CHICAGO (Legal Newsline) - Several California wineries avoided whistleblower lawsuits after Illinois Attorney General Lisa Madigan moved to dismiss 28 qui tam cases involving sales tax on shipping charges.
Qui tam cases are civil lawsuits brought by whistleblowers under the False Claims Act. In the wineries' cases, the Wine Institute and dozens of individual wineries were alleged to have failed in collecting sales taxes on shipping charges for wine shipped to Illinois customers.
The wineries claimed that by offering online purchasers the option to decline shipping and take delivery at the vendor’s location, they were not liable for tax collection on shipping charges. This stance was supported by a letter from the Illinois Department of Revenue.
Attorneys from Reed Smith, which represented the wineries, filed a request with Madigan to have the case dismissed. The Attorney General's Office can file a motion to dismiss any case in the court system at her individual discretion.
The courts almost always defer to the prosecutorial discretion of the state, and did so in this case, the firm said.
“They can file a motion to dismiss and they don’t really need a basis for that motion,” said Adam Beckerink, attorney at Reed Smith.
But in this case, Madigan did offer a rationale for the dismissal.
“They did say to the court that the reasons for the filing of the motion was, one, that the wineries proved to them that they offered the pick-up option, or, two, that the cases were so de minimis in the amount of taxes that would have been collected,” Beckerink said.
This is not the first time Illinois courts have addressed the issue of taxation as it relates to shipping charges. In Keen v. Wal-Mart Stores, Inc. the Illinois Supreme Court determined that in an online sale creates an inseparable link between the sale and the delivery, and therefore, delivery charges were taxable.
This decision stood in direct opposition to Department of Revenue regulations that said a separately stated shipping charge is separately negotiated and is not taxable as long as it reflects the actual cost of shipping.
To resolve this conflict, the Department sent its Second Notice of Proposed Rulemaking to the Joint Committee on Administrative Rules. The Department proposed a retroactive amendment that stated that if shippers offered a pick-up option, they would incur no liability under the regulation and provided clearer guidance on when and how taxes needed to be calculated.
If the Joint Committee on Administrative Rules accepts the proposed changes, it will create a safe harbor both for taxpayers who calculated their taxes relying on the Keen decision and for those who calculated based on the new decision.
“The fact that the Department had to go through the process of filing the second notice is a great indicator that these tax cases should not be prosecuted under the FCA,” Beckerink said.
The dismissal of these 28 cases does not put an end to all litigation for wineries, however. These were only a small number of the several hundred qui tam cases pending in the state.