Some Good News For Retailers Regarding False Claims Act Cases

It has become increasingly common that private parties have filed qui tam actions against retailers under state false claims act cases, seeking large damage recoveries against the retailers based on the claim that the retailers have failed to remit sales and use taxes and escheat amounts to the states.  We have previously reported on qui tam actions in Delaware, in which the relator, a former employee of Card Compliant, a gift card processing company, asserts that Card Compliant and several retailers engaged in a fraudulent scheme not to pay breakage (i.e. unredeemed) balances on gift cards.  There have also been a number of cases filed under the Illinois statute by the law firm Schad, Diamond and Shedden as the relator.  The complaint in each of these cases claims that the retailers have not properly collected (and remitted to the State of Illinois Department of Revenue) sales tax on shipping charges for online and catalog sales. In Illinois, as is the case under other state false claims statutes, the Attorney General may intervene in the law suit and move to dismiss the law suit on several grounds.  Unfortunately, neither the Illinois nor Delaware Attorney Generals thus far have intervened to dismiss the cases; in fact, in the Delaware case the Attorney General’s Office is joined as a plaintiff in the suit.

Sales and use tax collection and remittance oftentimes involve judgment calls as to what is taxable.  If the retailer is wrong, it may be responsible for a tax, which is its customers’ responsibility in the first place, together with interest and penalties.  To add the prospect of a treble damages recovery under a state false claims statute adds an unfair and unjustified burden and exposure to retailers.  A recent decision in one such case by the Cook County Circuit Court of the State of Illinois, however, provides a ray of sunshine to this otherwise bleak picture.  Please see Judge Mulroy’s decision of State ex rel. Schad, Diamond & Shedden, P.C. v. National Business Furniture, LLC, Case No. 12 L 84 (Circuit Court of Cook County, Ill. Oct. 23, 2014).  After a two day trial (in which Brann & Isaacson represented the retailer), Judge Mulroy ruled that the plaintiff failed to establish that the mail order company, National Business Furniture, had actual knowledge that it was required to pay taxes on shipping charges or that it acted in deliberate ignorance, or in reckless disregard, of its obligations to collect tax.  The Judge made it clear that it was not up to the court to decide whether National Business Furniture correctly concluded that it did not owe sales tax on shipping charges; the proper question is whether National Business Furniture made proper inquiry as to the taxability of the shipping charges.  Based on a prior audit by the Illinois Department of Revenue in which the auditor did not take exception with National Business Furniture’s non-collection of sales and use tax on shipping charges, the Court found that the plaintiff failed to meet its burden.  Therefore, the Judge dismissed the law suit.

While National Business Furniture was required to spend the time and expense in litigating this case, we hope that the decision is a deterrent to future claims under state false claims statute for non-collection of state sales taxes.

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