United States: The Illinois Attorney General Offers To Settle False Claims Act Cases Against Wineries

Just as Reed Smith Obtains Private Letter Rulings Calling Legal Theory Underlyin

On July 23, 2015, the Illinois attorney general issued a group settlement proposal to the defendants in its Illinois False Claims Act ("IFCA") prosecutions of numerous out-of-state wineries. 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. In recent years, the Attorney General authorized actions against Internet vendors registered to collect Use Tax but alleged not to have collected tax on shipping charges. An IFCA 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 and $11,000, plus for the payment of attorney fees to the private plaintiff, referred to as a "relator."

Just days before the proposal, Reed Smith had informed the Attorney General that it expected to receive private letter rulings from the Illinois Department of Revenue (the "Department") on behalf of two wineries located outside of Illinois. In these rulings, the Department held that the separately stated shipping charges imposed by the wineries for purchases by Illinois customers were not subject to Illinois use tax, because the wineries offered their Illinois customers the option of picking up their purchases at the winery.

The timing of the Attorney General's settlement proposal gives the appearance of little more than an attempt to extract the maximum settlement value from the IFCA prosecutions at a time when the letter rulings have raised serious questions regarding the legal theory underlying the prosecutions.

The Letter Rulings On June 11, 2015 and July 14, 2015, Reed Smith requested private letter rulings from the Department on behalf of two wineries that are defendants in the IFCA prosecutions. In these requests, Reed Smith requested that the Department find that:

An out-of-state vineyard/winery that is registered as an Illinois Use Tax collector and which makes online sales of wine is not, pursuant to 86 Ill. Admin. Code § 130.415(d), required to charge Illinois Use Tax on the separately stated shipping charge on the invoice for such purchase by an Illinois purchaser when it offers its online customers (including, its Illinois customers) the delivery options to (A) have the wine shipped to the Illinois purchaser, or (B) have the purchaser take delivery of his or her purchase at the vineyard/winery outside of Illinois, and the Illinois purchaser declines option (B) and chooses option (A).

On July 14, 2015, based on the Department's representation that the private letter rulings would be issued, and that the above reading of the Department's Regulation, 86 Ill. Admin. Code § 130.415(d) was correct, and that the taxpayers would not owe tax on the shipping charges incurred by their Illinois customers, Reed Smith filed Motions to Dismiss the IFCA prosecutions authorized against the two wineries.1

The private letter rulings were signed by the Department on July 16, 2015 and received by Reed Smith on July 27, 2015. In the private letter rulings the Department examined its regulation in light of the decision in Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351 (2009), and the Department determined as follows:

Thus, when charges for outgoing transportation and delivery are separately identified and the purchaser has the option to pick up the tangible personal property, outgoing transportation and delivery is considered a service separate and distinct from the sale of tangible personal property that is being transported or delivered and charges for such services should be excluded from the gross receipts subject to the Retailers' Occupation Tax (or Use Tax in the case of out-of-state wineries who sell directly to Illinois residents). When a seller offers the purchaser the option to pick up the property at the seller's location, the seller must maintain documentation which demonstrates that the purchaser had that option.

In your letter, you stated that your customers have the option to come to your winery and pick up any wine they purchase from you or they can have the wine delivered to them. In addition, you provided documentation to support your assertion that your customers have this pick-up option. Based on all the information you have provided in your letter, it is the Department's opinion that the transportation and delivery charges associated with your sales of wine are not subject to tax.

The Attorney General's Settlement Proposal Before the private letter Rulings were issued, Reed Smith had advised the Attorney General that the Department had provided Reed Smith with advance notice that it would be issuing rulings favorable to the wineries. It has been Reed Smith's experience that most of the defendant wineries in the IFCA prosecutions routinely and prominently offered the option to pick up wine purchases at the winery as an alternative to shipping to the purchaser. As a consequence, the Department's intent to issue the private letter rulings should have been a wake-up call to the Attorney General about the wisdom of pursuing the IFCA prosecutions against most of the defendant wineries.

Nevertheless, on July 23, 2015, almost 10 days after Reed Smith filed its motions to dismiss on behalf of its clients, the Illinois Attorney General issued a group settlement proposal. This proposal was sent to counsel for the defendants in the IFCA prosecutions, as well as directly to new winery defendants in IFCA prosecutions, some of which received the settlement proposal before even being served with a complaint.

The terms of the settlement proposal, which has been agreed to by the "State and Relator"2 are as follows:

  1. Relator will voluntarily dismiss all shipping and handling cases involving potential shipping tax due (i.e., single damages) of less than $1,000.
  2. As to shipping and handling cases with potential shipping tax due of $1,000 or greater, the State and Relator agree to settle those cases for two times ("2X") the sales tax potentially due on shipping and handling charges for all defendants' sales to Illinois customers from November 19, 2009 (the date of the Illinois Supreme Court's decision in Kean v. Wal-Mart) to the present (the "Time Period"). This 2X settlement amount will include any amounts due to the Relator for a relator's share of the proceeds pursuant to 740 ILCS 175/4(d).
  3. If Relator has engaged in no motion practice or discovery, Relator agrees to cap its attorney's fees, costs and expenses (combined) at $3,000 for cases settled pursuant to the terms of item 2 above. The cases involving no motion practice and discovery as of the date of this letter are identified under Category I in the attachment to this letter.
  4. In the other cases, any amounts due to the Relator for reasonable expenses and reasonable attorney fees and costs, pursuant to 740 ILCS 175/4(d), should be either negotiated separately between the Relator and defendants or determined by the Court via the Relator's filing of a petition for expenses, attorney's fees, and costs. These other cases are identified under Category II in the attachment to this letter.

Is the Attorney General's Settlement Offer a "good deal"? As a result of the letter ruling requests, Reed Smith confirmed the Department's position that at all relevant times under the applicable regulation no tax would apply to shipping charges when the vendor offers the option to pick up the purchase at the vendor's location, even if the vendor's location is outside of Illinois. No vendor offering that pick-up option to its purchasers should ever have been prosecuted under the IFCA.

If the Department's position is that the tax liability for such a defendant should have been zero, then a "good" settlement of an IFCA prosecution against such a defendant should be a finding of no damages and a dismissal order which provides that each party shall bear its own costs and attorneys' fees. One would have thought that the Attorney General, after being advised that a favorable Department ruling was forthcoming, would have made the effort to offer a "good" settlement proposal. Instead, the Attorney General made a cynical offer. In exchange for dropping a now untenable prosecution, all the Attorney General has offered is to limit a defendant's liability to double a tax amount that the Department has taken the position is not due, plus the relator's attorney's fee demand. In other words, the Attorney General is offering defendants the choice between bearing the costs of defending themselves in the IFCA prosecutions or agreeing to a settlement payment based on a nonexistent violation of the law.

The Attorney General successfully opposed making the Department a formal party to the IFCA prosecutions, foreclosing the opportunity to have the Department abate taxes if the liability was based on positions contrary to the Department's regulation. Nevertheless, Reed Smith has directly asked the Department to abate all taxes associated with transportation and delivery charges in situations in which its winery clients can show that a pick-up option was available.

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.


  1. The Motions to Dismiss are still pending before Judge Thomas R. Mulroy, Jr.
  2. It should be noted that while the Illinois Attorney General refers to Stephen B. Diamond, P.C. (the Plaintiff in these IFCA prosecutions) as a "relator," it has yet to be proven that the Plaintiff is a relator for purposes of the Illinois False Claims Act.

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