IN THE CIRCUIT COURT OF COOK COUNTY, ILLINOIS COUNTY DEPARTMENT- LAW DIVISION STATE OF ILLINOIS ex rel. SCHAD DIAMOND and SHEDDEN, Plaintiff, v. NATIONAL BUSINESS FURNITURE, LLC Defendant. ) ) ) No. 12L84 ) consolidated with ) No. 11 L 8285 ) ) Honorable Thomas R. Mulroy ) ORDER Relator, Stephen B. Diamond, P.C.,I filed an Illinois False Claims Act action on behalf of the State of Illinois alleging that Defendant, National Business Furniture, LLC (hereinafter "NFB"), knowingly failed to pay sales tax under the Retailer's Occupation Tax Act ("ROTA") and the Use Tax Act ("UTA") on shipping and handling charges on Internet and catalog sales in Illinois. Facts A. Background NBF was formed in January 2006, and has been a registered Illinois taxpayer since its formation. NBF sells office furniture, equipment, and supplies to customers throughout the United States, including in Illinois, through: direct sales by sales representatives; by telephone; through catalogs; and via its website. For purchases made by catalog or through the website, NBF offers three primary delivery options: 1) 1 On December 18, 2013, Relator filed Form CBA 10.30 Articles of Amendment with the Illinois Secretary of State changing the name of Schad, Diamond & Shedden, P.C.to Stephen B. Diamond, P.C. Stephen B. Diamond, P.C. is a continuation of Schad, Diamond & Shedden, P.C. 1
tailgate delivery which is delivery outside the customer's building; 2) inside delivery; and 3) delivery by a provider selected and paid directly by the customer. A fourth option, which is available but rarely used, is pick-up at the manufacturer's distribution center. Charges for delivery purchased from NBF are separately stated on all invoices for all purchases made by catalog or through the website. B. Use Tax Regulations Section 130.415 of the Administrative Code governs the taxation of shipping and handling charges for customers in Illinois. Under 130-415, if shipping and handling charges are included in the selling price of the product, tax must be collected on the shipping and handling charges. However, if "the seller and the buyer contract separately for such transportation or delivery charges by not including such charges in the selling price," then shipping is not taxable. See 86 Ill. Adm. Code 130-415. The best evidence that transportation or delivery charges were agreed to separately and apart from the selling price, is a separate and distinct contract for transportation or delivery. However, documentation which demonstrates that the purchaser had the option of taking delivery of the property, at the seller's location, for the agreed purchase price, or having delivery made by the seller for the agreed purchase price, plus an ascertained or ascertainable delivery charge, will suffice. See I d. at 130.415(d). C. Audit On September 19, 2007, the Illinois Department of Revenue (hereinafter "IDOR") notified NBF that an Illinois Sales and Use Tax audit had been initiated. See September 2
19, 2007 Audit Letter to NBF from the IDOR. The audit period was from January 1, 2006 through June 30, 2007. I d. NBF was required to make their books and records available to the IDOR auditor, which included: Illinois Sales and Use Tax Returns; Excel data files of Illinois destination sales; Exemption Certificates; and, Information regarding purchases in Illinois. I d. The audit was concluded on February 28, 2008. At the conclusion of the audit, IDOR did not assess a tax or penalty for defendant's failure to pay tax on its delivery charges. See Notice of Audit Results, dated Feb. 27, 2008, part of Def. Exhibit 5 Litigation Background A two day bench trial was held on August 28th 2014 -August 29th, 2014. Relator argued NBF knowingly failed to collect and remit $199,076 of tax on shipping charges in Illinois for the period of January 2006 through the present. Relator alleged that based on treble damages and mandatory penalties for 73 false claims from January 2006 through January 2012 and 30 false claims from February 2012 through July 2014, NBF owes the State of Illinois $731,500. Defendant argued that its shipping and handling charges are not' "inseparably linked" to the merchandise price and thus are not part of the selling price and therefore its policy of not collecting Illinois use tax on delivery charges is consistent with Illinois law. Further, NBF argued that it was audited by the IDOR in 2007 through 2008 for 3
the period of January 1, 2006 through June 30, 2007 and the IDOR did not ask or require NBF to collect or remit use tax on shipping and handling charges associated with website or catalog sales to Illinois customers. NBF asserted that based on its review of applicable legal authorities and the result of the IDOR audit, it believed its policy and practice regarding the collection of use tax on charges for shipping and handling was consistent with the requirements of Illinois law. Therefore, NBF argued it acted in good faith and did not make any false statements to the State and thus did not violate the Illinois False Claims Act. Decision This case was brought under the Illinois False Claims Act (hereinafter "IFCA"). Therefore, it is not for the Court to rule on whether a tax on shipping charges was due, or to interpret and/or apply the various Illinois tax laws. Rather, Relator must prove, by a preponderance of the evidence, that NBF had actual knowledge that it had to pay tax on shipping and handling charges, acted in deliberate ignorance, or acted with reckless disregard when it did not collect and remit tax on its shipping charges for Internet and catalog sales from January 2006 to the present. The IFCA prohibits one who "knowingly makes, uses, or causes 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 one who "knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the State" See 4
740 ILCS 175/3(a)(1)(G). 2 Under the IFCA, "the terms 'knowing' and 'knowingly' mean that a person,... has actual knowledge of the information; acts in deliberate ignorance of the truth or falsity of the information; or acts in reckless disregard of the truth or falsity of the information." See 740 ILCS 175/3Cb)(1)(B). The IFCA "does not encompass innocent mistakes or negligence." U.S. v. King-Vassal, 728 F.3d 707,713 (7th Cir. 2013). A person acts with reckless disregard when they "fail to make such inquiry as would be reasonable and prudent to conduct under the circumstances" stated differently, "when the actor knows or has reason to know of facts that would lead a reasonable person to realize that harm is the likely result of the relevant act." Id. 3 NBF was informed on September 19, 2007, that it was being audited by the IDOR for the period of January 1, 2006 to June 30, 2007. See September 19, 2007 Audit Letter to NBF from the IDOR. The audit was performed by Edward Sholtes and was completed on February 28, 2008. See I d., see also Def. Exhibits. The State required NBF to make the following books and records available for review: Illinois Sales and Use Tax Returns, Excel data files of Illinois destination sales, exemption certificates, and information regarding purchases in Illinois. Id. Dan Paruzynski, NBF's Chief Financial Officer from 1999 through 2008, Eileen Baus, NBF's Chief Financial Officer beginning in 2008, and Perry Amadon, NBF's Vice President of Finance beginning in 2012, all testified regarding the records that were given to the auditor by NBF. NBF disclosed to 2 In July 2010, the Illinois False Claims Act was amended. Prior to July 2010, the IFCA required a showing that one "knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the State." See 740 ILCS 175/3 (a) (2009). The IFCA no longer requires that there be a false record or statement but rather the knowing failure to pay an obligation to the State is sufficient. See 740 ILCS 175/3(a)(1)(G). 3 The Illinois False Claims Act is a mirror image of the Federal False Claims Act. 5
the auditor invoices and transaction records showing sales of goods, use tax collected on those goods, separate charges of shipping and handling, and no use tax collected on those charges. See Def. Exhibit 5. The IDOR found a total tax due of $2,472 plus penalties and interest. See Notice of Audit Results, dated Feb. 27, 2008, part of Def. Exhibit 5. The IDOR did not assess a tax or a penalty for NBF's failure to pay tax on shipping and handling charges. I d. The Court found Paruzynski, Baus, and Amadon to be credible witnesses. All three witnesses testified about the materials given to the auditor by NBF which were used by the auditor to determine if any tax was owed by NBF. These materials included invoices and records showing that NBF was not collecting tax on shipping and handling charges. NBF believed that its shipping and handling charges were a separate contract and therefore not part of the selling price of the goods. NBF relied upon this audit and its interpretation of 130-415 to determine that it did not have to collect tax on shipping and handling charges. The IDOR, Illinois' tax collection agency which monitors case law relating to 130-415 and issues public letters relating to it, carefully audited NBF's books and records and found no violation of 130-415. The IDOR did not inform NBF in its audit report that it owed tax on its delivery charges or that it was in violation of 130-415. NBF relied upon this audit in determining that its policy of not collecting tax on shipping and handling charges for its Internet and catalog sales in Illinois was proper. The proliferation of statutes and regulations has sometimes made it difficult for the average citizen to know and comprehend the extent of the duties and obligations 6
~~~~ ----- ---- ORDER imposed by the tax laws. The purpose of the IFCA is not to penalize frank differences of opinion or innocent errors made despite the exercise of reasonable care. The IFCA "does not encompass innocent mistakes or negligence." King-Vassal, 728 F.3d at 713. Rather, Relator had the burden to prove NBF had actual knowledge that it had to pay tax on shipping and handling charges, acted in deliberate ignorance, or acted with reckless disregard when it did not collect and remit tax on its shipping charges for internet and catalog sales from January 2006 to the present. A person acts with reckless disregard when they "fail to make such inquiry as would be reasonable and prudent to conduct under the circumstances." I d. The Court finds Relator has not met its burden. 7
It is hereby Ordered: 1. The Court finds for Defendant NBF against Relator on Relator's complaint. 2. This case is severed from case number 11 L 8285. Judge Thomas R. Mulroy, Jr. OCT 2 3 2014 Circuit Court-1941 Stephen Diamond Matthew Burns Jessica Stewart Stephen B. Diamond P.C. 332 S. Michigan Ave, Suite 1000 Chicago, IL 60604 312-939-6280 David A. Genelly Matthew M. Showel Vanasco, Genelly & Miller 33 N. LaSalle St., Suite 2200 Chicago, IL 60602 312-786-5100 Attorneys for Relator David Swetnam-Bur1~K:1-~ Peter Brann Brann & Isaacson 184 Main Street P.O. Box 3070 Lewiston, ME 04243-3070 207-786-3566 Ronald Wisniewski Swanson, Martin & Bell, LP 330 N. Wabash Ave. Suite 3300 Chicago, IL 60601 312-321-9100 Attorneys for Defendant 8