Seller beware! Hundreds of retailers that sell to Illinois purchasers have been sued for failing to properly collect sales and use tax. In nearly every case, the plaintiff, an Illinois law firm, claims that the seller failed to collect the tax on shipping and handling charges billed to Illinois purchasers.
These types of lawsuits often surprise retailers because an Illinois administrative regulation excludes from sales and use tax shipping and handling charges that are agreed upon separately from the purchase price of property. But a 2009 Illinois Supreme Court decision, Kean v. Wal-Mart Stores, Inc., held that where a buyer must select a shipping method and pay a delivery charge to complete an online order, that charge becomes part of the purchase price and therefore taxable. Nearly six years after Kean, the Illinois Department of Revenue has not amended or withdrawn its regulation. As a result, many retailers—erroneously but understandably—continue to rely on the Department’s guidance.
Some plaintiff firms are taking advantage of retailers’ confusion. Hundreds of lawsuits have been filed against retailers, accusing them of knowingly failing to collect sales and use tax. These claims fall under the Illinois False Claims Act (the “FCA”), which allows a private party, known as a “Relator,” to sue on behalf of the State of Illinois for violations of the sales and use tax statutes. The Relator routinely demands all remedies under the FCA, including (1) payment of all taxes owed, interest, and penalties, (2) mandatory treble damages, (3) penalties of $5,500-$11,000 per violation, with each monthly tax return counting as a violation, and (4) attorneys’ fees. Because the FCA allows a Relator to seek damages for the six-year period preceding the filing of a complaint, a retailer’s potential exposure can be large, even where the amount of tax at issue is small.