Illinois Retailers Beware: Sales and Use Tax Collection Responsibilities Subject to Increasing Scrutiny

Over the last decade, collection and remittance of sales tax on Illinois retail sales has come under increased scrutiny. Besides Illinois Department of Revenue audits, retailers have been subject to third party class action and whistleblower lawsuits for alleged failure to properly collect and remit sales or use tax on their retail sales. These suits underscore the necessity that retailers remain vigilant in computing the taxes due on their retail sales.

Illinois Whistleblower Litigation – Round 1: Online Retailer Nexus

In 2001, an initial round of whistleblower lawsuits was filed against a number of out-of-state online retailers that allegedly failed to collect and remit the required use taxes on their sales to Illinois customers. The Illinois whistleblower statute authorizes private citizens, termed “relators,” to initiate litigation to force payment of taxes owed to the State, and if successful, the relators are entitled to an award of a portion of the proceeds recovered. Many of these suits, however, were eventually settled or dismissed. (See, e.g., The State ex rel. Beeler, Schad and Diamond, P.C. v. Burlington Coat Factory Warehouse Corporation and Burlington Coat Factory Direct Corporation, 860 N.E.2d 423 (Ill. App. Ct. 2006) (appellate court affirmed trial court’s decision dismissing whistleblower suit, in spite of relator’s objections, where Attorney General intervened and requested dismissal based on a determination that the defendant probably did not have requisite nexus for Illinois use tax collection.))

Class Action Litigation – Taxation of Delivery Charges

In 2006, a class action lawsuit was filed against Walmart Stores, Inc. and its online retailing subsidiary, Walmart.com, U.S.A., LLC (collectively “Walmart”) by Illinois customers that purchased products from Walmart online. The plaintiffs alleged that Walmart collected Illinois sales tax on delivery charges contrary to the requirements of Illinois’ sales tax statute and sought a permanent injunction against such collection. An Illinois sales tax regulation, however, provides that delivery charges are taxable, as part of the selling price, unless a seller can document that the delivery charges were the subject of separate agreement between the purchaser and seller. Thus, the Illinois Supreme Court ruled that Walmart properly collected Illinois sales tax under this regulation. (Kean v. Walmart Stores, Inc., 919 N.E. 2d 926 (Ill. 2009).) Moreover, because purchasers in all instances were charged for delivery when they purchased products online, the court ruled that the charges were taxable. The court also upheld dismissal of the class action complaint.

Illinois Whistleblower Litigation – Round 2: Taxation of Delivery Charges

Predictibly, in the wake of the Kean decision, numerous whistleblower suits were filed late last year alleging that the online retailers attempted to defraud the State of Illinois by failing to collect and remit sales taxes on delivery charges. Thus far, the Illinois Attorney General has chosen not to intervene in this litigation. Accordingly, the relator can proceed forward with the suits, and if successful, will be entitled to an award of 25% to 30% of the proceeds recovered, plus attorneys fees. Defendants in turn can be subject to treble damages and penalties ranging from $5,500 to $11,000 for each violation of the whistleblower act. Defendants have filed motions to dismiss these whistleblower suits on procedural grounds.

Conclusion

In addition to Illinois, Delaware, Florida, Indiana, Rhode Island, and Nevada have adopted state whistleblower statutes that permit private individuals to act as relators in bringing an action in court for tax fraud. The recent spate of class action and whistleblower tax fraud litigation in Illinois underscores the necessity for retailers to remain vigilant in ensuring that they properly collect and remit sales and use taxes in accordance with the most recent interpretation of state sales and use tax laws. In this regard, questions regarding when there is nexus for use tax collection, and proper computation of the tax base, should be researched carefully and reviewed. Software used to compute and remit sales and use taxes also should be monitored and periodically reviewed to ensure that it computes tax in accordance with current interpretation of state tax laws.


If you have any questions regarding the contents of this newsletter, please contact the following attorneys in the firm’s State and Local Tax Practice Group.

Chicago (312) 558-5600 San Francisco (415) 591-1000
Robert F. Denvir Charles J. Moll III
Alan Lindquist Troy M. Van Dongen
Bradley R. Marsh
Jocelyn M. Wang
Dina Bronshtein Segal
Jasmine I. Tollette

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