January 3, 2005, 12:00 AM

Three retailers reach accord in Illinois sales-tax dispute

Out-of-court settlements end online sale-tax cases against Wal-Mart, Target and Office Depot.

Three online retailers have avoided trial by agreeing to pay the state of Illinois a combined total of more than $2.4 million to compensate for sales tax they failed to collect on transactions made on the Internet.

The out-of-court settlements will end the cases against the online merchants, Wal-Mart.com Inc.; Target Corp. and its affiliate, Target.Direct LLC; and Office Depot Inc. and its subsidiary Viking Office Products Inc., according to the Illinois Attorney General’s office.

All three of the retailers began collecting taxes for Illinois in February 2004, so the payments represent restitution for taxes that went uncollected before then, says Illinois assistant attorney general Charles Godbey.

The state sued the three retailers and more than 60 others in September 2003, arguing that the web retailers violated a state law that requires online merchants to collect state sales tax if the companies operate stores in the state. Having stores in Illinois would allow consumers to return merchandise in the state after purchasing it online, the state maintained.

The settlements paid by the three retailers came early in the litigation process and no trial date had been set, Godbey says. “Our office is proceeding with litigation against the other retailers,” he says.

The settlement could encourage retailers to come to agreements with other states and takes place against a national backdrop of increasing cooperation among merchants and state governments on web sales tax collection, says John Logan, a senior state tax analyst for CCH Tax and Accounting, a Wolters Kluwer Co., Riverwoods, Ill.

Godbey declines to say whether the retailers who have not settled with the state have begun collecting Illinois sales tax. “That’s still confidential at this point because the matter is still in litigation.”

The state wasn’t alone in taking legal action against the long list of retailers. Chicago lawyer Stephen Diamond, a principal in the firm of Beeler, Schad & Diamond, brought suit against at least some of the retailers under the whistleblower statute, which would have allowed the firm to earn up to 25% of what the state recovered.

The Illinois Attorney General’s Office and the Illinois Department of Revenue became involved, too. “The state intervened, pursuant to the terms of the Illinois Whistleblower Act, and took over primary responsibility for prosecuting the action, because the state is the real party” to pursue the case, Godbey says.

In March 2003, Diamond told Internet Retailer he intended to take his crusade nationwide against web merchants who fail to collect state sales taxes. In Illinois, he filed suit against Target in 2001 and against Wal-Mart in 2002. m

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