Sales Tax Slice: Qui Tam Actions Aren’t What They Used To Be

Sales tax practitioners are familiar with the risk of audits by state tax departments if their sales tax collection is not up to snuff, but private qui tam actions also loom as a possibility. An ongoing case in Illinois, however, seems to limit this line of potential exposure.

Qui tam, or false claim actions, allow private individuals (as relators, or “ex rel.”) to bring a civil suit on behalf of the government. “Reverse” false claim actions involve suits where relators allege that another party has avoided paying the government money owed. In exchange for bringing a suit, a successful relator is entitled to a share of the payment owed to the government (and statutes often allow for treble, or triple, damages). Although most commonly related to Medicaid payments, qui tam actions can also be brought in several states for sales tax issues. No state has proved more popular for these qui tam actions than Illinois.

Illinois has been the hub of sales tax qui tam cases mostly because of one man, Stephen B. Diamond, the “King of Qui Tam.” Bloomberg Tax analysis shows that Diamond alone has filed more than 1,000 false claim actions in Illinois in the last 17 years, often pursuing dozens of cases concurrently. But his strategy might not be long lived. In 2012, Diamond successfully brought an action against My Pillow, Inc., winning $266,891 (his share of the treble damages), as well as attorney fees of $600,960.

However, the Illinois Appellate Court reversed the award of attorney fees because of the lack of independence between the lawyer (Diamond) and the relator-client (Diamond’s law firm). Accordingly, Stephen Diamond was only entitled to his share of the treble damages imposed against My Pillow, Inc. The case has been appealed to the Illinois Supreme Court, where arguments were held May 22, 2018.

It’s too soon to say how the Illinois Supreme Court will rule, but would-be relators would be well-advised to keep up with these most recent qui tam developments.

The case is Illinois ex rel. Schad, Diamond & Shedden PC v. My Pillow, Inc., Ill., No. 122487, oral argument May 22, 2018.

Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: Should attorneys be able to collect attorneys’ fees when they are the relator in a qui tam action?

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