Illinois: Prolific tax whistleblower creates controversy by filing hundreds of cases

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Illinois has a statute on the books, the Illinois False Claims Act (Act), also known as the Whistleblower Act, that is designed to allow an individual to sue another person or entity in the name of the state, for, among other things, failure to collect and remit taxes owed to the state. The complaint and related documents that initiate what are sometimes referred to as qui tam suits are kept under seal for 60 days, during which time the Attorney General may investigate, choose to intervene, and proceed with the action as the party with primary responsibility for pursing the charges. 

Alternatively, the attorney general may decline to take over the action, but allow the person bringing the action the right to pursue the case. Finally, the attorney general may dismiss the action, even if over the objections of the party bringing it in the first place, as long as there has been adequate notice and a hearing. Penalties for successful cases involve a tripling of the amount of damages, and additional sums. 

The King of Qui Tam
One lawyer, Stephen B. Diamond, whom Bloomberg characterized as a “notorious whistle blower” last June, has leveraged the Act to such a great extent that he has been called “the most prolific tax whistle-blower in the country,” for having filed more than 900 false claims lawsuits in the last 15 years. This includes 111 cases against online retailers, 202 against liquor distributors, 147 against wineries, and 450 against retailers that have allegedly failed to impose taxes on shipping and handling charges.

The June piece pointed to the king of qui tam’s own statements in court last May asserting that he had plans to pursue tailors located in Hong Kong and London by filing up to 85 lawsuits under the Act, on the grounds that they failed to collect and remit state sales and use taxes.

A number of lawyers who have represented defendants in Diamond’s lawsuits lament this “jamming [of the] circuit court with small-stakes claims that conflict with the spirit of the [Act].” One attorney went further, opining that Diamond’s activity represents nothing but “a new opportunity to extort money where there is no fraud…” This lawyer contended that if anything, these cases are for the Department of Revenue to handle, not the courts. 

The theory in the suits against the tailors is that they have a connection with Illinois that generates tax obligations with which they failed to comply. In court, Diamond explained that by “com[ing] into Illinois, set[ting] up shop in a hotel room, mak[ing] sales, and enter[ing] into sales contracts,” the tailors created nexus with the state, but have refused to satisfy the resulting sales and use tax obligations. 

The Illinois assistant attorney general told the court in the May 2017 hearing that the state would not intervene in the cases against the tailors, and that they could proceed while the state reserved its right to do so later.  The court unsealed almost 36 of Diamond’s suits. 

Conscious of the costs of litigation, especially discovery, the assistant attorney general reasoned that “[t]he State can take an active role in initial negotiations in the event that many of the defendants are interested in quick settlement, tax registration, payment of back tax, liability, without the expense of discovery.” 

Indeed, the dollars at issue can be large. For instance, last October, Diamond won a $6.6 million settlement in a suit against a subsidiary of computer companies Gateway Inc. and Acer Inc.  This was the largest settlement so far in his 15-year qui tam career, commented the ABA Journal.

New Developments
In a follow up to its June 2017 article, a Jan. 29, 2018 Bloomberg story noted that the court had unsealed 23 of Diamond’s newest cases against international tailors, filed in late 2017. As it had done before, the state waived its right to intervene, which permitted the court to remove the seals and authorize Diamond to proceed with the litigation. In a Jan. 4, 2018 hearing concerning the newest group, the court stayed discovery temporarily, and ordered the defendants to respond to the complaints by Feb. 28, 2018.

A National Law Review post wondered whether the suits would prevent other foreign businesses from “visiting Illinois at all.” The worry is not with payment of prospective tax obligations, but the idea that defendants would be forced to “to reach into their pockets and pay back taxes for six years … plus a multiple of three times back taxes for damages … plus additional significant penalties… plus Diamond's legal fees.”

The National Law Review poses a few other questions for these lawsuits:
  • Do these minimal visits, with no actual sale completed in Illinois, constitute sufficient nexus for a use tax collection obligation?
  • Does failure to charge and collect a tax actually constitute a false claim here?
  • Can a foreign company not obligated to file a federal return, and thus unable to register to collect tax in Illinois, be found liable for failing to collect and remit Illinois tax?
  • Should the recent trade show regulations, setting minimum thresholds for sales/use tax collection at trade shows in Illinois, apply to these very similar fact patterns?
We addressed the proposed new trade show rule last fall. It provided that nexus is created, triggering tax collection obligations, when an out-of-[s]tate retailer, or its representative, is in Illinois for the purpose of engaging in trade show activities, when it has more than $10,000 of gross receipts. 

The National Law Review ultimately asks, “Which state(s) will be next? And which industry?”

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