Use Tax case – Illinois

Sometimes tax compliance headaches present as private lawsuits rather than government actions, and in one case, a business prevailed even though its interpretation of tax law was arguably incorrect. The interesting thing about this case is that the tax question is almost irrelevant; the business’s ability to show that it made reasonable efforts to comply with the law was all the court needed.

National Business Furniture, a Wisconsin-based seller, collected use tax on its Illinois merchandise sales but not on delivery charges. Schad, Diamond & Shedden, an Illinois law firm, brought a qui tam, or whistleblower, case against NBF under the Illinois False Claims Act, seeking triple damages for unpaid taxes plus penalties, attorneys’ fees and costs, for the allegedly fraudulent failure to collect use tax on delivery charges. (A private party, called the relator, may file suit under the False Claims Act and is entitled to a portion of the proceeds if a suit is successful.) The circuit court found for NBF and the appellate court agreed.

A little background about the underlying tax issue … Illinois taxes delivery charges that are part of the selling price of the item. Identifying whether the charges are part of the selling price sounds simple but isn’t, and official guidance has been sparse. The Illinois Supreme Court’s 2009 decision in Kean v. Wal-Mart provided some clarification, although the regulations were not updated until 2016. Basically (in a gross oversimplification) the question turns on whether the buyer has a way of getting the item without paying the seller a delivery fee – by picking it up, for example, or by selecting slower free shipping. When a “no delivery fee” option is available, if the buyer selects an option that does require that they pay the seller for delivery, the charge is not considered to be an inseparable part of the selling price because it is possible to obtain the item without paying a shipping fee to the seller.

As described by the trial court, NBF offered customers four delivery options: tailgate delivery outside the customer’s building, inside delivery, delivery by a provider selected and paid for by the customer, or pick up at the manufacturer’s distribution center. NBF’s business decision not to collect use tax on shipping charges was based on their informed belief that the charges were not taxable. It is not entirely clear when that decision was made and it does not appear to have been researched extensively or specifically revisited after Kean.

The relator claimed that NBF should have been collecting use tax on its delivery charges, that the tax returns without such tax were fraudulent, and that its failure to do so was reckless.

NBF’s defense against the false claims action was that it took its tax obligations seriously. NBF subscribed to a tax alert service and met periodically with its lawyers and accountants. Additionally, NBF was audited by Illinois during the time period covered by the lawsuit and was not assessed for failing to pay tax on delivery.

The court held that NBF reasonably relied on its interpretation of the law and the Illinois sales and use tax audit to conclude that it was not obligated to collect use tax. Since the resolution of underlying issue doesn’t really matter in this type of case, the court did not reach a decision on whether NBF should have collected use tax on its delivery charges.

The Illinois False Claims Act, which is modeled on Federal law, requires that a defendant KNOWINGLY files a false record or statement. The statute (740 ILCS 175/3) defines knowing as having actual knowledge, acting in deliberate ignorance or acting in reckless disregard. Case law makes it clear that the law is not intended to penalize differences of opinion or innocent errors, or even ordinary negligence. In order to be found liable, a defendant would have to commit gross negligence or, as some courts have described it, “gross negligence-plus.”

Companies often settle lawsuits rather than incur substantial legal expenses and risk large fines but NBF chose to fight back against a serial whistleblower. The business showed that it took steps to ensure tax compliance and that was enough to successfully defend against the fraud charge.

State ex rel Schad, Diamond & Shedden, P.C. v. National Business Furniture, LLC, Appellate Court of Illinois, First District, No. 12 L 84, Aug. 1, 2016

AUTHOR

Connie Eisenberg

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