WSJ.com – Online Retailer Skips Sales Tax? You Might Sue
I actually saw this article online last week, but am just now getting around to comment on it. The link above is kind of funky, so I’ll include the full article text below in case the link dies or something. The gist of it is that there’s a lawyer in Illinois, Stephen Diamond, who has taken it upon himself to “whistleblow” on corporations who don’t charge sales tax for online purchases. But the kicker is, in Illinois he is entitled to up to 25% of whatever the settlement is that the state may actually collect. So, say the state collects a multimillion dollar settlement against some corporation for uncollected back sales taxes. This guy gets a quarter of that.
Now, why does this piss me off? Mostly, its that one of the biggest draws for me with buying stuff online is that I don’t have to pay sales taxes. Large electronic purchases can save a significant amount of money. Granted, if a company has a presence in your state they have to, and usually do, charge sales tax. I’m OK with that, and admittedly this guy is just going after those guys, like Wal-Mart and Target. So then the part that gets me is that he’s actually making quite a lot of money from letting the states know about these companies. Maybe its just the idea that essentially a guy who’s a “snitch” is making off with millions of dollars. Its kind of like a perverted good samaritan. I would think the states should be doing their own investigations and pursuing their own monies. Maybe I’m ticked because it feels like this guy is ruining the party for everyone else, plus getting rich off it. It should be up to the states to do this. If they don’t actively try to collect what they think they should get, then tough. Sales taxes on the internet are stupid anyway. Why does the government have to have its hands in everything?
The full text:
Online Retailer
Skips Sales Tax?
You Might Sue
By ROBERT GUY MATTHEWS
Staff Reporter of THE WALL STREET JOURNAL
October 14, 2005; Page B1CHICAGO — Like many shoppers, attorney Stephen Diamond buys lots of stuff online. But unlike other consumers, he sues retailers that don’t charge him state and local sales taxes — and is making a profit doing it.
Using a state whistle-blower law, Mr. Diamond since 2002 has filed about 95 suits in Cook County court here against retailers that failed to charge him taxes on Internet sales, alleging that they broke the law. In cases where the state of Illinois joins the suits and prevails, he is entitled to up to 25% of the financial damages, with the rest going to state coffers.
[Stephen Diamond]Mr. Diamond’s first eight suits were filed against such retailers as Wal-Mart Stores Inc., Office Depot Inc. and KB Toys Inc. He has netted about a half-million dollars already, from some retailers. Because of settlement agreements between the retailers and the attorney general’s office, the state’s judges have agreed to keep the names of most of the retailers and the settlement amounts confidential. More than 80 suits are pending in Illinois, and Mr. Diamond has made forays into other states as well.
“This is a no-brainer,” says Mr. Diamond, a veteran class-action attorney who has a scenic view of Lake Michigan from his downtown office. “I started going on the Internet and discovered to my astonishment that companies like Target Corp. and Wal-Mart were not collecting taxes on their Internet sales. I was like, “Wow!”
Online buyers are required to pay local and state sales taxes on purchases made over the Internet, but are rarely asked to do so. States and online retailers have argued for years over whether the retailers should and could collect the taxes, but now states are becoming increasingly aggressive. This month, 18 states formed a coalition to make it easier to collect taxes on Web sales.
FURTHER READING[Further Reading]
Some States Push to Collect Internet Sales Tax1
09/30/05State laws allow for the collection of taxes on Internet purchases if the retailers have a physical presence — a “nexus” in legal terms — in the state. But different states define “nexus” differently. In some states, the regular presence of a single sales person, even a traveling one, is enough to establish a nexus. In Illinois, a retailer is considered to have a physical presence if a customer can return an item purchased online to a retailer’s physical location.
To gather evidence for their lawsuits, Mr. Diamond and a couple of staffers went online and began the process of buying items from hundreds of different retailers. The goal: to see whether the retailers applied taxes at the end of the purchase. “If it showed no tax, we would go ahead and make the purchase,” he says. They identified about 150 retailers that weren’t collecting taxes. Of those, about 100, Mr. Diamond figured, met the test for having a “physical presence” in the state. The items they bought online were modest, usually costing around $15 to $20. Some were eventually returned, and others were given away.
Mr. Diamond sued the 95 companies and provided copies of the suits to the office of Illinois Attorney General Lisa Madigan, who decides whether to pursue the cases.
Under state law, if the attorney general decides not to join the suit, the office can dismiss the case after its own investigation, but only for legitimate reasons, the law says. And even if there is a reason to dismiss, the whistle blower can object. The state’s judges, if no settlement is reached, can decide the financial damages and remedies according to laws.
Chaka Patterson, the chief of special litigation in the Illinois attorney general’s office, says he was surprised by the flood of cases from Mr. Diamond. It was the first time that the whistle-blower law had been used in this manner. Many of the cases have merit, he says.
“We are aggressively pursuing those, and we are expecting to strike a settlement with some and go to trial with others,” he says.
Mr. Patterson declines to estimate the state’s take if the cases are won but says that Mr. Diamond could end up earning millions. That’s because the financial damages can total up to three times the amount of uncollected taxes.
Eager to expand his franchise beyond Illinois, Mr. Diamond subsequently widened his focus to include the three other states — Tennessee, Nevada and Virginia — that had laws permitting private citizens to sue on behalf of the government over taxes owed and to share in the financial damages recovered.
In 2003, in Tennessee’s Davidson County Chancery Court, Mr. Diamond filed about 30 suits alleging noncollection of sales taxes on online purchases by Wal-Mart, Target, Amazon.com Inc., PetsMart Inc., and Bass Pro Shops, among other companies.
But he didn’t reckon on the reaction of Loren Chumley, Tennessee’s commissioner of revenue, who wasn’t happy that a private citizen was using the whistle-blower law to enrich himself.
Viewing Mr. Diamond as an opportunist exploiting a legal loophole, Ms. Chumley immediately set out to change state law. She succeeded, and the cases were dismissed. Ms. Chumley says that Mr. Diamond was misusing the law. Mr. Diamond counters that Tennessee wasn’t being aggressive enough in collecting taxes.
But Ms. Chumley wasn’t through. In 2003, she told Virginia’s tax commissioner, Kenneth Wayne Thorson, about Mr. Diamond. Mr. Thorson says he notified the staff of Virginia Gov. Mark Warner and said, “We don’t want to go there. It is going to be a mess. We need to put a stop to this.”
In February 2004, Virginia’s state legislature voted unanimously to change the year-old law, which now excludes private citizens from getting money by suing online retailers that don’t collect sales taxes.
Nevada could be the next to snub Mr. Diamond. He has filed 10 suits there that the attorney general’s office moved to dismiss. A state trial court refused to dismiss those cases, and a state supreme court decision is pending on the outcome.
In Illinois, meanwhile, Mr. Diamond is fighting with the state over his share of the proceeds in cases involving some big retailers he sued.
Last year, the attorney general’s office negotiated a $2.4 million settlement with Wal-Mart, Target and Office Depot about uncollected sales taxes dating back to 1999. Mr. Diamond says that since he did all the legwork, he is entitled to the full 25% share plus any costs he incurred, which is allowable under the law. But the attorney general’s office wants to pay him less than 25%, and nothing for his costs.
Mr. Diamond has since filed an appeal against the state of Illinois.
Write to Robert Guy Matthews at robertguy.matthews@wsj.com2
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