Executive Summary The Illinois Joint Committee on Administrative Rules has approved the Illinois Department of Revenue’s proposed regulatory amendments clarifying the sales tax treatment of shipping charges. These amendments, which are effective retroactively to November 19, 2009, provide vendors of tangible personal property with safe harbors that can be relied upon for determining when shipping charges are subject to sales tax and will eliminate much of the uncertainty that False Claims Act plaintiffs attorneys had exploited to file a large number of cases against out of state vendors. Reed Smith is working to develop arguments for possible refunds of amounts that many vendors previously paid to settle these False Claims Act cases.
At the March 8, 2016 meeting of the Joint Committee on Administrative Rules (the “Committee”), the Committee considered the Illinois Department of Revenue’s (the “Department’s”) proposed amendments to its regulations clarifying the Department’s position on the sales tax treatment of shipping charges. The Department’s proposed amendments were on the Committee’s “no objection” list and were approved by a voice vote.
Now that the proposed amendments have been approved by the Committee, the Committee will send a formal letter to the Department notifying the Department of the approval and the Department will make the amendments official upon the receipt of such letter.
What does this mean? As discussed in our January 20, 2016 and August 31, 2015 Alerts, the amendments clarify, with retroactive effect back to November 19, 2009, the Department’s position on the sales taxation of shipping charges in light of the decision by the Supreme Court of Illinois in Kean v. Wal-Mart Stores, Inc1. In Kean, the court held that shipping charges are subject to Illinois sales tax when there is an inseparable link between the sale of tangible personal property and the outgoing transportation and delivery of the property.
Perhaps most important, the amendments provide a couple of unambiguous safe harbors. First, persons who computed their liability either under the regulations existing prior to the effective date of the amendments by omitting tax on separately stated shipping charges, or by charging and remitting tax on such separately stated charges as directed under the Kean decision, will be held to have correctly omitted or remitted tax on delivery charges. Second, the proposed amendments determine that shipping charges are not subject to sales tax for a seller of tangible personal property who offers the purchaser an option to pick up the property and charges the same price for the property, regardless of whether the buyer chooses shipping or pick-up. (Where a pick-up option is available, the Department reached the reasonable conclusion that there is no inseparable link between the taxable property being sold and the delivery of that property, and, therefore, the shipping charges should not be taxable.)
Will the False Claims Act Defendants that settled be entitled to refunds? The proposed amendments directly contradict the position taken by the plaintiff in the Illinois False Claims Act cases as well as the position taken by the Illinois Attorney General in the settlements of such cases in which the state participated. Most Defendants, despite having correctly applied the law, as is confirmed by the amendments approved by Committee, nevertheless settled their cases due to the onerous litigation costs that were incurred to defend the actions and that would be incurred to prevail on the merits. The retroactive effect of the amendments brings into question whether defendants can now recover moneys paid to the state and the plaintiff to settle cases that were never well-founded in law (or in fact, as some cases have revealed) and should not have been authorized to proceed. Reed Smith is developing arguments to support such recoveries.