Wineries put cork in qui tam lawsuits over wine shipping charges, sales tax

By Annie Hunt | Feb 8, 2016

A  group of more than two dozen California wineries who ship wine to Illinois customers have scored a legal win, as a Cook County judge granted the request of Illinois Attorney Gen. Lisa Madigan to dismiss numerous lawsuits alleging the wineries had shorted the state's treasury by not paying sales taxes on shipping and handling fees they charged consumers.

The qui tam lawsuits were originally filed by residents of Illinois, supposedly on behalf of the state, to collect sales tax they claimed the wineries should have been charging on the shipping costs of wine sent to Illinois from other states. The claim invoked the Illinois False Claims Act (IFCA) and appealed to the Illinois Attorney General, who initially allowed the plaintiff to proceed on behalf of the state.

In reaction to the suit, law firm Reed Smith LLP filed an action on behalf of the Wine Institute and its members in the Cook County Circuit Court against the Madigan's office on July 28.

“The qui tam plaintiffs lost these matters at the Circuit Court because we were able to convince the Illinois Attorney General’s office that no tax was due on the shipping and handling charges incurred by the defendants’ Illinois customers,” said Adam Beckerink, attorney for Reed Smith.

“As a procedural matter, the Illinois Attorney General filed Motions to Dismiss in these 28 qui tam matters, 17 of which were represented by us, based on the Attorney General’s prosecutorial discretion.”

According to Beckerink, the Illinois Attorney General exercised its prosecutorial discretion because the wineries had proven no tax was due on the shipping and handling charges because the defendants provided an option for customers to pick up purchases. The pickup option meant that shipping and handling charges were separately stated and negotiated. The Attorney General also stated the alleged liabilities potentially owed by the defendants were minimal.

“In short, the defendants prevailed because Illinois law supported the conclusion that they did not owe tax on shipping and handling amounts incurred by their Illinois customers,” said Beckerink, “It should be noted that several other defendants in these matters have settled even though a tax would not have been due on their shipping and handling charges because they would have incurred excessive legal fees to win their case, and did not have the support of the Attorney General’s Motion to Dismiss."

The dismissal of the qui tam lawsuits means Illinois wine consumers can now save on out-of-state shipments. Reed Smith reported that some of the alleged liabilities in the cases ranged from $800 to $3,000. However, all of the money would not have been received by the state. Under the ILFCA, the plaintiff would have been eligible for a portion of the liability.

The amount of money at stake under qui tam FCA cases has sparked a seeming a gold rush in whistleblowing. In 2015, the Department of Justice reported $3.5 billion was recovered from FCA settlements with whistleblowers leading the charge and collecting a percentage of the recovery as they go. When it comes to FCA claims in the tax arena, the cases can become increasingly complicated, especially when compared to more common injury claims.

“I believe that it is inappropriate to apply the False Claims Act in tax cases, especially when corporations have complicated tax returns that involve judgment calls regarding ambiguous tax laws,” said Beckerink.

“With the recent trend of Qui Tam actions (collecting too little tax) and Consumer Fraud actions (collecting too much tax) across the United States, taxpayers are being asked to be perfect, and not by the states’ departments of revenue, but by individuals and other third parties, who sometimes are only looking for their own pay day.”

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