Qui Tam - Illinois' New Form of Ambulance Chasers Targeting the Wine Industry

An Illinois Plaintiff's lawyer has recently been targeting the wine industry in qui tam class action suits alleging that wineries with direct ship sales have been breaking the law by deliberately disregarding the Illinois tax code. The Illinois False Claims Act (IFCA), formerly known as the Whistleblower Reward and Protection Act, derives from the Federal False Claims Act. 740 ILCS 175/1, A provision allows a private citizen to bring a civil suit on behalf of the government in the name of the government to recover damages for the government.

The Plaintiff in this case is the lawyer himself, Stephen Diamond of Chicago. Diamond is suing on his own - claiming he made the purchases and discovered the act - and thus not sharing in any recovery. Diamond has filed over 300 suits against out of state retailers.  Some of those claim that Illinois wine retailers are defrauding the Illinois government because they do not charge tax on the shipping and handling portion of the sales. The Illinois Department of Revenue has addressed the shipping charges, and does not require shipping charges if the shipping charges are separate from the price of goods or if the shipping charges are equal to the cost to the retailer of using the common carrier. Ill. Dept. Rev. Reg. Title 86 Part 130 Section 130.415. The shipping charges are taxable if the shipping charges exceed the cost to the retailer of using the common carrier, or if the shipping charges are included in the price. 

So if the Code is pretty clear, how does the Plaintiff have a leg to stand on? The Illinois Supreme Court held in Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, (Illinois 2009) that the tax on shipping charges was part of the “selling price” according to 35 ILCS 105/3-10 (2006), and 35 ILCS 120/1 (2006).  The Court concluded that because internet purchases must be delivered, that shipping was an inseparable part of the transaction. The court held that “under the Retailers Occupation Tax Act, that the shipping charge is inseparable of the Internet “selling price,” and tax must be assessed on the shipping charge.

While there are defenses, the litigation has been costly to those affected. Because Diamond is filing on his own behalf, he is actually making purchases himself.  Most of the cases have settled on terms favorable to Diamond as opposed to litigating the defenses.  The Illinois Attorney General has not yet gotten involved to make a determination, and the legislature has not yet addressed the disparity in the tax code and the Supreme Court ruling.  Until then, if you're a direct to consumer seller, it is advisable to beware and take precautions to avoid being a target of the suit. 

The Clark Hill Food and Beverage Team is well-equipped to help if you have questions about these actions, or how to avoid these actions. Please contact Jonathan Boulahanis, jboulahanis@clarkhill.com if you have questions.