CHICAGO — A Cook County Circuit Court judge has ruled in favor of a California wine company accused of violating the Illinois False Claims Act (IFCA), saying the facts don’t support a “reckless disregard” of its obligation to collect state taxes on shipping and handling.
Treasury Wine Estates, headquartered in California, sells and ships wine in the U.S. and internationally. It’s licensed to sell wine online to customers in Illinois. With hundreds of tax rates to keep track of and no in-house department to handle the work, the company hired third-party tax compliance and tax preparation firms to prepare its Illinois sales tax returns. Those firms believed the tax on shipping and handling wasn’t required, according to court documents.
Stephen B. Diamond, a Chicago lawyer, sued the wine company, saying invoices for orders he placed with Treasury Wine Estates didn't include state taxes on shipping and handling. Under the Illinois statute, a private citizen can bring a lawsuit on behalf of the state against someone who is accused of defrauding the government.
Diamond’s firm has made similar allegations against hundreds of businesses operating outside the state. More than 200 such claims were dismissed earlier this year because Diamond couldn’t establish 'nexus' - meaning he couldn't demonstrate the companies had a substantial enough presence in the state to establish tax liability.
Eight states including Illinois include taxes in their respective false claims statutes.
As a whistleblower under the IFCA, a private citizen who brings the suit is entitled to as much as 30 percent of whatever is recovered in the case, as well as attorney’s fees. The relator can also pursue the claim even if the state declines to join, which it did in the case involving Treasury Wine.
After a one-day bench trial Aug. 30, Cook County Circuit Judge Thomas Mulroy ruled Diamond didn’t prove that the California company committed gross negligence when it violated the state law, falling short of the high standard a whistleblower must meet.
Mary Kay Martire, an attorney at McDermott Will & Emery in Chicago who focuses on state and local tax disputes and represented Treasury Wine in the lawsuit, told the Cook County Record that the outcome of this case adds to a developing body of cases that help companies defend against these types of claims.
Treasury Wine Estates’ third-party tax preparers disclosed on the company’s returns that it wasn’t collecting the taxes in question in the suit. Such actions are far from reckless disregard, she said.
“You have to intentionally close your eyes, hide your head in the sand,” Martire said. “But if you’re just reasonably doing your duty here, you’re fine. It’s not reckless disregard. That’s really what the facts showed here.”
Diamond still has time to appeal the court’s decision if he chooses.
For other businesses worried about similar claims, Martire said being open about tax collection is important.
“They can’t stop someone from suing them but they can take some comfort that if they act in a reasonable and prudent fashion, they’re not acting in violation of a state false claims act,” she said.