Retail chain Best Buy can’t use an Illinois state investigation of its sales practices to sidestep a lawsuit brought by the owners of a Schaumburg Maytag appliance store, ostensibly on behalf of the state, accusing Best Buy, among other retailers, of sales tax fraud by misclassifying certain appliance sales as construction installations, a state appeals panel has ruled.
Even though the state investigation was ongoing at the time the rival store owners added Best Buy as a defendant in their lawsuit, the appellate justices said a Cook County judge was wrong to cite that investigation as proof of an “adversarial” state action against the electronics and home appliance retailer sufficient to thwart the lawsuit.
“Although the (Illinois Department of Revenue) 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,” the justices wrote. “Rather, these phases are precursors to a future adversary proceeding should the taxpayer not be satisfied with the outcome of the Board’s review.”
Justice Mary Anne Mason authored the court’s opinion, which was delivered on April 17. Justices Michael B. Hyman and Aurelia Pucinski concurred.
The legal action was launched in late 2015 by brothers Richard and Ralph Lindblom, who own the Advanced Maytag Home Appliance Center in Schaumburg.
Earlier that year, the brothers Lindblom had contacted the state Revenue Department, accusing Best Buy and other retailers of essentially cheating the state out of sales tax by classifying dishwashers and over-range microwave oven sales as “construction contracts,” allowing them to charge customers less. According to the appellate decision, the Lindbloms estimated these practices cost them about three dozen sales per year.
The Lindbloms’ report then triggered an audit and investigation into Best Buy’s sales activity by state regulators in August 2015. However, this was not public information.
In November 2015, the Lindbloms filed suit in Cook County Circuit Court, launching a so-called qui tam action against a number of retailers, but initially not Best Buy, for such practices. Under a qui tam action, private entities bring suit, ostensibly on behalf of the state or other government body, to recover taxes or other damages which have been allegedly wrongly withheld, either by intransigence or deceit.
However, such actions are subject to restrictions, as the actions must receive assent from the state and not duplicate an action already being undertaken by the state to recover the unpaid funds.
In January 2016, Best Buy received a notice of tax liability from the state of Illinois, requiring them to pay more than $210,000 in tax, penalties and interest on the alleged wrongly classified dishwashers and microwaves.
Best Buy requested a review of that decision two months later, and an in-person conference to discuss the disagreement over the tax liabilities was scheduled for October 2016.
However, in September 2016, the Lindbloms added Best Buy to their qui tam action.
Best Buy then asked the judge to dismiss the lawsuit against them, asserting the ongoing state proceedings made the Lindbloms’ qui tam suit “parasitic” and duplicative.
Cook County Judge James Snyder agreed, dismissing the case with prejudice.
The Lindbloms appealed, however, and the appellate justices said Snyder had erred, saying they believed the law did not classify the ongoing investigation and review as “adversarial” enough to make the qui tam action duplicative.
Essentially, the justices said, an adversarial state action does not begin until taxpayers protest the state’s tax liability decision, and “invoke administrative proceedings before an administrative law judge, or, alternatively, pay under protest and file an action in the circuit court.”
“… 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,” the justices wrote.
The appeals panel overturned Snyder’s decision, and sent the case back to Cook County court, allowing the Lindbloms to continue with their lawsuit against Best Buy.
According to Cook County court records, the Lindbloms are represented by attorneys with the firm of Massey & Gail LLP, of Chicago.
Best Buy is represented by the firm of Baker & McKenzie, of Chicago.