Online giant eBay is concerned if the U.S. Supreme Court rules a state can collect sales taxes from e-businesses, which have no physical presence in the state, the decision will unleash a torrent of tax collection lawsuits that will “damage the national economy” and impose “enormous burden” on small online retailers.
At the same time, the Illinois Supreme Court is weighing whether lawyers may deserve legal fees, for bringing some of those lawsuits in the Prairie State, accusing retailers of not paying taxes.
The nation’s high court is on the verge of ruling in South Dakota v. Wayfair, a case in which the state of South Dakota is saying online home goods seller Wayfair should collect and remit taxes to the state, from sales the Boston company makes retailing and shipping items to South Dakota online consumers.
The case hinges on the 1992 Supreme Court holding in Quill Corp. v. North Dakota, that ruled mail order catalog companies did not have to remit state sales taxes. More than a quarter century later, South Dakota is arguing the prevalence of internet commerce has put Quill in the horse-and-buggy era, requiring the Supreme Court's intercession.
Some leading companies, such as eBay, fear if the court grants South Dakota's wish, courthouse doors across the land will fly open for a stampede of so-called qui tam lawsuits against e-businesses of all sizes, from giant corporations, like eBay, to the small sellers who use those larger platforms, like eBay, Amazon and Etsy.
The federal government and about 10 states, including Illinois, allow for qui tam suits, in which a private party can sue on behalf of the government to expose a fraud on the government. In exchange, the private party gets a share of the recovered funds and damages, with the defendant paying the party's attorney fees. Qui tam actions are, in theory, permitted to encourage public whistleblowers.
The idea behind qui tam is people with unique or inside knowledge of corruption can be helpful in rooting out fraud and augmenting the government's limited resources. In the U.S., the federal government started allowing qui tam suits during the Civil War to expose fraud by contractors providing military supplies.
In friend-of-the-court papers submitted by eBay in support of Wayfair, eBay warned an adverse Supreme Court decision in the South Dakota case could put online retailers at the mercy of qui tam actions.
“Small sellers are likely to make occasional errors in the calculation of the tax due, either because they use defective software or due to the complexity of the tax-collection process. And in light of that complexity, sellers could easily be accused of making such errors even if they did not. These errors (or accusations) could have significant, and very expensive, legal consequences,” eBay contended.
When a party in Illinois brings a potential qui tam suit to the attention of the state, the Illinois Attorney General's Office can pursue the matter on its own. If the attorney general declines, the party can go ahead with the suit, but the attorney general oversees the litigation.
Sometimes the private party bringing the qui tam and their attorney are one and the same, as in the myriad cases involving Chicago lawyer Stephen B. Diamond, of the firm Stephen B. Diamond P.C., formerly known as Schad, Diamond & Shedden, P.C.
Diamond, who has been a lawyer since 1968, has pressed almost 1,000 qui tam actions since 2001 in Illinois, one of the states allowing such suits, resulting in settlements of $30 million against such big retailers as Walmart, Office Depot and Target. His share of the suits has been about $12 million, according to published reports.
In Diamond's press releases, he refers to himself and two lawyers in his firm, Tony Kim and Matthew Burns, as “whistleblower attorneys.”
Diamond declined to comment for this story.
Diamond's approach is to buy hundreds of products from online retailers to see if they are paying proper taxes, according to a report by Bloomberg Big Law Business. When Diamond sees possible violations, he sues under the Illinois False Claims Act.
“Internet merchants secure price advantages over brick and mortar stores” when “they fail to collect sales taxes,” Diamond charged.
Adam Beckerink, of the Chicago firm of Morgan, Lewis & Bockius, has defended against more than 50 qui tam suits during the past decade, some involving Diamond. Beckerink sees the value of such actions – to a degree.
“Qui tams have their place, for such things as Medicare fraud, but not for sales taxes. You have the Illinois Department of Revenue for that,” Beckerink said.
In some of Beckerink's cases, he has convinced the Illinois Attorney General to overrule the private party and dismiss the suits as unwarranted. However, many cases end in settlements, because it is cheaper to do so, than fight and accumulate attorney fees.
“It is not cost effective,” as Beckerink put it.
In South Dakota's case against Wayfair, Beckerink believes if South Dakota wins, the decision may not loose a flood of qui tam suits - provided the country's high court is careful to lay down clear rules governing taxes on internet sales. A “blurry” line, subject to multiple interpretations, however, will lead to litigation, Beckerink pointed out.
However, in Illinois, the state’s high court, in a case involving Diamond, could provide a push either to cork the possible torrent of qui tam actions, or popping the top, as lawyers could likely quickly recognize a way to score attorney fees, while claiming to be acting in the public good.
Since 2012, Diamond has pressed a qui tam case against MyPillow Inc., a Minnesota-based pillow manufacturer that has sold millions of pillows, mostly through television infomercials.
Beginning in Cook County Circuit Court, Diamond invoked the Illinois False Claims Act, alleging My Pillow failed to collect $221,379 in taxes on sales made through telephone and internet orders placed by Illinois residents between 2010 and 2013. The State of Illinois declined to pursue the matter itself, authorizing Diamond to act for the state.
In 2016, Cook County Associate Judge Thomas Mulroy ruled for Diamond, fixing the judgment at $1.38 million in damages and legal fees, of which Diamond received 30 percent, or $266,891, as well as his fees of $600,960 for 2,087 hours work. My Pillow challenged the fees in Illinois First District Appellate Court, arguing Diamond was his own attorney in the matter and didn't deserve fees.
The state appellate panel favored MyPillow, with Justice David Ellis finding that awarding fees to attorneys representing themselves, could spur some lawyers to pursue similar qui tam actions based on self-enrichment, rather than public good. Ellis did praise Diamond for rendering the “valuable service of uncovering fraud against the State.”
Diamond appealed, and the state Supreme Court took up the case.
Diamond maintained the False Claims Act allows for in-house attorney fees. To back his argument, Diamond said he was under the control of Illinois Attorney General Lisa Madigan's office during the litigation, which provided for “objective, independent counsel” and eliminated concern about “abusive fee generation.” Further, when the state itself presses a tax suit, the state's own attorneys are entitled to fees under the False Claims Act.
Diamond also pointed to his record of recovering $25 million in taxes for Illinois, as evidence of his right to attorney fees.
Even though Diamond says he has helped Illinois, the Illinois Attorney General is siding with My Pillow, having submitted friend-of-the-court papers on the company's behalf.
Permitting Diamond to reap fees “risks distorting the golden mean because it encourages parasitic or non-meritorious lawsuits,” Madigan contended.
Madigan went on to say a law firm could “bring a low-value lawsuit and engage in abusive discovery practices in hopes of obtaining a nuisance-value settlement that provides” the firm with “both a portion of the settlement and inflated attorneys' fees.”
In addition, Madigan said Diamond overstated the level of control her office had over Diamond's tax litigation.
The Illinois Chamber of Commerce has also acted to cut Diamond, saying the lawyer's “double recovery” is a “mockery” of the False Claims Act and “impedes the common good.” The Chamber added Diamond has “created a harmful cottage industry” by targeting Illinois businesses and hard-working citizens.”
Regardless of the outcomes of South Dakota v. Wayfair and Diamond's effort to collect fees, e-vendors face trouble other than qui tam suits alone. The eBay company noted if a business collects too much tax, a consumer class action could be lodged to recover the excessive taxes.
In Diamond's case for attorney fees, Beckerink is of the notion that if Diamond loses, it could dissuade Diamond and others from launching qui tams.
“It would certainly take away a benefit,” Beckerink observed.
The U.S. Supreme Court could deliver a ruling in the South Dakota matter before the court recesses around the end of June. If not, the ruling would not then come until at least October.