalties against these vendors; and (iv) certain other wineries’ websites allowed customers the option to pick up their wine at the seller’s location, and based on such facts, some wineries received Private Letter Rulings from the Department that their shipping charges were not taxable. Notwithstanding such notifications, the Attorney General allowed the IFCA filings to proceed. Moreover, the courts have upheld the Attorney General’s authority to intervene in these cases after they are allowed to go forward, and to dismiss the cases based upon prosecutorial discretion. The Attorney General was asked to do so in the above-mentioned instances, but has declined.
Role of the Department of Revenue in the IFCA Cases The Department is charged by the Taxpayers’ Bill of Rights with the duty and the power to abate taxes assessed based on erroneous written information issued by the Department. However, the Department is not a named party in any of the IFCA cases, and the Attorney General has successfully opposed joining the Department as a party to any of the IFCA cases. Consequently, the Internet vendors have been unable to avail themselves of the Department’s authority to abate taxes, despite the vendors’ reliance on the Department’s regulations.
Relief Requested The Wine Institute and the Wineries have requested that the court enjoin the Attorney General from authorizing any IFCA prosecutions without first establishing that the Department: (i) agrees with the interpretation of the tax law being made by the private plaintiff in the IFCA prosecutions, (ii) would, if it encountered the facts alleged, impose a negligence or fraud penalty under the tax laws, and (iii) would not, based on the facts alleged, abate any penalty imposed. Further, the Wine Institute and the Wineries have asked the court to order the Attorney General to review all pending IFCA prosecutions and conform the positions authorized in those prosecutions with any declarations the court may make in the Wine Institute and Wineries’ litigation. Lastly, the Wine Institute and the Wineries have asked the court to order the Department to implement procedures to abate taxes paid by IFCA defendants as a result of a position authorized by the Attorney General that is contrary to the Department’s regulations.
For more information on the IFCA prosecutions in Illinois and the suit brought by the Wine Institute and its members, contact the authors of this Alert or another member of the Reed Smith State Tax Group.
- See our prior Client Alerts on the IFCA cases 15-089 and 14-036
- “Qui tam” is the Latin term for one who sues on his own behalf and on behalf of the state, implemented through federal and state laws usually patterned on the federal False Claims Act. In Illinois, a qui tam defendant can be held liable for three times the tax liability arising from the alleged violation, for a maximum of 10 years, with a penalty per violation of between $5,500 to $11,000, plus for the payment of attorney fees to the private plaintiff, referred to as a “relator.”
- 86 Ill. Admin. Code § 130.415(d).
Client Alert 2015-215