By: John W. Edwards II and John Hinman
As readers of this blog (and certainly the many wineries and wine retailers who have been sued) know, the State of Illinois permitted the politically connected Diamond law firm to maintain hundreds of qui tam lawsuits claiming that not collecting sales tax on shipping charges for wine sent to Illinois consumers violated Illinois law. (See previous blog posts Illinois Qui Tam Lawsuits - Private Enforcement of a State Claim, Illinois Finally Offers Certainty and Relief for Victims of Sales Tax Lawsuits, But Prompt Action is Required in Pending Cases). It was not a surprise that in every case the costs of litigating the claims exceeded Diamond’s settlement demand. The result? Many settlements. Both Diamond and the State (which was a passive party) reaped substantial windfalls. This was a State-sanctioned rip-off and is a glaring example of the misuse of governmental power for the benefit of one politically connected lawyer.
Now there is a new sheriff in town. Governor Bruce Rauner took office in January 2015. Because of the outrage that the Diamond lawsuits generated around the US (including by the Wine Institute and almost every state winery and wine retailer trade association) the Illinois Attorney General moved to dismiss numerous claims against the defendants that were still pending. The trial court in Chicago granted the motions, holding that the State has broad discretion to decide what qui tam claims it wishes to pursue and Diamond wasn’t the one who should be making that decision.
Following up, the Illinois Department of Revenue (“IDOR”) proposed amendments to its regulations that will, if adopted (likely in the first half of 2016), clarify the Illinois rules on taxes on shipping charges. The amendments will accomplish the following:
- Any seller that provides its Illinois customers with the option of picking up the ordered goods at the Sellers’s location is not required to remit sales taxes on shipping charges - if the pick-up option is offered at the time of sale. The Illinois customer does not have to use the pick-up option, or even be likely to use it. All that the seller will have to do is provide the option. This provision will be retroactive to 2009, when the Illinois Supreme Court decided the case that gave rise to the claims for taxes on shipping charges in the first place. This is a simply common sense solution.
- To prevent a new series of claims on behalf of consumers against sellers that did collect Illinois sales tax on shipping charges, the IDOR proposed a unique safe harbor for those that had offered the pick-up option all along. Sellers that offered a pick-up option will be deemed to have remitted sales taxes to Illinois correctly, regardless of whether they (i) collected and paid taxes on shipping after 2009 or (ii) did not collect the tax. This safe harbor is intended to protect Sellers from further litigation in Illinois, no matter how they responded to the confusion caused by the 2009 decision that gave rise to basis of the lawsuit in the first place.
- Going forward, a Seller that offers free shipping (where permitted) or free shipping over a minimum amount of purchases need not collect tax on any additional shipping charges the customer chooses to incur, such as expedited shipping charges, so long as the selling price of the goods does not change.
- Also, going forward, if a Seller that offers a pick-up option for some goods but not others and the customer chooses to have all goods shipped, the Seller can itemize the shipping charge for each item and must collect sales tax on the charges for the items without the pick-up option. If the Seller charges a lump sum for shipping, the entire charge is taxable if the total cost of goods without a pick-up option exceeds the cost of those with the option, but nontaxable if the reverse is true. It behooves all sellers to carefully examine their pick-up option terms and conditions.
- The new Regulations will apply to all Sellers that make sales to Illinois consumers and that (i) are subject to the Illinois Retailers Occupation Tax; (ii) maintain a place of business in Illinois; (iii) self-assess the Illinois sales and use tax; and (iv) hold a winery Shipper’s License from Illinois.
While these regulations provide welcome, albeit long-overdue, relief to wine sellers servicing Illinois consumers, those wineries (and there are many small wineries who just don’t obtain DTC permits) and retailers (who are prohibited from applying for DTC permits) face serious penalties (including potential felony charges) for shipping without a DTC permit. Moreover, the proposed inclusion of the Illinois trade practice policies into the regulations require that all wine shipped into Illinois be actually produced by the winery holding the DTC permit.
To top it all off a new bill [IL SB 2989] is pending in the Illinois legislature that does following (from the bill description):
Provides that any person who both has received an initial cease and desist letter from the State Commission and for compensation ships alcoholic liquor into this State without a license shall be guilty of a Class 4 felony. Prohibits and establishes criminal penalties for the transportation of more than a certain amount of beer, wine, or spirits into the State without a license or for transporting beer, wine, or spirits into the State for sale or resale without a license. Increases other penalties.
Once again a state introduces a “send wine, go to jail” bill. Illinois is (and will continue to be) a challenging state in which to do business, especially for those without DTC permits, or for those unable to obtain DTC permits.