State of Illinois ex rel. Schad, Diamond & Shedden, P.C. v. National Business Furniture, LLC
2016 IL App (1st) 150526
| Ill. App. Ct. | 2016Background
- Relator (Schad, Diamond & Shedden, P.C.) brought a qui tam action under the Illinois False Claims Act against National Business Furniture, LLC, alleging the company knowingly failed to collect and remit Illinois use tax on shipping charges for internet and catalog sales (2006–2014).
- Illinois law taxes use of tangible personal property; shipping is taxable unless delivery charges are separately contracted for (86 Ill. Adm. Code §130.415 and IDOR guidance). Kean v. Wal‑Mart clarified that shipping inseparable from the sale (when required to complete the purchase) is taxable.
- NBF used a drop‑shipment model (manufacturers ship directly to customers), had no Illinois locations, separately itemized shipping on invoices, and offered a small number of customers a "freight collect" option using customers’ carrier accounts.
- NBF’s long‑standing practice was to collect use tax on merchandise but not on separately itemized shipping; the company was audited by the Illinois Department of Revenue in 2007–2008 and received a closing letter not indicating a violation.
- After a two‑day bench trial, the circuit court found relator failed to prove NBF acted with the requisite scienter (actual knowledge, deliberate ignorance, or reckless disregard) under the False Claims Act; the Appellate Court affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether NBF knowingly concealed or avoided an obligation to pay use tax on shipping charges (reverse false claim) | NBF had a clear duty to tax shipping (like Kean) and nonetheless failed to collect and filed false ST‑1 returns; its failure to investigate was reckless | NBF reasonably (though perhaps mistakenly) believed shipping was separately contracted and nontaxable; it relied on IDOR audit and internal procedures | Court: Relator failed to prove knowing concealment or reckless disregard; judgment for defendant affirmed |
| Whether IDOR audit knowledge negates scienter (government‑knowledge defense) | Audit did not show state approval of the practice; relator argued the defense was inapplicable without proof of affirmative approval | NBF relied on audit results and records shown to auditor to support reasonable belief of compliance | Court: Did not find the trial court applied a legal government‑knowledge rule; appellate court treated audit as factual evidence supporting lack of reckless disregard and affirmed |
| What standard constitutes "reckless disregard" under the Act | Relator: NBF’s long failure to inquire satisfies reckless disregard | NBF: Reckless disregard requires gross‑negligence‑plus; mere error or ordinary negligence insufficient | Court: Reckless disregard is an aggravated form of negligence; relator did not show NBF ignored obvious warning signs or buried its head in the sand |
| Whether relator proved falsity of ST‑1 returns or underlying duty to collect tax | Relator: ST‑1s omitted tax on shipping, thus false; Kean and regulation support taxability | NBF: Whether tax was due was uncertain/fact‑dependent; trial court need not resolve duty because scienter lacking | Court: Declined to decide underlying duty; affirmed on lack of required state of mind |
Key Cases Cited
- Kean v. Wal‑Mart Stores, Inc., 235 Ill.2d 351 (Ill. 2009) (online shipping charges treated as inseparable and taxable where purchase cannot be completed without selecting paid shipping)
- Eychaner v. Gross, 202 Ill.2d 228 (Ill. 2002) (bench‑trial factual findings, including state of mind, are reviewed for manifest weight)
- State ex rel. Beeler, Schad & Diamond, P.C. v. Burlington Coat Factory Warehouse Corp., 369 Ill. App. 3d 507 (Ill. App. Ct. 2006) (False Claims Act background and qui tam structure)
- United States v. King‑Vassel, 728 F.3d 707 (7th Cir. 2013) (reckless disregard standard under FCA does not encompass ordinary negligence)
- United States v. Krizek, 111 F.3d 934 (D.C. Cir. 1997) (reckless disregard as an extreme/gross‑negligence standard)
- United States ex rel. Williams v. Renal Care Group, Inc., 696 F.3d 518 (6th Cir. 2012) (congressional intent: limited duty to inquire; liability requires aggravated failure to investigate)