Whistle blower cases have become a problem in numerous states, including Illinois.
Here’s a short glimpse into how the process works. The principal targets are businesses that:
- Make some sales at retail, even if this is just a small percentage of total sales
- Have a website, over which sales are made, even if it just a small percentage of total sales
The typical scenario is that a law firm which specializes in bringing these sort of actions (legally referred to as the “relator”) will have an employee select a target. It appears that targets are usually found by searching online. A small purchase will be made by the relator, often less than $20. The relator will then see if sales tax is charged on the amount of shipping and handling billed on the invoice. If it is not, then the relator will file (if the target is in Illinois) a “False Claims Act Complaint” in Circuit Court (in Illinois, typically Cook County). The target’s first indication that it has been named in a lawsuit is when it receives of copy of the complaint.
For companies that find themselves in this position, the first action should probably be to consult with their accountant to review the documentation that is part of the complaint to determine if its claim regarding the target’s treatment of sales and use tax is correct or not. The next step is to retain an attorney who has experience in this area. Even in cases in which the complaint appears to be frivolous, judges rarely dismiss these actions, forcing them into the full hearing process. If the court agrees the tax has not been properly charged, the next step is to determine the extent of the problem (beyond just the relator’s purchase). To the amount of tax determined to have been underpaid will be added penalties and interest. Often, a treble damages rule will apply, meaning the target will owe three times the tax (along with penalties and interest) determined as underpaid. Finally, the target will also be ordered to pay the relator’s fees. The bottom line is that targets often settle with the relator out of court even in the target has good facts, to avoid extensive legal fees and the chance that the decision might not be in their favor.
Many companies determine that the best policy might be to charge taxes on delivery, shipping, and handling fees and be “done with it”. But, recently a rash of class actions suits brought in various states have pursued companies selling at retail for over collection over sales and use taxes. The most notable of these cases have been against “Papa John’s” for collecting tax on delivery fees.
Faced with this “Catch 22” situation, companies selling at retail should strongly consider a review of their sales and use tax billing policies and procedures by a professional in this area as these actions have been filed against companies of all sizes.