Litigation Alert
May 4, 2015

Recent Appellate Decision Offers Guidance to Online Retailers Accused of Failing to Pay Illinois Retail Taxes

By: Amy M. Rubenstein and Jin Yan

Since 2009, online retailers across the country have been confronted with lawsuits alleging failure to pay all required sales/use taxes on online sales to Illinois customers. While lawsuits to recover deficient sales/use taxes are usually brought by the State of Illinois against taxpayers, these lawsuits are brought by private persons under an Illinois whistleblower statute, the Illinois False Claims Act, and most originate from a Chicago law firm nominally acting on behalf of the State. Many retailers settle quickly with the plaintiff law firm (termed the relator) because defense costs typically exceed projected liabilities.

The Illinois appellate court's recent decision in People ex rel. Schad, Diamond & Shedden, P.C. v. QVC, Inc., 2015 IL App (1st) 132999 (Ill. Ct. App. 2015) offers guidance for defending against the relator's lawsuits or avoiding them altogether.

First, retailers should keep detailed records of any tax audits and findings because those records can provide a winning defense. In QVC, the court held that a defendant retailer could rely on a 2006 audit — which found that the retailer’s tax returns were "in order" despite the retailer's failure to pay applicable taxes — as a shield against further liability. Because the statute of limitations under the whistleblower statute is six years, retailers should retain their audit records beyond the three-year timeframe that typically applies to state tax matters.

Second, retailers should proactively investigate and comply with sales/use tax obligations because those actions may help avoid litigation or quickly conclude pending litigation. In QVC, the retailer began complying with the sales/use tax laws within two weeks after it was served with the complaint. Though the court's decision does not mention whether the retailer's voluntary remedial actions caused the State to dismiss the complaint, it appears likely that those actions played a part in the State's decision.

Third, retailers can avoid protracted litigation against the relator by cooperating with the State. Although in many cases, the State declines to intervene and allows the relator to litigate and settle lawsuits, the appellate court in QVC reaffirmed that the State ultimately controls the lawsuit. The State retains discretion to pursue or dismiss the action, even over the relator's objections.

QVC highlights that retailers are not defenseless when they find themselves on the receiving end of these lawsuits. Because of the unique situation each retailer faces, however, it is critical to engage experienced counsel as early as possible to assess and minimize potential exposure.

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