Recently we at ShipCompliant hosted a webinar to review the latest updates in the ongoing saga of the Illinois qui tam cases. We were excited to be joined by Steve Gross of the Wine Institute, along with Adam Beckerink and Michael Wynne of Reed Smith LLP, who are representing the Wine Institute in its suit against the Illinois Department of Revenue and the Illinois Attorney General. While many interesting points were brought up in the webinar, we noted a few major take aways we wanted to highlight.
To quickly rehash what is going on in the Qui Tam cases, an Illinois attorney, Stephen Diamond, has filed lawsuits against at least 132 wineries since last December, accusing them of failing to pay tax on shipping and handling charges for deliveries made into Illinois. (Qui Tam essentially means that a party can stand in the king’s shoes, and sue on behalf of the government–and receive a share of any bounty raised.) Under Illinois’ tax rules, there are certain situations where tax on the freight is due; these are when the freight charges are “inseparable” from the cost of the product itself (according to a 2009 Illinois Supreme Court case, Kean v. Wal-Mart). However, Adam and Michael, under the direction of the Wine Institute, have been seeking to get Qui Tam cases dismissed, arguing that the wineries had properly separated freight charges from the cost of the wine.
To this effect, they have received Private Letter Rulings, on behalf of two of their winery clients, from the Illinois Department of Revenue, which provided a general definition of what “inseparable” means. While a private letter ruling cannot control how a judge will rule on a case or be relied on by a party that did not request the ruling, it does indicate how the relevant government body would view the law. The Private Letter Rulings they received highlighted three requirements in order for the shipping charges incurred by Illinois customers to be considered separate:
- Shipping charges must be stated separately from the cost of the wine.
- There must be an option to pick up the wine at the winery (even for non-Illinois wineries).
- The price of the wine cannot change depending on whether the wine is shipped to the customer or picked up onsite.
When all three of these conditions are in place, then tax on the shipping charges is not required. If a winery can document that it had these conditions in place when Diamond made his purchase (he had to have bought wine to show that the winery wasn’t levying the tax), then it has a good basis for dismissal of its case.
However, there is an important double-edge to this provision. Just as a winery needn’t pay a tax on freight if these conditions are in place, a winery may be subject to a potential lawsuit if these conditions are in place and is still assessing a tax on freight. This charge would arise out of Illinois’ consumer protection rules, under which a consumer would accuse the winery of overcharging them. (This was the basis of the Kean trial, where the plaintiff accused Wal-Mart of improperly charging tax on shipping; but there the Illinois Supreme Court said that the absence of a pick up option meant that Wal-Mart was correct in charging the tax.)
So our big take away from the webinar is that a winery can set up their shop to avoid having to pay tax on freight. It would do so by implementing the three requirements listed above. But, if a winery did follow this system, it should also make sure it is not charging a tax on freight. Or it might be sued by its customers (a good chance it may still be Stephen Diamond).
If you are a ShipCompliant user, you must do this by logging into your account, and changing your settings. Simply go to the Tax Preference page here, and uncheck the box that indicates Illinois Tax Freight. If you are not a ShipCompliant user, you will have to arrange this through your existing system.
It is also notable that wineries that offered a pick-up option can argue to dismiss their case. While none have yet been successful, the Illinois Attorney General has indicated this is an argument that has particular sway.
If you’d like to learn more about this situation, check out the resources here. As always, feel free to contact us at firstname.lastname@example.org.