Wines & Vines

September 2015 Finance Issue

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September 2015 WINES&VINES 17 WINE INDUSTRY NEWS C hicago, Ill.—Some lawyers chase ambulances in search of dollars. Others target wineries. In recent years, Steven Diamond, a partner at Schad, Diamond and Shedden in Chicago has pursued out-of-state wineries (and other businesses) confused by an obscure Illinois law that requires package senders to a pay use tax on shipping and handling charges. (The state also charges sales tax on the wine itself.) Diamond's scheme follows a pattern: He orders a bottle of wine, then prints out the receipt showing that the winery collected Illi- nois taxes on the merchandise, but not ship- ping & handling. He then files a private citizen whistleblower action (or qui tam action) to collect the unpaid use tax on all of the merchant's sales to Illinois consumers on behalf of the attorney general of Illinois. He also claims that the winer- ies violated the Illinois False Claims Act by filing "false" (i.e., erroneous) tax returns. That act allows the state to collect three times the amount of tax owed, plus a civil penalty of $5,000 to $10,000 per violation. Diamond gets 25% of the pen- alties collected and "reasonable attorneys' fees," which can multi- ply the uncollected use tax into a significant sum. The Wine Institute first learned of these lawsuits when they were initially filed in late December 2014. Steve J. Gross, the Wine Institute's vice president of state relations, mentioned this in a talk at the DtC Symposium in January and warned winer- ies not to ship to Diamond. The San Francisco, Calif.-based Wine Insti- tute is fighting the bogus penalties with some assistance from the Napa Valley Vintners and three wineries: Miner Family Winery, Staglin Family Vineyard and Chimney Rock Winery (which is owned by the Terlato family of Illinois). According to Gross, many other states tax shipping charges—Arkansas, Connecticut, Georgia (off-site sales only), Hawaii, Indiana, Michigan, Nebraska, New Mexico, New York, North Carolina, North Dakota, Ohio, South Carolina, Tennessee, Texas, Vermont, Washing- ton and West Virginia—but in these states, unlike Illinois, the law is clear. On top of that confusion, the Illinois at- torney general and the Illinois Department of Revenue differ on whether the use tax is due. The Wine Industry's attorney, Michael J. Wynne of Reed Smith, received letters from the rev- enue department saying the tax wasn't due. The attorney general's office offered winer- ies the chance to settle before Reed Smith filed a lawsuit, asserting that the taxes weren't le- gitimate, but, said Wynne, "We believe that the attorney general's office knew the lawsuit was pending. Just days before the proposal, Reed Smith had informed the attorney general that it expected to receive private letter rulings from the Illinois Department of Revenue on behalf of two wineries located outside of Illinois. He continues, "In these rulings, the Depart- ment (of Revenue) held that the separately stated shipping charges imposed by the winer- ies for purchases by Illinois customers were not subject to Illinois use tax, because the win- eries offered their Illinois customers the option of picking up their purchases at the winery," part of the confusing law. "Our hope is to get the Department of Revenue and the at- torney general on the same page," Wynne said. "We're confident that this would end the situation. If not, we'll seek a solution in court." Wynne also said that the law was clear until 2009, when a court case (Kean v. Wal-Mart) raised some issues, and wineries that thought they were following the law found out the Illinois attorney general disagreed. That year, the Illinois Supreme Court ruled that, even if an Internet merchant separates shipping and handling charges on its website, those charges are "included in the selling price" and subject to use tax if the buyer has to pay those charges to obtain the goods. The attorney general's offer to settle in- cluded voluntarily dismissing all shipping and handling cases involving potential shipping tax due of less than $1,000. It would charge twice the tax due for liabilities of $1,000, plus "rela- tor" costs. The Wine Institute and its attorney claim wineries are offered a bad choice: pay a tax they aren't due or sustain high legal costs to fight the tax. In the mean time, wineries should be vigilant not to ship to Diamond; other wineries are charg- ing and paying use tax on shipping just to be sure, and a few may have stopped shipping to Illinois. Illinois is an important market for wineries. According to Ship- Compliant, Illinois was the fifth- largest destination for the 3.95 million cases shipped direct to consumer (DtC) in the United States in 2014. Wineries shipped 171,000 cases to Illinois consum- ers in 2014—11% more than in 2013. That wine had a value of $85 million, with an average bot- tle price of $41. Wine Institute has been lobby- ing the Illinois legislature to clarify when sales tax is due on shipping charges, but that process will take some time. Gross said the wine in- dustry advocacy group chose to litigate because there was no progress on legislation that would fix the problem. The Wine Institute announced: "While the litigation will not provide an immediate remedy, the goal is to put a stop to the cur- rent and future law- suits and to clarify the confusion surround- ing when/if a winery should be collecting t a x e s o n s h i p p i n g fees." "We also need to clarify the (Illinois) False Claims Act to eliminate this practice," Wynne said. —Paul Franson Wineries should be wary of shipping to Illinois, where an attorney is exploiting a tax loophole to collect tax penalties paid to the state. "Our hope is to get the Department of Revenue and the attorney general on the same page." —Michael J. Wynne, attorney for Wine Institute MIMI ZYCHERMAN TOP STORY Wine Institute Fires Back at Illinois Lawsuits

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