When purchasing goods online from an out-of-state retailer, you may be liable for sales tax not just on the cost of the items, but also any shipping and handling fees. The courts in many states have struggled with when to tax such costs. The issue also spawned an unusual lawsuit recently decided by an Illinois appeals court.
Before discussing that case, it is important to understand the previous approach taken by Illinois courts to this subject. In 2009, the Illinois Supreme Court unanimously held out-of-state shipping charges are subject to the state’s sales tax. This decision arose from a class action filed by a disgruntled Wal-Mart customer who objected to paying sales tax on an $8 shipping charge included in a $23 trampoline purchase. Wal-Mart included the shipping charges in assessing sales tax, which the customer argued was illegal under Illinois law. The Illinois administrative code states that shipping charges are excluded from sales tax only if they are separately contracted.
The Illinois Supreme Court disagreed and dismissed the lawsuit. The court agreed with Wal-Mart’s interpretation of the law, which held the shipping “was an inseparable link in the chain of events leading to completion of the sale,” and thus subject to tax. In other words, the customer did not enter into a separate agreement with respect to shipping (which would not be subject to sales tax); the shipping was part of a “single sale and purchase,” and therefore Wal-Mart properly assessed tax on the entire sales price.
Based on the Supreme Court’s 2009 decision, a law firm in Chicago sued retailer QVC in 2011, alleging it had failed to collect sales tax on shipping charges paid by Illinois customers over a period of several years. The law firm filed what is known as a “qui tam” action, where it claims to be acting on behalf of the State of Illinois. Qui tam lawsuits are essentially a legal form of bounty hunting. The private litigant initiates and oversees the lawsuit, and if any damages are recovered, it gets to keep a portion of the proceeds as a reward.
The flip side is the state can choose to intervene and prosecute the qui tam action itself. Which is exactly what happened here – the Illinois Attorney General intervened and decided to dismiss the complaint against QVC. The law firm objected, but a judge granted the state’s motion to dismiss and declined to award the law firm a bounty.
The law firm appealed. In an April 21, 2015 decision, a three-judge panel of the Illinois Court of Appeals upheld the trial court’s decision. Justice P. Scott Neville, Jr., writing for the panel, said the state was well within its rights to seek dismissal of the law firm’s complaint. He noted in 2006 – before the Supreme Court’s decision in the Wal-Mart case – Illinois tax officials audited QVC and told the company it did not have to collect sales tax on shipping charges. Shortly after the law firm brought its lawsuit in 2011, QVC began collecting and paying such taxes. But this decision did not retroactively invalidate the state’s 2006 determination. To the contrary, Neville said, “The State considered and approved all of QVC’s practices, including its explicit practice of not charging use taxes on shipping and handling charges for merchandise shipped to Illinois.”
The law firm nonetheless claimed it was entitled to a share of the taxes QVC began collecting in 2011, arguing it was a direct consequence of the qui tam action. But Neville said the court “cannot construe the payment QVC voluntarily started to make on sales after the filing of this lawsuit as part of the proceeds of this lawsuit.” In a qui tam action, the private litigant must first obtain a court judgment in order to collect. A private litigant receives no award when, as here, the state chooses to dismiss the lawsuit after a defendant voluntarily alters its conduct.
S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info
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