By Nicole Boutros and Pilar Mata
The Illinois Cook County Circuit Court held that an Illinois law firm (the Relator) that filed a qui tam lawsuit against a taxpayer failed to meet its burden to prove the taxpayer knowingly failed to collect and remit Illinois use tax, as required under the Illinois False Claims Act. The taxpayer sold furniture, equipment and supplies to Illinois customers through representatives, by telephone, through a catalog and over its website. The taxpayer collected use tax on the sale of its goods by catalog and over the Internet but did not collect tax on the shipping and handling charges associated with such sales. The Relator alleged the taxpayer knowingly failed to collect and remit such tax and sought treble damages and mandatory penalties on each alleged false claim. The court held that the Relator failed to prove the taxpayer had actual knowledge that it had to pay tax on shipping and handling charges, acted in deliberate ignorance, or acted with reckless disregard when it did not collect and remit tax on such charges. In so doing, the court adopted the standard for “reckless disregard” issued under federal False Claims Act cases, finding that the Relator had to prove the taxpayer failed to conduct a reasonable or prudent inquiry, or that the taxpayer knew or had reason to know of the facts that would lead a reasonable person to believe harm was likely to result. The court also emphasized that the Illinois False Claims Act was not intended to penalize “frank differences of opinion or innocent errors made despite the exercise of reasonable care” and “does not encompass innocent mistakes or negligence.” The fact that the Illinois Department of Revenue had conducted a use tax audit of the taxpayer but had not assessed additional tax for shipping and handling charges was central to the court’s holding that the Relator failed to meet its burden of proof. This is the second Illinois case holding that the Relator did not meet its burden of proof when the taxpayer relied upon the results of the Department’s audit of the taxpayer’s books and records in which the Department did not assess use tax on shipping and handling charges. The court’s holding in this case and explanation of the standard to demonstrate a “knowing” act is likely to impact numerous other Illinois False Claims Act cases filed by the Relator as a whistleblower in Illinois. State of Illinois ex rel. Schad Diamond & Shedden v. National Business Furniture, LLC, No. 2012 L 000084 (Ill. Cir. Ct. Oct. 23, 2014); see also State of Illinois Ex Rel. Schad Diamond and Shedden v. FansEdge Inc., No. No. 11 L 9550 (Ill. Cir. Ct. Jun. 5, 2014).