Joys of bounty-hunting: internet sales tax

In Chicago, veteran class-action attorney Stephen Diamond has been profitably suing retailers that don’t collect state and local sales taxes from online customers:

Using a state whistle-blower law, Mr. Diamond since 2002 has filed about 95 suits in Cook County court here against retailers that failed to charge him taxes on Internet sales, alleging that they broke the law. In cases where the state of Illinois joins the suits and prevails, he is entitled to up to 25% of the financial damages, with the rest going to state coffers….

Because of settlement agreements between the retailers and the attorney general’s office, the state’s judges have agreed to keep the names of most of the retailers and the settlement amounts confidential.

The retailers, like their mail-order-catalogue counterparts, have in the past often taken the position that the responsibility for making sure sales tax is paid rests with the customer; disputes sometimes arise about whether a particular retailer has sufficient operations within a state to count as present within it for tax-collection purposes.

Mr. Diamond’s targets have included such firms as Wal-Mart, Office Depot and KB Toys. He has taken an interest in expanding his practice beyond Illinois to the three other states with laws allowing private citizens to enrich themselves this way, but his efforts in those cases have been less successful. After he filed about 30 tax suits in Tennessee, lawmakers there repealed their statute authorizing such suits, and passed the word to nearby Virginia which also repealed its similar law. That leaves Nevada, where he has filed 10 suits which the state attorney general has moved to dismiss. In Illinois, he would seem in little danger of being shut down any time soon: the office of state Attorney General Lisa Madigan, a key trial lawyer ally, has been willing to cooperate with his activities though disputing his right to as high a share of the booty as he would like. (Robert Guy Matthews, “Online Retailer Skips Sales Tax? You Might Sue”, Wall Street Journal, Oct. 14)(online subscribers only).


  • Question: Wouldn’t the collecting of a state sales taxes across a state line constitute regulation of interstate commerce and be illegal constitutionally? I’m just a simple person who learned to read and am not a lawyer, but taxation across a state line somehow doesn’t seem to be legal. Please correct me if I am wrong. I would actually like to be educated on the subject.
    Pat McGee
    first time commenter, long time reader

  • thats why he i aiming at retailers with a “physical presence” in the state. And to prove the internet and retail locations are part of the same company he returns items purchased online to the store location for refund. If the retailer has a physical prescence they are required to collect tax. Still strikes of entrapment and the worst sort of ambulance chasing. particularly when he starts going into states where he has no vested interest in the tax revenue.

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