This presentation will discuss recent cases including decisions/settlements that have never been reported as well as best practices/strategies to minimize an area in which even the most conscientious of taxpayers are at risk.

1. Chicago Tax Club
Chicago Tax Club ~ April Conference
McDonald Corporation Hamburger University
Whistleblower and Class Action Lawsuits in Sales Tax:
Damned if You Do, Damned if You Don’t
Panel:
David C. Blum, Levenfeld Pearlstein
Ted Bots, Baker & McKenzie
David Hughes, Horwood Marcus & Berk
Moderator:
Larry Ewing, CDH
April 13th, 2015

2. Chicago Tax Club
• Qui Tam Actions/State False Claims Acts
• Class Action Exposure for Over-Collection
• Efforts to Legislatively Confine Vendor
Exposures
• The ABA Model Act
• MTC Uniformity Project
• Consumer Fraud Damages for Over-
Collecting
Overview

3. Chicago Tax Club
• Qui Tam Actions
• Are brought by an informer, under a
statute that establishes a penalty for the
commission or omission of a certain act;
• Provide that such penalties may be
recovered in a civil action;
• Awards a part of the penalty to the
“whistleblower” who brings the action (with
the remainder going to the state or some
other institution).
Federal Court and Qui Tam Actions

4. Chicago Tax Club
• Federal False Claims Act first enacted in 1863
• Crack down on suppliers in the Civil War
• Provides for private enforcement actions against those
alleged to have defrauded the federal government
• 31 USC §§ 3729-3733
• Prohibits any person from defrauding the government
by false claims, records, or statements
• Excludes allegedly fraudulent tax claims
Federal Court and Qui Tam Actions

5. Chicago Tax Club
• Approximately 30 jurisdictions have False Claims
Acts
• Some states restrict their FCA provisions to Medicaid
and/or contractor-type “frauds”.
• A number of state FCA statutes contain explicit “tax
bars” prohibiting qui tam actions for allegedly false
tax claims (e.g., CA, DC, HI, MA, NM, NYC, NC, TN,
VA). Some states impose a tax bar only with respect
to income tax matters (e.g., IL, IN, RI).
• A number of states do not appear restrict the action
to a particular subject matter (e.g., DE, FL, NV, NH,
NJ).
• In 2010, New York became the first state to explicitly
authorize the application of its FCA to tax claims.
State False Claims Acts

6. Chicago Tax Club
• Traditional False Claims Actions
• False claims for payment from the state
• Reverse False Claims Actions
• False statements to avoid or reduce
payments to the state
• Reverse false claims actions give rise to
Qui Tam actions for tax.
Types of Qui Tam Actions

7. Chicago Tax Club
• Defendant made or used a false statement
• To avoid or reduce payment owed to the state
• Defendant knew or should have known
statement was false
• “Knowledge” can be actual, but also includes
deliberate ignorance or reckless disregard.
• Specific intent to defraud not required.
• Legal dispute as to interpretation of law
should negate scienter.
Elements of Qui Tam Actions – Generally

8. Chicago Tax Club
• Proper relator
• Direct and independent knowledge of false
statement
• No publicly available knowledge unless
relator is “original source”
Elements of Qui Tam Actions – Generally

9. Chicago Tax Club
• The relator (plaintiff) investigates
• Direct and independent knowledge of false
statement
• No publicly available knowledge unless relator
is original source and gathers evidence
• The relator (plaintiff) gives notice to the
Attorney General
• The relator files the complaint filed under seal
Timeline of a Qui Tam Action

10. Chicago Tax Club
• The Attorney General investigates and:
• Intervenes and takes over, dismisses,
dismisses to pursue alternate State remedy,
or
• Does not intervene and allows the relator to
proceed
• The complaint is unsealed and summons
issues to the defendant
Timeline of a Qui Tam Action

11. Chicago Tax Club
• Sales & Use Tax Collection
• Lawsuits against remote or internet sellers
(e.g., Beeler, Schad & Diamond litigation):
• Direct mail and online retailers
• Investigate nexus, returns, affiliates
• Shipping & handling charges
• Liquor licenses
• Lawsuit against Sprint Nextel Corporation
(New York) for failure to charge sales tax
on 100% of charges for flat rate wireless
plans.
Typical Qui Tam Actions

12. Chicago Tax Club
• Unclaimed Property
• Lawsuits for failing to remit unused
amounts on prepaid calling cards.
• Actions against MetLife and Prudential for
allegedly failing to turn over unclaimed life
insurance funds.
• Possible Future Actions
• Corporate income tax
Typical Qui Tam Actions

13. Chicago Tax Club
• On the merits
• No collection obligation (e.g., no nexus) or
obligation to pay
• Ambiguous law or regulatory guidance
• Reliance on sound legal theory
Defenses to Qui Tam Actions

14. Chicago Tax Club
• Procedural
• Improper parties
• Relator not an “original source” of the
information.
• Conflicts between FCA and other areas of law
(e.g., state constitution / tax provisions).
• Failure to state claim: no actual knowledge,
no false statement, no claim submitted to
state.
• Government (already) had knowledge (e.g.,
prior sales tax audit).
Defenses to Qui Tam Actions

15. Chicago Tax Club
• Per occurrence
• Possible treble damages, “reasonable”
attorney’s fees and civil penalty.
• Civil penalty generally between $5,000
and $10,000 per false claim.
• Whistleblower generally awarded between
15% and 30% of the state’s recovery.
Qui Tam Liability

16. Chicago Tax Club
• Illinois False Claims Act (“FCA”) allows
whistleblowers (Relator) to bring qui tam
actions against taxpayers for false sales/use
tax claims but not income tax.
• Taxpayers found liable under the FCA are
subject to treble damages of the tax deemed
owed or not paid, plus a statutory penalty of
between $6,000 and $12,000 for each “false”
claim.
• Taxpayers found liable are also required to
pay for the costs and attorneys fees of
bringing the action.
False Claims Act – Illinois

17. Chicago Tax Club
• Whistleblower Rewards
• Up to 30 percent of the recovered
proceeds.
• A whistleblower who planned or initiated
the false claim may even recover an
award provided that the person is not
convicted of a crime for the false act.
False Claims Act – Illinois

18. Chicago Tax Club
• Whistleblower Protections
• A strengthened immunity provision and added
protections from retaliation encourage current
and former employees, contractors, or agents
to become whistleblowers.
• Employees, contractors, and agents are
protected from retaliation for transmitting any
information for the purpose of investigating,
filing, or potentially filing an action under the
FCA, even if the transmission “violate[s] a
contract, employment term, or duty owed to
the employer or contractor.”
False Claims Act – Illinois

19. Chicago Tax Club
• Elements Needed to Establish Liability
• Must show that the taxpayer “knowingly”:
- Presented or caused to be presented, a false
or fraudulent claim for payment or approval;
- Made, used, or caused to be made or used, a
false record or statement material to a false or
fraudulent claim;
- Made, used, or caused 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 a local government.
False Claims Act – Illinois

20. Chicago Tax Club
• “Knowingly”
• Means something more than actual
knowledge.
• Also includes acting in deliberate
ignorance or reckless disregard of the
truth or falsity of information.
False Claims Act – Illinois

21. Chicago Tax Club
• Disagreeing with Agency Guidance
• Liability may attach if a taxpayer takes a
reporting position that contravenes
published agency guidance, even if the
taxpayer has a good faith basis to believe
the guidance is incorrect, in excess of the
Department’s authority, or
unconstitutional.
False Claims Act – Illinois

22. Chicago Tax Club
• Not Limited to Fraud
• FCA specifically provides that there does
not have to be any showing of any intent
to defraud the government.
• The qui tam plaintiff or government must
simply prove the taxpayer made a claim
that it “knew” was incorrect.
False Claims Act – Illinois

23. Chicago Tax Club
• Other Considerations
• 10 year statute of limitations
• Retroactive to April 1, 2007
• Taxpayer secrecy does not apply
• Conspirator liability, including tax
professionals
• Voluntary Disclosure may not protect from
liability
False Claims Act – Illinois

24. Chicago Tax Club
• Potential Defenses
• Mere negligence
• Ambiguous law or regulatory guidance
• Reliance on sound legal theory
• Government knowledge
• Pending “civil action”
False Claims Act – Illinois

25. Chicago Tax Club
• Potential Defenses
• Public disclosure
• Who’s an appropriate whistleblower?
• Voluntary disclosure?
• State and Federal Constitutional violations
False Claims Act – Illinois

26. Chicago Tax Club
Recent Illinois Legislation:
Senate Bill 1828/House Bill 2803
• Amends 740 ILCS 175/4 (Illinois False Claims Act)
by adding subsection (e)(5):
• No court shall have jurisdiction over a civil action
that relates to or involves a false claim regarding
certain tax acts administered by the Illinois
Department of Revenue (“DOR”), unless the
action is brought by the Attorney General.
False Claims Act – Illinois

27. Chicago Tax Club
Recent Illinois Legislation:
Senate Bill 1828/House Bill 2803
• Amends 740 ILCS 175/4.5, which establishes several restrictions
upon actions for false claims relating to tax:
• The DOR shall have the sole authority to bring an
administrative action and the AG shall have the sole authority
to bring a judicial action for a false claim pertaining to taxes
administered by the DOR.
• Includes additional provisions concerning reporting,
enforcement, and payment of rewards.
• An award may be appealed exclusively to the Court of Claims
within 30 days of determination.
False Claims Act – Illinois

28. Chicago Tax Club
• Should FCAs be Applied to Tax?
• Removes tax administration decisions
from taxing authorities and put them in the
hands of an elected official.
• Leads to disparate treatment among
taxpayers.
• Contravenes well-established procedures
designed to ensure efficient resolution of
tax disputes.
False Claims Act

29. Chicago Tax Club
• Should FCAs be Applied to Tax? (cont.)
• Upends protections for taxpayer rights,
including historical right to privacy in tax
matters.
• May discourage use of voluntary
disclosure programs.
• Incentivizes collection of transaction taxes,
which may expose taxpayers to class-
action consumer fraud lawsuits.
False Claims Act

30. Chicago Tax Club
• Customer liability actions against vendors:
• Applications of coupons
• Jurisdiction rate assignments
• Sourcing conventions
• Product/Service taxability
• Examples
• Chang Wong v. Whole Foods No. 1:15 - CV-00898 (2014) (tax on in-
store coupons)
• Schojan v. Papa Johns No. 14-CA-003491 (2014) and Tucker v. Papa
Johns No. 3:14-CV-00618 (2014) (tax on delivery charges)
• Long v. Dell, C.A. No. 03-2636 (2012) (tax on service contracts and
shipping charges)
• In re AT&T Mobility Wireless Data Servs. Sales Tax Litig., 789 F. Supp.
2d 935 (N.D. Ill. 2011) (internet access)
Class Action Law Suits

31. Chicago Tax Club
• Vendors often can defend against the actions
because they used due diligence and remitted funds
to the jurisdiction -- but not without costs.
• State governments can also face class action
lawsuits
Class Action Law Suits

32. Chicago Tax Club
Kean v. Walmart
• Kean bought a trampoline on walmart.com for $23.33 plus
$7.97 shipping and $2.74 sales tax (Sept. 2006).
• Alleged sales tax should have only been imposed on
trampoline and not shipping and handling.
• One month later (October 2006), filed a multistate class
action in Cook County Circuit Court alleging:
• consumer fraud and deceptive business practices;
• unjust enrichment; and
• Injunctive relief – creation of a “class protest fund”
• Nov 2006 filed a TRO and preliminary injunctive relief

33. Chicago Tax Club
Kean v. Walmart
• From Walmart’s perspective, they collected and remitted the tax,
which is now held by the state.
• So if money is owed to plaintiffs, the state should refund it….
• IDOR then intervene as party defendants and among other things,
filed a motion to dismiss plaintiffs’ case.
• Nov 2009, Illinois Supreme Court ruled that Walmart correctly
charged and collected sales tax on shipping charges -- no refund.
 Take away:
 One customer, with no sales tax experience or inside knowledge,
dragged Walmart through the courts for years, incurring sizable legal
bills and no good way out. Plaintiff deprived taxpayer and the state
of the efficient administration of an essential gov’t function.

34. Chicago Tax Club
Recent Illinois Cases
• Wong v. Target (Illinois Federal Court) – Coupon Case
• Bought an item for $10, used a $1 coupon, alleged he was
overcharged sales tax by applying tax on $10, not $9.
• Causes of Action: Consumer Fraud (unfair and deceptive acts and
practices), Common Law Fraud, and “Money Had and Received”
(i.e., unjust enrichment)
• Damages Sought: (1) Compensatory damages ($0.02 in his case);
(2) Punitive damages of “at least equal to 1% of annual revenue of
each of defendant’s Illinois stores during each year the violations
occurred;” (3) attorney’s fees, and (4) such other relief court deems
• Wong v. Whole Foods (Illinois Federal Court)
• largely identical to the Target case
34

35. Chicago Tax Club
Recent Cases
• Papa John’s International (Illinois & Florida)
• “Illegally” collected sales tax on delivery fees
• Consumer fraud, deceptive trade practices, etc
• Florida case recently settled; Illinois still pending
• BJ’s Wholesale Club (Florida & Pennsylvania)
• “illegally” overcharged and kept sales tax on items purchased
through discounts, coupons and other price reductions offers
(e.g., rebate coupon “dealer discount”)
• “prospective class consists of many thousands, If not tens of
thousands, of BJ’s members who were improperly charged
under the guise of BJ’s collection of sales tax”
35

36. Chicago Tax Club
Recent Cases
• Walmart & Sam’s Club
• Pennsylvania
• Named plaintiff bought two cans of shaving gel with a “buy one
get one free” coupon. Total purchase $2.97.
• Alleges Walmart overcharges sales tax in PA stores and Internet
sales and has “misappropriates millions of dollars…”
• Ohio
• Retailer shortchanged customers who returned items to different
stores by applying lower sales tax rates
• Breach of contract – violates terms of sale by refunding less than
the original purchase price
• Walmart seeks to remove to State Tax Commission from federal
court since they are exclusive arbiter of state tax refund claims.
36

37. Chicago Tax Club
• Class actions can be brought against the government
jurisdiction –
• Arizona Department of Revenue v. Bernard J. Dougherty,
29 P.3d 862: class action lawsuits against the State were
permitted in Tax Court.
• Granados v. County of Los Angeles, CA Court of Appeal,
Second District, No. B200812 (March 28, 2012): a
taxpayer can file a class action claim for refund of CA
local telephone users taxes paid. Before filing the claim
the plaintiff must first file a claim that contains the
information required by the Government.
Tax Collection Liability Litigation

38. Chicago Tax Club
• Customer Remedy Procedures – § 325
• First course of remedy
• Reasonable business practice to use state
provided data.
• Taxability Matrix – § 328
• Definitions and sourcing rules -- §§ 314, 315 & Library of
Definitions
• Database requirements – § 307
• Local rate and boundary changes – § 302
Streamlined Agreement Provisions

39. Chicago Tax Club
• Prepared by the Government Submissions and
Legislative Whitepapers Subcommittee with the
State and Local Tax Committee
• Paper balanced conflicting interests of sellers,
purchasers and state and local governments.
• Subcommittee drafted a model that would not
violate SSUTA but would provide an exclusive
remedy for a purchaser to obtain a refund of
over-collected tax.
American Bar Association Model Act

40. Chicago Tax Club
• The paper outlines 15 Governing principles. Some
highlights include:
• Principle 6 – Sellers are, in collecting tax from purchasers
and paying it over to the taxing jurisdiction, acting merely
as agents for the taxing jurisdiction. Accordingly, sellers
should not be subject to claims arising from or in any way
related to an overpayment by purchasers or liability to such
purchasers or anyone else other than a taxing jurisdiction
revenue department, regardless of the nature of the claim
or cause of action asserted, unless the party asserting the
liability demonstrates that in collecting the tax the seller
acted with willful intent to defraud the purchaser.
American Bar Association Model Act

41. Chicago Tax Club
• Principle 9 – Any purchaser who has overpaid a tax should
be entitled to a refund if a timely and adequate claim is
filed.
• Principle 11 – A taxing jurisdiction has a legitimate interest
in ensuring that duplicate refunds are not issued.
Accordingly, a taxing jurisdiction may establish procedures
for that purpose.
• Principle 14 – A taxing jurisdiction has a compelling
interest in the fair and equitable interpretation of its
transaction tax laws and should be an indispensable party
in any litigation determining the proper application of those
laws.
American Bar Association Model Act

42. Chicago Tax Club
• Major provisions:
• Section 4 sets forth Purchaser Recourse provisions
• Purchaser’s relief is limited to a refund claim
pursuant to §5
• Seller should not be party to any action
• Section 5 sets forth Refund Procedures
• Purchaser may file a claim with the seller with time
limits (90 days) for response
• Purchaser may under certain circumstances file a
claim with the taxing jurisdiction
American Bar Association Model Act

43. Chicago Tax Club
• MTC Sales Tax Uniformity Subcommittee formed
a drafting group (public and private sector
members) to address class action and false
claims issues
• December 2014 – Subcommittee proposed that
executive committee recommend states adopt
ABA Model Act
• MTC still working on a model whistleblower act.
MTC Project on Class Action/False Claims

44. Chicago Tax Club
• Kawa v. Wakefern Food Corporation, 24 NJ Tax 444
(App. Div. 2009)
• Class action not permitted
– Cited Streamlined and exclusive remedy
provisions in New Jersey Statutes
• Consumer fraud damages not applicable
because remedies governed by sales tax laws
Consumer Protection Violations?

45. Chicago Tax Club
• Nava v. Sears, Roebuck and Co., Illinois Appellate Court,
First District, No. 1-12-2063 (July 29, 2013)
• Tax on coupon discounts for converter boxes
erroneously collected
• Customer brought suit under consumer protection act
• Also sought certification of a class action
• Trial court dismissed the case, but Appellate Court
reinstated and remanded the consumer protection act
claims
• Found that Sears was not statutorily authorized to
collect this tax
Consumer Protection Violations?

46. Chicago Tax Club
• Loeffler v. Target Corporation, Slip Opinions No.
5173972 (May 1, 2014)
• May a consumer in a sales tax transaction sue a retailer
under the consumer protection laws for allegedly
improperly collecting sales tax reimbursement on a
transaction the plaintiff contends is not subject to sales
tax? Target collected sales tax reimbursement from
consumers who purchased a cup of coffee “to go.”
• Held that the refund scheme created by California tax
code provides the exclusive remedy for a dispute over
the applicability of the state tax laws to retail
transactions.
Consumer Protection Violations?

47. Chicago Tax Club
• Yabsley v. Cingular Wireless LLC , 176 Cal.App.4th
1156
• Did Cingular violate the CA False Advertising Law
when it advertised it would collect sales tax
reimbursement on sales of cellular phones?
• Under Regulation1585, the retailer must pay sales
tax (and may collect sales tax reimbursement) on the
full unbundled price of the phone when it sells a cell
phone bundled with a service contract
• Court of Appeals agreed with the trial court that
regulations provide the same safe harbor for suits
under the UCL that statutes do. The class action was
thus dismissed.
False Advertising Violations?

48. Chicago Tax Club
Questions?
David Hughes
Horwood Marcus
Chicago, Illinois
(312) 267-2193
dhughes@hmblaw.com
David C. Blum
Levenfeld Pearlstein
Chicago, Illinois
(312) 476-7557
dblum@lplegal.com
Ted Bots
Baker & McKenzie
Chicago, Illinois
(312) 861-8845
Theodore.Bots@bakermckenzie.com