An Illinois Appellate Court affirmed a circuit court’s dismissal of a qui tam action filed against a United Kingdom-based tailoring shop. The court held that although the tailor’s failure to investigate its use tax collection obligations was “an ostrich-type situation,” the tailor nevertheless did not violate the Illinois False Claims Act.
The Illinois False Claims Act provides two theories of liability:
- knowingly making, using, or causing to be made or used a false record or statement material to an obligation to pay or transmit money or property to the State; or
- knowingly concealing or knowingly and improperly avoiding or decreasing an obligation to pay or transmit money or property to the State.
The Act defines “knowingly” to include a person: (i) having actual knowledge of the information; (ii) acting in deliberate ignorance of the truth or falsity of the information; or (iii) acting in “reckless disregard” of the truth or falsity of the information. The Relator claimed the tailor’s failure to investigate its tax responsibilities was reckless disregard of the tax law.
The tailor’s failure to investigate its use tax obligation could have been sufficient to demonstrate that it acted with reckless disregard, but the Relator failed to seek and submit discovery on the tailor’s nexus with Illinois to support a finding of scienter, i.e. the requisite knowledge under the False Claims Act.
Further, in choosing to use the words “avoid” and “conceal,” the court found that the legislature intended to cover only those persons who intentionally choose not to meet their tax obligation, rather than a merely failing to pay tax.
The record failed to show the tailor knowingly concealed, avoided, or decreased an overpayment it received from the State of Illinois. Therefore a dismissal of the qui tam action was warranted.