People ex rel. Lindblom v. Sears Brands, LLC

JUSTICE MASON delivered the judgment of the court, with opinion.

Decision Under Review Appeal from the Circuit Court of Cook County, No. 15-L-50776; the Hon. James E. Snyder, Judge, presiding. Judgment Reversed and remanded. Counsel on Appeal Paul Berks, of Massey & Gail, LLP, of Chicago, for appellants. Baker & McKenzie LLP, of Chicago (Scott L. Brandman, David A. Pope, Matthew S. Mock, and David A. Hemmings, of counsel), for appellee. Panel JUSTICE MASON delivered the judgment of the court, with opinion.
Justices Pucinski and Hyman concurred in the judgment and opinion.

¶ 1 Relators-appellants, Richard Lindblom and Ralph Lindblom, brought this qui tam action on behalf of themselves and the State of Illinois under the Illinois False Claims Act (Act) (740 ILCS 175/1 et seq. (West 2014)) against defendants Sears Brands, LLC (Sears); Home Depot U.S.A., Inc. (Home Depot); Lowe's Home Centers, LLC (Lowe's); Best Buy Stores, L.P. (Best Buy); and Gregg Appliances, Inc. (Gregg Appliances). This appeal involves only defendant-appellee Best Buy. For purposes of this appeal, relators alleged that Best Buy knowingly engaged in a scheme to avoid payment of retailers' occupation tax (sales tax) and use tax by treating the sale and installation of dishwashers and over-the-range microwave ovens as a construction contract, which is not subject to the collection of sales tax from purchasers. At the time relators added Best Buy as a defendant, the Illinois Department of Revenue (Department) was in the process of auditing Best Buy's sales tax calculation practices and had issued a proposed tax liability. Best Buy requested review of the proposed tax liability by the Department's Informal Conference Board (Board). Best Buy moved to dismiss relators' qui tam complaint under section 2-619(a)(9) of the Code of Civil Procedure (735 ILCS 5/2-619(a)(9) (West 2014)), asserting that the "government action bar" set forth in section 4(e)(3) of the Act (740 ILCS 175/4(e)(3) (West 2014)) barred relators' qui tam action because it was the subject of an administrative civil money penalty proceeding (the audit combined with the Board's review) and the State was already a party in that proceeding. The trial court agreed with Best Buy's position and dismissed Best Buy from relators' qui tam action. ¶ 2 Relators appeal the dismissal, asserting that the audit and the Board's review were not adversarial and, thus, could not be an administrative civil money penalty proceeding. Relators also contend that the subject of the audit and the Board's review were different from the qui tam suit that focused on fraud and Best Buy's knowing misclassification of sales of over-the-range microwaves and dishwashers as a construction contract in order to avoid remittance of sales tax to the Department. Finding merit in relators' position, we reverse and remand for further proceedings.

¶ 5 In Illinois, the Retailers' Occupation Tax Act (35 ILCS 120/1 et seq. (West 2014)) imposes sales tax on retailers selling tangible personal property to purchasers for use or consumption. Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, 362 (2009) (citing 35 ILCS 120/2 (West 2006)); 86 Ill. Adm. Code 130.101 (2005). The use tax complements the sales tax and is imposed on taxpayers for the use of tangible personal property purchased from a retailer. Irwin Industrial Tool Co. v. Department of Revenue, 238 Ill. 2d 332, 340 (2010) (citing 35 ILCS 105/3 (West 2008)); 86 Ill. Adm. Code 150.101(a) (1991). The sales tax is computed as a percentage of "gross receipts" (35 ILCS 120/2-10 (West 2014)), defined as the "total selling price" (id. § 1). Citibank, N.A. v. Illinois Department of Revenue, 2017 IL 121634, ¶ 2. A retailer remits the sales tax collected from the purchaser to the Department. Id. On the other hand, a construction contract involves the incorporation of tangible personal property into real estate, and such contracts are not subject to sales tax on the labor furnished and tangible personal property (materials and fixtures) incorporated into a structure. 86 Ill. Adm. Code 130.1940(c) (2000); 86 Ill. Adm. Code 130.2075(a)(2) (2001). Instead, the construction contractor pays a use tax based on the price it paid for the affixed property. 86 Ill. Adm. Code 130.1940(c) (2000); 86 Ill. Adm. Code 130.2075(a)(2) (2001). Stated simply, a purchaser does not pay sales tax on a construction contract.

¶ 7 Several sections of the Act are relevant here. Section 3(a)(1)(G) provides that any person who "knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the State" is liable to the State for a civil penalty. 740 ILCS 175/3(a)(1)(G) (West 2014). Section 4(b)(1) authorizes private persons, referred to as plaintiffs-relators, to bring civil actions on behalf of themselves and on behalf of the State of Illinois against any person violating section 3(a)(1)(G). Id. § 4(b)(1); State ex rel. Beeler, Schad & Diamond, P.C. v. Burlington Coat Factory Warehouse Corp., 369 Ill. App. 3d 507, 510 (2006) (citing 740 ILCS 175/4(b)(1) (West 2002)). The action brought by a relator is known as a "qui tam" action. Id. (citing 740 ILCS 175/4(c) (West 2002)). But under section 4(e)(3), a relator may not "bring an action under subsection (b) [permitting qui tam actions] which is based upon allegations or transactions which are the subject of a civil suit or an administrative civil money penalty proceeding in which the State is already a party." 740 ILCS 175/4(e)(3) (West 2014). Section 4(e)(3)'s restriction is known as the "government action bar." See United States ex rel. Batty v. Amerigroup Illinois, Inc., 528 F. Supp. 2d 861, 876 & n.12 (N.D. Ill. 2007) (referring to 31 U.S.C. § 3730(e)(3) (2006), a federal parallel provision to 740 ILCS 175/4(e)(3), as the government action bar). The government action bar prohibits qui tam actions that are parasitic in that they duplicate the State's civil suits or administrative proceedings without giving the government any useful return, other than the potential for additional monetary recovery. People ex rel. Schad, Diamond & Shedden, P.C. v. QVC, Inc., 2015 IL App (1st) 132999, ¶ 23; 740 ILCS 175/4 (West 2014). ¶ 8 After a relator files a qui tam action, the State may elect to intervene, take over and proceed with the action, or decline to intervene giving the relator the right to conduct the action. Burlington Coat Factory Warehouse Corp., 369 Ill. App. 3d at 510 (citing 740 ILCS 175/4(b)(4) (West 2002)). A relator is a party to the qui tam action and is awarded a percentage of the proceeds or settlement if the action is successful. Id. (citing 740 ILCS 175/4(c)(1), (d) (West 2002)).

¶ 10 Richard and Ralph Lindblom are brothers, and they own and operate Advanced Appliance, Inc., d/b/a Advanced Maytag Home Appliance Center (Advanced Maytag), located in Schaumburg, Illinois. Advanced Maytag's business consists of selling and servicing home appliances. Likewise, a portion of Best Buy's business includes selling home appliances, such as dishwashers and over-the-range microwaves. ¶ 11 Beginning in the late 1970s, the relators' father, who owned Advanced Maytag at the time, learned that Advanced Maytag's competitor, defendant Sears, did not charge sales tax on the allegations: that Best Buy was not a construction contractor and was subject to sales tax on the sale of dishwashers and over-the-range microwaves. The trial court granted Best Buy's motion to dismiss with prejudice, dismissed Best Buy from the matter, and entered an Illinois Supreme Court Rule 304(a) (eff. Mar. 8, 2016) finding. Relators' timely appeal follows.

¶ 26 The dispositive issue on appeal is whether the Department's audit in conjunction with the Board's informal review was an administrative civil money penalty proceeding barring relators' qui tam action pursuant to the government action bar. ¶ 27 Because we must determine what qualifies as an administrative civil money penalty proceeding as that term is used in the Act, the issue before us is a matter of statutory construction. It is well settled that the cardinal rule of statutory construction is to ascertain and give effect to the intent of the legislature. In re Marriage of Turk, 2014 IL 116730, ¶ 15. The statute's language is the best indication of the legislature's intent and must be given its plain, ordinary, and popularly understood meaning. Id.; In re Detention of Lieberman, 201 Ill. 2d 300, 308 (2002). It is appropriate to consult a dictionary to determine a statutory term's plain and ordinary meaning. People v. Perry, 224 Ill. 2d 312, 330 (2007). When the statute's language is clear and unambiguous, we must apply it as written without resort to extrinsic aids or tools of interpretation. Turk, 2014 IL 116730, ¶ 15. A court should not consider the statute's words and phrases in isolation but instead should interpret each word and phrase in light of the statute as a whole. Standard Mutual Insurance Co. v. Lay, 2013 IL 114617, ¶ 26. Statutory interpretation is a question of law that we review de novo. Citibank, N.A., 2017 IL 121634, ¶ 39. ¶ 28 The parties correctly note that the Act does not define the term "administrative civil money penalty proceeding." Both parties turned to Black's Law Dictionary's definition of the term "administrative proceeding": "[a] hearing, inquiry, investigation, or trial before an administrative agency, [usually] adjudicatory in nature but sometimes quasi-legislative." Black's Law Dictionary 54 (10th ed. 2014). Best Buy relies on the first half of the definition, arguing that the Department's audit was investigatory and the Board's review was an adversarial proceeding. Relators rely on the second half of the definition, arguing that an administrative proceeding, regardless of the form it takes, must be either adjudicatory in nature or quasi-legislative. Relators contend that the Department's audit along with the Board's informal review was neither. We agree with relators. ¶ 29 When relators added Best Buy as a defendant to the qui tam action, the Board was in process of reviewing the proposed liability, but the Department's audit had not yet been completed because no notice of tax liability had been issued to Best Buy. Until the Department completed its audit by issuing the statutory notice of final liability to Best Buy, there was no final assessment of tax due and, consequently, no determination subject to adjudication. ¶ 30 Although the Retailers' Occupation Tax Act establishes an administrative process that begins with the initiation of an audit and provides for an informal review of the proposed audit assessments, that process is not an administrative proceeding and does not implicate formal beyond what is provided for in the statute, which, under the well-established canons of statutory interpretation, is not permissible. See Schultz v. Illinois Farmers Insurance Co., 237 Ill. 2d 391, 408 (2010) (it is improper to add provisions not found in a statute or to depart from a statute's plain language by reading into the law exceptions, limitations, or conditions that the legislature did not express in the statute). Although the Department's audit of Best Buy and the Board's review were steps in an administrative process and were investigatory in nature, they do not constitute steps in an administrative proceeding for purposes of the government action bar. Rather, steps in an administrative proceeding would include the filing of a complaint in the circuit court under the Protest Monies Act or requesting an administrative hearing, and neither occurred here before Best Buy was named as a defendant in relators' complaint. ¶ 33 Because the Department's audit and the Board's informal internal review of the proposed audit adjustments were not an administrative civil money penalty proceeding that the State was already a party to, the government action bar is not applicable to relators' qui tam action. For this reason, the trial court erred in granting Best Buy's section 2-619(a)(9) motion to dismiss. ¶ 34 Best Buy also contends that relators' qui tam action addressed the same subject as the Board's informal review and was "parasitic" because it relied on and used information derived from the Department's audit and the Board's review. But because the Department's audit and the Board's review of the proposed audit adjustment were not an administrative civil money penalty proceeding, Best Buy's contention is beside the point. Likewise, because this appeal involves a motion to dismiss on jurisdictional grounds addressing whether the government action bar precludes the qui tam action, we need not address Best Buy's contentions as to the merits of the allegations in the qui tam action that it erroneously treated retail appliance sales as construction contracts.

¶ 36 For these reasons, we reverse the trial court's dismissal of relators' qui tam complaint and remand for further proceedings consistent with this opinion. ¶ 37 Reversed and remanded.