$10 Jump Rope Leads to $30,000 Tax Nightmare

For over 50 years, Bloomberg Tax’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...

By Michael J. Bologna

Oct. 18 — Jeff Pape’s $30,000 false claims nightmare began when his small online business WrestlingGear.com Ltd. sold a $10 jump rope to the Chicago law firm Schad, Diamond & Shedden P.C.

The nightmare ended in February 2014 after four months of litigation, a settlement payable to Illinois and the law firm, legal fees and hundreds of hours of lost productivity for his four-person wrestling equipment company based in Elmhurst, Ill. ( Illinois ex rel. Schad, Diamond & Shedden P.C. v. WrestlingGear.com Ltd., Ill. Cir. Ct., No. 13 L 1839, settlement 2/5/14 ).

The law firm, headed by veteran whistle-blower Stephen B. Diamond, determined that WrestlingGear failed to charge tax on shipping and handling charges for the jump rope, triggering a tax deficiency of about 80 cents. The law firm promptly filed suit under the Illinois False Claims Act, accusing Pape and his company of a pattern of conduct that defrauded the state (see related story in this issue).

Pape, a wrestling enthusiast and a certified public accountant, was surprised by the lawsuit. He had studied Illinois’ tax regulations and believed he wasn’t obligated to collect the tax because customers had the option of picking up their orders from his showroom. But several attorneys who understood Diamond’s litigation strategies warned Pape that he might lose his business before he ever got a chance to present his defense to a judge.

“The frustrating part is: I honestly believe I was 100 percent in compliance with the laws. And If I had to work with the Illinois Department of Revenue versus dealing with Mr. Diamond, I could have explained why I was compliant,” Pape told Bloomberg BNA. “But under Illinois law, I was going to have to go to court to explain how I was compliant and that was going to cost me thousands and thousands and thousands and thousands of dollars.”

Settle Quickly

Pape’s attorney advised him to settle quickly, but the process was neither simple nor quick. Pape had to essentially shut down his business for days at a time over four months to assemble the financial records and other documentation demanded by Diamond.

The process revealed that WrestlingGear failed to remit approximately $4,600 in sales tax to the state over six years, a finding that Pape continues to dispute. The tax deficiency triggered a $9,800 settlement with the state; a $4,200 settlement with Schad, Diamond; $5,000 in attorneys' fees payable to Schad, Diamond; and a $10,000 legal bill for his own defense.

Two weeks after Pape finalized the settlement, the department of revenue commenced a full audit of WrestlingGear. After 15 months and hundreds of additional hours of lost time and productivity, the audit uncovered a few hundred dollars worth of mistakes.

Pape remembers that 19-month stretch as one of the most stressful in his life.

“There are companies avoiding millions and millions of dollars in taxes, and they come after me,” he said. “I was paying roughly the correct amount of taxes. It put a tremendous amount of stress on me, my family, my kids.”

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Daily Tax Report