The Appellate Court of Illinois First Judicial District has released an order affirming the Trial Court’s decision in case 15 L 50776, People of the State of Illinois, ex rel. v. Sears Brands, LLC, et al, Lowe’s Home Centers LLC Defendant- Appellee. The case was brought as a qui tam action by Richard and Ralph Lindblom against a group of defendants, including Sears, Home Depot, and Lowe’s. The original argument made by the Relators was related to the defendant retailers failing to collect and remit sales tax on certain appliance sales that included installation, thus giving an unfair competitive edge to the defendant retailers. The suit claimed that rather than charge customers as a retailer, which would require collection of sales tax at both the state and local rate where the product is delivered, Lowe’s and the others claimed the appliances were purchased as part of the “contractor business”, which allowed the retailers to charge only the state use tax rate, since contractors are considered the end user of appliances they install. The trial court agreed with the Plaintiffs and Relators; both sides sought to appeal certain court orders within the case.
The Appeals Court first considered the obligation of Lowe’s to collect sales tax, which they viewed under Illinois’ system where taxation is the rule, and any parties seeking exemption must prove they are entitled to it, which is a heavy burden. In looking at whether Lowe’s could be considered a contractor, the court noted that Lowe’s describes itself as a home improvement retailer and calls its stores retail selling spaces. Further, Lowe’s did not hold a Contractor‘s License in Chicago or Illinois, and when providing a written quote, Lowe’s specifically claimed they do not engage in general contracting.
Next, the Appeals Court considered liability under the Illinois False Claims Act, which Lowe’s argued against, claiming they had not knowingly violated tax requirements. Lowe‘s claimed they had been acting in what they believed was an appropriate manner, noting the Department of Revenue had completed an audit of Lowe’s for a prior period and had not flagged any issues with Lowe’s tax practices. In the periods between November 2009 to June 2015, the Appeals Court found that the Lowe’s had not acted with the knowledge and reckless disregard required under the False Claims Act. In 2015 though, the Department of Revenue issued a compliance alert which clarified Lowe’s collection responsibilities. The Trial Court found, and the Appeals Court held that Lowe’s did act with the required reckless disregard for the periods after the memo was issued.
Finally, the Appeals Court was left to determine damages, which were originally awarded based on unpaid sales tax. The Relators argued that the trial court made an error when they only assessed the tax at the state level, claiming they were entitled to claim for all local municipalities as well, which the Illinois Attorney General concurred with. Though the Appeals Court did agree these local level taxes could be claimed, they denied the plaintiff’s appeal due to a failure to include significant allegations of fraud relating to local governments. The Appeals Court also held that Lowe’s is entitled to a setoff for tax for the use tax it did remit to the state as well, and that the Trial Court must recalculate many of the original calculations of taxes and penalties in light of the rest of the order.
This case highlights many important sales tax concepts: being aware of what a taxpayer is actually selling, records, changing tax guidance, and making sure all information is provided. The order in this case notes repeated examples of Lowe’s being presented as a retailer and behaving as a retailer, which made it challenging for Lowe’s to present itself as a contractor. However, Lowe’s was able to combat the claim of recklessness with their records; the audit had not flagged any of these issues, so there was no reason to believe they were doing anything incorrectly. However, once the tax guidance changed, Lowe’s was responsible for updates on their side, which meant by not doing so, they did demonstrate the reckless disregard needed under the Illinois False Claims Act. Finally, the Relators and the State of Illinois were not able to recoup any of the local taxes because they did not present their full argument initially and explicitly, instead relying on the overall complaint and making the argument the local tax was implicitly included. (Order dated September 30,2024, People of the State of Illinois, ex rel. v. Sears Brands, LLC, et al, Lowe’s Home Centers LLC Defendant- Appellee. case 15 L 50776, Hon. Catherina A. Schneider Presiding Judge, Appellate Court of Illinois First Judicial District)