On March 22, 2018, an Indiana state trial court judge granted a motion to dismiss in State of Indiana ex. rel Harmeyer v. The Kroger Co. et al. Relator Harmeyer—an attorney and Kroger patron—alleged that the grocery chain knowingly failed to collect and remit state sales tax on hundreds of goods throughout the state. Under Indiana law, the state’s gross retail tax does not apply to “food and food ingredients” but it does apply to candy, soft drinks, dietary supplements, and prepared foods. Relator’s sixth amended complaint identified more than 1,400 food items that relator alleged were mischaracterized as tax-exempt based on the ingredients and food preparation. For example, relator alleged that a protein bar should be classified as taxable candy rather than nontaxable food. By classifying items as tax-exempt, relator alleged that the grocery chain cost the state millions of dollars in tax revenue each year.
The superior court judge dismissed relator’s complaint with prejudice holding that the complaint failed to meet the heightened pleading requirement of 9(b) because Harmeyer failed to allege the time, place, and method by which misrepresentations were made to the state. The court also noted that Harmeyer, whose similar case against a grocer in another state had been dismissed, was not an employee of Kroger, had no inside knowledge of what took place within the company, and merely presumed, as he had in his other case, that the defendant’s characterization of the items as tax-exempt was false and done with reckless disregard of the truth. While Harmeyer argued that the allegation of 1400 mischaracterizations was sufficient to plead recklessness, the court could not determine from the complaint whether this was a substantial percentage of the products sold by defendant and therefore could not presume recklessness from that number. The judge dismissed the case with prejudice, and the relator filed a notice of appeal on April 13.
The dismissal is a blow to serial qui tam relators who, with no inside information, bring claims against companies based solely on a presumption that they must be non-compliant with an industry regulation. The Harmeyer appeal will be a case worth following in light of the recent uptick in FCA litigation involving state taxes (previous post here). While a provision in the federal FCA, found at 31 USC § 3729(d), bars actions for false claims arising under the Internal Revenue Code, companies must still consider potential exposure in the jurisdictions that permit FCA suits arising from state tax matters.