A retailer may not be insulated from liability under the Illinois False Claims Act even if the retailer disclosed to the Department of Revenue that it did not collect or remit sales taxes on certain transactions. At least, that is a possibility based on a recent Circuit Court ruling in State of Illinois ex rel. Stephen B. Diamond, P.C. v. Constellation Brands US Operations, Inc., Case No. 2014 L 7508, one of the many pending cases that a Chicago law firm (the relator) has pursued on the State's behalf against online retailers for allegedly failing to collect sales and use taxes on certain transactions.

In Constellation Brands, the Court denied the defendant retailer's motion to dismiss and declined to rule on the retailer's "government knowledge" defense. That defense precludes liability for making a false claim when the government knows and approves of a defendant's actions. The retailer in Constellation Brands submitted uncontroverted evidence that, for six years, it filed monthly tax returns showing that it did not collect sales and use taxes on its online sales to Illinois customers. The relator argued that those tax returns were insufficient to invoke the government knowledge defense because (1) the Department never audited the retailer, (2) the Department receives thousands of returns and may not have reviewed the retailer’s returns, and (3) the Department never affirmatively approved the retailer’s actions.

During oral argument, the Court asked the relator how a retailer could notify the Department that it was not collecting taxes other than by disclosing that fact on its tax returns. The relator responded that a retailer should request a private letter ruling that it did not have to collect taxes on the sales at issue. The retailer's attorney argued that the retailer had no obligation beyond filing truthful tax returns and that the Department’s acceptance of those tax returns proved the defense and required the Court to dismiss the lawsuit.

Although the Court was "very intrigued" by the retailer's government knowledge defense, it would not dismiss the case without seeing more facts. The Court, therefore, did not rule on the merits of the defense, leaving open the possibility that the defense may prevail on summary judgment or at trial.

Whether the Court will ultimately make a substantive ruling on the government knowledge defense remains to be seen. Most retailers pursue early settlement with the relator because the cost of litigation often exceeds the projected tax liabilities. However, the Court's willingness to entertain the government knowledge defense may give retailers some settlement leverage over the relator. In the meantime, as the relator continues to bring additional lawsuits against retailers, defense counsel can be expected to craft and test new theories to minimize their clients' exposure.