People ex rel. Lindblom v. Sears Brands, LLC

• Decision Date: 23 April 2019
• Docket Number: No. 1-18-0588,1-18-0588
• Parties: The PEOPLE of the State of Illinois EX REL. Richard LINDBLOM and Ralph Lindblom, Plaintiffs-Appellants, v. SEARS BRANDS, LLC, an Illinois Corporation, and 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 (Sears Brands, LLC, and Home Depot U.S.A., Inc., Defendants-Appellees).
• Court: United States Appellate Court of Illinois

2019 IL App (1st) 180588

143 N.E.3d 101

436 Ill.Dec. 606

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

v. SEARS BRANDS, LLC, an Illinois Corporation, and 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(Sears Brands, LLC, and Home Depot U.S.A., Inc., Defendants-Appellees).

No. 1-18-0588

Appellate Court of Illinois, First District, SECOND DIVISION.

April 23, 2019

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

Robert M. Andalman and Rachael Blackburn, of A&G Law LLC, and Fred O. Marcus and David S. Ruskin, of Horwood Marcus & Berk Chtrd., both of Chicago, and Jeffrey S. Bucholtz (pro hac vice), of King & Spalding LLP, of Washington, D.C., for appellees.

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 Home Depot.¹

¶ 2 Relators alleged that Home Depot knowingly engaged in a scheme to avoid payment of retailers' occupation tax to the Illinois Department of Revenue (Department) by treating the sale and installation of dishwashers and over-the-range microwave ovens as a construction contract, the latter not being subject to the collection of sales tax from purchasers. Because relators did not plead a specific completed transaction in which Home Depot did not charge and collect the required sales tax from its customer, the trial court dismissed relators' third amended complaint with prejudice for failure to state a claim under section 2-615 of the Code of Civil Procedure ( 735 ILCS 5/2-615 (West 2014) ).

¶ 3 Relators appeal the dismissal of their complaint asserting that pleading an actual completed transaction was not necessary because the third amended complaint pled other facts sufficient to state a cause of action under the Act. Relators also claim that the trial court abused its discretion in denying their motion seeking leave to file a fourth amended complaint to cure the defect and plead an actual transaction in which Home Depot did not charge its customer sales tax. In addition to the insufficiency of relators' complaint, Home Depot claims that the public disclosure bar and government action bar defeat relators' claims. Finding error in the dismissal of relators' third amended complaint, we reverse and remand for further proceedings.

¶ 4 I. Background

¶ 5 A. Retailers' Occupation Tax Act

¶ 6 In Illinois, the Retailers' Occupation Tax Act (ROTA) ( 35 ILCS 120/1 et seq. (West 2014) ) and the Use Tax Act ( 35 ILCS 105/1 et seq. (West 2014) ) are complementary, interlinking statutes comprising the taxation scheme commonly referred to as the sales tax. Kean v. Wal-Mart Stores, Inc. , 235 Ill. 2d 351, 362, 336 Ill.Dec. 1, 919 N.E.2d 926 (2009). The ROTA imposes a tax on retailers selling tangible personal property to purchasers and is this State's primary means of taxing the retail sale of tangible personal property. Id. ; Irwin Industrial Tool Co. v. Department of Revenue , 238 Ill. 2d 332, 340, 345 Ill.Dec. 20, 938 N.E.2d 459 (2010). The Use Tax Act ( 35 ILCS 105/3 (West 2014) ) imposes a tax upon consumers for the privilege of using in Illinois tangible personal property purchased at retail from a retailer. Kean , 235 Ill. 2d at 362, 336 Ill.Dec. 1, 919 N.E.2d 926. A retailer's tax liability under the ROTA is computed as a percentage of "gross receipts" ( 35 ILCS 120/2-10 (West 2014) ), defined as the "total selling price" (id. § 1). Kean , 235 Ill. 2d at 362, 336 Ill.Dec. 1, 919 N.E.2d 926. Likewise, the use tax is computed as a percentage of the "selling price." Id. An identical tax rate of 6.25% is imposed under the ROTA ( 35 ILCS 120/2-10 (West 2014) ) and the Use Tax Act ( 35 ILCS 105/3-10 (West 2014) ). Kean , 235 Ill. 2d at 362-63, 336 Ill.Dec. 1, 919 N.E.2d 926 ; Irwin Industrial Tool Co. , 238 Ill. 2d at 340, 345 Ill.Dec. 20, 938 N.E.2d 459.

¶ 7 A retailer selling tangible personal property is responsible for remitting the retailers' occupation tax to the Department, but a retailer may reimburse itself for that tax liability by collecting tax from purchasers for using that property within the state, which is commonly known as the "sales tax" on the purchase of tangible personal property.² Nava v. Sears, Roebuck & Co. , 2013 IL App (1st) 122063, ¶ 14, 374 Ill.Dec. 164, 995 N.E.2d 303. Even though a single sale and purchase of tangible personal property at retail triggers the imposition of both the use tax (for use of the property) and retailers' occupation tax (for selling the property), the retailer is responsible for remitting only one payment to the Department and that single payment satisfies both tax obligations. Id.

¶ 8 The ROTA carves out an exception for construction contracts that incorporate tangible personal property into real estate. People ex rel. Lindblom v. Sears Brands, LLC , 2018 IL App (1st) 171468, ¶ 5, 423 Ill.Dec. 526, 105 N.E.3d 934 ; see also 86 Ill. Adm. Code 130.1940(a)(6) (2000). Construction contracts are not subject to retailers' occupation tax on the labor furnished and tangible personal property (materials and fixtures) incorporated into a structure as an integral part thereof. 86 Ill. Adm. Code 130.1940(c) (2000); 86 Ill. Adm. Code 130.2075(a)(2) (2001). The rationale underlying such treatment is that an item incorporated into a structure loses its identity as tangible personal property because it becomes part of the real estate, and the ROTA only applies to sales of tangible personal property, not to real estate. Spurgeon v. Department of Revenue , 52 Ill. App. 3d 29, 31, 6 Ill.Dec. 450, 362 N.E.2d 1370 (1977) (citing G.S. Lyon & Sons Lumber & Manufacturing Co. v. Department of Revenue , 23 Ill. 2d 180, 177 N.E.2d 316 (1961) ). Instead of paying the retailers' occupation tax, a construction contractor incurs a use tax based on the cost of the affixed property, i.e. , not the retail price, because the contractor is the end-user of the tangible personal property. See id. Stated simply, a construction contractor pays use tax and a customer does not pay "sales tax" on construction contracts.

¶ 9 B. The False Claims Act

¶ 10 Two 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); Sears Brands, LLC , 2018 IL App (1st) 171468, ¶ 7, 423 Ill.Dec. 526, 105 N.E.3d 934. 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). 740 ILCS 175/4(b)(1) (West 2014); Sears Brands, LLC , 2018 IL App (1st) 171468, ¶ 7, 423 Ill.Dec. 526, 105 N.E.3d 934. The action brought by a relator is known as a "qui tam " action. Sears Brands, LLC , 2018 IL App (1st) 171468, ¶ 7, 423 Ill.Dec. 526, 105 N.E.3d 934.

¶ 11 After a relator files a qui tam action, the State may elect to intervene and proceed with the action, or decline to intervene giving the relator the right to conduct the action. State ex rel. Schad, Diamond & Shedden, P.C. v. My Pillow, Inc. , 2018 IL 122487, ¶ 4, 426 Ill.Dec. 1, 115 N.E.3d 923 ; Sears Brands, LLC , 2018 IL App (1st) 171468, ¶ 8, 423 Ill.Dec. 526, 105 N.E.3d 934. A relator is a party to the qui tam action and is awarded a percentage of the proceeds or settlement if the action results in a recovery. My Pillow, Inc. , 2018 IL 122487, ¶ 8, 426 Ill.Dec. 1, 115 N.E.3d 923 ; Sears Brands, LLC , 2018 IL App (1st) 171468, ¶ 8, 423 Ill.Dec. 526, 105 N.E.3d 934.

¶ 12 C. The Lindbloms's Case

¶ 13 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. Sears Brands, LLC , 2018 IL App (1st) 171468, ¶ 10, 423 Ill.Dec. 526, 105 N.E.3d 934. Advanced Maytag's business consists of selling and servicing home appliances. Id. Likewise, a portion of Home Depot's business includes selling home appliances, including dishwashers and over-the-range microwaves.

¶ 14 Relators learned that defendants, including Home Depot, did not charge customers sales tax on the retail sales of dishwashers and microwaves when the customer also arranged for delivery and installation services from defendants because defendants treated those sales as a construction contract, which was not subject to the collection of sales tax from customers. Id. ¶ 11. Relators estimated that Advanced Maytag lost approximately 36 sales a year to defendants based on defendants' lower prices due to their failure to collect sales tax from customers. Id.

¶ 15 Relators believed defendants' practice was a knowing and purposeful scheme to avoid remitting the taxes owed on the retail sale of dishwashers and over-the-range microwaves. Id. Based on that belief, relators sent the Department a letter in February 2015,³ notifying the Department that defendants were not charging customers tax on the sale of certain appliances when the customer also arranged for delivery and installation. In June 2015, allegedly in response to the information provided in the relators' letter, the Department issued a compliance alert addressing the proper tax treatment of appliances and other tangible personal property sold with installation...