THE PEOPLE OF THE STATE OF ILLINOIS ex rel. RICHARD LINDBLOM and RALPH LINDBLOM, Plaintiffs-Appellants, v. SEARS BRANDS, LLC, an Illinois Corporation, HOME DEPOT, U.S.A., INC., a Georgia Corporation, LOWE’S HOME CENTERS, LLC, a North Carolina Corporation, BEST BUY STORES, L.P., a Minnesota Corporation, and GREGG APPLIANCES, INC., an Indiana Corporation, Defendants (Best Buy Stores, L.P., a Minnesota Corporation, Defendant-Appellee).
No. 1-17-1468
Appellate Court of Illinois, First District, Second Division
April 17, 2018
2018 IL App (1st) 171468
Hon. James E. Snyder, Judge, presiding.
Illinois Official Reports; Reversed and remanded.
Baker & McKenzie LLP, of Chicago (Scott L. Brandman, David A. Pope, Matthew S. Mock, and David A. Hemmings, of counsel), for appellee.
Panel JUSTICE MASON delivered the judgment of the court, with opinion. Justices Pucinski and Hyman concurred in the judgment and opinion.
¶ 1 Relators-appellants, Richard Lindblom and Ralph Lindblom, brought this qui tam action on behalf of themselves and the State of Illinois under the Illinois False Claims Act (Act) (
¶ 2 Relators appeal the dismissal, asserting that the audit and the Board’s review were not adversarial and, thus, could not be an administrative civil money penalty proceeding. Relators also contend that the subject of the audit and the Board’s review were different from the qui tam suit that focused on fraud and Best Buy’s knowing misclassification of sales of over-the-range microwaves and dishwashers as a construction contract in order to avoid remittance of sales tax to the Department. Finding merit in relators’ position, we reverse and remand for further proceedings.
¶ 3 BACKGROUND
¶ 4 A. Retailers’ Occupation Tax Act
¶ 5 In Illinois, the Retailers’ Occupation Tax Act (
¶ 6 B. The False Claims Act
¶ 7 Several sections of the Act are relevant here.
¶ 8 After a relator files a qui tam action, the State may elect to intervene, take over and proceed with the action, or decline to intervene giving the relator the right to conduct the action. Burlington Coat Factory Warehouse Corp., 369 Ill. App. 3d at 510 (citing
¶ 9 C. The Lindbloms’ Case
¶ 10 Richard and Ralph Lindblom are brothers, and they own and operate Advanced Appliance, Inc., d/b/a Advanced Maytag Home Appliance Center (Advanced Maytag), located in Schaumburg, Illinois. Advanced Maytag’s business consists of selling and servicing home appliances. Likewise, a portion of Best Buy’s business includes selling home appliances, such as dishwashers and over-the-range microwaves.
¶ 11 Beginning in the late 1970s, the relators’ father, who owned Advanced Maytag at the time, learned that Advanced Maytag’s competitor, defendant Sears, did not charge sales tax on the
¶ 12 In February 2015, relators contacted the Department and provided specific examples of defendants’ failure to charge purchasers sales tax on dishwashers and over-the-range microwaves when also arranging for delivery and installation of those appliances. The Department acknowledged that defendants may have stretched the interpretation of “affixed to real estate,” as well as what constitutes a construction contract versus a retail purchase with separate installation.
¶ 13 Following and allegedly in response to the information provided by relators, in June 2015, the Department issued a compliance alert to retailers addressing the proper tax treatment of appliances and other tangible personal property sold with installation services and whether those sales qualified as construction contracts. The compliance alert clarified that if a customer who is the end user of tangible personal property makes a retail purchase and enters into a separate agreement for installation, then the sale is an over-the-counter transaction subject to sales tax. The compliance alert explained that the sale of tangible personal property along with a separate agreement to install the property does not convert a retail sale into a construction contract. The applicable tax relating to the sale of tangible personal property is based either on the cost of the property affixed to real estate as part of a construction contract, or on the selling price of items sold over-the-counter.
¶ 14 On August 31, 2015, Best Buy received a notice of audit initiation from the Department notifying Best Buy that it was conducting a limited scope review of Best Buy’s appliance sales to Illinois customers for the audit period from July 1, 2012, through December 31, 2013. The Department’s audit of Best Buy was confidential and not publically disclosed.
¶ 15 During an audit, the Department examines the procedures a taxpayer has used in tax returns to calculate the tax base, any exemptions and deductions claimed, and the overall accuracy of the tax return filed.
¶ 16 A taxpayer may request review by the Department’s Board of the proposed audit adjustments, and the Board’s review is informal in nature. Id. The Board’s informal review process affords taxpayers an opportunity to resolve disagreements with the Department’s proposed audit adjustments before commencement of the formal protest and administrative hearing process.
¶ 17 After the Board concludes its review, the Board issues an action decision and the audit is finalized. Id.; Ill. Dep’t of Revenue, Informal Conference Board Review, http://tax.illinois.gov/Publications/PIOs/PIO-58.pdf (last visited Apr. 12, 2018). If the Board upholds the proposed tax liability, the Department issues a notice of tax liability. Following receipt of a notice of tax liability, a taxpayer may dispute the imposition of the tax by withholding payment and participating in an administrative hearing.
¶ 18 On November 12, 2015, relators filed this whistleblower qui tam action under the Act, alleging that big-box appliance retailers, Sears, Home Depot, Lowe’s, and Gregg Appliances, violated
¶ 19 About two months later on January 25, 2016, the Department sent Best Buy a notice of proposed liability asserting that Best Buy owed sales tax on certain sales of appliances that were sold with installation and delivery and assessed $173,610 in tax, $26,040 in penalties, and $11,026 in interest. Best Buy requested full abatement of the assessed penalty, which the Department granted. On March 23, 2016, Best Buy requested review of the proposed liability by the Board. Best Buy asserted that it acted properly as a construction contractor not subject to sales tax on receipts from labor furnished and tangible personal property installed into a
¶ 20 While the Board’s review was pending, relators amended their qui tam complaint to include Best Buy as a defendant. Approximately a month later on September 28, 2016, relators filed a second amended complaint, which is the subject of this appeal. In that complaint, relators alleged that defendants, including Best Buy, engaged in a scheme to conceal and avoid their obligations to pay sales tax to the State. The alleged scheme involved defendants characterizing nonpermanently affixed installed appliances (dishwashers and over-the-range microwaves) as permanent improvements to real property to avoid collecting sales tax from their customers. Relators asserted that defendants knowingly and incorrectly designated the sales of these appliances when they arranged for delivery and installation as construction contracts (instead of retail sales) and knowingly failed to collect and remit sales tax on the gross receipts from the sales of those appliances.
¶ 21 Defendants filed a joint motion to dismiss the second amended complaint, asserting that relators failed to plead fraud with the requisite specificity demonstrating that defendants knowingly submitted false claims and failed to remit the required tax due.
¶ 22 Best Buy also moved separately to dismiss the second amended complaint on the independent ground that the government action bar of
¶ 23 On January 23, 2017, after Best Buy filed its motions to dismiss and before the trial court ruled on those motions, the Board denied Best Buy’s request to withdraw the tax and interest liabilities assessed in the notice of proposed liability. Best Buy received the Department’s “Notice of Tax Liability” dated April 4, 2017, which assessed $173,610 in tax and $18,537.58 in interest for the audit period. Best Buy objected to the assessed liability by filing an action under the Protest Monies Act (
¶ 24 After a hearing on defendants’ motions to dismiss held on the same day Best Buy received the Department’s notice of tax liability, the trial court granted defendants’ joint section 2-615 motion to dismiss without prejudice, finding that the complaint failed to plead fraud with specificity. The trial court reserved ruling on Best Buy’s separate motion to dismiss and directed the parties to submit additional briefs on the issue of whether the Department’s audit procedures constituted an administrative civil money penalty proceeding that barred relators’ qui tam claim. After reviewing the supplemental briefs, the trial court found that the government action bar applied because the Department’s audit and notice of proposed liability, combined with Best Buy’s invocation of the Board’s informal assessment review, constituted an administrative civil money penalty proceeding. The trial court also found that the qui tam
¶ 25 ANALYSIS
¶ 26 The dispositive issue on appeal is whether the Department’s audit in conjunction with the Board’s informal review was an administrative civil money penalty proceeding barring relators’ qui tam action pursuant to the government action bar.
¶ 27 Because we must determine what qualifies as an administrative civil money penalty proceeding as that term is used in the Act, the issue before us is a matter of statutory construction. It is well settled that the cardinal rule of statutory construction is to ascertain and give effect to the intent of the legislature. In re Marriage of Turk, 2014 IL 116730, ¶ 15. The statute’s language is the best indication of the legislature’s intent and must be given its plain, ordinary, and popularly understood meaning. Id.; In re Detention of Lieberman, 201 Ill. 2d 300, 308 (2002). It is appropriate to consult a dictionary to determine a statutory term’s plain and ordinary meaning. People v. Perry, 224 Ill. 2d 312, 330 (2007). When the statute’s language is clear and unambiguous, we must apply it as written without resort to extrinsic aids or tools of interpretation. Turk, 2014 IL 116730, ¶ 15. A court should not consider the statute’s words and phrases in isolation but instead should interpret each word and phrase in light of the statute as a whole. Standard Mutual Insurance Co. v. Lay, 2013 IL 114617, ¶ 26. Statutory interpretation is a question of law that we review de novo. Citibank, N.A., 2017 IL 121634, ¶ 39.
¶ 28 The parties correctly note that the Act does not define the term “administrative civil money penalty proceeding.” Both parties turned to Black’s Law Dictionary’s definition of the term “administrative proceeding“: “[a] hearing, inquiry, investigation, or trial before an administrative agency, [usually] adjudicatory in nature but sometimes quasi-legislative.” Black’s Law Dictionary 54 (10th ed. 2014). Best Buy relies on the first half of the definition, arguing that the Department’s audit was investigatory and the Board’s review was an adversarial proceeding. Relators rely on the second half of the definition, arguing that an administrative proceeding, regardless of the form it takes, must be either adjudicatory in nature or quasi-legislative. Relators contend that the Department’s audit along with the Board’s informal review was neither. We agree with relators.
¶ 29 When relators added Best Buy as a defendant to the qui tam action, the Board was in process of reviewing the proposed liability, but the Department’s audit had not yet been completed because no notice of tax liability had been issued to Best Buy. Until the Department completed its audit by issuing the statutory notice of final liability to Best Buy, there was no final assessment of tax due and, consequently, no determination subject to adjudication.
¶ 30 Although the Retailers’ Occupation Tax Act establishes an administrative process that begins with the initiation of an audit and provides for an informal review of the proposed audit assessments, that process is not an administrative proceeding and does not implicate formal
¶ 31 We must be mindful that the relevant statutory language refers to both a “civil suit” and “administrative civil money penalty proceeding” as matters sufficient to impose the government action bar. Reading “civil suit” and “administrative civil money penalty proceeding” together, along with the requirement that the State was already a party to either of those actions, we can easily ascertain that the legislature intended to bar qui tam actions that were already subject to an adversarial proceeding in which the State was a party. Although the Department initiated the audit of Best Buy and grants the Board power to review and consider a taxpayer’s grievances concerning proposed audit assessments, neither aspect of the investigation of Best Buy’s potential tax liability amounted to an adversarial proceeding. Rather, these phases are precursors to a future adversarial proceeding should the taxpayer not be satisfied with the outcome of the Board’s review. It is the taxpayer’s conduct in pursuing relief from the notice of tax liability (no longer a proposed liability) by requesting an administrative hearing or initiating a civil suit under the Protest Monies Act that triggers the Department’s status as a party in an adversarial proceeding. A “party” is commonly understood to mean “[o]ne by or against whom a lawsuit is brought” (Black’s Law Dictionary 1297 (10th ed. 2014)), and the Department and Best Buy only became parties and opponents in an adversarial proceeding when Best Buy filed its action under the Protest Monies Act, 10 months after it had been joined as a defendant in this case. In other words, at the time relators named Best Buy as a defendant, the Department had not yet issued a final tax liability subject to formal adversarial proceedings, and Best Buy had not yet taken any action to trigger the Department’s status as a party in an adversarial proceeding.
¶ 32 Best Buy contends that, even if the Board’s review was not an administrative civil money penalty proceeding, its protest monies action was one step in a continuous process (beginning with the Department’s audit) that collectively qualifies as an administrative civil money penalty proceeding.
¶ 33 Because the Department’s audit and the Board’s informal internal review of the proposed audit adjustments were not an administrative civil money penalty proceeding that the State was already a party to, the government action bar is not applicable to relators’ qui tam action. For this reason, the trial court erred in granting Best Buy’s section 2-619(a)(9) motion to dismiss.
¶ 34 Best Buy also contends that relators’ qui tam action addressed the same subject as the Board’s informal review and was “parasitic” because it relied on and used information derived from the Department’s audit and the Board’s review. But because the Department’s audit and the Board’s review of the proposed audit adjustment were not an administrative civil money penalty proceeding, Best Buy’s contention is beside the point. Likewise, because this appeal involves a motion to dismiss on jurisdictional grounds addressing whether the government action bar precludes the qui tam action, we need not address Best Buy’s contentions as to the merits of the allegations in the qui tam action that it erroneously treated retail appliance sales as construction contracts.
¶ 35 CONCLUSION
¶ 36 For these reasons, we reverse the trial court’s dismissal of relators’ qui tam complaint and remand for further proceedings consistent with this opinion.
¶ 37 Reversed and remanded.