An appeals court found a California retailer is not liable
for failure to collect Illinois use tax for catalog and Internet sales, and
also threw out more than $100,000 in attorney’s fees a lower court had awarded
the law firm that brought the qui tam action.
The lawsuit was filed by law firm Beeler, Schad &
Diamond P.C., of Chicago, against Relax the Back Corp., pursuant to the
Illinois False Claims Act, which targets those who try to defraud the
government. A Cook County trial court found in favor of the law firm regarding
catalog sales and in favor of the defendant regarding Internet sales. Both
sides appealed, and the appellate court found in favor of the defendant on all counts.
Qui tam cases are brought by a private individual on behalf
of the government. In such cases, the party bringing the suit could financially
benefit from successful litigation; in such cases, a law firm could collect attorney’s
fees. The phrase is part of a longer Latin phrase that translates to “who sues
in this matter for the king as well as for himself.”
Relax the Back sells back and neck care products such as
ergonomic chairs and massagers. The company is completely based in California,
with no offices, warehouses or inventory in Illinois. According to court
documents, the company’s only connection to Illinois is five retail stores
fully owned and operated by franchisees, which are visited by a corporate
trainer or inspector about once per year.
Customers can also purchase products from the company
through its website and catalogs. In its complaint, the Diamond firm alleged
that the company had knowingly avoided its duty to collect the tax, and the
company was interrogated by the state in 2004. The attorney general closed the
subpoena after finding that Relax the Back had “substantially complied” with
the investigation, and the company was never audited by the Illinois Department
At the bench trial, the company’s chief financial officer
explained that he had consulted with a tax attorney and a sales tax specialist
related to Relax the Back’s tax obligations, and both determined it did not
have sufficient physical presence in Illinois to require it to collect the use
tax. An audit by the state of New York did not find a tax liability on the
company’s web and catalog sales in that state, giving company officers even
more confidence that it did not have an Illinois tax obligation. Outside
accountants who audited the company’s finances annually also never brought up any
Diamond argued that the franchise stores offered enough
presence to require collection of the use tax and that the company acted with
reckless disregard by not collecting the tax.
The Illinois First District Appellate Court agreed with the
defendant that Diamond failed to prove Relax the Back acted recklessly or with
deliberate ignorance, and found it had made a good-faith effort to determine
its tax liability, when law on what constitutes sufficient physical presence is
“far from clear.”
“It is an affirmative omission, or an act in reckless
disregard of the truth or falsity of the information, that is actionable (under
the False Claims Act),” the court wrote. “’Reckless disregard’ does not apply
to acts resulting from innocent mistakes or negligence.”
Court documents noted that in 2013, one of Relax the Back’s
25 employees moved to Illinois for family reasons; the company acknowledged
that as a “physical presence” and began voluntarily collecting use tax on web
and catalog sales that year.
Justice Sheldon A. Harris delivered the opinion of the
court, with justices Mary L. Mikva and Maureen E. Connors concurring.
Relax the Back was represented in the action by the firm of
Tabet Divito & Rothstein, of Chicago.
It is not the first time the Diamond law firm has attempted
to press such qui tam actions, as the firm has turned such actions in to a
steady source of business and litigation. Since 2002, the firm has filed dozens
of such actions in Cook County Circuit Court.
And the appellate decision also does not mark the first time
the firm has suffered a loss in a qui tam action.
In May, for instance, a Cook County Circuit judge dismissed
more than 200 third-party lawsuits filed by Stephen B. Diamond, P.C., to
collect sales tax on liquor sold to Illinois residents from out-of-state
retailers. Those cases were dismissed at the request of the state; the judge in
that case ruled that Diamond had failed to prove the state acted in bad faith.