                                                                               Digitally signed by
                               Illinois Official Reports                       Reporter of Decisions
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                                                                               of this document
                                       Appellate Court                         Date: 2016.11.17
                                                                               11:31:39 -06'00'




        State ex rel. Schad, Diamond & Shedden, P.C. v. National Business Furniture, LLC,
                                    2016 IL App (1st) 150526



Appellate Court           THE STATE OF ILLINOIS ex rel. SCHAD, DIAMOND AND
Caption                   SHEDDEN, P.C., Relator-Appellant, v. NATIONAL BUSINESS
                          FURNITURE, LLC, Defendant-Appellee.



District & No.            First District, First Division
                          Docket No. 1-15-0526


Filed                     August 1, 2016


Decision Under            Appeal from the Circuit Court of Cook County, No. 12-L-84; the Hon.
Review                    Thomas R. Mulroy, Judge, presiding.



Judgment                  Affirmed.



Counsel on                Stephen B. Diamond, P.C. (Stephen B. Diamond, Matthew S. Burns,
Appeal                    and David Kim, of counsel), and Vanasco, Genelly & Miller (David
                          A. Genelly, of counsel), both of Chicago, for appellant.

                          Swanson, Martin & Bell, LLP, of Chicago (Ronald L. Wisniewski, of
                          counsel), and Brann & Isaacson, of Lewiston, Maine (Peter J. Brann
                          and David Swetnam-Burland, of counsel), for appellee.



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

¶1       This is a qui tam action brought on behalf of the State of Illinois by relator, the law firm
     Schad, Diamond & Shedden, P.C., against defendant National Business Furniture, LLC, a
     retailer of business furniture and office supplies. Relator alleged that, from January 2006
     through August 2014, defendant knowingly failed to collect and remit use tax on shipping
     charges for Internet and catalog sales it made to Illinois residents, a so-called “reverse false
     claim” for which relator contended defendant was liable for treble damages and penalties
     under the Illinois False Claims Act (740 ILCS 175/1 et seq. (West 2010)). Following a two-day
     bench trial, the circuit court entered judgment in defendant’s favor, finding relator failed to
     prove that defendant knowingly concealed or avoided an established duty to pay to the State.
     For the reasons that follow, we affirm the judgment of the circuit court.

¶2                                           BACKGROUND
¶3       To put relator’s claims in context, a brief overview is needed of both the law governing the
     collection of use tax in Illinois and the way defendant sells and ships its products.
¶4       Pursuant to the Use Tax Act, “[a] tax is imposed upon the privilege of using in [Illinois]
     tangible personal property purchased at retail from a retailer.” 35 ILCS 105/3 (West 2014).
     Retailers have a duty to collect the tax from their customers and remit it to the State. 35 ILCS
     105/3-45 (West 2014). Use tax is computed as a percentage of the selling price of the
     merchandise—currently 6.25%. 35 ILCS 105/3-10 (West 2014). At all relevant times, section
     130.415 of the Administrative Code provided that the determination of whether use tax must
     be collected on shipping charges “depends not upon the separate billing of such *** charges or
     expense, but upon whether [they] are included in the selling price of the property.” 86 Ill. Adm.
     Code 130.415(b) (eff. Oct. 2, 2000). That is, if shipping charges are separately contracted for,
     they are not considered part of the selling price and are not taxed. Id. Although “[t]he best
     evidence that transportation or delivery charges were agreed to separately and apart from the
     selling price[ ] is a separate and distinct contract for transportation or delivery[,] ***
     documentation which demonstrates that the purchaser had the option of [either] taking delivery
     of the property, at the seller’s location, for the agreed purchase price, or having delivery made
     by the seller for the agreed purchase price plus an ascertained or ascertainable delivery charge
     will suffice.” 86 Ill. Adm. Code 130.415(d) (eff. Oct. 2, 2000).
¶5       The Illinois Department of Revenue (IDOR) has issued a number of general information
     letters which, although they are not binding statements of department policy, provide further
     guidance to retailers regarding when use tax must be collected. These letters state that
     “[m]erely listing the [shipping] charges separately on an invoice without more evidence is
     insufficient” to establish that such charges were separately contracted for. 1 Because the
     determination is fact-specific, the IDOR sometimes states in its letters that a conclusion
     regarding a particular retailer’s tax liability cannot be reached without additional information




        1
         Illinois Department of Revenue General Information Letter No. ST 03-0103-GIL (July 10, 2003).

                                                 -2-
     regarding how transactions are processed and what delivery options are available to the
     retailer’s customers.2
¶6       Our supreme court further clarified the law governing the taxation of shipping charges in
     Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351 (2009). The plaintiffs in Kean alleged, inter alia,
     that an online retailer improperly collected Illinois use tax on shipping charges in connection
     with purchases made from its website. Id. at 354. The appellate court affirmed the circuit
     court’s dismissal of the plaintiff’s complaint for failure to state a claim and the supreme court
     agreed. Id. at 377. It concluded that “no separate agreement for transportation arose” where,
     even though several different options were available to them, “plaintiffs could not submit their
     internet orders unless and until they selected a shipping option”; nor could they make
     purchases on the defendant’s website and then pick up the merchandise at one of the
     defendant’s brick and mortar stores. Id. at 367-69. Because a transaction could only be
     completed by paying the defendant for shipping, the supreme court concluded that the shipping
     charges were “inseparable” from the sale and therefore taxable. Id. at 369, 376. Notably, the
     court in Kean declined to consider several hypothetical scenarios, including whether shipping
     charges would be taxable if a customer purchased items from the defendant’s website and
     separately arranged for them to be shipped by a third-party carrier. Id. at 376.3
¶7       We turn now to the details of defendant’s business model. Defendant is a Wisconsin-based
     company that sells office furniture and supplies to customers throughout the country through
     any combination of four channels: in-person visits from sales representatives, catalog orders, a
     toll-free telephone line, and defendant’s website. Defendant has no retail locations or
     warehouses in Illinois, but instead operates on a drop-shipment model; it forwards orders to
     third-party manufacturers it has contracts with, who then ship merchandise directly to
     defendant’s customers. Except in rare situations where a customer orders from a local
     manufacturer and elects to pick up the merchandise at the manufacturer’s warehouse, the items
     defendant sells must be delivered to its customers.
¶8       Defendant does not have separate written contracts regarding delivery. Its customers
     typically select the type of delivery they would like and pay defendant a shipping charge that is
     indicated on their invoice or order confirmation. Website customers are told that a “delivery
     charge will be calculated at checkout. *** This product ships via UPS or FedEx and will be
     brought inside your building,” and are provided with a toll-free telephone number to call if
     they “require additional services.” A separately itemized shipping charge then automatically

         2
           See, e.g., Illinois Department of Revenue General Information Letter No. ST 09-0100-GIL (July
     31, 2009) (“We cannot tell from the information that you have provided whether the transportation
     charges (freight) have been separately contracted for or not under the guidelines of Section 130.415.”).
         3
           Prompted by the supreme court’s decision in Kean, amendments to section 130.415 that went into
     effect on April 1, 2016, now provide a number of additional illustrations clarifying when an
     “inseparable link” exists between shipping charges and the selling price of merchandise. 86 Ill. Adm.
     Code 130.415(b)(1)(B), amended at 40 Ill. Reg. 6130, 6143 (eff. Apr. 1, 2016). The amendments also
     establish a safe harbor period between November 19, 2009, and the effective date, during which time a
     business is considered compliant if it computed its tax liability under either the old or the new rule. Id.
     Because, as discussed infra, the circuit court did not reach the underlying issue of whether defendant
     had a duty to collect use tax on shipping charges in Illinois, but instead concluded that defendant lacked
     the requisite state of mind for a False Claims Act violation—and because we affirm on that basis—the
     recent amendments to section 130.415 have no bearing on our analysis.

                                                     -3-
       appears when the customer proceeds to the “shopping cart” page. Defendant’s catalog
       similarly indicates that the “ADVERTISED PRICE DOES NOT INCLUDE DELIVERY
       CHARGES” and “[s]hipping and handling charges will be applied.” It instructs customers to
       call defendant for an “exact charge” for shipping to include on the catalog order form.
¶9         The “frequently asked questions” section of defendant’s website explains that there are
       several options for delivery, with smaller items generally delivered by UPS and larger items
       like furniture either delivered to the inside of the customer’s place of business or retrieved by
       the customer from the back of the delivery truck. Customers are again encouraged to call
       defendant for more information about their shipping options. Although not mentioned on
       defendant’s website or catalog order form, customers who call may alternatively arrange for
       delivery using their own accounts with third-party shipping companies. Those who select this
       “freight collect” option are charged nothing for shipping and handling by defendant.
       According to defendant’s records, this delivery method was selected in connection with
       approximately 20 to25 orders, out of thousands of purchases made by Illinois residents during
       the relevant time period.
¶ 10       In Illinois, it has been defendant’s practice at all relevant times to collect and remit use tax
       on merchandise totals but not on shipping charges, a practice which is clearly reflected on its
       invoices and order confirmations. Exceptions to this policy include sales to tax-exempt
       purchasers like government entities, for which no use tax is collected at all, and rare cases
       where use tax is collected on the bundled total because the shipping charge is not separately
       stated, i.e., where a customer requests a bundled price for its own internal purposes, or where a
       vendor includes free shipping in the price of its goods.
¶ 11       In its complaint filed on January 4, 2012,4 relator alleged that, contrary to this policy,
       defendant had a clear duty to collect use tax on shipping charges in Illinois. Relator further
       alleged that, prior to July 27, 2010, defendant “knowingly made, used or caused to be made or
       used [ ] false record[s] or statement[s] to conceal, avoid or decrease [this] obligation to pay or
       transmit money or property to the State.” Specifically, relator alleged that defendant’s order
       confirmation pages, order and shipment confirmation e-mails, invoices, accounting records,
       and the monthly ST-1 tax returns it filed with the IDOR “falsely omit[ted] tax on shipping and
       handling charges due on its Internet and Catalog sales.” As to defendant’s actions after July 27,
       2010, when amendments to the False Claims Act eliminated the requirement of a false record
       or statement (compare 740 ILCS 175/3(a)(7) (West 2008), with 740 ILCS 175/3(a)(1)(G)
       (West 2010)), relator simply alleged that defendant “knowingly concealed or knowingly and
       improperly avoided or decreased” its obligation to collect and remit use tax on shipping
       charges. On February 6, 2014, relator amended its complaint to add allegations of defendant’s
       continued failure to collect use tax on shipping charges during the two years that the case had
       been pending. Relator sought damages equal to three times the amount of unpaid taxes,
       statutory penalties for each failure to file an accurate monthly ST-1 tax return, and expenses,
       costs, and attorney fees. See 740 ILCS 175/3(a)(1), (a)(2) (West 2010).
¶ 12       A two-day bench trial was held on August 28 and 29, 2014. The circuit court heard
       testimony from the three individuals—Daniel Paruzynski, Eileen Baus, and Perry
       Amadon—who served as defendant’s chief financial officers during the relevant time period
       and, by virtue of that office, had primary responsibility for the company’s collection and

          4
           The State declined to intervene on February 24, 2012.

                                                    -4-
       remittance of state use taxes. In addition to explaining defendant’s business model and the
       shipping options available to its customers, these witnesses were questioned regarding when
       and how the company implemented its use tax policy in Illinois and what mechanisms it has for
       complying with state and municipal tax laws in the various jurisdictions in which it sells
       merchandise.
¶ 13       Daniel Paruzynski, a certified public accountant, was hired as defendant’s chief financial
       officer in 1999, a position he held until he left the company in February 2008. He testified that
       defendant collected use tax on merchandise sold in approximately 20 states and on shipping
       charges in approximately 15 of those states. When asked why the company made this
       distinction, Paruzynski stated: “Because based on our interpretation of the rules, we
       conclude[d] that freight and handling is taxable in those states. And the few states that
       [defendant] does not collect and remit, it’s because the conclusion is it’s not taxable in those
       states.” Paruzynski explained that, when the company became subject to use taxes within a
       jurisdiction, he and his staff would conduct research and “maybe” consult with an accounting
       or a law firm regarding the company’s tax obligations. According to Paruzynski, defendant
       subscribed to a tax alert to inform it of changes to the rates and rules adopted by the various
       states, and employed lawyers and accountants with whom defendant met regularly to advise it
       on state tax issues.
¶ 14       Although defendant began to have a sales presence in Illinois around the time he started
       with the company, thus making it subject to Illinois use tax requirements, Paruzynski was not
       sure if the decision to tax merchandise but not shipping charges was made before or during his
       tenure. He admitted, however, that the policy was not revisited when defendant was later
       acquired by a German company and had to re-register with the State. Paruzynski “assum[ed]”
       the company’s initial conclusion that it had no duty to tax shipping charges in Illinois was
       “probably” based on its interpretation of section 130.415. Although he was sure that he had
       reviewed the regulation prior to the weeks leading up to trial, he could not recall specifically
       when he did so. He furthermore did not recall ever reviewing any case law or general
       information letters issued by the IDOR. When asked what conclusions he drew from section
       130.415, Paruzynski stated: “The conclusions were that based on how we negotiated freight
       with the customer, that [shipping costs] would have been not taxable.” Paruzynski additionally
       testified that, during his employment, the accounting firm Deloitte and Touche filed tax returns
       on defendant’s behalf in all states where it was required to do so, and never indicated to
       defendant that it should tax shipping charges for merchandise delivered in Illinois. He
       admitted, however, that he could not recall having any specific conversations with the
       accountants regarding the issue. Paruzynski testified that he never received any indication that
       the law regarding the taxation of shipping charges in Illinois had changed. If he had, the
       company would have revisited its policy.
¶ 15       Eileen Baus began working for defendant in 1996 and served as the company’s controller
       from 2003 to 2008 and its chief financial officer from February 2008, when she took over for
       Paruzynski, until September 2012. Baus testified that Illinois is one of 20 states and, including
       municipalities, hundreds of taxing jurisdictions in which defendant sells merchandise, and that
       the company subscribes to a publication that announces changes in state laws governing sales
       and use taxes. Although she could not recall where she learned it, Baus has always believed
       that a shipping charge was not taxable if it was separately itemized on an invoice. She did not
       recall ever reviewing statutes or regulations or talking to defendant’s accountants or lawyers


                                                   -5-
       about Illinois use tax. She was also not aware of the Kean decision until after the filing of this
       lawsuit. Although she relied on those who reported to her to review relevant state court
       decisions, she admitted that the company had no specific procedure in place for those
       individuals to follow. Baus confirmed that she was involved in the purchase and installation of
       new tax software in 2010 and testified that no new review of state tax laws and regulations was
       undertaken at that time. Instead, tax codes for each state were simply programmed into the
       software based on the company’s existing practices. Baus additionally confirmed that the
       company made no changes to its policy relating to the collection and remittance of Illinois use
       tax following the filing of this lawsuit.
¶ 16       Perry Amadon testified that he took over as defendant’s chief financial officer in 2012.
       When this lawsuit was first filed, he read section 130.415 and “skimmed” the supreme court’s
       decision in Kean, but reviewed no other case law. He stated that it was his decision to maintain
       the status quo and continue to not collect use tax on shipping charges in Illinois. Although he
       agreed that the law “could be interpreted different ways,” Amadon testified that he “never saw
       anything that clearly state[d] that [defendant] should have been collecting sales and use tax on
       shipping charges.” The circuit court judge made a point of asking Amadon why he did not
       consult with a tax professional:
                   “THE COURT: Someone as careful as you are would when confronted with an
               interpretation of regulation normally reach out to an expert tax lawyer or an expert
               outside accounting firm and you didn’t and I’m wondering why.
                   THE WITNESS: I can’t tell you why I didn’t do that.”
¶ 17       Evidence was also presented at trial concerning the IDOR’s audit of defendant’s business
       in late 2007 and early 2008. This evidence includes a letter received by defendant from the
       IDOR on December 19, 2007, announcing that an “Illinois Sales and Use Tax audit” would be
       conducted for the period of January 1, 2006 to June 30, 2007. The IDOR requested access to
       defendant’s ST-1 sales and use tax returns, Excel data files for Illinois destination sales,
       exemption certificates, and information regarding the company’s own purchases in Illinois.
       The letter informed defendant that “[a]s part of the audit process, [the auditor would] perform
       compliance reviews for all other Illinois taxes administered by the [IDOR]” and that “[a]ny
       additional information required as a result of the review of the above information [would] be
       requested as the audit progresse[d].”
¶ 18       Paruzynski testified that, over his career, he had participated in approximately 20 state tax
       audits, including seven or eight that occurred while he served as defendant’s chief financial
       officer. During the IDOR audit at issue here, Paruzynski and his staff interacted with the
       auditor on a day-to-day basis. It was Paruzynski’s understanding that the auditor would look at
       the company’s sales tax returns and compare them to company records, verify exemption
       certificates for transactions involving tax-exempt purchasers, and review documentation for
       purchases made by the company’s Illinois sales representatives. Although the focus of the
       audit was not on the collection of use taxes on shipping charges, it was understood that the
       auditor would have access to all of defendant’s files and could request any documents he
       wanted. In Paruzynski’s experience, state tax auditors typically worked this way, first looking
       at specific items, then broadening their search as they saw fit. According to Paruzynski, the
       auditor did ask for additional documents during the audit and defendant “made every attempt”
       to comply with those requests. Paruzynski did not recall, however, whether the auditor


                                                   -6-
       specifically asked about defendant’s policy of not collecting use taxes on shipping charges in
       Illinois or whether the issue ever arose during the course of the audit.
¶ 19        Paruzynski identified Defendant’s Exhibit No. 5 (the audit file) as “a file that [he] would
       have created to document th[e] audit process.” Although he could not say with certainty which
       documents were given to the auditor, he testified that the documents in the file all related to
       transactions that the auditor had asked about. Although the audit largely involved transactions
       with tax-exempt entities for which no use tax was collected, it was apparent from several
       documents in the file, including an invoice, screen shots of defendant’s electronic records, and
       printouts of customer ledgers, that, when use tax was collected, it was collected only on the
       merchandise total and not on shipping charges. Paruzynski testified that, because he believed
       the company was complying with Illinois law, he had no concerns about the auditor seeing
       documents of this nature. Nor did he have any reason to ask the auditor about defendant’s use
       tax policy.
¶ 20        Paruzynski stated that at no time while he was employed by defendant did he have any
       doubt that the company was complying with Illinois tax law, a belief he said was confirmed by
       the February 27, 2008, audit closing letter which defendant received from the IDOR. The letter
       simply informed defendant of an unrelated balance that it owed, which defendant paid, and did
       not mention the taxation of shipping charges. Upon receipt of this letter, Paruzynski stated: “I
       came to the conclusion that we were handling [the collection of use tax] properly in Illinois.”
¶ 21        In its closing argument, relator argued that defendant had a duty to collect and remit use tax
       on shipping charges in Illinois because, just as in Kean, a purchase could not be completed
       without delivery, making shipping charges inseparable from the purchase price of the
       merchandise. According to relator, defendant’s monthly ST-1 tax returns were false records or
       statements that concealed its failure to remit use tax on shipping charges. Relator argued that,
       prior to being served with the complaint in this matter in 2012, defendant acted with reckless
       disregard by failing to conduct any inquiry into its duty to tax shipping charges in Illinois and,
       that, after the complaint was filed, defendant continued to act with at least reckless disregard, if
       not deliberate ignorance, when its chief financial officer Perry Amadon decided to continue the
       status quo without consulting any tax professional. Finally, relator argued that defendant
       “[p]resented no [c]redible [a]udit [d]efense” because none of its witnesses discussed the
       taxation of shipping charges with the auditor or could say with certainty that the auditor was
       shown documents clearly revealing defendant’s use tax policy.
¶ 22        For its part, defendant argued that the real issue was not whether it had a duty to collect use
       tax on shipping charges, but whether relator had met its burden of proving that defendant
       knowingly concealed an established duty and, at least prior to July 2010, had made false
       statements in its ST-1 tax returns. Defendant contended that, under the specific facts
       implicated by defendant’s business model, the duty to collect use tax on shipping charges was
       “uncertain and disputed, not established and clear,” and that it reasonably relied on the results
       of the IDOR’s audit to conclude that it was in compliance with Illinois law. Defendant stressed
       that witnesses’ inability to recall how the company adopted its policy concerning the collection
       of use tax in Illinois did not mean that the decision was made haphazardly. According to
       defendant, the safeguards it had in place to track changes in state tax laws—including the
       review of published tax alerts, reliance on the results of state tax audits, and periodic
       consultation with its lawyers and accountants—demonstrated that it took its tax obligations
       seriously.

                                                    -7-
¶ 23       In its opinion issued on October 23, 2014, the circuit court found that relator failed to
       demonstrate that defendant acted with reckless disregard. Finding the defendant’s current and
       former chief financial officers to be credible witnesses, the circuit court concluded that
       defendant reasonably relied upon the results of the IDOR audit, as well as its own
       interpretation of section 130.415, to determine that it had no duty to collect use tax on shipping
       charges in Illinois.
¶ 24       Relator’s motion to reconsider was denied and this timely appeal followed.

¶ 25                                            ANALYSIS
¶ 26        On appeal, relator contends that the circuit court erroneously concluded that defendant did
       not recklessly disregard its obligation to collect and remit use tax on shipping charges in
       Illinois—a finding fatal to relator’s claim pursuant to the Illinois False Claims Act (740 ILCS
       175/1 et seq. (West 2010)).
¶ 27        Although we review a circuit court’s conclusions of law de novo, we defer to its findings of
       fact following a bench trial—including its findings regarding a party’s state of mind—unless
       they are against the manifest weight of the evidence. Eychaner v. Gross, 202 Ill. 2d 228,
       251-52 (2002); Gambino v. Boulevard Mortgage Corp., 398 Ill. App. 3d 21, 54 (2009). “A
       decision is against the manifest weight of the evidence only when an opposite conclusion is
       apparent or when the findings appear to be unreasonable, arbitrary, or not based on the
       evidence.” Eychaner, 202 Ill. 2d at 252. We view the evidence in the light most favorable to
       the appellee (Cipolla v. Village of Oak Lawn, 2015 IL App (1st) 132228, ¶ 60) and will neither
       reweigh the evidence nor reassess the credibility of witnesses (In re D.L., 326 Ill. App. 3d 262,
       269 (2004)).
¶ 28        The claim at issue in this case was brought under the Illinois False Claims Act (Act) (740
       ILCS 175/1 et seq. (West 2010)),5 an anti-fraud statute modeled on the federal False Claims
       Act (31 U.S.C. §§ 3729-3733 (2006)). State ex rel. Beeler, Schad & Diamond, P.C. v.
       Burlington Coat Factory Warehouse Corp., 369 Ill. App. 3d 507, 510-11 (2006). Pursuant to
       the Act, a party that perpetrates fraud against the State is liable for civil penalties and triple
       damages. 740 ILCS 175/3(a)(1) (West 2010). Claims may be brought on the State’s behalf by
       the Attorney General or by a private person—referred to as a relator—in a qui tam action. 740
       ILCS 175/4(a)-(c) (West 2010). In a qui tam action, the State may choose to intervene or, as in
       this case, may instead let the relator proceed with the litigation. 740 ILCS 175/4(b)(4) (West
       2010). The relator is considered a party to the action and is entitled to a percentage of the
       proceeds or settlement if the suit is successful. 740 ILCS 175/4(c)(1), (d) (West 2010).
¶ 29        The Act prohibits not only the knowing presentment to the State of a false claim for
       payment, but also the knowing concealment or improper avoidance of an obligation to pay or
       transmit money or property to the State—a so-called “reverse false claim.” 740 ILCS
       175/3(a)(1)(A), (G) (West 2010). An “obligation” is defined as, inter alia, an “established
       duty, whether or not fixed, arising *** from statute or regulation.” 740 ILCS 175/3(b)(3) (West
       2010). As we noted above, amendments which took effect on July 27, 2010, eliminated the
       requirement that a defendant concealing an obligation to pay must make a false record or
       statement in order to come within the purview of the Act. Compare 740 ILCS 175/3(a)(7)

           5
            The Act is sometimes referred to by its former title, the Whistleblower Reward and Protection Act.
       740 ILCS 175/1 (West 2010).

                                                      -8-
       (West 2008), with 740 ILCS 175/3(a)(1)(G) (West 2010). For purposes of the Act, a party
       “knowingly” conceals or avoids an obligation to pay when it has “actual knowledge” of the
       obligation, or “acts in deliberate ignorance” or “reckless disregard” of the obligation. 740
       ILCS 175/3(b)(1)(A)(i)-(iii) (West 2010). No proof of a specific intent to defraud is required.
       740 ILCS 175/3(b)(1)(B) (West 2010).
¶ 30       Relator contends on appeal that the circuit court erroneously applied the “government
       knowledge defense” to conclude that the mere fact of the IDOR audit negated defendant’s
       scienter as a matter of law and “permanently immunized [defendant] from liability.” The
       defense applies where “the government knows and approves of the particulars of a claim for
       payment before that claim is presented” effectively “negat[ing] the fraud or falsity required” to
       establish a violation of the Act. United States ex rel. Durcholz v. FKW Inc., 189 F.3d 542, 545
       (7th Cir. 1999). According to relator, even if the evidence established that the State knew that
       defendant did not collect and remit use tax on shipping charges as a result of the audit, it did not
       establish that the State knew and approved of the practice as part of an ongoing dialogue as
       required by Durcholz and similar cases. See, e.g., id. Relator urges us to consider de novo
       whether the circuit court applied the correct legal standard for this defense.
¶ 31       Although relator directs our attention to its closing argument, in which it faulted defendant
       for failing to conclusively demonstrate that the taxation of shipping charges was an issue
       discussed with or brought to the IDOR’s attention during the audit, defendant argues that
       relator failed to preserve this issue for appeal by raising it for the first time in its posttrial
       motion. We conclude that, even if preserved, the argument is based on a flawed reading of the
       circuit court’s October 23, 2014, order. The government knowledge defense was not asserted
       by defendant at trial. There is furthermore no indication in the record that the circuit court
       ruled, as a matter of law, that the State’s knowledge of defendant’s practices precluded
       relator’s claim. Instead, it made a finding of fact on the merits of relator’s claim, concluding
       that relator failed to establish that defendant acted with the requisite state of mind. The court’s
       focus was not on the legal effect of what the State knew, but on what defendant’s employees
       believed about the company’s duty to collect and remit use tax in Illinois. Because the
       government knowledge defense was neither raised at trial nor implicated by the circuit court’s
       order, the authorities cited by relator establishing the elements of that defense are inapplicable.
¶ 32       We instead consider whether the circuit court’s findings are contrary to the manifest weight
       of the evidence. Without reaching the underlying issue of whether defendant had a duty to
       collect and remit use tax on shipping charges in Illinois, the circuit court concluded that relator
       failed to prove that defendant knowingly concealed or improperly avoided an obligation to pay
       money to the State. Specifically, the court concluded that the evidence presented at trial did not
       establish that defendant acted with reckless disregard. Although few courts in Illinois have
       addressed the issue, a number of federal courts have considered what it means to act with
       reckless disregard in the context of an alleged False Claims Act violation. Because the
       language of the federal and Illinois statutes are virtually identical, we review decisions from
       these courts as persuasive authority. State ex rel. Beeler, Schad & Diamond, P.C. v. Target
       Corp., 367 Ill. App. 3d 860, 865 (2006). In doing so, a clear picture of the requisite state of
       mind emerges.
¶ 33       To begin with, reckless disregard does not encompass mere “[i]nnocent mistakes or
       negligence.” (Internal quotation marks omitted.) United States v. King-Vassel, 728 F.3d 707,
       712 (7th Cir. 2013). Although the congressional report accompanying the bill that added the

                                                    -9-
       reckless disregard standard to the federal statute defined it as the failure “ ‘to make such
       inquiry as would be reasonable and prudent to conduct under the circumstances,’ ” the report
       further noted that this is “ ‘a limited duty to inquire as opposed to a burdensome obligation,’ ”
       and “ ‘[o]nly those who act in gross negligence of this duty will be found liable.’ ” (Emphasis
       and internal quotation marks omitted.) United States ex rel. Williams v. Renal Care Group,
       Inc., 696 F.3d 518, 530 (6th Cir. 2012) (quoting S. Rep. 99-345, at 20 (1986), as reprinted in
       1986 U.S.C.C.A.N. 5266, 5285-86). Thus, reckless disregard has been described as “an
       extreme version of ordinary negligence” (United States v. Krizek, 111 F.3d 934, 942 (D.C. Cir.
       1997)), “an aggravated form of gross negligence” (United States ex rel. Burlbaw v. Orenduff,
       548 F.3d 931, 945 n.12 (10th Cir. 2008)), “gross negligence-plus” (Krizek, 111 F.3d at 941),
       and a state of mind lying “on a continuum between gross negligence and intentional harm”
       (id.). Its inclusion in the statute “attempts to reach *** the ostrich type situation where an
       individual has buried his head in the sand and failed to make simple inquiries which would
       alert him that false claims are being submitted.” (Internal quotation marks omitted.) United
       States ex rel. Ervin & Associates, Inc. v. Hamilton Securities Group, Inc., 370 F. Supp. 2d 18,
       41 (D.D.C. 2005) (quoting S. Rep. 99-345, at 20 (1986), as reprinted in 1986 U.S.C.C.A.N.
       5266, 5285). Accordingly, a party acts with reckless disregard when it ignores “obvious
       warning signs” and “refus[es] to learn of information which [it], in the exercise of prudent
       judgment, should have discovered.” (Internal quotation marks omitted.) Id. at 42.
¶ 34       Here, the circuit court stated that it found defendant’s current and former chief financial
       officers, Paruzynski, Baus, and Amadon—who all testified that defendant believed its
       shipping and handling charges were not part of the taxable selling price of the goods defendant
       sold—“to be credible witnesses.” Noting that “[t]he proliferation of statutes and regulations
       has sometimes made it difficult for the average citizen to know and comprehend the extent of
       the duties and obligations imposed by the tax laws,” and that “[t]he purpose of the [Act] is not
       to penalize frank differences of opinion or innocent errors made despite the exercise of
       reasonable care,” the circuit court concluded that defendant did not act recklessly when it
       relied both upon the results of the IDOR audit and its own interpretation of section 130.415 to
       determine that it had no duty to collect use tax on shipping charges in Illinois.
¶ 35       With respect to the audit, the circuit court found that defendant “disclosed to the auditor
       invoices and transaction records showing sales of goods, use tax collected on those goods,
       separate charges of shipping and handling, and no use tax collected on those charges,” that
       “[t]he IDOR, *** carefully audited [defendant’s] books and records and found no violation of
       §130.415,” and that the IDOR concluded the audit did not indicate in any way that defendant’s
       policies and practices were not in compliance with Illinois law. Taken as a whole, the contents
       of the audit file and the testimony of defendant’s employees support the circuit court’s
       conclusion that defendant reasonably relied on the results of the audit to determine that it was
       in compliance with Illinois law. The IDOR’s audit-initiation letter made clear that the audit
       was an “Illinois Sales and Use Tax audit” and that the auditor would be checking for
       compliance with “all” Illinois taxes. Relator presented no evidence indicating that defendant’s
       employees were anything other than forthright with the auditor. Although the focus of the audit
       may not have been on the taxation of shipping charges, the evidence nonetheless established
       that the auditor had access to all of defendant’s tax records.
¶ 36       Relator argues that no witness testimony or documentary evidence conclusively
       established that the auditor viewed invoices for taxable transactions from which it would have


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       known that defendant was not collecting use tax on shipping charges. Defendant presented at
       least some evidence that the auditor was made aware of the company’s policy as a result of the
       audit, however. Relator correctly notes that only one invoice in the audit file,6 regarding a
       customer named GC America, relates to a taxable transaction. We disagree, however, with
       relator’s assertion that this document, on its face, would not have alerted the auditor to the fact
       that defendant generally did not tax shipping charges for otherwise taxable transactions. As
       part of the audit, defendant sent GC America a letter stating that it had not charged the
       appropriate Illinois sales tax. Although defendant never collected use tax for this transaction
       because GC America indicated that it had already self-assessed and paid the tax on its own, the
       invoice defendant prepared to accompany the letter clearly indicated the tax defendant was
       otherwise prepared to collect was based only on the merchandise total.
¶ 37        As the trier of fact, the circuit court was in the best position to make a determination as to
       witness credibility and the weight to be afforded to the testimony. In re Estate of Maslowski,
       204 Ill. App. 3d 379, 384 (1990). It concluded that defendant’s employees were truthful when
       they testified both that they believed the auditor was well aware of defendant’s use tax policy
       as a result of the audit and that they concluded at the close of the audit that defendant’s
       practices were in compliance with Illinois law. This was compelling evidence that defendant
       did not act with reckless disregard with respect to any obligation to pay money to the State.7
       The circuit court’s findings were thus not “unreasonable, arbitrary, or not based on the
       evidence,” nor was the opposite conclusion apparent. Eychaner, 202 Ill. 2d at 252.
¶ 38        Even without the evidence of the IDOR audit, the court’s finding that defendant did not act
       with reckless disregard was not contrary to the manifest weight of the evidence. Given that, at
       all relevant times, neither section 130.415, the IDOR’s general information letters, Kean, nor
       any other case law that we are aware of addressed the “freight collect” option that defendant’s
       current and former chief financial officers testified was available to its customers through the
       company’s toll-free telephone line, reasonable minds could disagree regarding whether
       defendant had a duty to collect and remit use tax on shipping charges in Illinois.8 This court

           6
              Although relator repeatedly stresses that the audit file was admitted over objection, it makes no
       challenge to the circuit court’s evidentiary rulings on appeal.
            7
              Notably, even the IDOR general information letters that relator argues defendant should have
       reviewed indicate that, when presented with fact-specific questions regarding whether use tax should be
       collected on shipping charges, the department often defers to its auditors in the field, who it feels are in
       a better position to know the relevant facts. See, e.g., Illinois Department of Revenue General
       Information Letter No. ST 03-0103-GIL (July 10, 2003) (“We are unable to respond to the [sic] your
       letter in the manner requested. As you are currently under audit with the Illinois Department of
       Revenue, we must decline to provide an opinion as to the taxability of the charges about which you are
       inquiring.”). Other letters, which relator relied on in connection with its motion for summary judgment
       but chose not to introduce at trial, make this deference even clearer. See, e.g., Illinois Department of
       Revenue General Information Letter No. ST 05-0029-GIL (May 5, 2005) (“In light of the information
       contained in your letter, we must defer to the determination of the auditor, who is in the best position to
       make a determination on this matter.”).
            8
              Indeed, although the amendments to section 130.415 that went into effect earlier this year have no
       bearing on defendant’s state of mind during the time frame at issue here, the numerous additional
       examples they provide of when an “inseparable link” exists between delivery charges and the selling
       price of merchandise confirm that the determination is fact-intensive and indicate that the IDOR felt

                                                       - 11 -
       has held that a knowing violation of the Act cannot occur “when the pertinent area of the law is
       unclear and specific factual analysis must be completed to determine” a retailer’s use tax
       liability. State ex rel. Beeler, Schad & Diamond, P.C. v. Ritz Camera Centers, Inc., 377 Ill.
       App. 3d 990, 997 (2007). Such was the case here. We, therefore, cannot say it was arbitrary or
       unreasonable for the circuit court to believe the testimony of defendant’s employees that the
       company honestly, even if mistakenly, concluded that it had no such duty.
¶ 39       In sum, relator’s primary assertion that “[f]or more than a decade, [defendant] failed to
       make any inquiry into its duty to collect and remit taxes on shipping charges” (emphasis
       added) mistakenly applies an ordinary negligence standard to a cause of action that requires
       “gross negligence-plus.” To be sure, to the extent that defendant’s employees believed that the
       company did not have to tax shipping charges simply because they were separately itemized,
       they were mistaken. Their failure to periodically review the company’s policies absent
       publicized changes in state laws may or may not have been negligent. Significantly more than
       an error, mistake, or ordinary negligence is required, however, to demonstrate reckless
       disregard in the context of a False Claims Act violation. Wang v. FMC Corp., 975 F.2d 1412,
       1421 (9th Cir. 1992) (explaining that the concern in a false claims case is with uncovering
       fraud, not errors), overruled on other grounds by United States ex rel. Hartpence v. Kinetic
       Concepts, Inc., 792 F.3d 1121 (9th Cir. 2015); Hindo v. University of Health Sciences/The
       Chicago Medical School, 65 F.3d 608, 613 (7th Cir. 1995) (noting that “[i]nnocent mistakes or
       negligence are not actionable” as false claims). Relator instead needed to prove that defendant
       ignored obvious warning signs, buried its head in the sand, and refused to learn information
       from which its duty to pay money to the State would have been obvious. Ervin, 370 F. Supp. 2d
       at 41-42. The evidence presented in this case, taken as a whole together with all reasonable
       inferences in defendant’s favor, was not manifestly inadequate to support the circuit court’s
       conclusion that relator failed to meet this burden.
¶ 40       Because we affirm the judgment below on the grounds relied upon by the circuit court, we
       need not consider the alternative arguments raised by defendant on appeal, i.e., whether
       defendant in fact had a duty to collect use tax on shipping charges or whether it made false
       statements or records in an effort to conceal such a duty.

¶ 41                                        CONCLUSION
¶ 42       For the foregoing reasons, we affirm the judgment of the circuit court.

¶ 43       Affirmed.




       retailers were in need of additional guidance beyond that previously available. See 40 Ill. Reg. 6130,
       6143 (eff. Apr. 1, 2016).

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