Warning: Illinois Courts Will Not Abide By Sales Tax Audit Results

In rulings in two of the more than 200 recent Illinois False Claims Act ("FCA") cases, the Circuit Court of Cook County (i) denied a motion by the retailer/defendant seeking a dismissal of the complaint and (ii) granted the Illinois Attorney General's Motion to Dismiss a third-party complaint filed against it.

In one case, the taxpayer filed a Motion to Dismiss the complaint based on the fact that the purchases that were the basis of the complaint occurred during a taxable period that had previously been audited by the Illinois Department of Revenue (the "Department"), and the audit period had, thus, been closed. The Illinois Attorney General (the "Attorney General") refused to intervene in that action. The court denied the taxpayer's motion on November 12, 2013. In another FCA action, the defendant taxpayer filed a third-party complaint against the Attorney General and the Department claiming, among other grounds, that the Attorney General had an obligation to file a Motion to Dismiss in the action because the purchases upon which the complaint was based occurred during taxable periods that were under audit by the Department, and were specifically being reviewed by the Department's auditor. In response to the third-party complaint, the Attorney General filed a Motion to Dismiss. On January 23, 2014, without briefing, the court granted the Attorney General's Motion.

Although lower court rulings on non-dispositive motions would not typically be noteworthy, these rulings merit attention because they have negative implications for all retailers subject to Illinois sales and use tax. These rulings call into question whether a retailer should ever agree to any form of sampling as part of its Illinois sales tax audit. Imagine that a retailer has amicably concluded an Illinois sales tax audit for a set of years, made a complete payment of the audit liability, and has therefore closed those years for assessment and refunds under the Illinois sales tax law. That retailer should expect that Illinois could not later file a lawsuit seeking additional sales or use tax for the closed audit period, including triple the amount of the tax on an issue that may have been part of the audit, plus penalties and legal fees. However, as these recent rulings confirm, the Illinois courts will allow private individuals, acting as "whistleblowers" on behalf of the State, to do precisely that, unless the retailer can prove as a matter of fact that the prior audit...