The Illinois Attorney General Offers To Settle False Claims Act Cases Against Wineries

On July 23, 2015, the Illinois attorney general issued a group settlement proposal to the defendants in its Illinois False Claims Act ("IFCA") prosecutions of numerous out-of-state wineries. For at least the last decade, the Attorney General has authorized civil IFCA prosecutions by private plaintiffs alleging violations of the Illinois Use Tax Act. In recent years, the Attorney General authorized actions against Internet vendors registered to collect Use Tax but alleged not to have collected tax on shipping charges. An IFCA defendant can be held liable for three times the tax liability arising from the alleged violation, for a maximum of 10 years, with a penalty per violation of between $5,500 and $11,000, plus for the payment of attorney fees to the private plaintiff, referred to as a "relator."

Just days before the proposal, Reed Smith had informed the Attorney General that it expected to receive private letter rulings from the Illinois Department of Revenue (the "Department") on behalf of two wineries located outside of Illinois. In these rulings, the Department held that the separately stated shipping charges imposed by the wineries for purchases by Illinois customers were not subject to Illinois use tax, because the wineries offered their Illinois customers the option of picking up their purchases at the winery.

The timing of the Attorney General's settlement proposal gives the appearance of little more than an attempt to extract the maximum settlement value from the IFCA prosecutions at a time when the letter rulings have raised serious questions regarding the legal theory underlying the prosecutions.

The Letter Rulings On June 11, 2015 and July 14, 2015, Reed Smith requested private letter rulings from the Department on behalf of two wineries that are defendants in the IFCA prosecutions. In these requests, Reed Smith requested that the Department find that:

An out-of-state vineyard/winery that is registered as an Illinois Use Tax collector and which makes online sales of wine is not, pursuant to 86 Ill. Admin. Code § 130.415(d), required to charge Illinois Use Tax on the separately stated shipping charge on the invoice for such purchase by an Illinois purchaser when it offers its online customers (including, its Illinois customers) the delivery options to (A) have the wine shipped to the Illinois purchaser, or (B) have the purchaser take delivery of his or her purchase at the vineyard/winery outside of Illinois, and the Illinois...