Illinois judges have tossed five false claims lawsuits filed by a prolific whistleblower, responding to the state’s rationale that the sales tax disputes don’t meet economic thresholds for remote sellers.
Over the last two weeks, state court judges have dismissed five of the nearly 80 whistle blower cases in Cook County Circuity Court alleging sales and use tax frauds by bespoke tailors based primarily in Hong Kong, the U.K., and Thailand. In each case, the judge was responding to a motion to dismiss by Attorney General Kwame Raoul (D), who believes the cases hold minimal potential tax liabilities for the state.
Annie Thompson, a spokesperson for Raoul, said another 11 cases could be dismissed over the next month. Additional motions to dismiss could be filed in subsequent weeks as the state reviews the tax liabilities in dispute.
“Eleven motions to dismiss are currently pending. The state will evaluate additional cases for dismissal on a rolling basis, to the extent it receives information/data from defendants,” Thompson told Bloomberg Tax in a Feb. 27 email.
Judge Daniel J. Kubasiak is expected to issue a written ruling in three of those cases on March 1, Thompson said.
King of Qui Tam
All of the nearly 80 cases targeting custom tailors were filed by Chicago attorney Stephen B. Diamond, known to some as the “king of qui tam.”
Qui tam lawsuits permit whistleblowers, or relators, to step into the shoes of the attorney general to sue persons who knowingly perpetrate fraud against the state. The Illinois False Claims Act also allows whistleblowers to claim a bounty and attorney’s fees if their claims are successful. Over the past 18 years, Diamond has filed more than 1,000 such cases against retailers. More than 90 percent of those cases have been dismissed or settled, leaving the tailor cases as Diamond’s remaining viable tract of litigation.
Diamond’s cases object to a custom tailoring business model in which foreign and out-of-state tailors meet with Illinois customers at hotels in the Chicago area. After these sales and fitting sessions, tailors in remote locations sew custom garments and later ship them directly to their Illinois customers. Diamond contends the defendants create a tax connection, or nexus, with Illinois during these fitting sessions and are obligated to collect and remit taxes to the state.
Attorneys for the state didn’t address the legal viability of Diamond’s argument that the tailors have tax nexus with Illinois. Instead, they called on the court to dismiss the five cases because the tax disputes don’t meet the economic presence thresholds established in the U.S. Supreme Court’s South Dakota v. Wayfair decision and Public Act 100-587, a state law codifying those standards. The law specifies that remote sellers must have at least $100,000 in gross annual sales and make at least 200 separate sales transactions with Illinois consumers to have economic presence in the state.
In one case targeting George Cleverley & Co. Ltd, Raoul argued for dismissal after a review revealed the London-based fine tailor averaged $20,000 per year in gross sales between 2011 and 2017, resulting in a potential tax exposure to the state of less than $1,500 per year.
Assuming Diamond’s allegations could be proven, “the potential harm to the State is minimal, particularly in comparison to the limits detailed in Illinois Public Act 100-587,” Assistant Attorney General Charles Godbey wrote in the Dec. 28 motion to dismiss.
Tony Kim, a partner with Kim & Burns LLP and counsel for Diamond, didn’t immediately respond to Bloomberg Tax’s request for comment. In the past, Diamond has objected to or appealed any efforts by the attorney general to dismiss his lawsuits.
David S. Ruskin, a partner in the Chicago office of Horwood Marcus & Berk Chartered and counsel for nearly 30 of the tailor defendants, was optimistic additional cases would be dismissed throughout the year. The pace of the dismissals, however, will depend on the tailors’ ability to present affidavits showing they lack tax nexus with Illinois.
Ruskin noted judges in Cook County frequently act “in lockstep” in certain patterns of cases. He said judges disfavor “inconsistent orders or rulings in these matters.”
The case is Illinois ex rel. Stephen B. Diamond v. G.J. Cleverley & Co. Ltd., Ill. Cir. Ct., No. 2107-L-3034, motion to dismiss granted 2/8/19.