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Another Effort at False Claims Act Reform: Bills Introduced to Amend Illinois Act to Restrict Tax-Related Claims

by Mary Kay McCalla Martire | Feb 16, 2017 | False Claims Act, Illinois

Illinois Legislators have recently introduced three bills that would amend the Illinois False Claims Act (“Act”) to restrict the ability to bring tax-related claims. Senate Bill 9, the proposed “grand bargain” to resolve Illinois’ budget stalemate, includes language that would eliminate the ability to use the Act to bring tax claims. In addition, Representative Frank Wheeler and Senator Pam Althoff have introduced House Bill 1814 and Senate Bill 1250, respectively, which are identical pieces of legislation that would significantly restrict a private citizen’s right to bring tax-related claims. Senate Bill 9, if adopted in its current form, would eliminate the ability to bring a tax-related claim under the Act. Currently, the Act only excludes the right to bring income tax-related claims. 740 ILCS 175/3(c). This would effectively conform the Act to the federal False Claims Act, which does not extend to tax claims. Rather, tax-related claims are brought before the Internal Revenue Service’s Whistleblower Office as whistleblower claims. House Bill 1814 and Senate Bill 1250 (“Bills 1814/1250”) preserve the right to bring tax claims under the Act, and they maintain the prohibition against income tax claims. However, in a significant improvement over current practice, the Bills would amend the Act to restrict the ability of a whistleblower or its counsel to control or profit from the filing of tax claims. In addition, they enhance the role played by the Department of Revenue (“Department”) in determining whether a whistleblower’s tax claim should be pursued. Effectively, the Bills make the filing of state tax-related whistleblower claims more like the procedure for bringing a federal tax violation before the IRS. Currently, the Act authorizes private citizens, termed “relators,” to initiate litigation to force payment of tax allegedly owed to the State. 740 ILCS 175/4(b). Hundreds of such claims have been filed in Illinois by whistleblowers claiming a failure to collect and remit sales tax on internet sales. Relators file a complaint under seal with the circuit court and serve the complaint on the State. Id. 175/4(b)(2). The Illinois Attorney General’s office then has the opportunity to review the allegations and decide whether to intervene in the litigation. Id. 175/4(b)(2), (3). The Department is not named as a Defendant and there is no requirement to involve the Department in the litigation. If the Attorney General declines to proceed with the litigation, the relator may proceed with the lawsuit on its own and, if successful, is entitled to an award of 25 percent to 30 percent of the proceeds or settlement of the action, plus its attorneys’ fees and costs. Id. 175/4(d)(2). Even if the State intervenes and proceeds with the litigation, eliminating the relator’s day-to-day involvement, the relator is entitled to an award of 15 percent to 25 percent of the proceeds of settlement, plus attorneys’ fees and costs. Id. 175/4(d)(1). In contrast, Bills 1814/1250 provide that only the Attorney General (“AG”) and the Department have the right to initiate claims under [...]

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Illinois Supreme Court Holds City of Chicago Went Too Far in Taxing Cars Rented Outside Its Borders

by Catherine A. Battin | Jan 25, 2017 | Constitutional Issues, Illinois, Local Tax

The Illinois Supreme Court, in Hertz Corp v. City of Chicago, 2017 IL 119945 (Jan. 20, 2017) , held that the City of Chicago’s ruling requiring rental car companies located within three miles of the City to collect tax on vehicle rentals is unconstitutional under the home rule article of the Illinois Constitution. Hopefully, the court’s ruling will stymie the City’s expansive interpretation of its taxing powers.

The tax at issue is the City’s Personal Property Lease Transaction Tax (Lease Tax), which is imposed upon “(1) the lease or rental in the city of personal property or (2) the privilege of using in the city personal property that is leased or rented outside of the city.” Mun. Code of Chi. § 3-32-030(A). While the Lease Tax is imposed upon and must be paid by the lessee, the lessor is obligated to collect it at the time the lessee makes a lease payment and remit it to the City. Mun. Code of Chi. §§ 3-32-030(A), 3-32-070(A).

The subject of this litigation is the City’s application of the Tax in its Personal Property Lease Transaction Tax Second Amended Ruling No. 11 (eff. May 1, 2011) (Ruling 11). The plaintiffs argued that Ruling 11 extends the reach of the tax ordinance beyond Chicago’s borders in violation of the home rule provision of the Illinois Constitution and violates the federal due process and commerce clauses. The Ruling “concerns [short-term] vehicle rentals to Chicago residents, on or after July 1, 2011, from suburban locations within 3 miles of Chicago’s border … [excluding locations within O’Hare International Airport] by motor vehicle rental companies doing business in the City.” Ruling 11 § 1. The Ruling explains that “‘doing business’ in the City includes, for example, having a location in the City or regularly renting vehicles that are used in the City, such that the company is subject to audit by the [City of Chicago Department of Finance] under state and federal law.” Ruling 11 § 3. As for taxability of leased property, the Ruling cites the primary use exemption, exempting from Tax “[t]he use in the city of personal property leased or rented outside the city if the property is primarily used (more than 50 percent) outside the city” and stating the taxpayer or tax collector has the burden of proving where the use occurs. Ruling 11 § 2(c) (quoting Mun. Code of Chi. § 3-32-050(A)(1)).

Ruling 11 contains a rebuttable presumption that motor vehicles rented to customers who are Chicago residents from the suburban locations of rental companies that are otherwise doing business in Chicago are subject to the Lease Tax. The Ruling applies to companies with suburban addresses located within three miles of the City. The presumption may be rebutted by any writing disputing the conclusion that the vehicle is used more than 50 percent of the time in the City. The opposite is assumed for non-Chicago residents. Ruling 11 § 3. The Ruling provides that such a writing can be as simple as a customer’s [...]

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

by Catherine A. Battin and Mary Kay McCalla Martire | Oct 19, 2016 | False Claims Act, Illinois, Sales Tax

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).

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Another Taxpayer Victory in Illinois False Claims Act Litigation, Affirming a Taxpayer’s Right to Rely On Qualified Third Parties For Tax Return Preparation

by Mary Kay McCalla Martire | Sep 13, 2016 | Illinois

On August 30, 2016, following a one day bench trial, Cook County Circuit Judge Thomas Mulroy ruled in favor of Treasury Wine Estates (“TWE”) in Illinois False Claims Act (“Act”) litigation filed by the law firm of Stephen B. Diamond, PC (“Relator”). Relator alleged that TWE had violated the FCA by knowingly failing to collect and remit Illinois use tax on the shipping and handling charges associated with its internet sales of wine shipped to Illinois customers. State of Ill. ex rel. Stephen B. Diamond, P.C. v. Treasury Wine Estates Americas Company, d/b/a Treasury Wine Estates, No. 14 L 7563 (Cir. Ct. of Cook County, Ill. Aug. 30, 2016) (“Order”). The Court held that Relator failed to prove that TWE knowingly violated the FCA or that it acted in reckless disregard of any Illinois tax collection obligation.

The Court confirmed that an “extreme version of ordinary negligence” standard applies to prove that a defendant “knowingly” violated the FCA by acting in “reckless disregard” of an obligation to pay or transmit money to the State. The Order describes “[t]his standard … [as] meant to reach defendants who intentionally close their eyes, hide their heads in the proverbial sand, and do not make simple inquires which would inform them that false claims are being made.” Order at 14. The Court’s interpretation of the “reckless disregard” standard is consistent with the standard recently established by the Illinois Appellate Court in State of Illinois ex rel. Schad, Diamond & Shedden, P.C. v. National Business Furniture, LLC, 2016 IL App (1st) 150526, ¶ 39 (Aug. 1, 2016) and is very favorable for defendants defending against FCA claims. (“Significantly more than an error, mistake, or ordinary negligence is required … to demonstrate reckless disregard in the context of a False Claims Act violation. Relator … needed to prove that defendant ignored obvious warning signs, buried its head in the sand, and refused to learn information from which its duty to pay money to the State would have been obvious.”), aff’g, No. 12 L 84 (Cir. Ct. of Cook County, Ill. Oct. 23, 2014) (citations omitted).

Analyzing the evidence produced at trial, the Court held that it was reasonable for TWE to rely on third party tax consultants to prepare and file its Illinois tax returns, even though TWE did not review the returns before they were filed. The Order states:

Defendant relied on its consultants to do the job for which they were hired, to do the right thing and to be acquainted with Illinois sales tax law.Defendant relied on its preparers’ expertise, experience in the field and representations to ensure its ST-1 forms were accurate. Defendant was faced with the task of filing hundreds of tax returns in many states which have different and conflicting laws. Defendant did what a prudent business would do: it asked for help with navigating the murky waters of Illinois tax law and the challenging task of correctly preparing an Illinois sales tax return. Defendant did not [...]

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Cook County Circuit Court Dismisses 201 False Claims Act Lawsuits

by Mary Kay McCalla Martire | May 24, 2016 | Constitutional Issues, False Claims Act, Illinois, Nexus, Sales Tax

At a hearing yesterday, Cook County Circuit Judge James Snyder granted the State of Illinois’ (State) Motion to Dismiss 201 Illinois False Claims Act (FCA) cases filed by the law firm of Stephen B. Diamond, PC (Relator) against out-of-state liquor retailers. The lawsuits alleged that the defendants were obligated to collect and remit sales tax on their internet sales of alcohol shipped to Illinois customers. The complaints admitted that the defendants lacked any physical presence in the state, and would not qualify for any Illinois liquor retail license, but nevertheless asserted a tax collection obligation for sales and a tax remission obligation for gallonage tax arising under the 21st Amendment of the US Constitution and the Supreme Court’s decision in Granholm v. Heald, 544 U.S. 460 (2005).

In its motion to dismiss and at oral argument, the State relied upon the favorable standard for consideration of motions to dismiss False Claims Act cases filed by the State established by the Illinois Appellate Court in two prior cases: State ex rel. Beeler, Schad & Diamond v. Burlington Coat Factory Warehouse Corp., 369 Ill. App. 3d 507 (1st Dist. 2006) and State ex rel. Schad, Diamond & Shedden, P.C. v. QVC, Inc., 2015 IL App (1st) 132999 (Apr. 21, 2015). In both cases, the appellate court held that when the State moves to dismiss a qui tam action allegedly filed on its behalf, its motion should be granted absence evidence of “glaring bad faith” on the part of the State in moving to dismiss. The State argued that it had concluded that the Relator’s claims were weak, based in part on the Relator’s admission that the defendants lacked nexus. In response, the Relator argued that the State had acted in bad faith by relying on Quill Corp. v. North Dakota, 504 U.S. 298 (1992) and other commerce clauses nexus rulings and, according to the Relator, ignoring the 21st Amendment and Granholm, which the Relator alleged supplanted any nexus analysis (a point the State and the defendants vigorously disputed in briefing prior to argument).

After hearing argument, Judge Snyder ruled from the bench that the Diamond firm had failed to meet its burden of proving bad faith by the State in moving to dismiss the 201 lawsuits.

The Diamond firm will have 30 days from the date of entry of the Circuit Court’s dismissal orders to either seek reconsideration or appeal from the trial court’s ruling.

Illinois Department of Revenue Further Revises its Proposed Amendments to Shipping and Handling Regulations

by Mary Kay McCalla Martire | Feb 19, 2016 | False Claims Act, Illinois, Local Tax, Sales Tax

The Illinois Department of Revenue (Department) has further revised its recently proposed amendments to the regulations governing the taxability of shipping and handling charges. See our prior coverage here. The revisions to the Proposed Amendments to 86 Ill. Admin. Code §§ 130.415 and 130.410 (Revised Proposed Amendments) were made in response to particular comments and concerns raised by industry groups, as explained by the Department in its Second Notice of Proposed Rulemaking. The Revised Proposed Amendments address the following topics:

Retroactivity of the Revised Proposed Amendments to November 19, 2009, the date of the Kean decision: The Department added a “safe harbor provision” for taxpayers that have complied with the existing regulation for time periods prior to the effective date of the Revised Proposed Amendments. Prop. 86 Ill. Admin. Code § 130.415(b)(1)(A)(i). Taxpayers fitting within the safe harbor will be considered to be in compliance with Illinois law regarding the taxability of delivery charges.
Clarification of taxpayers subject to the Revised Proposed Amendments: The Department clarified that all persons making taxable sales or collecting or self-assessing Illinois use tax are subject to the Revised Proposed Amendments. Prop. § 130.415(b)(1)(A)(ii).
Free shipping option: The Department has added language expressly stating that when a seller offers customers free standard shipping or “qualified” free shipping (i.e., free shipping for purchases totaling at least a certain amount), any other separately stated shipping service for which a seller charges customers (i.e., expedited shipping) are separately contracted for and thus nontaxable. Rev. Prop. § 130.415(b)(1)(B)(ii), (C). For delivery charges to qualify as nontaxable because a seller offers “qualified” free shipping, the customer’s purchase must actually be eligible for free shipping (i.e., must total at least a specified dollar threshold). Rev. Prop. § 130.415(b)(1)(D)(v).
Taxability of delivery charges where taxability or tax rate of underlying property differs: The Revised Proposed Amendments also provide that sellers can elect to itemize delivery charges on sales of taxable and tax exempt items and low and high rate items and pay the associated tax on shipping charges as determined by the underlying item. Rev. Prop. 130.415(b)(1)(F)(i). In the absence of separately identifying the delivery charges, the “lump sum” rules as set forth in the original version of the Proposed Amendments will apply. Rev. Prop. § 130.415(b)(1)(F)(i).
Taxability of delivery charges where taxability of charges themselves differ: The Department also added a similar rule based on taxability of the delivery charges themselves, in a circumstance, for example, where some charges are taxable and others are not. The Revised Proposed Amendments mirror the rule expressed above, stating that that a seller can separately state delivery charges for each item sold and pay the associated tax as determined per item. Rev. Prop. 130.415(b)(1)(E)(i). If the invoice contains a lump sum of total delivery charges, the sum will not be taxable if the selling price of items with nontaxable delivery charges is greater than the selling price of items with taxable delivery charges. [...]

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Illinois Appellate Court Upholds Finding of Consumer Fraud Act Violation in Sales Tax Overcollection Case

by Catherine A. Battin | Feb 9, 2016 | Illinois, Sales Tax

The Illinois Appellate Court recently affirmed a finding for a plaintiff individual, upholding the circuit court’s conclusion that defendant Sears, Roebuck and Co. (Sears) violated the Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1) (the Act) by overcharging plaintiff sales tax on his purchase of a digital television converter box (converter box”). Aliano v. Sears, Roebuck & Co., 2015 IL App (1st) 143367 (Dec. 30, 2015). Sears appealed the circuit court’s ruling on two bases: (1) that the court failed to find that the plaintiff was actually deceived by any alleged misrepresentation made by Sears (an element required to be found for a violation of the Act); and (2) that the court found Sears had violated that Act based on its determination that overcollection of sales tax “is a de jure deceptive practice violation of the [Act].” Although it upheld the underlying ruling, the court reversed the circuit court’s award of attorneys’ fees pursuant to the Consumer Fraud Act and remanded for a determination of the amount of reasonable fees to which the plaintiff is entitled.

Plaintiff’s claim under the Act was based on his purchase of a converter box. At the time of his purchase, Plaintiff presented a coupon issued by the federal government for a $40 credit against the purchase price. The coupon entitled Sears to a reimbursement by the federal government for the lesser of $40 or the purchase price of the converter box. Approximately a year before Plaintiff’s purchase, the Illinois Department of Revenue (the Department) had issued a bulletin stating that the portion of the selling price covered by the coupon was not subject to Illinois sales tax. Despite this guidance, the Sears sales associates who handled Plaintiff’s purchase charged him sales tax on the full selling price of the converter box. Plaintiff sued, alleging that Sears wrongfully collected sale tax on the value of the coupon.

In arguing that Plaintiff was not deceived by the sales associate’s representation of the amount of tax owed, Sears contended that Plaintiff knew he would be overcharged sales tax on the purchase, and that he “went shopping for a lawsuit.” One month before Plaintiff’s purchase, the case captioned Nava v. Sears, Roebuck & Co. was filed in the circuit court, in which virtually identical allegations were made against Sears. (On allegations that Sears violated the Act, the appellate court eventually determined that a genuine issue of material fact existed and reversed the circuit court’s grant of summary judgment in favor of Sears (see Nava v. Sears, Roebuck & Co., 2013 IL App (1st) 122063 (July 29, 2013).) Despite finding that “[t]he facts relied upon by Sears could certainly support the inference that the plaintiff was not deceived by the representations of Sears’s sales associate as to the net amount that he owed and that he was well aware at the time that he purchased the converter box that sales tax should not have been assessed on the $40 value of the NTIA coupon which he [...]

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City of Chicago Debt Relief Program – A Tax Amnesty Opportunity

by Mary Kay McCalla Martire and Nick Furtwengler | Dec 8, 2015 | Illinois, Interest and Penalties, Local Tax

Chicago’s Department of Finance currently is offering an amnesty program called the Debt Relief Program (Program). The Program gives individuals and businesses the opportunity to resolve outstanding debt and avoid certain interest and penalties. The Program is outlined in Article IV of the Management Ordinance enacted with the City of Chicago’s (City’s) Fiscal Year 2016 Budget. It is unrelated to the Chicago Department of Finance’s recent Voluntary Disclosure offer to providers and customers with respect to the Personal Property Lease Transaction Tax, which we covered in a previous blog post.

The Program runs from November 15, 2015 to December 31, 2015, and offers amnesty for three types of “debt,” defined as follows:

Unregistered Taxpayers or Unregistered Tax Collectors: Includes tax liabilities for tax periods prior to January 1, 2012, for any taxpayer or tax collector that is not currently registered with the City for the tax.

Final Tax Assessments: Includes tax assessments issued prior to January 1, 2012, where the taxpayer failed to respond to the Department of Finance’s findings that taxes were owed.

Real Property Transfer Taxes: Includes real property transfers that took place prior to January 1, 2012.

We think the better reading of the City’s reference to “unregistered” taxpayers is that the registration is tax specific, meaning that a taxpayer registered to pay a particular tax would not, by the fact of that registration, be precluded from participating in the amnesty program with respect to another type of tax for which the taxpayer had not registered. (City of Chicago Debt Relief Ordinance of 2015, Section 2; Form 2015 Debt Relief Application – Unregistered Taxpayers and Tax Collectors, Section 2).

The Program’s main benefit includes the waiving of interest and penalties. In order to receive this benefit, the eligible tax debt must be paid in full and the applicable tax returns must be filed with the City by December 31, 2015. If the eligible tax debt is not paid in full by December 31, 2015, regular interest and penalty amounts will be assessed.

The following taxes are not eligible for the Program: regulatory, compensation or franchise fees, special assessments, the cigarette tax, the automatic amusement device tax, wheel tax license fees, the Chicago Transit Authority portion of the real property transfer tax, and the Metropolitan Pier and Exposition Authority airport departure tax. Also ineligible are tax debts in pending legal activity or for which the City has obtained an order from the Department of Administrative Hearings or a judgment from a court of competent jurisdiction. All other taxes imposed under the Municipal Code of Chicago or by ordinance passed by the Chicago City Council are eligible for the Program.

Unregistered taxpayers and taxpayers with outstanding tax debts to the City of Chicago should consider whether to participate in the Program. To apply for tax debt relief through the Program, taxpayers need to complete a Tax Debt Relief application with the City, accompanied [...]

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Taxpayers Stand to Lose Under Chicago’s Lease Tax VDA Offer

by Catherine A. Battin, Eric D. Carstens and Stephen P. Kranz | Nov 20, 2015 | Audits, Illinois, Incentives, Interest and Penalties, Local Tax, Transaction Taxes

Yesterday, the City of Chicago (City) Department of Finance (Department) published an Information Bulletin that provides additional guidance on the Personal Property Lease Transaction Tax (Lease Tax) and extends a new Voluntary Disclosure Agreement (VDA) offer to providers and customers. The updated guidance includes an overview of the Lease Tax, a description of the amendments included in the FY 2016 Revenue Ordinance that passed on October 28, 2015, and answers to 15 FAQs. The details on the Department’s controversial interpretation of the Lease Tax in Ruling #12 and the recent amendments to the Lease Tax have been covered by the authors in prior blog posts, available here and here. The new VDA offer is a significant development that may be enticing to certain providers and customers. However, before providers and customers rush to sign up to pay the Lease Tax for the foreseeable future, they should carefully evaluate whether any Lease Tax obligation is in fact due and whether they qualify under the loose terms outlined in the Bulletin (discussed in detail below). It should be noted at the outset that the guidance (and accompanying VDA offer) do not relate to the City’s amusement tax, which has also been of concern after a ruling was issued this summer interpreting the tax to apply to streamed digital content.

VDA Offer Terms

The most significant component of yesterday’s guidance is the VDA offer beginning on page 6 of the Bulletin. While the VDA may seem enticing, we encourage providers and customers alike to proceed with caution as the practical application of the ambiguous (and discretionary) terms are tainted with uncertainty.

As a threshold to qualifying, the provider or customers must qualify (i.e., be a qualified discloser) for the City standard voluntary disclosure program. Under the standard program, a taxpayer must not be under audit or investigation (i.e., has not received a written notice relating to an audit or investigation for the tax at issue) and must “waive their right to an administrative hearing or claim for refund or credit, and agree not to initiate or join any lawsuits for the payments made under the program.” This is significant because we believe a challenge to the Lease Tax is imminent and those that participate in the VDA program will not benefit if any such challenge is successful.

Even if a taxpayer is considered a qualified discloser under the standard program, to qualify for the more favorable Lease Tax offer providers and customers must file an application by January 1, 2016, and come into compliance with the Lease Tax Ordinance by the same date (or such later date that the Department may agree to). If all of these requirements are met, they will receive the following terms:

As to charges for nonpossessory computer leases that qualified for Exemption 11 under the Department’s interpretation of the exemption before the issuance of Ruling #12, no liability for tax, interest or penalties based on those charges for [...]

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Illinois Proposed Regulations Governing Apportionment of Income for Transportation Companies Moving Forward

by Mary Kay McCalla Martire | Nov 19, 2015 | Allocation/Apportionment, Illinois, Income Tax

On November 17, the Illinois Joint Committee on Administration Rules approved a proposed regulation promulgated by the Illinois Department of Revenue (Department) implementing statutory changes to the apportionment formula for business income derived from providing transportation services. The changes are effective for tax years ending on or after December 31, 2008. See Prop. 86 Ill. Admin. Code § 100.3450 (Regulation).

The Regulation reflects recent statutory changes made to the apportionment formulas for both non-airline and airline transportation services. See 35 ILCS 5/304(d). It provides definitions of key terms, including “revenue mile” and “In this State.”

As finalized, the Regulation incorporates certain industry comments to the Department’s initial draft of the Regulation (See TFI comments) by adding a definition of “freight” and deleting language that created inconsistency in the definition of “revenue mile.” The Regulation does not reflect taxpayer criticisms of the language regarding the “transaction-by-transaction” approach in subpart (b)(4). This subpart states that in a “transaction” where a taxpayer transports a passenger or freight both by air and otherwise, gross receipts from airline services is equal to the portion of the total gross receipts from the “transaction” that is representative of airline miles or “any other reasonable method supported by … books and records.” In many cases in the transportation industry, tracking revenue on a transactional basis and per mode of transportation is not practical and is not an industry norm. Nor is it required by statute. Although the regulatory provision’s allowance of “any other reasonable method” could be helpful, its ambiguity provides little certainty to taxpayers regarding what alternative methodology would be acceptable to the Department.

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