HOW HE SEES IT Enterprising lawyer may send online sales taxes soaring

By ERIC PETERS
KNIGHT RIDDER/TRIBUNE
WASHINGTON -- If you suddenly find yourself being charged state and local taxes on purchases made over the Internet, you may want to place the blame on an enterprising Chicago plaintiffs' lawyer named Stephen Diamond.
A frequent online shopper, Diamond noticed that many online retailers failed to charge him state sales taxes -- apparently in violation of an Illinois law that requires collection of taxes on Internet purchases if the retailer has a store location in the state.
While most states forego collection of Internet taxes, Illinois requires retailers to add its state tax to online orders if they maintain a physical presence in the state -- narrowly defined as just one store where shoppers can return online purchases.
That was more than enough to spur Diamond to action. Using a whistle-blower law that allows private citizens to share up to 25 percent of the financial damages the state recovers from tax scofflaws, Diamond has filed almost 100 lawsuits in Cook County since 2002 and raked in more than a half-million dollars.
Corporate deep pockets
Like Willie Sutton, the famed bank robber of the 1940s, Diamond knows "where the money is" -- in this case, large corporations with deep, deep pockets. He goes after major retailers like Wal-Mart, Target, KB Toys and Office Depot, all of which generate hundreds of millions of dollars from online sales.
"This is a no-brainer," the veteran class-action warrior told an inquiring reporter earlier this fall. "I started going on the Internet and discovered to my astonishment that companies like Target and Wal-Mart were not collecting taxes on their Internet sales. I was like 'wow."'
While some states and local jurisdictions require retailers to collect Internet taxes if they have a physical presence, the requirement often is honored mostly in the breech.
Retail giants like Land's End and Sears charge those online taxes, if they have stores in a given state, but many others don't citing ambiguity about whether such laws are legal and the huge extra administrative expense of collecting and distributing online sales taxes to all 50 states, not to mention dozens of cities and counties that impose their own sales taxes. Diamond's lawsuits may force online businesses to collect state and local sales taxes -- an added expense that almost certainly would force across-the-board price increases.
Congress repeatedly has imposed a moratorium on Internet taxes, but it applies only to federal taxes, not state and local. As he filed his suits, Diamond found a staunch ally in Illinois Attorney General Lisa Madigan. Last year alone, her staff pressured Wal-Mart, Target and Office Depot to fork over $2.4 million. Not all of that was for allegedly uncollected taxes since financial damages can total up to three tiems the sales taxes that weren't collected.
While Diamond found fertile ground in his home state, he came up barren when he tried to expand his "get rich" scheme to Tennessee, Virginia and Nevada -- three states that also allowed whistle-blowers to share in financial damages recovered on taxes owed.
The tax commissioners of Tennessee and Virginia looked askance at what they essentially viewed as a northern carpetbagger attempting to misuse their laws for self-enrichment. They promptly persuaded their state legislatures to outlaw such practices.
The issue remains undecided in Nevada, where Diamond has filed 10 lawsuits against Internet miscreants. The state attorney general's office moved quickly to dismiss them, but a state trial court refused and the matter is now pending before the State Supreme Court.
The Wall Street Journal once described personal injury lawyers as "the nation's only true parasitic class."
Frivolous lawsuits
If you subscribe to that definition, Stephen Diamond may qualify as this month's poster boy for the thousands of personal injury lawyers who rake in mega bucks from frivolous lawsuits that wind up costing consumers millions of dollars each year.
Indeed, the American Tort Reform Association, a grass-roots coalition that works for civil justice reform, says the nation's "sue first" tort system currently costs consumers $246 billion, or $845 per citizen or $3,380 for a family of four.
That figure is rising since tort costs in this country increased a staggering 35.4 percent from 2000 to 2003. The system actually benefits personal injury lawyers like Diamond far more than most of the Jane and Joe Six-Packs who are roped in as plaintiffs.
Damage awards currently funnel only 22 cents on the dollars back to claimants to cover their actual economic losses, while lawyer's contingency fees and expenses combined with administrative costs to grab the remaining 78 percent.
Virtually every advanced democracy on Earth does far better in rewarding successful plaintiffs, while limiting lawyers to reasonable fees. Yet congressional efforts at real tort reform continue to languish on Capitol Hill. Consumers should demand an end to a farce in which they are so ill-served.
X Eric Peters is an independent journalist based in the nation's capital and a contributing editor to Consumer Research magazine. Distributed by Knight Ridder/Tribune Information Services