Illinois Official Reports 

Appellate Court

State ex rel. Schad, Diamond & Shedden, P.C. v. National Business Furniture, LLC,

2016 IL App (1st) 150526

Appellate Court 

Caption

THE STATE OF ILLINOIS ex rel. SCHAD, DIAMOND AND 

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 

Review

Appeal from the Circuit Court of Cook County, No. 12-L-84; the Hon. 

Thomas R. Mulroy, Judge, presiding.

Judgment Affirmed.

Counsel on

Appeal

Stephen B. Diamond, P.C. (Stephen B. Diamond, Matthew S. Burns, 

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.
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 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). 
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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. 
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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 

 

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

 

5The Act is sometimes referred to by its former title, the Whistleblower Reward and Protection Act. 

740 ILCS 175/1 (West 2010). 
- 9 - 

(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 
- 10 - 

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 

 

6Although relator repeatedly stresses that the audit file was admitted over objection, it makes no 

challenge to the circuit court’s evidentiary rulings on appeal. 

7Notably, 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 
- 12 - 

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).