United States: The Wine Institute And Reed Smith Team Up To Fight Illinois False Claims Act Overreach

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.

Footnotes

1. See our prior Client Alerts on the IFCA cases  15-089 and 14-036

2. "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."

3. 86 Ill. Admin. Code § 130.415(d).

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions