People ex rel. Lindblom v. Sears Brands, LLC

• Decision Date: 17 April 2018
• Docket Number: No. 1–17–1468,1–17–1468
• Citation: 2018 IL App (1st) 171468,105 N.E.3d 934
• Parties: The PEOPLE of the State of Illinois EX REL. Richard LINDBLOM and Ralph Lindblom, Plaintiffs–Appellants, v. SEARS BRANDS, LLC, an Illinois Corporation, Home Depot, U.S.A., Inc., a Georgia Corporation, Lowe's Home Centers, LLC, a North Carolina Corporation, Best Buy Stores, L.P., a Minnesota Corporation, and Gregg Appliances, Inc., an Indiana Corporation, Defendants (Best Buy Stores, L.P., a Minnesota Corporation, Defendant–Appellee).
• Court: United States Appellate Court of Illinois

2018 IL App (1st) 171468

105 N.E.3d 934

The PEOPLE of the State of Illinois EX REL. Richard LINDBLOM and Ralph Lindblom, Plaintiffs–Appellants,

v.SEARS BRANDS, LLC, an Illinois Corporation, Home Depot, U.S.A., Inc., a Georgia Corporation, Lowe's Home Centers, LLC, a North Carolina Corporation, Best Buy Stores, L.P., a Minnesota Corporation, and Gregg Appliances, Inc., an Indiana Corporation, Defendants

(Best Buy Stores, L.P., a Minnesota Corporation, Defendant–Appellee).

No. 1–17–1468

Appellate Court of Illinois, First District, SECOND DIVISION.

April 17, 2018

Paul Berks, of Massey & Gail, LLP, of Chicago, for appellants.

Baker & McKenzie LLP, of Chicago (Scott L. Brandman, David A. Pope, Matthew S. Mock, and David A. Hemmings, of counsel), for appellee.

JUSTICE MASON delivered the judgment of the court, with opinion.

¶ 1 Relators-appellants, Richard Lindblom and Ralph Lindblom, brought this qui tam action on behalf of themselves and the State of Illinois under the Illinois False Claims Act (Act) ( 740 ILCS 175/1 et seq. (West 2014) ) against defendants Sears Brands, LLC (Sears); Home Depot U.S.A., Inc. (Home Depot); Lowe's Home Centers, LLC (Lowe's); Best Buy Stores, L.P. (Best Buy); and Gregg Appliances, Inc. (Gregg Appliances). This appeal involves only defendant-appellee Best Buy. For purposes of this appeal, relators alleged that Best Buy knowingly engaged in a scheme to avoid payment of retailers' occupation tax (sales tax) and use tax by treating the sale and installation of dishwashers and over-the-range microwave ovens as a construction contract, which is not subject to the collection of sales tax from purchasers. At the time relators added Best Buy as a defendant, the Illinois Department of Revenue (Department) was in the process of auditing Best Buy's sales tax calculation practices and had issued a proposed tax liability. Best Buy requested review of the proposed tax liability by the Department's Informal Conference Board (Board). Best Buy moved to dismiss relators' qui tam complaint under section 2–619(a)(9) of the Code of Civil Procedure ( 735 ILCS 5/2–619(a)(9) (West 2014) ), asserting that the "government action bar" set forth in section 4(e)(3) of the Act ( 740 ILCS 175/4(e)(3) (West 2014) ) barred relators' qui tam action because it was the subject of an administrative civil money penalty proceeding (the audit combined with the Board's review) and the State was already a party in that proceeding. The trial court agreed with Best Buy's position and dismissed Best Buy from relators' qui tam action.

¶ 2 Relators appeal the dismissal, asserting that the audit and the Board's review were not adversarial and, thus, could not be an administrative civil money penalty proceeding. Relators also contend that the subject of the audit and the Board's review were different from the qui tam suit that focused on fraud and Best Buy's knowing misclassification of sales of over-the-range microwaves and dishwashers as a construction contract in order to avoid remittance of sales tax to the Department. Finding merit in relators' position, we reverse and remand for further proceedings.

¶ 3 BACKGROUND

¶ 4 A. Retailers' Occupation Tax Act

¶ 5 In Illinois, the Retailers' Occupation Tax Act ( 35 ILCS 120/1 et seq. (West 2014) ) imposes sales tax on retailers selling tangible personal property to purchasers for use or consumption. Kean v. Wal–Mart Stores, Inc. , 235 Ill. 2d 351, 362, 336 Ill.Dec. 1, 919 N.E.2d 926 (2009) (citing 35 ILCS 120/2 (West 2006) ); 86 Ill. Adm. Code 130.101 (2005). The use tax complements the sales tax and is imposed on taxpayers for the use of tangible personal property purchased from a retailer. Irwin Industrial Tool Co. v. Department of Revenue , 238 Ill. 2d 332, 340, 345 Ill.Dec. 20, 938 N.E.2d 459 (2010) (citing 35 ILCS 105/3 (West 2008) ); 86 Ill. Adm. Code 150.101(a) (1991). The sales tax is computed as a percentage of "gross receipts" ( 35 ILCS 120/2–10 (West 2014) ), defined as the "total selling price" (id. § 1). Citibank, N.A. v. Illinois Department of Revenue , 2017 IL 121634, ¶ 2, 422 Ill.Dec. 833, 104 N.E.3d 400. A retailer remits the sales tax collected from the purchaser to the Department. Id. On the other hand, a construction contract involves the incorporation of tangible personal property into real estate, and such contracts are not subject to sales tax on the labor furnished and tangible personal property (materials and fixtures) incorporated into a structure. 86 Ill. Adm. Code 130.1940(c) (2000) ; id. § 130.2075(a)(2) (2001). Instead, the construction contractor pays a use tax based on the price it paid for the affixed property. Id. § 130.1940(c) (2000); id. § 130.2075(a)(2) (2001). Stated simply, a purchaser does not pay sales tax on a construction contract.

¶ 6 B. The False Claims Act

¶ 7 Several sections of the Act are relevant here. Section 3(a)(1)(G) provides that any person who "knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the State" is liable to the State for a civil penalty. 740 ILCS 175/3(a)(1)(G) (West 2014). Section 4(b)(1) authorizes private persons, referred to as plaintiffs-relators, to bring civil actions on behalf of themselves and on behalf of the State of Illinois against any person violating section 3(a)(1)(G). Id. § 4(b)(1); State ex rel. Beeler, Schad & Diamond, P.C. v. Burlington Coat Factory Warehouse Corp. , 369 Ill. App. 3d 507, 510, 307 Ill.Dec. 769, 860 N.E.2d 423 (2006) (citing 740 ILCS 175/4(b)(1) (West 2002) ). The action brought by a relator is known as a "qui tam " action. Id. (citing 740 ILCS 175/4(c) (West 2002) ). But under section 4(e)(3), a relator may not "bring an action under subsection (b) [permitting qui tam actions] which is based upon allegations or transactions which are the subject of a civil suit or an administrative civil money penalty proceeding in which the State is already a party." 740 ILCS 175/4(e)(3) (West 2014). Section 4(e)(3)'s restriction is known as the "government action bar." See United States ex rel. Batty v. Amerigroup Illinois, Inc. , 528 F.Supp.2d 861, 876 & n.12 (N.D. Ill. 2007) (referring to 31 U.S.C. § 3730(e)(3) (2006), a federal parallel provision to 740 ILCS 175/4(e)(3), as the government action bar). The government action bar prohibits qui tam actions that are parasitic in that they duplicate the State's civil suits or administrative proceedings without giving the government any useful return, other than the potential for additional monetary recovery. People ex rel. Schad, Diamond & Shedden, P.C. v. QVC, Inc. , 2015 IL App (1st) 132999, ¶ 23, 391 Ill.Dec. 687, 31 N.E.3d 363 ; 740 ILCS 175/4 (West 2014).

¶ 8 After a relator files a qui tam action, the State may elect to intervene, take over and proceed with the action, or decline to intervene giving the relator the right to conduct the action. Burlington Coat Factory Warehouse Corp. , 369 Ill. App. 3d at 510, 307 Ill.Dec. 769, 860 N.E.2d 423 (citing 740 ILCS 175/4(b)(4) (West 2002) ). A relator is a party to the qui tam action and is awarded a percentage of the proceeds or settlement if the action is successful. Id. (citing 740 ILCS 175/4(c)(1), (d) (West 2002) ).

¶ 9 C. The Lindbloms' Case

¶ 10 Richard and Ralph Lindblom are brothers, and they own and operate Advanced Appliance, Inc., d/b/a Advanced Maytag Home Appliance Center (Advanced Maytag), located in Schaumburg, Illinois. Advanced Maytag's business consists of selling and servicing home appliances. Likewise, a portion of Best Buy's business includes selling home appliances, such as dishwashers and over-the-range microwaves.

¶ 11 Beginning in the late 1970s, the relators' father, who owned Advanced Maytag at the time, learned that Advanced Maytag's competitor, defendant Sears, did not charge sales tax on the retail sales of dishwashers and over-the-range microwaves when the purchaser also arranged for delivery and installation services from Sears because Sears treated those sales as a construction contract, which was not subject to the collection of sales tax from purchasers. Relators later learned that the other named defendants, including Best Buy, followed Sears's practice of failing to remit sales tax on the gross receipts from the sale of dishwashers and over-the-range microwaves by treating sales of those appliances as construction contracts. Relators believed this practice was a knowing and purposeful scheme to avoid remitting the taxes owed on the sale of dishwashers and over-the-range microwaves. Relators estimated that Advanced Maytag lost approximately 36 sales a year to defendants based on defendants' lower prices due to their failure to collect and remit the requisite sales tax.

¶ 12 In February 2015, relators contacted the Department and provided specific examples of defendants' failure to charge purchasers sales tax on dishwashers and over-the-range microwaves when also arranging for delivery and installation of those appliances. The Department acknowledged that defendants may have stretched the interpretation of "affixed to real estate," as well as what constitutes a construction contract versus a retail purchase with separate installation.

¶ 13 Following and allegedly in response to the information provided by relators, in June 2015, the Department issued a compliance alert to retailers addressing the proper tax treatment of appliances and other tangible personal property sold with installation services and whether those sales qualified as construction contracts. The compliance alert clarified that if a customer who is the end user of tangible personal property makes a retail purchase and enters into a separate agreement for installation, then the sale is an over-the-counter transaction subject to sales tax. The compliance alert explained that the sale of tangible personal property along with a separate agreement to install the property does not convert a retail sale into a construction contract. The applicable tax...