People ex rel. Beeler, Schad and Diamond, P.C.
2016 IL App (1st) 151580
| Ill. App. Ct. | 2016Background
- Relator Beeler, Schad & Diamond sued Relax the Back (RTB) under the Illinois False Claims Act, alleging RTB failed to collect and remit Illinois use tax on Internet and catalog sales.
- RTB is headquartered in California, has no Illinois offices/warehouses, and sells via website and catalogs; five independently owned Illinois franchise stores exist (franchise agreement disclaims agency).
- RTB did not collect Illinois use tax on Internet or catalog sales until 2013; in 2004 RTB consulted tax counsel and a sales-tax specialist who advised no Illinois nexus.
- Trial court found no liability as to Internet sales (found a ‘‘firm wall’’ between online operations and franchises and credited RTB’s good-faith investigation) but found RTB liable for catalog sales because, after RTB required franchisees to mail catalogs annually, RTB failed to re-evaluate its tax position.
- Trial court awarded trebled damages and penalties (total ~$21,043) and attorney fees/costs (~$109,061); appellate court affirmed no liability for Internet sales but reversed liability for catalog sales and vacated fee award.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether RTB knowingly avoided use-tax obligation under Illinois False Claims Act | RTB’s franchise-distributed catalogs and relationship created substantial nexus and its failure to collect was knowing or reckless | RTB acted in good faith after professional advice; Internet sales are separated from franchise operations; no knowledge/recklessness | Reversed catalog-liability finding: RTB did not act with reckless disregard; affirmed no liability for Internet sales |
| Whether RTB’s pre- and post-catalog-investigation conduct showed reckless disregard | Relator: RTB failed to reexamine tax obligation after instituting catalog requirement, so conduct was reckless | RTB relied on counsel, auditors, and a favorable NY audit; law on nexus is unsettled, so failure to reassess was at most mistake/negligence | Held failure to reassess was not reckless disregard given unsettled law and reliance on professionals |
| Whether trial court’s good-faith finding bars liability for Internet sales | Relator: franchise provision of Use Tax Act and precedents require nexus for Internet sales too | RTB: there was a ‘‘firm wall’’ between Internet sales and franchises and a good-faith investigation negates knowledge | Affirmed: no liability for Internet sales; good-faith investigation and separation of operations negate requisite state of mind |
| Whether attorney-fee award should stand given reversal of damages | Relator: fees recoverable under the Act; trial court properly awarded fees based on prevailing-party rules | RTB: fee award depends on underlying liability and damages; reversal of liability/costs requires vacating fees | Reversed fee and costs award because underlying liability for catalog sales was reversed |
Key Cases Cited
- Quill Corp. v. North Dakota, 504 U.S. 298 (discusses physical-presence requirement for state use-tax collection)
- Brown’s Furniture, Inc. v. Wagner, 171 Ill.2d 410 (Ill. 1996) (adopts test that physical presence must be more than the "slightest" and examines facts showing sufficient nexus)
- Ritz Camera Centers, Inc. v. State ex rel. Beeler, 377 Ill. App.3d 990 (Ill. App. 2007) (interprets "knowing" under Illinois False Claims Act; good-faith inquiry and unsettled law can negate liability)
- National Geographic Soc. v. California Bd. of Equalization, 430 U.S. 551 (1977) (analyzes nexus when defendant maintained in-state offices and solicitation activity)
- United States v. King-Vassel, 728 F.3d 707 (7th Cir. 2013) ("reckless disregard" for FCA requires more than innocent mistake or negligence)
- United States ex rel. Wilkins v. State of Ohio, 885 F. Supp. 1055 (S.D. Ohio 1995) (discusses "knowing" presentation or omission as basis for reverse false-claim liability)
- United States ex rel. Ervin & Assocs., Inc. v. Hamilton Sec. Grp., Inc., 370 F. Supp. 2d 18 (D.D.C. 2005) (describes "ostrich"/head-in-sand standard for reckless disregard)