Qui Tam/Class Actions: State & MTC Mitigation Actions

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1 COST 2015 Sales Tax Conference and Audit Session Qui Tam/Class Actions: State & MTC Mitigation Actions Jordan M. Goodman Horwood Marcus & Berk Chartered Chicago, Illinois (312) Theodore R. Bots Baker & McKenzie LLP Chicago, Illinois (312) Overview Qui Tam Actions/State False Claims Acts Class Action Exposure for Over-Collection Efforts to Legislatively Confine Vendor Exposures The ABA Model Act MTC Uniformity Project Consumer Fraud Damages for Over- Collecting 1

2 Federal Court and Qui Tam Actions Qui Tam Actions Are brought by an informer, under a statute that establishes a penalty for the commission or omission of a certain act; Provide that such penalties may be recovered in a civil action; Awards a part of the penalty to the whistleblower who brings the action (with the remainder going to the state or some other institution). Federal Court and Qui Tam Actions Federal False Claims Act first enacted in 1863 Crack down on suppliers in the Civil War Provides for private enforcement actions against those alleged to have defrauded the federal government 31 USC Prohibits any person from defrauding the government by false claims, records, or statements Excludes allegedly fraudulent tax claims 2

3 State False Claims Acts Approximately 30 jurisdictions have False Claims Acts Some states restrict their FCA provisions to Medicaid and/or contractor-type frauds. A number of state FCA statutes contain explicit tax bars prohibiting qui tam actions for allegedly false tax claims (e.g., CA, DC, HI, MA, NM, NYC, NC, TN, VA). Some states impose a tax bar only with respect to income tax matters (e.g., IL, IN, RI). A number of states do not appear restrict the action to a particular subject matter (e.g., DE, FL, NV, NH, NJ). In 2010, New York became the first state to explicitly authorize the application of its FCA to tax claims. Types of Qui Tam Actions Traditional False Claims Actions False claims for payment from the state Reverse False Claims Actions False statements to avoid or reduce payments to the state Reverse false claims actions give rise to Qui Tam actions for tax. 3

4 Elements of Qui Tam Actions Generally Defendant made or used a false statement To avoid or reduce payment owed to the state Defendant knew or should have known statement was false Knowledge can be actual, but also includes deliberate ignorance or reckless disregard. Specific intent to defraud not required. Legal dispute as to interpretation of law should negate scienter. Elements of Qui Tam Actions Generally Proper relator Direct and independent knowledge of false statement No publicly available knowledge unless relator is original source 4

5 Timeline of a Qui Tam Action The relator (plaintiff) investigates Direct and independent knowledge of false statement No publicly available knowledge unless relator is original source and gathers evidence The relator (plaintiff) gives notice to the Attorney General The relator files the complaint filed under seal Timeline of a Qui Tam Action The Attorney General investigates and: Intervenes and takes over, dismisses, dismisses to pursue alternate State remedy, or Does not intervene and allows the relator to proceed The complaint is unsealed and summons issues to the defendant 5

6 Typical Qui Tam Actions Sales & Use Tax Collection Lawsuits against remote or internet sellers (e.g., Beeler, Schad & Diamond litigation): Direct mail and online retailers Investigate nexus, returns, affiliates Shipping & handling charges Liquor licenses Lawsuit against Sprint Nextel Corporation (New York) for failure to charge sales tax on 100% of charges for flat rate wireless plans. Typical Qui Tam Actions Unclaimed Property Lawsuits for failing to remit unused amounts on prepaid calling cards. Actions against MetLife and Prudential for allegedly failing to turn over unclaimed life insurance funds. Possible Future Actions Corporate income tax 6

7 Defenses to Qui Tam Actions On the merits No collection obligation (e.g., no nexus) or obligation to pay Ambiguous law or regulatory guidance Reliance on sound legal theory Defenses to Qui Tam Actions Procedural Improper parties Relator not an original source of the information Conflicts between FCA and other areas of law (e.g., state constitution / tax provisions) Failure to state claim: no knowledge, no false statement, no claim submitted to state Government had knowledge 7

8 Qui Tam Liability Per occurrence Possible treble damages, reasonable attorney s fees and civil penalty. Civil penalty generally between $5,000 and $10,000 per false claim. Whistleblower generally awarded between 15% and 30% of the state s recovery. False Claims Act New York New York amended its False Claims Act (FCA) to allow whistleblowers to bring qui tam actions against taxpayers for false claims under the New York Tax Law. Taxpayers found liable under the FCA are subject to treble damages of the tax deemed owed or not paid, plus a statutory penalty of between $6,000 and $12,000 for each false claim. Taxpayers found liable are also required to pay for the costs and attorneys fees of bringing the action. 8

9 False Claims Act New York Whistleblower Rewards Up to 30 percent of the recovered proceeds. A whistleblower who planned or initiated the false claim may even recover an award provided that the person is not convicted of a crime for the false act. False Claims Act New York Whistleblower Protections A strengthened immunity provision and added protections from retaliation encourage current and former employees, contractors, or agents to become whistleblowers. Employees, contractors, and agents are protected from retaliation for transmitting any information for the purpose of investigating, filing, or potentially filing an action under the FCA, even if the transmission violate[s] a contract, employment term, or duty owed to the employer or contractor. 9

10 False Claims Act New York Elements Needed to Establish Liability Must show that the taxpayer knowingly : - Presented or caused to be presented, a false or fraudulent claim for payment or approval; - Made, used, or caused to be made or used, a false record or statement material to a false or fraudulent claim; - Made, used, or caused to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the state or a local government. False Claims Act New York Knowingly Means something more than actual knowledge. Also includes acting in deliberate ignorance or reckless disregard of the truth or falsity of information. 10

11 False Claims Act New York Disagreeing with Agency Guidance Liability may attach if a taxpayer takes a reporting position that contravenes published agency guidance, even if the taxpayer has a good faith basis to believe the guidance is incorrect, in excess of the Department s authority, or unconstitutional. False Claims Act New York Not Limited to Fraud FCA specifically provides that there does not have to be any showing of any intent to defraud the government. The qui tam plaintiff or government must simply prove the taxpayer made a claim that it knew was incorrect. 11

12 False Claims Act New York Other Considerations 10 year statute of limitations Retroactive to April 1, 2007 Taxpayer secrecy does not apply Conspirator liability, including tax professionals Voluntary Disclosure may not protect from liability False Claims Act New York Potential Defenses Mere negligence Ambiguous law or regulatory guidance Reliance on sound legal theory Government knowledge Pending civil action 12

13 False Claims Act New York Potential Defenses Public disclosure Who s an appropriate whistleblower? Voluntary disclosure? State and Federal Constitutional violations False Claims Act Should FCAs be Applied to Tax? Removes tax administration decisions from taxing authorities and put them in the hands of an elected official. Leads to disparate treatment among taxpayers. Contravenes well-established procedures designed to ensure efficient resolution of tax disputes. 13

14 False Claims Act Should FCAs be Applied to Tax? (cont.) Upends protections for taxpayer rights, including historical right to privacy in tax matters. May discourage use of voluntary disclosure programs. Incentivizes collection of transaction taxes, which may expose taxpayers to classaction consumer fraud lawsuits. Class Action Law Suits Customer liability actions against vendors: Jurisdiction rate assignments Sourcing conventions Product/Service taxability Examples Chang Wong v. Whole Foods No. 1:15 - CV (2014) (tax on instore coupons) Schojan v. Papa Johns No. 14-CA (2014) and Tucker v. Papa Johns No. 3:14-CV (2014) (tax on delivery charges) Long v. Dell, C.A. No (2012) (tax on service contracts and shipping charges) In re AT&T Mobility Wireless Data Servs. Sales Tax Litig., 789 F. Supp. 2d 935 (N.D. Ill. 2011) (internet access) 14

15 Class Action Law Suits Vendors often can defend against the actions because they used due diligence and remitted funds to the jurisdiction -- but not without costs. State governments can also face class action lawsuits Tax Collection Liability Litigation Class actions can be brought against the government jurisdiction Arizona Department of Revenue v. Bernard J. Dougherty, 29 P.3d 862: class action lawsuits against the State were permitted in Tax Court. Granados v. County of Los Angeles, CA Court of Appeal, Second District, No. B (March 28, 2012): a taxpayer can file a class action claim for refund of CA local telephone users taxes paid. Before filing the claim the plaintiff must first file a claim that contains the information required by the Government. 15

16 Streamlined Agreement Provisions Customer Remedy Procedures 325 First course of remedy Reasonable business practice to use state provided data. Taxability Matrix 328 Definitions and sourcing rules , 315 & Library of Definitions Database requirements 307 Local rate and boundary changes 302 American Bar Association Model Act Prepared by the Government Submissions and Legislative Whitepapers Subcommittee with the State and Local Tax Committee Paper balanced conflicting interests of sellers, purchasers and state and local governments. Subcommittee drafted a model that would not violate SSUTA but would provide an exclusive remedy for a purchaser to obtain a refund of over-collected tax. 16

17 American Bar Association Model Act The paper outlines 15 Governing principles. Some highlights include: Principle 6 Sellers are, in collecting tax from purchasers and paying it over to the taxing jurisdiction, acting merely as agents for the taxing jurisdiction. Accordingly, sellers should not be subject to claims arising from or in any way related to an overpayment by purchasers or liability to such purchasers or anyone else other than a taxing jurisdiction revenue department, regardless of the nature of the claim or cause of action asserted, unless the party asserting the liability demonstrates that in collecting the tax the seller acted with willful intent to defraud the purchaser. American Bar Association Model Act Principle 9 Any purchaser who has overpaid a tax should be entitled to a refund if a timely and adequate claim is filed. Principle 11 A taxing jurisdiction has a legitimate interest in ensuring that duplicate refunds are not issued. Accordingly, a taxing jurisdiction may establish procedures for that purpose. Principle 14 A taxing jurisdiction has a compelling interest in the fair and equitable interpretation of its transaction tax laws and should be an indispensable party in any litigation determining the proper application of those laws. 17

18 American Bar Association Model Act Major provisions: Section 4 sets forth Purchaser Recourse provisions Purchaser s relief is limited to a refund claim pursuant to 5 Seller should not be party to any action Section 5 sets forth Refund Procedures Purchaser may file a claim with the seller with time limits (90 days) for response Purchaser may under certain circumstances file a claim with the taxing jurisdiction MTC Project on Class Action/False Claims MTC Sales Tax Uniformity Subcommittee formed a drafting group (public and private sector members) to address class action and false claims issues December 2014 Subcommittee proposed that executive committee recommend states adopt ABA Model Act MTC still working on a model whistleblower act. 18

19 Consumer Protection Violations? Kawa v. Wakefern Food Corporation, 24 NJ Tax 444 (App. Div. 2009) Class action not permitted Cited Streamlined and exclusive remedy provisions in New Jersey Statutes Consumer fraud damages not applicable because remedies governed by sales tax laws Consumer Protection Violations? Nava v. Sears, Roebuck and Co., Illinois Appellate Court, First District, No (July 29, 2013) Tax on coupon discounts for converter boxes erroneously collected Customer brought suit under consumer protection act Also sought certification of a class action Trial court dismissed the case, but Appellate Court reinstated and remanded the consumer protection act claims Found that Sears was not statutorily authorized to collect this tax 19

20 Consumer Protection Violations? Loeffler v. Target Corporation, Slip Opinions No (May 1, 2014) May a consumer in a sales tax transaction sue a retailer under the consumer protection laws for allegedly improperly collecting sales tax reimbursement on a transaction the plaintiff contends is not subject to sales tax? Target collected sales tax reimbursement from consumers who purchased a cup of coffee to go. Held that the refund scheme created by California tax code provides the exclusive remedy for a dispute over the applicability of the state tax laws to retail transactions. False Advertising Violations? Yabsley v. Cingular Wireless LLC, 176 Cal.App.4th 1156 Did Cingular violate the CA False Advertising Law when it advertised it would collect sales tax reimbursement on sales of cellular phones? Under Regulation1585, the retailer must pay sales tax (and may collect sales tax reimbursement) on the full unbundled price of the phone when it sells a cell phone bundled with a service contract Court of Appeals agreed with the trial court that regulations provide the same safe harbor for suits under the UCL that statutes do. The class action was thus dismissed. 20

21 Questions? Jordan M. Goodman Horwood Marcus & Berk Chartered Chicago, Illinois (312) Theodore R. Bots Baker & McKenzie LLP Chicago, Illinois (312)