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People ex rel. Beeler v. Relax The Back Corp.

Court of Appeals of Illinois, First District, First Division

October 17, 2016

THE PEOPLE ex rel. BEELER, SCHAD AND DIAMOND, P.C., Plaintiff-Appellee and Cross-Appellant,
v.
RELAX THE BACK CORPORATION, Defendant-Appellant and Cross-Appellee.

         Appeal from the Circuit Court of Cook County. No. 03 L 11525 Honorable Ronald F. Bartkowicz, Judge Presiding.

          JUSTICE HARRIS delivered the judgment of the court, with opinion. Presiding Justice Connors and Justice Mikva concurred in the judgment and opinion.

          OPINION

          HARRIS JUSTICE.

         ¶ 1 Plaintiff, Beeler, Schad & Diamond, P.C. (relator), filed a claim against defendant, Relax the Back, Corp. (RTB), for damages and civil penalties pursuant to the Illinois False Claims Act (740 ILCS 175/1 et seq. (West 2014)), for failure to collect and remit use tax on RTB's Internet and catalog sales to Illinois customers. After a bench trial, the trial court found in favor of relator regarding catalog sales, but in favor of RTB on Internet sales. RTB appealed and relator filed a cross-appeal. On appeal, RTB contends that the trial court erred in (1) finding liability under the False Claims Act for failing to collect Illinois use tax where it found that RTB made a good faith effort to conduct an investigation into its tax obligations and at all times RTB truthfully stated that it collected no Illinois use tax and (2) awarding approximately $110, 000 in attorney fees based on a purported tax liability of $5181. On cross-appeal, relator contends that the trial court erred in finding that RTB had a substantial nexus to Illinois only for catalog sales, when its finding should have also applied to Internet sales. For the following reasons, we affirm the trial court's determination of no liability regarding RTB's Internet sales and reverse its finding of liability on RTB's catalog sales. We also reverse the judgment awarding relator attorney fees and costs.

         ¶ 2 JURISDICTION

         ¶ 3 The trial court entered its judgment after a bench trial on December 18, 2014. The parties filed motions for reconsideration and for briefing on damages and penalties. The trial court denied the motions for reconsideration on May 6, 2015, but awarded damages in favor of relator. On May 29, 2015, RTB filed its notice of appeal. Relator filed a petition for fees and costs on May 21, 2015, and on August 13, 2015, the trial court entered a judgment awarding relator fees and costs. RTB filed a notice of appeal from that order on September 10, 2015. By order of this court, RTB's two appeals were consolidated. Accordingly, this court has jurisdiction pursuant to Illinois Supreme Court Rules 301 and 303 governing appeals from final judgments entered below. Ill. S.Ct. R. 301 (eff. Feb. 1, 1994); R. 303 (eff. May 30, 2008).

         ¶ 4 RTB contends that this court lacks jurisdiction to consider relator's cross-appeal from the trial court's judgment because it was not filed until September 10, 2015, more than 30 days after the trial court denied the motions for reconsideration on May 6, 2015. Illinois Supreme Court Rule 303(a)(3) (eff. Jan. 1, 2015) provides that "[i]f a timely notice of appeal is filed *** any other party, *** within 30 days from the entry of the judgment or order being appealed, or within 30 days of the entry of the order disposing of the last pending postjudgment motion, whichever is later, may join in the appeal, appeal separately, or cross-appeal by filing a notice of appeal, indicating which type of appeal is being taken." Although the trial court entered its judgment on May 6, 2015, relator filed its petition for attorney fees and costs on May 21, 2015. The trial court has jurisdiction to consider a petition for fees filed within 30 days of the entry of a final judgment. John G. Phillips & Associates v. Brown, 197 Ill.2d 337, 343-44 (2001). "The filing of a postjudgment petition for fees renders a *** notice of appeal premature." Suburban Auto Rebuilders, Inc. v. Associated Tile Dealers Warehouse, Inc., 388 Ill.App.3d 81, 97 (2009). Since relator filed its petition for fees within 30 days of the trial court's May 6, 2015, judgment, RTB's notice of appeal filed on May 29, 2015, was premature and only became effective when the trial court entered its order awarding fees and costs on August 13, 2015. See Ill. S.Ct. R. 303(a)(2) (eff. Jan. 1, 2015) ("[w]hen a timely postjudgment motion has been filed by any party, *** a notice of appeal filed before the entry of the order disposing of the last pending postjudgment motion, or before the final disposition of any separate claim, becomes effective when the order disposing of said motion or claim is entered"). Relator filed its cross-appeal on September 10, 2015. Since relator's cross-appeal was filed within 30 days of the trial court's August 13, 2015, judgment, we have jurisdiction to consider the cross-appeal.

         ¶ 5 BACKGROUND

         ¶ 6 RTB is a business that sells back and neck care products, including ergonomic chairs, recliners, massagers and backpacks, as well as books and videos. RTB's headquarters and only office is located in La Palma, California. RTB has no building, warehouse, or inventory in Illinois. Prior to 2013, no employee lived in Illinois. RTB's only connection to Illinois are the five retail stores owned and operated by franchisees. The franchise agreement expressly disclaims an agency relationship between RTB and franchisees and requires franchisees to display their identification as an independent owner prominently in their stores. RTB periodically sends a trainer or inspector to visit the stores with a minimum of one visit per year. In early 2005, RTB amended the franchise agreement to require franchise owners to mail a minimum of 1000 catalogs each year to customers. RTB also maintains a website and has a catalog from which customers may purchase merchandise. This merchandise is sent directly from the manufacturer or from a warehouse in California and delivered by common carrier. RTB did not collect use tax on Internet and catalog sales in Illinois until 2013.[1]

         ¶ 7 Relator filed the original complaint under seal on September 26, 2003. Relator's complaint alleged that RTB had a duty to collect and remit use tax in Illinois and knowingly avoided its duty to collect the tax, in violation of the False Claims Act (then referred to as the Illinois Whistleblower Reward and Protection Act). On August 27, 2004, the State of Illinois issued a subpoena requiring RTB to answer interrogatories and to produce documents regarding RTB's physical presence in Illinois. RTB provided the requested materials and argued that it did not have sufficient physical presence in Illinois to collect the use tax. The Attorney General determined that RTB "has substantially complied with the State's investigatory subpoena, so the subpoena matter is closed." RTB has never been audited by the Illinois Department of Revenue (IDOR).

         ¶ 8 In December 2005, relator served RTB with its complaint alleging violations of the False Claims Act. The Illinois Attorney General declined to intervene. At the bench trial, relator called as its only witness Robert McMillan, RTB's chief financial officer. In 2004 he consulted with outside legal counsel, Jeff Ward, regarding the subpoena and whether RTB had an obligation to collect Illinois use tax on Internet and catalog sales. Ward was a tax attorney who had been RTB's outside counsel since 1996. As legal counsel, Ward had access to all information related to RTB's operations and to all business records regarding RTB's Internet and catalog sales. Ward concluded that RTB did not have sufficient physical presence in Illinois to require RTB to collect Illinois use tax on Internet and catalog purchases.

         ¶ 9 McMillan consulted with Krista Isaacs, a sales tax specialist in accounting. Isaacs reviewed the franchise agreement for Illinois and had access to accounting documents associated with the annual audit of RTB's financial statements. Isaacs concluded that RTB did not have sufficient physical presence in Illinois to require the collection of Illinois use tax. McMillan also discussed with Isaacs an audit that was being conducted by the state of New York to investigate RTB's sales tax obligations on catalog and Internet sales. New York closed its audit without a finding of liability, which further led McMillan to believe that RTB did not have an obligation to collect use tax in Illinois.

         ¶ 10 McMillan testified that outside certified public accountants audited all of RTB's financial statements every year. It was his understanding that if the auditors determined RTB should be collecting Illinois use tax, and it was not collecting the tax, the auditors would have had to qualify their opinion regarding RTB's financial statements. McMillan stated that at no time did the auditors qualify their opinions. McMillan testified that he conducted a review of all corporate records from 1997 to 2010 for advice he received from professionals regarding RTB's Illinois tax obligations. McMillan understood that under the law, a substantial nexus requiring RTB to collect Illinois use tax is shown if RTB has employees in Illinois, or a warehouse in Illinois, or real or personal property located in Illinois. Although a substantial physical presence need not be shown pursuant to Brown's Furniture, Inc. v. Wagner, 171 Ill.2d 410 (1996), McMillan understood the case as holding that "frequent, almost daily contact within the State" is required to find a substantial nexus. He relied on the advice of Ward and Isaacs, as well as his own knowledge and experience as an accountant and chief financial officer, in concluding that RTB did not have sufficient physical presence in Illinois to require collection of the use tax.

         ¶ 11 At the close of relator's case, RTB moved for a directed verdict arguing that relator did not meet its burden to prove that RTB acted with the requisite knowledge in failing to collect Illinois use tax, nor did RTB make a false statement or record. The trial court denied RTB's motion. RTB then called an opinion witness to testify. Michael Scaduto, the former bureau manager of the audit bureau at the ...


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