Transcript Bounty Hunters: Whistleblower and Class Action Suits for

Bounty Hunters: Whistleblower and
Class Action Suits for Alleged Under
and Over Collection of Taxes
Detroit TEI – December 9, 2014
Mary Kay Martire
[email protected]
312.984.2096
Jane Wells May
[email protected]
312.984.2115
www.mwe.com
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Agenda
 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 False Claims Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 Class Action/Consumer Fraud Claims. . . . . . . . . . . . .
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 Best Practices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Introduction
 Retailers are being targeted by bounty hunters in the
sales/use tax arena.
 Qui Tam/False Claims Act Litigation for under collection of
tax.
 Class action, consumer fraud claims for over collection.
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What is the False Claims Act?
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Modeled on the Federal Act
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The Elements of a False Claim
 Whistleblower.
 Knowing use of a false statement.
 Material to an obligation to pay money to the
government.
 “Reverse” false claim common in tax matters.
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The Penalties are Significant!
 Government obligation tripled.
 Per occurrence civil penalties.
 Reasonable attorneys’ fees, costs and
expenses.
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Common Defenses
 Prior public disclosure.
 Relator is not an “original source.”
 No “knowing” violation.
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Common Defenses (Cont’d)
 No false statement.
 Taxes were remitted or otherwise not
owed.
 Good audit facts.
 Statute of limitations.
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Where Can You Be Sued?
All Types of Taxes
Delaware
Florida
Nevada
New Hampshire
New York
Washington
Wisconsin
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Where Can You Be Sued? (Cont’d)
Anything But Income Tax
Illinois
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Indiana
Rhode Island
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False Claims Act cases – difficulties
 Public has a pro-whistleblower sentiment.
 Fact intense, so hard to summarily dismiss.
 May not involve State Revenue Department; State
AGs lack tax knowledge, may seek to benefit from
settlement rather than support dismissal of
unworthy cases.
 Complex intersection of false claims and tax law.
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False Claims Act cases – Tennessee
and Nevada
 Tennessee.
– Dismissed by order of Chancery Court (State of Tenn. ex rel. Beeler, Schad &
Diamond P.C. v. Target Corp., No. 02-3764-III, slip op. (Tenn. Chancery Ct.
Dec. 1, 2003)).
– Statute amended to exclude tax matters.
– Failure to state a claim – no submission of alleged false statement; no falsity;
no knowledge.
 Nevada.
– Supreme Court of Nevada dismissed cases. Int’l Game Tech., Inc. v. Second
Judicial Dist. Court of the State of Nev., 127 P.3d 1088 (Nev. 2006).
– Nevada AG established good cause for dismissal based on its view that tax
matters are best left to the DOR.
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False Claims Act cases – Illinois
 Class action plaintiffs’ law firm filed hundreds of qui tam suits after
“investigation” (i.e., purchasing goods online and collecting documents
relating to seller’s tax collection practices).
 Round 1 (Sales/Use Tax on Ecommerce).
– Nexus of out-of-state retailers was an issue.
– Multiple trips to Illinois Appellate Court; one trip to Illinois Supreme Court; still
being litigated (affiliate nexus theory).
 Round 2 (Tax on Shipping/Handling charges).
– Settlement, litigation, or dismissal.
 Round 3 (Liquor Tax).
– 25 new cases unsealed in November 2014.
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Today’s IRS Whistleblower Statute:
IRC § 7623 (a) and (b)
 IRC § 7623(a) – the “old” program still governs claims below
$2 million but, as a matter of policy, the IRS is applying many
of the new program standards to 7623(a) claims.
 IRC § 7623(b) – the “new” and significantly stronger program
intended to encourage whistleblower claims in significant tax
cases.
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False Claims Act cases – Illinois
Illinois Aftermath.
– Anti qui tam legislation – H.B. 74 would amend the False Claims Acts
to shut down Relator filings (Attorney General and Department of
Revenue have sole authority to bring tax actions). HB 0074, 98th
Gen. Assem. (Ill. 2013).
– Proposed regulations on shipping/handling charges – all charges are
taxable.
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False Claims Act Cases – New York
 Background on New York State’s False Claims Act:
− Revised in 2010 to permit claims to be brought in court by
“whistleblowers” or by the AG outside the statutory dispute resolution
system.
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False Claims Act Cases – New York
 State of New York v. Sprint-Nextel Corp.
− The NYS AG alleges that starting in 2005 Sprint-Nextel Corporation intentionally
under collected and underpaid New York state and local sales taxes on roughly
25% of its flat-rate access charges for wireless calling plans.
− The alleged underpayment is $130M in tax; the FCA lawsuit seeks to require
Sprint pay thee times this amount plus penalties.
− Sprint has asserted that the AG has not adequately alleged that Sprint violated
the FCA and that the lawsuit cannot apply to conduct prior to 2010, when the
FCA was amended.
− In February 2014, the Appellate Division upheld a July 2012 trial court decision
allowing the AG’s action under the FCA to proceed.
− The New York Court of Appeals will now review the Appellate Division’s ruling.
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False Claims Act Cases – New York
 State of New York ex rel David Danon v. Vanguard Group
Inc.,
– Former employee/lawyer turned “whistleblower” alleges that Vanguard has
been evading more than $1 billion in federal taxes and $20 million in NYS
taxes prior to 2011.
– False Claims Act litigation moves to income tax arena.
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False Claims Act Cases - Delaware
 State of Delaware v. Card Compliant LLC.
− Qui tam whistleblower complaint brought under Delaware’s False Claims Act
alleges that dozens of Delaware retailers devised improper schemes to avoid
being classified as holders of unclaimed gift card liabilities.
− False Claims Act litigation moves to unclaimed property arena.
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IRS Whistleblower Claims
 1867: First federal tax whistleblower statute.
 1954: Program codified at IRC § 7623.
– Many problems and critics: Underutilized and ineffective.
– Virtually unchecked discretion in IRS on whether to pay.
– Few standards, dispersed decision making and no appeal of IRS
decisions.
– Authorized awards from 1% to 15% of amount recovered.
– Capped awards at $10 million.
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IRS Whistleblower Claims – History
 1998: Senator Harry Reid proposes eliminating program,
calling it the “Awards for Rats” Program. Paying snitches to
“rat” was “unseemly, distasteful and just wrong.”
 2006: Treasury Inspector General for Tax Administration
finds whistleblower tips “significantly contributed to the
detection and punishment of tax law violations” leading to
better cases for audit and more $$.
 2006: IRC § 7623(b): Congress enacts an enhanced
Program to encourage awards in significant tax cases.
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IRC § 7623 (b) – Key Features
 Monetary thresholds: Amount in dispute > $2,000,000;
individual taxpayer’s gross income must exceed $200,000 for
any taxable year at issue.
 Increased awards: 15 and 30% of the amount recovered,
with some exceptions.
 Removed $10 million cap.
 Created a central Whistleblower office.
 Provided for judicial review of certain issues.
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IRS Whistleblower Program
 IRC Sec. 7623(b).
– Key distinctions from state False Claims Act:
1. IRS must decide case is worth pursuing.
2. Information must lead to judicial or administrative action by
government.
3. No attorneys’ fee award to whistleblower.
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IRS Whistleblower Program (Cont’d)
4.
IRS whistleblower office decides whether an award is
paid and the amount.
5.
Basic award range of 15-30% based on extent of
whistleblower’s contribution to the action.
6.
Award reduced to < 10% when disclosure comes
principally from judicial or administrative hearing,
government report, audit, investigation or news media.
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IRS Whistleblower Program (Cont’d)
7. Reduced if whistleblower planned or initiated actions
leading to underpayment of tax.
8. 15-30% award applies when taxpayer’s annual gross
income is greater than $200,000 and amounts in
dispute are greater than $2,000,000.
9. Maximum 15% award in smaller dollar cases, capped at
$10 million.
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Results under the “New” IRS Program
 Federal whistleblower claims have increased in both number
and quality. 10,000 taxpayers under audit/investigation for
claims >$.
 Awards have been slow in coming but some have been
made.
– An accountant who blew the whistle on his company collected $4.5
million in 2011.
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Consumer Fraud and Class Actions –
general background
 State Unfair or Deceptive Acts or Practices (UDAP) laws modeled on FTC used to raise
wrongful collection of tax claims.
 Broadly worded.
–
N.Y. Gen. Bus. Law § 349(a): “Deceptive acts or practices in the conduct of any business, trade or commerce or in
the furnishing of any service in this state are hereby declared unlawful.”
 Both attorney general and consumer causes of action.
–
Consumer class actions generally allowed.
 Damages similar to FCA.
–
Up to triple damages.
–
Per-violation damages.
–
Attorneys’ fees.
 Other counts possible (unjust enrichment, negligence, unjust exaction, etc.).
 Class actions – numerosity, commonality, typicality, and adequate representation.
–
See Young v. Nationwide Mut. Ins. Co., 693 F.3d 532 (6th Cir. 2012) (affirming certification of plaintiff subclasses
where incorrect charges for local government premium taxes were allegedly assessed as a result of insurance
company’s failure to correctly source risks).
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Consumer Fraud and Class Actions –
specific examples
 Milwaukee Safeguard Ins. Co. v. Selcke, Dir. of Ins., 179 Ill. 2d 94 (1997).
– Class actions claims interrupt taxpayers’ claim for refund after Illinois premium
tax was held unconstitutional.
– Ultimately proved helpful in obtaining settlement.
 AT&T Corp. v. Allen, No. 97,916 (Okla. Civ. App. June 10, 2003).
 P.J.’s Concrete Pumping Serv., Inc. v. Nextel W. Corp., 345 Ill. App. 3d
992 (2d Dist. 2004).
 City of Fairview Heights v. Orbitz, Inc., No. 05-CV-840-DRH (S.D. Ill. July
12, 2006).
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Consumer Fraud and Class Actions –
Volbers-Klarich
 Applicability to tax over collection unclear.
– Depends on statute and case law.
 See Volbers-Klarich v. Middletown Mgmt., Inc., 125 Ohio St.
3d 494 (Ohio 2010).
– Defendant hotel allegedly imposed a nonexistent tax on
consumers.
– Court recognized that a refund action, not UDAP, is ordinarily
the proper challenge to over collection.
– But Ohio UDAP claim may proceed for collection of a
nonexistent tax, as there is no taxing jurisdiction.
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Consumer Fraud and Class Actions – Long
 Long v. Dell, Inc., 984 A.2d 1074 (R.I. 2009).
– Trial court had jurisdiction to hear Deceptive Trade Practices Act (“DTPA”) tax
over collection claims.
– Despite intervention and objection of Division of Taxation.
 Long v. Dell Computer Corp., No. 03-2636 (R.I. Super. Ct. Apr. 2, 2012)
(class not certified).
– Concluded that Dell over collected tax under applicable law.
– But Dell not liable under DTPA in “gray area.”
• Honest misrepresentation.
– Additionally, over collection was not material.
• Did not affect consumer purchase decision.
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Consumer Fraud and Class Actions – Kean
 Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351 (Ill. 2009) (no class
certification).
– Alleged violation of the Consumer Fraud and Deceptive Business Practices
Act for charging tax on shipping charges on an internet purchase.
– Wal-Mart’s motion to dismiss granted and affirmed on appeal; shipping
charges part of taxable selling price.
– “[A]n ‘inseparable link’ exists between the sale and delivery of the
merchandise plaintiffs purchased from Wal-Mart’s internet store . . . .
[P]laintiffs were required to buy the delivery service.”
– Position taken by Illinois as amicus arguably differed from position on audit.
 Ignited Round 2 of whistleblower cases.
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Consumer Fraud and Class Actions –
Loeffler
 Loeffler v. Target Corp., 173 Cal. App. 4th 1229 (Cal. Ct. App. 2008), rev.
granted, 216 P.3d 520 (Cal. 2009).
 Consumers sued under California consumer protection statutes alleging
Target collected excess sales tax on “to go” coffee.
 Refund.
– State Board of Equalization procedure must be followed.
– Standing – Taxpayers only can file a refund claim or refund suit.
 Injunction against future collections.
– Impermissibly seeking to enjoin tax collection.
 Does the state bar a consumer from filing a lawsuit against a retailer
under state consumer protection statutes? (pending before California
Supreme Court).
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Best Practices for Defense of FCA,
Consumer Fraud and Class Action Litigation
1. You’re not in Kansas Anymore.
2. Everybody Loves a Whistleblower;
Everybody Hates a Tax Cheat.
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Best Practices for Defense of FCA,
Consumer Fraud and Class Action Litigation
3. Beware of the State.
4. Rely on your Friends, But …
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Best Practices for Defense of FCA,
Consumer Fraud and Class Action Litigation
5. Call the Claimants’ Bluff.
6. The Harsh Reality of Settlement.
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Best Practices for Defense of FCA,
Consumer Fraud and Class Action Litigation
7. Beware the Secondary Source.
8. Protect Yourself Through Audit
Disclosure.
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Best Practices for Defense of FCA,
Consumer Fraud and Class Action Litigation
9. Consider Third Party Litigation Risk
in Tax Planning.
10. Lobby now or Prepare to Endure
the Consequences.
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Best Practices for Minimizing Risk of
Insider Claims
1.
File properly under the law.
 Know and monitor the law.
 Know and monitor the facts.
 Establish a returns checking process.
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Best Practices for Minimizing Risk of
Insider Claims
2. Hire the right people.
 Vet new hires carefully.
 Monitor workload and other stressors.
 Use team approach with levels of review.
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Best Practices for Minimizing Risk of
Insider Claims
3. Understand systems issues.
 Monitor systems for disconnection
between knowledge and action.
 Be aware of federal/state differences.
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Best Practices for Minimizing Risk of
Insider Claims
4. Create the best environment.
 Foster non-competitive, cooperative
team environment.
 Rehabilitate or eliminate known “bad”
actors.
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Best Practices for Minimizing Risk of
Insider Claims
5. Processes and Procedures.
 Establish process for receiving internal
claims.
 Publicize internal claim process.
 Use the process.
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Investigate all reported claims.
•
Report generic requests or investigations.
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Jane W. May
Jane Wells May is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s
Chicago office. Jane heads the Firm’s State & Local Tax Practice Group. She focuses her practice on
state and local tax matters.
Contact
Chicago
312.984.2115
[email protected]
Education
Vanderbilt University
School of Law, J.D.,
1986
Wittenberg University,
B.A. (with honors),
1980
Jane represents businesses in connection with state and local tax controversies at the audit, administrative
and judicial levels around the United States. Her clients include companies in manufacturing, retailing,
pharmaceuticals, automotive, health care, energy, technology and insurance industries. She has
successfully litigated state and local tax matters raising a variety of statutory and constitutional issues.
Jane has defended numerous internet sellers in several states against cases brought under state
whistleblower statutes, including the Illinois False Claims Act, alleging fraudulent failures to collect and
remit use tax.
Jane also advises business clients on tax planning matters and represents athletes and entertainers in
connection with employment contract issues.
A member of the Taxpayer’s Federation of Illinois Policy Committee, Jane is a regular speaker at seminars
on state and local tax issues. She is a member of the Chicago Bar Association’s State and Local Tax
Committee and is admitted to practice in Illinois. Jane was named a leading tax lawyer in the 2009, 2010
and 2011 editions of The Legal 500 United States, which states that she has “built a noteworthy local and
state taxes practice.” She was also ranked by Chambers USA in 2008, 2009, 2010 and 2011, which notes
that she “is full of energy and brings a wealth of experience to the work.” Furthermore, say the Chambers
rankings, Jane is “excellent from an advocacy point of view” and is considered a “strategic leader” in state
and local tax. She has also been named an Illinois Super Lawyer in the tax area by Law & Politics.
At Vanderbilt University, Jane was senior articles editor of the Vanderbilt Law Review and a member of
Order of the Coif and Moot Court Board.
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Mary Kay McCalla Martire
Mary Kay McCalla Martire (State & Local Tax, Chicago) Mary Kay is a partner in the law firm of McDermott
Will & Emery LLP and is based in the Firm’s Chicago office. As a member of the Firm’s State & Local Tax
Practice Group, Mary Kay helps clients resolve state and local tax disputes in a wide range of tax and fee
issues, including income, sales and use, utility, aircraft, tobacco, workers compensation and premium and
retaliatory taxes. She represents clients in audit disputes, settlement conferences and other negotiations with
state and local tax officials. Mary Kay has extensive litigation experience in state and federal court and
administrative tribunals, including appeals. Her litigation experience includes injunctions, whistleblower
actions and class action defense.
Mary Kay also has litigated a number of disputes in the insurance arena. She served as the principal trial
attorney for a group of insurance companies who successfully challenged the constitutionality of the Illinois
privilege tax. Milwaukee Safeguard Ins. Co. v. Selcke, 179 Ill. 2d 94 (1997). She has also handled retaliatory
tax and state income tax matters for insurers, including captives.
Mary Kay also has a wide range of experience in other types of business disputes, including antitrust matters,
contract disputes, intellectual property and media law.
Mary Kay has been Peer Review Rated as AV® Preeminent™, the highest performance rating in MartindaleHubbell's peer review rating system and was selected for inclusion in the 2005, 2008, 2009, 2010 and 2011
Illinois Super Lawyers lists.
Mary Kay is a past chair of the State and Local Tax Committee of the Chicago Bar Association and the
Chicago Lawyers Committee for Civil Rights Under Law, Inc. (CLCCRUL). She frequently speaks on state and
local tax topics.
Mary Kay received her J.D. from University of Michigan Law School and her B.A. from Michigan State
University. She is admitted to practice in both Illinois and Michigan.
[email protected]
www.mwe.com
Tel: +1 312 984 2096
Questions?
Jane Wells May
McDermott Will & Emery, LLP
227 West Monroe
Chicago, IL 60606
(312) 984-2115
[email protected]
Mary Kay Martire
McDermott Will & Emery LLP
227 West Monroe
Chicago, IL 60606
(312) 984-2096
[email protected]
Contact Jane or Mary Kay for a detailed listing of the authorities cited
in this Power Point, or a copy of our article in State Tax Notes on Lessons
Learned from False Claims Act litigation.
56980962-1
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