Illinois Appellate Court Delivers Another Blow to Relator in False Claims Act Litigation

On Monday, October 17, the Illinois Appellate Court issued another taxpayer-friendly opinion in an Illinois False Claims Act case alleging a failure to collect and remit sales tax on internet and catalog sales to customers in Illinois (People ex. rel. Beeler, Schad & Diamond, P.C. v. Relax the Back Corp., 2016 IL App. (1st) 151580)). The opinion, partially overturned a Circuit Court trial verdict in favor of the Relator, Beeler, Schad & Diamond, PC (currently named Stephen B. Diamond, PC).

Consistent with its opinion in State of Illinois ex rel. Schad, Diamond & Shedden, P.C. v. National Business Furniture, LLC, 2016 IL App (1st) 150526 (Aug. 1, 2016)), the Appellate Court emphasized the high standard of proof imposed on a whistleblower seeking to prove a reckless disregard of the tax laws. The opinion is noteworthy because the court repeatedly acknowledged that “what constitutes sufficient physical presence to justify collection of the use tax is far from clear.” 2016 IL App. (1st) 151580, ¶¶ 22, 24 (“Our supreme court in Brown’s Furniture, Inc. v. Wagner, 171 Ill. 2d 410 (1996) recognized that Quill did not make clear what constitutes a substantial nexus and that in looking at the evidence in these types of cases, reasonable minds can differ on whether sufficient physical presence has been established. Thus, the court found that the law in this area is open to interpretation depending on the facts of each case.”) The court concluded that if there is a lack of clarity in the law and the defendant conducts a good-faith investigation into its tax obligations and “its failure to collect the tax resulted from an honest misinterpretation of unsettled law or simple negligence, there is no liability under the False Claims Act.” Id. ¶ 34.

The court also repeatedly emphasized that proof of tax liability does not equate to a False Claims Act violation. See id. (“Although inquiry into whether a substantial nexus exists is helpful in making this determination, a finding of substantial nexus is not conclusive because a violation of the False Claims Act does not necessarily occur every time a substantial nexus is found and the defendants did not collect the tax. If the defendant conducts a good-faith investigation into its tax obligations, and its failure to collect the tax resulted from an honest misinterpretation of unsettled law or simple negligence, there is no liability under the False Claims Act.”)

Practice Note: The opinion is another arrow in the quiver for defendants battling tax-related False Claims Act litigation claims in the Circuit Court of Cook County and elsewhere, particularly when the state has not moved to dismiss the litigation. As we have previously written, the Illinois Appellate Court has established a very favorable standard for consideration of state-filed motions to dismiss False Claims Act litigation. See our prior post on this subject here.

Lauren A. FerranteLauren A. Ferrante
Lauren A. Ferrante focuses her practice on state and local taxation. She represents taxpayers at all stages of state and local controversy disputes at the audit, administrative and judicial levels. Lauren also assists taxpayers with planning, transactional, and compliance matters with respect to various state and local taxes, including income and franchise, sales and use, gross receipts and other miscellaneous taxes. Read Lauren Ferrante's full bio.

Catherine A. BattinCatherine A. Battin
Catherine (Cate) A. Battin represents clients in state and local tax controversies at the audit, administrative and judicial levels in numerous jurisdictions. She provides national state tax strategies for clients on a full range of state tax issues, including income tax apportionment, nexus, combination and sales tax characterization of products and services. She has defended numerous internet sellers in cases brought under the Illinois False Claims Act alleging fraudulent failures to collect and remit use tax. Read Catherine A. Battin's full bio.

Mary Kay McCalla MartireMary Kay McCalla Martire
Mary Kay McCalla Martire focuses her practice on state and local tax disputes. She helps clients with audits, tax-related litigation, letter rulings and settlement conferences. Mary Kay has experience resolving disputes involving income, sales and use, utility and telecommunications taxes, as well as premium and retaliatory tax. Read Mary Kay McCalla Martire's full bio.