State ex rel. Beller Schad & Diamond, P.C. v. Ritz Camera Centers, Inc.

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State: Illinois

Court: 1st District Appellate

Docket No: 1-05-1059 Rel

Case Date: 10/05/2007

Preview:1-05-1059 FIFTH DIVISION October 5, 2007

No. 1-05-1059

THE STATE ex rel. BEELER SCHAD AND DIAMOND, P.C., Plaintiffs-Appellees, v. RITZ CAMERA CENTERS, INC., and RITZ INTERACTIVE, INC., and WOLF CAMERA, INC., dELiA*s CORP., NBTY, INC., and VITAMIN WORLD, INC., and VITAMIN WORLD ONLINE, INC., ANTHROPOLOGIE, INC., ANTHROPOLOGIE DIRECT, LLC, and URBAN OUTFITTERS DIRECT, LLC, MTS INCORPORATED, and TOWER DIRECT LLC, PACIFIC SUNWARE OF CALIFORNIA, INC., and PACSUN.COM, PETsMART, INC., PETsMART.COM, and PETsMART DIRECT, BASSNET, INC., G.H. BASS & CO., IZOD CORPORATION, IZOD.COM, INC., and PHILLIPS VAN-HEUSEN CORPORATION, RETAIL BRAND ALLIANCE, INC., d/b/a CASUAL CORNER GROUP,

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Appeal from the Circuit Court of Cook County

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1-05-1059 PRESIDIO RETAIL, INC., d/b/a ARMANI EXCHANGE, HALLMARK CARDS, INC., THE PFALTZGRAFF COMPANY, HOT TOPIC, INC., BASS PRO, INC., BASS PRO OUTDOOR WORLD, L.L.C., BASS PRO OUTDOORS ONLINE, L.L.C., and THREE JOHNS COMPANY, a/k/a BASS PRO SHOPS, INC., NEW BALANCE ATHLETIC SHOE, INC., NEW BALANCE WEB EXPRESS, BOOKS-A-MILLION, INC., BOOKSAMILLION.COM, INC., 1-800-FLOWERS.COM, INC., MAIDENFORM, INC., TUPPERWARE.COM, INC., AMAZON.COM, INC., BORDERS GROUP, INC., BORDERS ONLINE, INC., TOYSRUS, INC., and TOYSRUS.COM, EB CATALOG CO., INC., EB WORLD.COM, INC., and ELECTRONICS BOUTIQUE HOLDING CORP., SPENCER GIFTS ONLINE, INC., UNIVERSAL STUDIOS, INC., and UNIVERSAL STUDIOS ON-LINE, INC., STUART WEITAMAN, INC., and GATEWAY, INC., f/k/a GATEWAY 2000, Defendants-Appellants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) 02 L 6312 02 L 6702 02 L 7528 02 L 7529 02 L 7530

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03 L 2931 03 L 3071 Honorable Ronald F. Bartkowicz, Judge Presiding.

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1-05-1059 JUSTICE GALLAGHER delivered the opinion of the court: In this Illinois Supreme Court Rule 308 petition (155 Ill. 2d R. 308), we are asked to answer six certified questions dealing with a claim brought under the Illinois Whistleblower Reward and Protection Act (Act) (740 ILCS 175/1 et seq. (West 2002)), filed by Beeler Shad & Diamond as a relator on behalf of the State of Illinois. The underlying claim relates to defendants' sale of goods over the internet and/or through catalogs into Illinois and defendants' alleged failure to collect and remit use tax relating to these sales.1 The trial court certified the following questions for interlocutory review:

Question 1 "As a matter of law, if a remote retailer does not collect and remit use tax on sales to Illinois customers, can it make a 'knowingly' false record or statement, as required to create liability under the Illinois Whistleblower Reward and Protection Act, 740 ILCS 175/1?" Question 2 "(a) As a matter of law, does the Whistleblower Act require the existence of an actual record or statement to support a claim or can the failure to keep a record be actionable? (b) As a matter of law, can documents memorializing a purchase (i.e. invoices or packing receipts) that show in the line item for tax '$0.0' or in some other way that tax is not being collected be considered 'false' under the Whistleblower Act where the retailer that created those documents does not collect tax?

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This court granted a motion to withdraw from the appeal filed by Pfaltzgraff Co.,

Maidenform, Inc., Toy's R Us and PETsMART. 3

1-05-1059 (c) Under the Whistleblower Act, as a matter of law, is it necessary that a false statement be submitted to or actually relied upon by the State?" Question 3 "Does the application of the general provisions of the Whistleblower Reward and Protection Act, 740 ILCS 175/1, to enforce the sales and use tax laws improperly deprive taxpayers of the specific rights and privileges afforded them under the Protest Monies Act (30 ILCS 230/1), the Taxpayer's Bill of Rights, 20 ILCS 2502/1, and/or the statutory administrative procedures offered by the Illinois Department of Revenue, 35 ILCS 105/1; 35 ILCS 120/1, such that the Whistleblower Reward and Protection Act cannot be used to enforce the collection of taxes due the State?" Question 4 "Is the Illinois Department of Revenue the sole entity authorized by the Illinois General Assembly to assess and collect use tax?" Question 5 "Does the Illinois Whistleblower Reward and Protection Act, 740 ILCS 175/1, apply to alleged tax liabilities under the Use Tax Act?" Question 6 "(a) Does the Illinois Whistleblower Reward and Protection Act, 740 ILCS 175/1, violate the Attorney General clause of the Illinois Constitution, Article V, Section 15, by improperly usurping the exclusive authority of the Attorney General to initiate and conduct litigation on behalf of the State?

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1-05-1059 (b) Does the Illinois Whistleblower Reward and Protection Act, 740 ILCS 175/1, as applied to tax matters, violate either the Attorney General clause or the Executive Compensation clause of the Illinois Constitution, Article V, Sections 15 and 21?" This court denied defendants' Rule 308 petition; however, the Illinois Supreme Court pursuant to its supervisory authority directed this court to answer the above certified questions, which we now do in this appeal.

BACKGROUND The following facts are relevant to answering the certified questions raised on appeal. The law firm of Beeler, Schad & Diamond filed a complaint alleging that the defendant retailers' records, returns and statements that claimed no use tax was due on their sales to Illinois consumers were knowingly false within the meaning of the Act. Beeler, Schad & Diamond filed this complaint on behalf of the State of Illinois as a relator. The complaint alleged that "defendants are retailers whose out-of-state operations made sales to Illinois residents over the Internet and/or through catalogs and defendants failed to collect and remit use tax on these sales." The complaint also alleged that each of defendants' Web sites, retailers' records, returns and statements that claimed no use tax due on its sales to Illinois customers was knowingly false within the meaning of the Act. Beeler, Schad & Diamond also filed a similar complaint in Nevada. In the Nevada case, the Nevada Supreme Court addressed the false claims actions brought by Beeler, Schad & Diamond relating to allegations of falsified tax liabilities associated with the retailers' Internet and/or catalog sales. International Game Technology, Inc. v. Second Judicial District Court of 5

1-05-1059 the State of Nevada, 122 Nev. 132, ____, 127 P.3d 1088, 1095 (2006). The Attorney General in the Nevada case intervened and moved to dismiss the case. International Game Technology, Inc., 122 Nev. at ____, 127 P.3d at 1096. The Nevada Supreme Court affirmed the trial court's dismissal of the case. International Game Technology, 122 Nev. at ___, 127 P.3d at 1108. The Nevada court held that false claims actions incorporating the state's revenue statutes were not necessarily excluded as claims appropriately brought under the Nevada false claims act, but the Attorney General had articulated a legitimate government purpose for intervening and dismissing the complaint, asserting that the entity entrusted to maintain consistency and uniformity in the tax laws should resolve the issue. International Game Technology, 122 Nev. at ___, 127 P.3d at 1108. Here, the Attorney General intervened in the matter filed in the circuit court and prosecuted the matter on the State's behalf. In response to the complaint filed in Illinois, defendants filed a joint motion to dismiss. The trial court denied defendants' joint motion to dismiss and also granted defendants' motion for an interlocutory appeal under Rule 308. This court denied defendants' Rule 308 petition for leave to appeal, and defendants appealed that decision to the Illinois Supreme Court, which directed this court pursuant to its supervisory authority to answer the certified questions. Before addressing the certified questions, we deem it necessary to provide background information underlying the questions in the instant appeal. The act implicated in the instant matter is the Illinois Whistleblower Reward and Protection Act (740 ILCS 175/1, et seq. (West 2002)). The Act provides a provision relating to false claims. 740 ILCS 175/3 (West 2002). According to the false claims provision, a person presents a false claim when he "knowingly 6

1-05-1059 makes, uses, or causes to be made or used, a false record or statement to conceal, avoid or decrease an obligation to pay or transmit money or property to the State." 740 ILCS 175/3(a)(7) (West 2002). The Illinois false claims provision defines "knowing" and "knowingly" as: "a person, with respect to information: (1) has actual knowledge of the information; (2) acts in deliberate ignorance of the truth or falsity of the information; or (3) acts in reckless disregard of the truth or falsity of the information, and no proof of specific intent to defraud is required." 740 ILCS 175/3(b) (West 2002). Alleged violations of the Act may be brought in a civil action commenced by the Attorney General or a private person, referred to as a "relator," in the State's name in actions known as qui tam actions. 740 ILCS 175/4(a), (b), (c) (West 2002). The State may intervene, proceed with the action and take over conduct of the action, or decline to intervene. 740 ILCS 175/4(b)(4)(A), (B) (West 2002). If the State proceeds with an action commenced by the relator, the relator receives a percentage of the proceeds from the successful disposition or settlement of the claim. 740 ILCS 175/4(d) (West 2002). The Act is modeled after the Federal False Claims Act (FCA) (31 U.S.C.

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