A quirk of Illinois law has allowed a Chicago attorney to file lawsuits against dozens of wineries and wine retailers, forcing vintners to question if they should stop doing business with Illinois customers. Now a California wine-trade group has decided to fight back, urging judges to dismiss the suits.
The lawsuits have been filed by Steven Diamond, partner at Schad, Diamond and Shedden in Chicago. For a decade now, Diamond has focused on an Illinois law that requires businesses to collect sales taxes for the state, not only on what they sell, but on shipping-and-handling charges. A whistleblower rule allows anyone within the state to sue in the name of Illinois and collect any recovered funds.
Diamond and his firm have filed hundreds of suits against various companies in industries such as cookware, flowers and motorsports. More recently, Diamond began filing complaints against wineries and out-of-state alcohol retailers.
In each case, Diamond purchases wine online and prints out receipts showing that the sellers collected Illinois taxes on the wine, but not on shipping and handling. Diamond then files suit to collect the unpaid taxes, and claims that the business violated the Illinois False Claims Act by filing false tax returns, an act that allows recovery of three times the amount of tax owed and a civil penalty of $5,000 to $10,000 per violation.
Illinois is an important market for wineries. According to Ship Compliant, of the 3.95 million cases shipped direct to consumer in 2014, Illinois was the fifth largest destination, receiving 171,000 cases.
In many past cases, accused businesses have settled out of court to avoid costly legal fees. But with 179 “Illinois False Claims Act” lawsuits filed against wineries and retailers, California’s Wine Institute and several Napa Valley wineries have decided to pool their resources and fight back. The Wine Institute has teamed with Miner Family Winery, Chimney Rock Winery and Staglin Family Vineyard to file a complaint to stop False Claims Act lawsuits.
Because of the legal ramifications, most wineries declined to comment on the cases. In a letter to its members, the Wine Institute said, “While the litigation will not provide an immediate remedy, the goal is to put a stop to the current and future lawsuits and to clarify the confusion surrounding when/if a winery should be collecting taxes on shipping fees.”
The Institute’s team argues that wineries would not, under the Illinois Department of Revenue regulations, owe taxes, provided they have documentation that the purchaser had a choice of taking delivery at the seller’s location. Declining that option renders shipping charges non-taxable.
Illinois state regulations also maintain that shipping charges are not taxable if the shipping charges are separate from the price of the goods. But Diamond claims that sales, specifically online wine sales, have shipping charges as part of the selling price, as customers have no other option for receiving their wine without a delivery.
While the laws seem fairly straightforward, in 2009 the Illinois Supreme Court ruled in Kean v. Wal-Mart Stores Inc. that, in some cases, shipping charges, even if negotiated separately as stated above, are still eligible to be assessed sales tax because the shipment of the item is inherent in the purchase.
On April 28, the Illinois Attorney General's office dismissed more than 80 cases filed against liquor retailers and wineries, but countless others remain. Rollin Soles of Roco Winery in Oregon told Wine Spectator that he had his case dismissed because Roco had paid their taxes; but the fear of getting entangled in a legal mess has some businesses avoiding Illinois altogether. “I met an owner of a wine store in Dallas that shut down selling online to all Illinois,” said Soles.