“Better Late Than Never”-- Judge in Illinois Dismisses 201 Sales Tax Cases against Retailers

Is This the End of the Road for Steve Diamond's One-Man Crusade to Become Wealthy from Suing the Wine Industry?

By John W. Edwards II and John Hinman 

We have been reviewing the progress of the Illinois “Whistle-Blower” sales tax on shipping fees cases for well over a year while the cases have been pending [Illinois Qui Tam Lawsuits - Private Enforcement of a State Claim: A Bonanza for a Plaintiff's Lawyer & a Rip-Off of Retailers; IL Attorney General’s Office Announces Intention to Dismiss False Claims Act Against Liquor Retailers; IL Finally Offers Certainty & Relief for Victims of Sales Tax Lawsuits, but Prompt Action is Required in Pending Cases; Relief at Last! IL Moves to Fix the Sales Tax Lawsuits Against Out-Of-State Sellers But Proposes to Penalize Wineries & Retailers That Ship Without Permits]. 

We are now pleased to report that the end of the line for the plaintiff appears to be getting closer.  The plaintiff Chicago law firm headed up by Steve Diamond had most of his cases against retailers dismissed last week. Diamond has been enriching himself for ten years through “settlements” with out-of-state producers and retailers (in recent years involving many producers and retailers of alcoholic beverages) by claiming a failure to pay sales taxes on shipping and handling charges paid by Illinois residents who purchase wine from out of state retailers and wineries for shipment to their homes, and then suing the producers and retailers on behalf of the state.   His scheme, at least as it involves retailers and producers without Illinois permits or licenses, may finally be ending.

Illinois Attorney General Lisa Madigan moved to dismiss 201 cases against out-of-state retailers in the trial court of Cook County.  The cases included many that were still “sealed,” meaning that the State had not decided whether to intervene.  The Attorney General had previously moved to dismiss 350 other cases filed by Diamond.  The Attorney General’s motion to dismiss these 201 cases asserted that that they were “unlikely to be viable…because the relator’s [Diamond’s] complaints contained no allegations that the defendants had any presence in Illinois that could establish tax liability.” What this means is that without a state license or a state direct shipping permit (which establishes an agreement to submit to the jurisdiction of the state), or affirmative acts of marketing to Illinois residents, the seller was not doing business in Illinois and therefore could not be sued in Illinois. The motion was granted by the trial court on May 23, 2016.

Diamond opposed the Attorney General’s motion.  The Court ruled, however, that Illinois law provides discretion to the Attorney General to dismiss qui tam (Latin for “whistle blower”) cases brought on behalf of the State. The court said that the decision to dismiss can be overruled only upon a showing of “glaring bad faith” by the Attorney General.  Left unsaid, of course, was what the result should be when it is shown that Diamond has acted with “glaring bad faith.”

Diamond can appeal the trial court’s decision.  However, given the uniquely high standard of proof that Diamond must meet (“glaring bad faith” by the Attorney General), the prospects for a successful appeal appear bleak.  That is very good news for those that have been brought kicking and screaming into the Illinois courts by Diamond – their ordeal may finally be coming to an end!

Looking inside the decision of this court, however, we see the application of a principle that may protect retailers who are legally prohibited from obtaining direct shipping permits from states such as Illinois, as well as the wineries that ship wine purchased by their winery visitors to the buyers home without direct shipping permits (which is the case with many very small wineries throughout the US).  That is, if the seller doesn’t (or is not permitted to) register with the state, and the seller requires the purchaser to be the party legally sending the wine to the address desired by the purchaser, then the receiving state doesn’t have an adequate “nexus” (connection) with the out of state seller to assert liability for taxes. This also presumptively applies to other forms of liability (such as criminal or civil liability against the seller for assisting the state resident buyer’s violation of the relevant direct shipping protocol).  This would certainly validate the common seller (retailers and wineries alike) practice of paying sales taxes on sales in their home state and putting the onus on the buyer to be responsible for taxes in the state of the buyer. This makes the common invoice admonition “title passes to the buyer at the winery (or the store)” a potentially very powerful legal protection.

However, this compounds the uncertainly that is currently playing out in states such as New York over initiatives to hold retailers (such as Empire wine in Albany) responsible for violating the laws of other states by permitting (or assisting) customers buying in New York to ship to themselves in other states. Did the Illinois court really find that Illinois has no jurisdiction over New York (or California, or other states) retailers or producers with customers from Illinois if the goods are actually imported by the buyer as a technical contractual matter? A strong argument can be made that this is exactly what happened on May 23rd (which, if true, may soon be known as direct shipping freedom day in Illinois).

The stakes continue to rise across the US as retailers, international producers and small wineries without direct shipping permits continue to accommodate consumer demand for their products by allowing consumers to ship wine to themselves regardless of where they live. Stay tuned because this Illinois battle is not yet over.  There is too much money in it for Diamond who, rumor has it, is very well connected politically in the Illinois capital.

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