Appellate Court Upholds Dismissal Of False Claims Act Case Against QVC, Denies That Qui Tam Plaintiff Is Owed Monetary Proceeds, But Stops Short Of Setting A Helpful Precedent
On March 31, 2015, the Appellate Court of Illinois, First District in a Rule 23 Order,1 upheld the dismissal of a False Claims Act ("FCA") case against QVC, Inc. ("QVC").2 In the dismissed case, the qui tam plaintiff had alleged that QVC had fraudulently failed to collect and remit Illinois Retailers' Occupation Tax/Use Tax ("sales tax") on shipping and delivery charges. The court also denied the qui tam plaintiff's claim for an award of proceeds since the lawsuit was dismissed and did not result in any monies collected by the state. Although the ruling is in one of the very few early qui tam cases involving shipping and delivery charges in which the Illinois attorney general intervened to dismiss based on prosecutorial discretion, this is nevertheless a taxpayer-friendly ruling that may help stem the tide of frivolous and abusive qui tam suits being filed in Illinois and other states.
Background Illinois law regarding the taxation of shipping or delivery charges is uncertain. Regulations promulgated by the Illinois Department of Revenue ("the Department") specify that shipping or delivery charges imposed by a remote retail seller are deemed to be separately negotiated and, thus, not taxable, as long as the charges are separately stated. In late 2009, however, the Illinois Supreme Court decided Kean v. Wal-Mart Stores, Inc.3 , which, in the context of a consumer protection action, held that an online sale necessarily includes shipping, allowing no room for shipping charges to be separately negotiated. As a result of the decision in Kean, shipping charges associated with online sales became taxable, regardless of whether they were separately stated. However, the Department has yet to revise its regulations in response to Kean. Taxpayers who have continued to rely on the Department's regulation on shipping and delivery charges have been portrayed in hundreds of FCA filings as engaged in fraudulent conduct punishable by treble damages and penalties of up to $11,000 per violation.
In 2011, the Schad, Diamond and Shedden, P.C. law firm ("Schad") filed a complaint under the Illinois FCA alleging that QVC failed to collect sales taxes on shipping charges. Schad has become notorious for filing qui tam actions against Illinois taxpayers since 2002. The Illinois attorney general initially declined to intervene in the QVC case, thus, allowing Schad to prosecute the action on its own.
Previous audit grounds for dismissal In 2006, the Department...
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