A $6.272 million settlement has been reached in a whistleblower lawsuit filed against Gateway, Inc. and its subsidiary Cowabunga Enterprises, Inc. The settlement resolves claims that Gateway and Cowabunga violated the Illinois False Claims Act (FCA) by their knowing failure to collect and remit Illinois use tax on Internet sales to Illinois customers. Gateway and Cowabunga were selling untaxed merchandise through the Internet to Illinois customers despite the presence of agents or representatives in Illinois operating on the companies’ behalf.
Gateway had filed an interlocutory appeal after the trial court denied its motion to dismiss. The appellate court ruled that the False Claims Act “seeks to penalize actions that deprive the government of funds rightfully owed to it regardless of the nature of the underlying transaction giving rise to the claim.” The appellate court concluded that “use tax claims relating to Internet and/or catalog sales may be brought under the [False Claims] Act.”
Gateway was dismissed as a Defendant in 2013, but the action proceeded against Cowabunga. In October 2016, the Attorney General and the Relator entered into a settlement agreement with Gateway and Cowabunga. The Defendants agreed to pay $6.272 million for their failure to collect and remit $2.56 million in taxes during the period Oct. 1, 1999, through June 30, 2003.
Illinois has a false claims act with qui tam provisions permitting private individuals to sue state sales tax evaders on behalf of the government. Only a few states have that provision. Actions for unpaid taxes pursuant to the False Claims Act give the State a means to recover substantial amounts of lost revenue, including treble damages and penalties.
In this case, under the settlement agreement the whistleblower, Stephen B. Diamond, P.C., received $940,000 (15 percent) as the Relator’s share of the proceeds. In addition to the $6.27 million in taxes and damages, Defendants paid $365,000 for the Relator’s attorneys’ fees, expenses and costs. It should be noted that Mr. Diamond, a lawyer, was actually the whistleblower. The litigation was in the courts for 13 years.
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