Much of the criticism of Diamond centers on the fact that he was not exactly an “insider” in the suits he filed. He didn’t have inside intel about the defendants in the cases. Nor did he deploy sophisticated methods to identify businesses shirking their tax obligations. For the most part, he was basically online shopping, identifying companies (or entire industries) that weren’t collecting the appropriate sales tax and then filing an FCA case against the companies based on that information. Yet the generous whistleblower awards were intended to reward those willing to encourage courageous truth-tellers…hence much of the criticism.
The Director of the Illinois Department of Revenue described Diamond “as a financially motivated third party adept at manipulating the qui tam process to ‘victimize’ businesses that at most made an inadvertent mistake.” So it wasn’t exactly shocking when the Illinois Attorney General took the rare step of intervening and moving to dismiss hundreds of Diamond’s FCA suits.
In late-May of this year, the Cook County Circuit Court granted the Attorney General’s motion to dismiss hundreds of Diamond’s FCA suits. An appellate court affirmed that ruling earlier this month. It’s probably safe to assume that Mr. Diamond learned a valuable lesson from all of this: Illinois will not tolerate his antics…
Or will he?!
In July, on the heels of hundreds of the Illinois court dismissing hundreds of his Illinois FCA cases, the NYS Attorney General and Diamond reached a settlement with My Pillow, Inc. to resolve allegations that the Minnesota company violated the FCA by knowingly failing to collect and remit New York use taxes on its online and telephone sales of pillows and such to New York customers. The Settlement calls for My Pillow to pay more than $1.1 million for its failure to collect $537,000 in sales tax over a four-year period. The untaxed sales were made either by telephone or on the internet. What’s that you say? No nexus? Well here’s thing: in addition to the internet and phone sales, My Pillow was also selling its pillows at New York trade shows through independent contractors and other representatives. And based on that, it was found that My Pillow had nexus with New York.
New York’s FCA statute is widely regarded as among the toughest, if not the toughest, statutes of its kind, which explains perhaps why Mr. Diamond fared pretty well in the Empire State. With awards typically ranging from 15-30% for “relators” like Diamond, the $1.1 million settlement translates into a six-figure payday for Diamond.
No doubt Diamond’s record in Illinois is part of the reason this case garnered so much attention. But for out-of-state vendors making sales in New York, this case underscores the importance of sales tax compliance – especially considering that Diamond’s unsophisticated investigative techniques could be duplicated by just about anyone. As operations change and business strategies evolve, nexus should be assessed on an on-going basis.
