Irwin Industrial Tool Co. v. Department of Revenue ( 2010 )


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  •                          Docket No. 109300.
    IN THE
    SUPREME COURT
    OF
    THE STATE OF ILLINOIS
    IRWIN INDUSTRIAL TOOL COMPANY, f/k/a American Tool
    Companies, Inc., as Successor by Merger to ATC Air, Inc., Appellant,
    v. THE ILLINOIS DEPARTMENT OF REVENUE et al., Appellees.
    Opinion filed September 23, 2010.
    JUSTICE KARMEIER delivered the judgment of the court, with
    opinion.
    Chief Justice Fitzgerald and Justices Freeman, Thomas, Kilbride,
    Garman, and Burke concurred in the judgment and opinion.
    OPINION
    This appeal concerns the imposition of a use tax, pursuant to
    section 3 of the Use Tax Act (35 ILCS 105/3 (West 2008)), by the
    defendants, the Illinois Department of Revenue (Department), Brian
    Hamer, as the Director of Revenue, and Alexi Giannoulias, as the
    Illinois State Treasurer, on the purchase price of an airplane acquired
    by ATC Air, Inc. (ATC Air), a former subsidiary of American Tool
    Companies, Inc., now known as Irwin Industrial Tool Company
    (Irwin), the plaintiff. On ATC Air’s behalf, Irwin paid the total
    amount assessed under protest, pursuant to section 2a.1 of the State
    Officers and Employees Money Disposition Act (30 ILCS 230/2a.1
    (West 2008)), and filed a complaint seeking reimbursement. Only
    counts III and IV are relevant to this appeal. In count III, Irwin alleged
    that the use tax imposed did not meet the requirements of the
    commerce clause of the United States Constitution (U.S. Const., art.
    I, §8, cl. 3) because there was no substantial nexus between the
    airplane and Illinois so as to permit the Department to tax the
    airplane’s use in Illinois. Alternatively, in count IV, Irwin argued that
    even if there was a substantial nexus so as to subject the airplane to
    the Illinois use tax, the amount of tax imposed was unconstitutional
    under the commerce clause (U.S. Const., art. I, §8, cl. 3) because it
    was not “fairly apportioned,” i.e., it was based on the airplane’s entire
    purchase price instead of its actual use in Illinois.
    On cross-motions for summary judgment, the circuit court granted
    summary judgment in favor of the Department on count III, finding
    a substantial nexus between the airplane and Illinois so as to subject
    ATC Air to Illinois use tax liability. However, the circuit court
    granted summary judgment in favor of Irwin on count IV, finding that
    the Department could tax only 4% of the airplane’s value based on
    the percentage of time it spent on the ground in Illinois. Both parties
    appealed. The appellate court affirmed as to count III, finding a
    sufficient physical connection between both ATC Air and the airplane
    and Illinois, so as to satisfy the “substantial nexus” requirement and
    allow the Department to impose a use tax on the airplane. However,
    the appellate court reversed as to count IV, finding that the circuit
    court erred in limiting the use tax to 4% of the airplane’s value. For
    the following reasons, we affirm the judgment of the appellate court.
    BACKGROUND
    Irwin is a multinational corporation that manufactures and
    distributes tools through various domestic and foreign subsidiaries.
    During the relevant time period, Irwin’s headquarters was in Lincoln,
    Nebraska, but it also had a corporate office in Hoffman Estates,
    Illinois. Of its seven corporate officers, four had their offices in
    Illinois, its chief executive officer (CEO), chief operating officer
    (COO)/president, chief financial officer (CFO), and corporate vice
    president (VP)/general counsel. In addition, of its four corporate
    directors, two had their offices in Illinois.
    ATC Air was a wholly-owned subsidiary of Irwin, and its sole
    purpose was to provide air transportation services to Irwin and its
    affiliated companies. Irwin’s CEO was ATC Air’s only director, as
    well as its chairman and CEO. ATC Air’s other officers were also
    -2-
    Irwin’s officers. ATC Air’s CEO/only director/chairman, CFO, and
    general counsel all had their offices in Illinois. ATC Air maintained
    all of its business records at its office in Lincoln, Nebraska, and had
    seven employees, all of whom lived and worked in Nebraska.
    When ATC Air bought the airplane at issue here, it paid
    $7,670,710 in addition to trading in its previously owned airplane.
    ATC Air did not pay any sales tax on the purchase. ATC Air’s
    VP/general counsel executed the contract to purchase the airplane
    from a company in Kansas. The contract, promissory note, guaranty,
    security agreement, trade-in agreement, and bill of sale listed ATC
    Air’s address as 2800 West Higgins Road, Hoffman Estates, Illinois,
    which was Irwin’s Illinois office. ATC Air took delivery of the
    airplane in Arkansas and flew it to Lincoln, Nebraska, where it was
    hangared.
    ATC Air registered the airplane with the Federal Aviation
    Administration (FAA) by filing an aircraft bill of sale and an aircraft
    registration application. Both documents listed Irwin’s Illinois office
    address as ATC Air’s address. ATC Air subsequently filed an
    amendment to both documents, changing its address from Irwin’s
    Illinois office to an address in Lincoln, Nebraska.
    ATC Air owned the airplane for approximately two years–from
    April 12, 2000, through April 30, 2002. The airplane was used for
    customer visits, transporting Irwin’s officers and employees from one
    location to another, and matters relating to acquisitions and lawsuits.
    ATC Air charged Irwin for the airplane’s use, and ATC Air reported
    its income on federal and state consolidated income tax returns.
    The airplane was flown on 290 days, flying to locations
    throughout the United States, Canada, and Mexico. On 143 of those
    days, or 49.3% of the flight days, the airplane flew to and/or from
    Illinois. There were a total of 734 flight segments, of which 271,1 or
    36.9%, originated and/or ended in Illinois. The airplane flew to and
    from Illinois so often because Irwin’s principal officers, who were
    1
    Although the appellate opinion states that 269 of the 734 flight
    segments (36.6%) originated or ended at an Illinois airport, according to
    our count based on the flight log, 271 of the 734 flight segments (36.9%)
    originated and/or ended at an Illinois airport.
    -3-
    among the airplane’s main passengers, worked at Irwin’s Illinois
    office. The airplane often flew empty to Illinois where it would pick
    up one of Irwin’s corporate officers, fly him to various locations,
    return him to Illinois, and then fly empty back to its hangar in
    Nebraska.
    ATC Air filed a Nebraska personal property tax return and
    claimed an exemption for the airplane. ATC Air was not subject to
    Nebraska use tax on the airplane because it was an exempt carrier for
    Nebraska sales and use tax purposes. ATC Air did not file a sales/use
    tax return in Illinois on the airplane. After ATC Air sold the airplane,
    Irwin dissolved ATC Air and assumed its liabilities.
    Meanwhile, and unrelated to the dissolution of ATC Air, the
    Department audited the airplane’s purchase and found that ATC Air
    used the airplane in Illinois and was liable to the state for unpaid use
    tax, which it assessed, pursuant to the Use Tax Act, based on the
    airplane’s purchase price. Accordingly, the Department issued a
    notice of tax liability to ATC Air, assessing $536,950 in use tax, $500
    in penalties, and $275,869.94 in accrued interest, for a total of
    $813,319.94. Irwin, as successor by merger to ATC Air, paid the
    amount assessed under protest, pursuant to section 2a.1 of the State
    Officers and Employees Money Disposition Act, and timely filed this
    action. Irwin made a second payment to the Department under protest
    in the amount of $6,596.70, representing additional accrued interest.
    Irwin filed a six-count complaint for declaratory judgment and
    an injunction against the defendants. Only counts III and IV are
    relevant to this appeal. In count III, Irwin alleged that the Department
    should be precluded from imposing a use tax on the airplane under
    the commerce clause of the United States Constitution (U.S. Const.,
    art. I, §8, cl. 3) because the airplane did not have a “substantial
    nexus” to Illinois. In the alternative, in count IV, Irwin argued that
    even if a use tax were permissible, under the commerce clause (U.S.
    Const., art. I, §8, cl. 3), the amount assessed by the Department was
    improper and should have been based on the airplane’s actual use in
    Illinois instead of its total purchase price. Irwin subsequently filed a
    first amended complaint, raising the same arguments but alleging
    additional facts.
    After stipulating to facts and exhibits, including the airplane’s
    flight log, the parties filed cross-motions for summary judgment on
    -4-
    counts III and IV. Irwin argued that the commerce clause barred the
    Department from imposing a use tax because the airplane lacked a
    “substantial nexus” with Illinois. The airplane was hangared and
    maintained outside of Illinois and only made quick and periodic trips
    to the State. The flight log established that it spent only 3.65% of its
    time on the ground in Illinois and only 3.42% of its nights in Illinois.
    In the alternative, Irwin argued that the use tax violated the fair
    apportionment requirement of the commerce clause because it was
    based on the airplane’s purchase price instead of the actual time it
    was used in Illinois.
    In response, the Department argued that the airplane had
    sufficient connections with Illinois to justify a use tax under the
    commerce clause. The flight log established that the airplane was
    flown to and/or from Illinois on 49.3% of the days it was in flight to
    transport Irwin’s Illinois-based executives. The Department argued
    that ATC Air’s and the airplane’s contacts with Illinois were repeated
    and prevalent, and therefore sufficient to support the tax assessment.
    In addition, with respect to the amount taxed, the Department argued
    that, under the plain language of the Use Tax Act, the amount of tax
    is to be determined based upon the airplane’s purchase price or fair
    market value and not the percentage of time it was used in Illinois.
    See 35 ILCS 105/3–10 (West 2008) (“the tax imposed by this Act is
    at the rate of 6.25% of either the selling price or the fair market value,
    if any, of the tangible personal property”). The Department argued
    that in requiring “fairly apportioned” taxes, the commerce clause
    (U.S. Const., art. I, §8, cl. 3) is primarily concerned with preventing
    multiple taxation by different states, which is not an issue in this case
    because the airplane was never taxed in Nebraska or any other state.
    The Department argued that Illinois’ use tax credit for taxes paid to
    another state was sufficient to avoid any threat of multiple taxation.
    Following a hearing, the circuit court granted summary judgment
    in favor of the Department on count III, holding that there was a
    substantial nexus between the airplane and Illinois so as to permit the
    Department to impose a use tax. However, the circuit court granted
    summary judgment in favor of Irwin on count IV, finding that the
    Department could tax only 4% of the airplane’s value based on the
    percentage of time the airplane spent on the ground in Illinois. The
    Department filed a motion to reconsider with respect to count IV,
    -5-
    which was denied. The circuit court issued a finding, pursuant to
    Supreme Court Rule 304(a) (210 Ill. 2d R. 304(a)), that there was no
    just cause for delay in appealing its ruling.
    Both parties appealed. The appellate court affirmed the circuit
    court’s judgment with respect to count III, finding a sufficient
    physical connection between both ATC Air and the airplane with
    Illinois, so as to meet the threshold requirement of “substantial
    nexus” and permit the Department to impose a use tax on the
    airplane. However, the appellate court reversed the judgment with
    respect to count IV, finding that the circuit court erred in limiting the
    use tax to 4% of the airplane’s value. This court allowed Irwin’s
    timely petition for leave to appeal. 210 Ill. 2d R. 315.
    ANALYSIS
    Standard of Review
    This matter comes before us in the context of cross-motions for
    summary judgment. Summary judgment is appropriate “if the
    pleadings, depositions, and admissions on file, together with the
    affidavits, if any, show that there is no genuine issue as to any
    material fact and that the moving party is entitled to a judgment as a
    matter of law.” 735 ILCS 5/2–1005(c) (West 2008). The parties agree
    that there are no genuine issues of material fact raised in their cross-
    motions for summary judgment and that the case may be resolved as
    a matter of law. We review appeals from summary judgment rulings
    de novo. Lazenby v. Mark’s Construction, Inc., 
    236 Ill. 2d 83
    , 93
    (2010).
    The constitutionality of a statute is also reviewed de novo.
    Statutes are presumed to be constitutional, and we must construe a
    statute so as to uphold its constitutionality if it is reasonably possible
    to do so. The party challenging the validity of a statute has the burden
    of clearly establishing a constitutional violation. People v. Graves,
    
    235 Ill. 2d 244
    , 249 (2009).
    Illinois’ Use Tax
    Illinois’ use tax is imposed “upon the privilege of using in this
    State tangible personal property purchased at retail.” 35 ILCS 105/3
    (West 2008). The tax complements the Retailers’ Occupation Tax Act
    (35 ILCS 120/1 et seq. (West 2008)), Illinois’ primary means of
    -6-
    taxing the retail sale of tangible personal property. The primary
    purpose of the use tax is to prevent avoidance of the retailers’
    occupation tax by those making out-of-state purchases and to protect
    Illinois retailers against diversion of business to out-of-state retailers.
    Brown’s Furniture, Inc. v. Wagner, 
    171 Ill. 2d 410
    , 418 (1996). The
    use tax is imposed at the same rate as the retailers’ occupation tax. 35
    ILCS 105/3–10 (West 2008); 35 ILCS 120/2–10 (West 2008).
    Where, as here, the retailer is located outside Illinois and has no
    obligations under the Use Tax Act, the user in Illinois must pay the
    use tax directly to the state. 35 ILCS 105/10 (West 2008). However,
    a user is exempt from paying the use tax for the use of “tangible
    personal property that is acquired outside this State and caused to be
    brought into this State by a person who has already paid a tax in
    another State in respect to the sale, purchase, or use of that property,
    to the extent of the amount of the tax properly due and paid in the
    other State.” 35 ILCS 105/3–55(d)(West 2008).
    Commerce Clause
    The commerce clause of the United States Constitution expressly
    gives Congress the power to “regulate Commerce *** among the
    several States.” U.S. Const., art. I, §8, cl. 3. The Supreme Court has
    consistently interpreted this express grant of congressional authority
    as implicitly containing a negative command, known as the dormant
    commerce clause, which limits the power of the states to tax interstate
    commerce even when Congress has failed to legislate on the subject.
    This construction serves the “Commerce Clause’s purpose of
    preventing a State from retreating into economic isolation or
    jeopardizing the welfare of the Nation as a whole, as it would do if it
    were free to place burdens on the flow of commerce across its borders
    that commerce wholly within those borders would not bear.”
    Oklahoma Tax Comm’n v. Jefferson Lines, Inc., 
    514 U.S. 175
    , 179-
    80, 
    131 L. Ed. 2d 261
    , 268, 
    115 S. Ct. 1331
    , 1335-36 (1995).
    Contemporary dormant commerce clause analysis does not
    prohibit all state taxation of interstate commerce but rather only that
    which is unduly restrictive or discriminatory. See Jefferson 
    Lines, 514 U.S. at 179-83
    , 
    131 L. Ed. 2d
    at 
    268-71, 115 S. Ct. at 1335-37
    . To
    withstand a claim that it has unconstitutionally burdened interstate
    -7-
    commerce, a state tax must satisfy the four-part test enunciated in
    Complete Auto Transit, Inc. v. Brady, 
    430 U.S. 274
    , 
    51 L. Ed. 2d 326
    ,
    
    97 S. Ct. 1076
    (1977). Under Complete Auto, the tax must: (1) be
    applied to an activity with a substantial nexus with the taxing state;
    (2) be fairly apportioned; (3) not discriminate against interstate
    commerce; and (4) be fairly related to the services provided by the
    state. Complete 
    Auto, 430 U.S. at 279
    , 51 L. Ed. 2d at 
    331, 97 S. Ct. at 1079
    .
    In the present case, Irwin argues that the use tax failed to satisfy
    the first two prongs of the Complete Auto test. We begin by
    addressing the substantial nexus requirement.
    Substantial Nexus
    Both the due process and commerce clauses require a definite
    link, or minimum connection, between a state and the person,
    property, or transaction it seeks to tax. In the case of a tax on an
    activity, there must be a connection to the activity itself, rather than
    a connection only to the individual or corporation the state seeks to
    tax. The state’s power to tax an individual’s or corporation’s activity
    is justified by the protection, opportunities, and benefits the state
    confers on that activity. Allied-Signal, Inc. v. Director, Division of
    Taxation, 
    504 U.S. 768
    , 777-78, 
    119 L. Ed. 2d 533
    , 545-46, 112 S.
    Ct. 2251, 2258 (1992).
    In order to satisfy the substantial nexus requirement in the sales
    and use tax context, physical presence within the taxing state is
    necessary. Quill Corp. v. North Dakota, 
    504 U.S. 298
    , 317-18, 
    119 L. Ed. 2d 91
    , 110, 
    112 S. Ct. 1904
    , 1916 (1992). Quill reaffirmed that
    the “slightest” physical presence within a state is not enough to
    establish substantial nexus. 
    Quill, 504 U.S. at 315
    n.8, 119 L. Ed. 2d
    at 108 
    n.8, 112 S. Ct. at 1914 
    n.8. Left unclear after Quill, however,
    was the extent of physical presence in a state necessary to establish
    more than a “slight” physical presence. In Brown’s Furniture, we
    addressed the issue and concluded that the physical presence need not
    be “substantial” but must be more than a “slightest presence.”
    Brown’s 
    Furniture, 171 Ill. 2d at 424
    .
    With the foregoing principles and decisions in mind, we now
    consider whether ATC Air and the airplane at issue had a sufficient
    -8-
    physical presence in Illinois to establish a substantial nexus with the
    state. Even though the airplane was hangared and maintained outside
    of Illinois, its flight log established that during the relevant two-year
    time period, it made a total of 2722 take-offs or landings at Illinois
    airports, which included flights in and/or out of Illinois on nearly half
    of the days on which any flights were made. In fact, the flight log
    established that 36.9% of the total flight segments for the airplane
    were logged on flights to and/or from Illinois. In addition, the airplane
    was present overnight at one of Illinois’ airports on 25 occasions.
    The airplane’s frequent physical presence in Illinois, through the
    many take-offs and landings from Illinois runways, as well as the
    nights that it spent in Illinois, was not coincidental, but was inherent
    in its basic purpose and function in this state. The airplane was owned
    by ATC Air, whose corporate purpose was to provide transportation
    services to Irwin’s officers and employees. Thus, the airplane
    frequently and regularly flew to Illinois at the behest of Irwin’s
    corporate officers (four of whom had their offices in Illinois) to
    transport them to and from destinations throughout the United States.
    Moreover, when the airplane was initially purchased, the purchase
    agreement, as well as the bill of sale and registration application filed
    with the FAA, all listed Irwin’s Illinois corporate office as ATC Air’s
    primary address.
    In Director of Revenue v. Superior Aircraft Leasing Co., 
    734 S.W.2d 504
    (Mo. 1987), the Missouri Supreme Court addressed a
    case with facts very similar to those in the present case. There, a
    Missouri corporation, with its principal place of business in Ohio,
    purchased and took delivery of an airplane in Kansas. The airplane
    was hangared in Ohio. When the Missouri Department of Revenue
    imposed a use tax on the airplane’s purchase, the corporation objected
    on commerce clause grounds. Superior Aircraft 
    Leasing, 734 S.W.2d at 505
    . The Missouri Supreme Court held that, although the airplane
    was hangared and maintained in Ohio, there were sufficient contacts
    with Missouri to satisfy the substantial nexus requirement. The court
    2
    Although the appellate opinion states that the airplane made 290 take-
    offs and landings at Illinois airports, according to our count based on the
    flight log, the airplane actually made 272 take offs or landings (136 of
    each) at Illinois airports.
    -9-
    noted that 17.7% of the airplane’s total flight hours were logged on
    flights to Missouri for the corporation’s business. The time spent in
    Missouri for each of those trips ranged from several days to
    approximately a week. Superior Aircraft 
    Leasing, 734 S.W.2d at 507
    .
    Irwin attempts to distinguish Superior Aircraft Leasing by
    pointing out that the airplane in that case occasionally spent several
    days or a week on the ground in Missouri. However, the time the
    airplane spent on the ground in Missouri was much less significant to
    the Superior Aircraft court’s decision than the time the airplane spent
    in flight between Missouri and other destinations, which
    demonstrated the significance of the airplane’s presence inside the
    state, as it related to its purpose, function, and use. Similarly, in the
    present case, the time the airplane spent on the ground in Illinois is
    much less significant to our decision than the time the airplane spent
    in flight between Illinois and other destinations, which demonstrates
    the significance of the airplane’s presence inside Illinois, as it relates
    to its purpose, function, and use. Moreover, in the present case, in
    addition to the time spent in take-offs and landings on Illinois
    runways, the airplane spent 25 full nights in Illinois.
    Irwin also attempts to distinguish Superior Aircraft Leasing by
    arguing that, in that case, the taxpayer was a Missouri corporation and
    therefore had obvious contacts with Missouri so as to meet the
    substantial nexus requirement, whereas, in this case, ATC Air was not
    an Illinois corporation. We find this distinction unpersuasive. First,
    we note that, although Superior Aircraft Leasing was a Missouri
    corporation, its principal place of business was in Ohio, and the
    airplane was hangared and maintained there. Similarly, here, ATC
    Air’s principal place of business was in Nebraska, and the airplane
    was hangared and maintained there. In addition, although ATC Air
    was not an Illinois corporation, the record establishes that ATC Air
    had a demonstrated physical presence in Illinois. ATC Air’s sole
    director, and its chairman and CEO, had his office in Illinois, as did
    its CFO and its general counsel. Moreover, ATC Air did a substantial
    portion of its business in Illinois, in that its pilot-employees
    frequently and regularly flew its airplane into and out of Illinois to
    transport Irwin’s corporate officers and directors to and from their
    offices in Illinois.
    Accordingly, we find that both ATC Air and the airplane had
    -10-
    more than a “slight” physical presence in Illinois and met Complete
    Auto’s substantial nexus requirement so as to allow the Department
    to impose a use tax on the airplane. We thus proceed to the fair
    apportionment argument.
    Fair Apportionment
    The primary purpose of the fair apportionment prong of the
    Complete Auto test is to prevent multiple taxation by “ensur[ing] that
    each State taxes only its fair share of an interstate transaction.”
    Goldberg v. Sweet, 
    488 U.S. 252
    , 260-61, 
    102 L. Ed. 2d 607
    , 616,
    
    109 S. Ct. 582
    , 588 (1989). However, the Supreme Court has long
    held that the Constitution imposes no single apportionment formula
    on the states and has therefore declined to undertake the essentially
    legislative task of establishing a single constitutionally mandated
    method of taxation. Instead, the Court has determined whether a tax
    is fairly apportioned by examining whether the tax is internally and
    externally consistent. 
    Goldberg, 488 U.S. at 261
    , 102 L. Ed. 2d at
    
    616, 109 S. Ct. at 588-89
    . “To be internally consistent, a tax must be
    structured so that if every State were to impose an identical tax, no
    multiple taxation would result.” 
    Goldberg, 488 U.S. at 261
    , 102 L.
    Ed. 2d at 
    617, 109 S. Ct. at 589
    , citing Container Corp. of America
    v. Franchise Tax Board, 
    463 U.S. 159
    , 169, 
    77 L. Ed. 2d 545
    , 556,
    
    103 S. Ct. 2933
    , 2942 (1983). “The external consistency test asks
    whether the State has taxed only that portion of the revenues from the
    interstate activity which reasonably reflects the in-state component of
    the activity being taxed.” 
    Goldberg, 488 U.S. at 262
    , 102 L. Ed. 2d
    at 
    617, 109 S. Ct. at 589
    , citing Container Corp., 463 U.S at 
    169-70, 77 L. Ed. 2d at 556
    , 103 S. Ct. at 2942. The Court thus examines “the
    in-state business activity which triggers the taxable event and the
    practical or economic effect of the tax on that interstate activity.”
    
    Goldberg, 488 U.S. at 262
    , 102 L. Ed. 2d at 
    617, 109 S. Ct. at 589
    .
    In the present case, Irwin concedes that the use tax imposed on the
    full value of the airplane is internally consistent because the Use Tax
    Act contains an exemption from use tax for tangible personal property
    that has been subjected to sales or use taxes in other states (see 35
    ILCS 105/3–55(d) (West 2008)). However, Irwin argues that the use
    tax is not externally consistent. Irwin argues that because the airplane
    was hangared and maintained in Nebraska, and traveled to more than
    -11-
    30 states and jurisdictions, spending less than 4% of its total time on
    the ground in Illinois, the tax on the airplane’s full value is not fairly
    apportioned. For the reasons that follow, we disagree.
    The Supreme Court has consistently approved taxation of sales
    without any division of the tax base among different states and has
    instead held such taxes properly measurable by the gross charge for
    the purchase. Jefferson 
    Lines, 514 U.S. at 186
    , 
    131 L. Ed. 2d
    at 
    272, 115 S. Ct. at 1339
    . Because a use tax is generally levied to
    compensate the taxing state for its incapacity to reach the
    corresponding sale, it is commonly paired with a sales tax and is
    applicable only when no sales tax has been paid or subject to a credit
    for any such tax paid. Jefferson 
    Lines, 514 U.S. at 193-94
    , 
    131 L. Ed. 2d
    at 
    277, 115 S. Ct. at 1342-43
    . The District of Columbia and 44 of
    the 45 states that impose sales and use taxes allow such a credit or
    exemption for similar taxes paid to other states. Jefferson 
    Lines, 514 U.S. at 194
    , 
    131 L. Ed. 2d
    at 
    277, 115 S. Ct. at 1343
    .
    These credit or exemption provisions create a national system
    where the state of purchase or first use imposes the tax. No other state
    taxes the transaction unless no prior tax has been imposed or if the
    tax rate of the prior taxing state is less, in which case the subsequent
    taxing state imposes a tax measured only by the differential rate.
    Jefferson 
    Lines, 514 U.S. at 194
    , 
    131 L. Ed. 2d
    at 
    277-78, 115 S. Ct. at 1343
    , quoting KSS Transportation Corp. v. Baldwin, 
    9 N.J. Tax 273
    , 285 (1987).
    The Supreme Court has indicated that such credit provisions
    resolve the problem of multiple taxation and satisfy the fair
    apportionment requirement. See, e.g., 
    Goldberg, 488 U.S. at 264-65
    ,
    102 L. Ed. 2d at 
    618-19, 109 S. Ct. at 590-91
    (in holding that a tax on
    the full amount of interstate telephone calls did not violate the
    external consistency requirement, the Court noted that “[t]o the extent
    that other States’ telecommunications taxes pose a risk of multiple
    taxation, the credit provision contained in the Tax Act operates to
    avoid actual multiple taxation”); D.H. Holmes Co. v. McNamara, 
    486 U.S. 24
    , 31, 
    100 L. Ed. 2d 21
    , 28, 
    108 S. Ct. 1619
    , 1623-24 (1988)
    (“We have no doubt that the second *** element[ ] of [Complete Auto
    is] satisfied. The Louisiana taxing scheme is fairly apportioned, for
    it provides a credit against its use tax for sales taxes that have been
    paid in other States”); Tyler Pipe Industries, Inc. v. Washington State
    -12-
    Department of Revenue, 
    483 U.S. 232
    , 245 n.13, 
    97 L. Ed. 2d 199
    ,
    212 n.13, 
    107 S. Ct. 2810
    , 2819 n.13 (1987) (“Many States provide
    tax credits that alleviate or eliminate the potential multiple taxation
    that results when two or more sovereigns have jurisdiction to tax parts
    of the same chain of commercial events”); Henneford v. Silas Mason
    Co., 
    300 U.S. 577
    , 
    81 L. Ed. 814
    , 
    57 S. Ct. 524
    (1937) (upholding a
    use tax that contained an exemption for property that had already
    been subject to a sales or use tax in another state).
    Accordingly, Illinois courts have held, as the appellate court did
    here, that such credit or exemption provisions resolve the problem of
    multiple taxation and satisfy the fair apportionment requirement. See,
    e.g., Goldberg v. Johnson, 
    117 Ill. 2d 493
    , 503 (1987) (finding that
    Illinois’ credit against any tax due from a taxpayer who had paid two
    or more taxes on the same interstate telecommunication cured any
    possible constitutional infirmity resulting from multiple taxation);
    American River Transportation Co. v. Bower, 
    351 Ill. App. 3d 208
    ,
    213 (2004) (finding Illinois’ use tax fairly apportioned because no tax
    was paid in another state, and if a tax had been paid in another state,
    the Use Tax Act would exempt the taxpayer from the Illinois use tax
    for any amounts that had been paid); Square D Co. v. Johnson, 
    233 Ill. App. 3d 1070
    , 1080 (1992) (same).
    In Archer Daniels Midland Co. v. Department of Revenue, 170 Ill.
    App. 3d 1014 (1988), a case factually similar to the present case, the
    appellate court rejected a Delaware corporation’s argument that
    Illinois’ use tax should not have been based on the full value of three
    airplanes purchased outside of Illinois but instead that the tax should
    have been based upon the proportion of take-offs and landings from
    or in Illinois compared to total flight take-offs and landings. Archer
    Daniels 
    Midland, 170 Ill. App. 3d at 1015
    , 1022. The appellate court
    further rejected the corporation’s argument that flight segments that
    had no connection with Illinois should not have been taxed, because
    they were not related to any service provided by Illinois, and taxing
    the full purchase price in essence taxed the corporation for activities
    unrelated to the state. Archer Daniels 
    Midland, 170 Ill. App. 3d at 1022
    . The appellate court agreed with the Department that Illinois’
    use tax on the full value of the airplanes was fairly apportioned
    because the statute exempts property where a sales or use tax has
    been paid in another state. Archer Daniels Midland, 170 Ill. App. 3d
    -13-
    at 1022. In holding that the Department could impose a use tax on the
    full value of the airplanes, the appellate court explained:
    “[The corporation] has not claimed that it paid taxes on its
    planes elsewhere; therefore, it has not been subject to
    multistate taxation. The sales and use taxes are
    complementary and equalize the burden on interstate and
    intrastate transactions. The sales tax is measured by the
    purchase price of an item, without regard to the amount of use
    the item will receive, and so is the use tax. Nor is the use tax
    a precise charge for benefits provided by the State. [The
    corporation] enjoys the protection of Illinois laws, access to
    its legal system, and innumerable other services. Because [the
    corporation] receives all these benefits, it is properly subject
    to taxation in this State.” Archer Daniels Midland, 170 Ill.
    App. 3d at 1022-23.
    Similarly, in Frank W. Whitcomb Construction Corp. v.
    Commissioner of Taxes, 
    144 Vt. 466
    , 467-68, 
    479 A.2d 164
    , 165
    (1984), the Vermont Supreme Court upheld the imposition of
    Vermont’s use tax on the full value of a New Hampshire owned
    airplane that spent 17% of its flight time in Vermont. In doing so, the
    court overruled the circuit court’s decision to apportion the taxpayer’s
    liability based on the amount of time the airplane spent in Vermont.
    Frank W. Whitcomb Construction 
    Corp., 144 Vt. at 467
    , 479 A.2d at
    165. The court explained:
    “The Commerce Clause does not require an
    apportionment in addition to a tax credit. The rule of
    Complete Auto [citation] requiring a tax on interstate
    commerce to be ‘fairly apportioned’ is satisfied here. The
    state has provided a tax credit in lieu of apportionment. This
    credit, not unlike a proportionate tax, eliminates the
    possibility of cumulative use tax liability. The Vermont
    legislature has chosen not to incorporate apportionment
    within the use tax scheme. This Court, therefore, is without
    power to impose such a requirement. [Citation.] We agree
    with the Commissioner that apportionment of this tax is
    neither constitutionally required nor legislatively authorized.”
    Frank W. Whitcomb Construction 
    Corp., 144 Vt. at 473
    , 479
    A.2d at 168.
    -14-
    Following the same rationale, other jurisdictions throughout the
    United States have found use taxes fairly apportioned where a system
    of credits is in place. See, e.g., Ex Parte Fleming Foods of Alabama,
    Inc., 
    648 So. 2d 577
    (Ala. 1994); Service Merchandise Co. v. Arizona
    Department of Revenue, 
    188 Ariz. 414
    , 
    937 P.2d 336
    (App. 1996);
    Pledger v. Brunner & Lay, Inc., 
    308 Ark. 512
    , 
    825 S.W.2d 599
    (1992); Yamaha Corp. of America v. State Board of Equalization, 
    73 Cal. App. 4th 338
    , 
    86 Cal. Rptr. 2d 362
    (1999); General Motors
    Corp. v. City & County of Denver, 
    990 P.2d 59
    (Colo. 1999); In re
    Tax Appeal of Taylor Crane & Rigging, Inc., 
    22 Kan. App. 2d 27
    ,
    
    913 P.2d 204
    (1995); Wabash Power Equipment Co. v. Lindsey,
    2003–2196 (La. App. 1 Cir. 9/17/04); 
    897 So. 2d 621
    ; Chesapeake &
    Potomac Telephone Co. of Maryland v. Comptroller of the Treasury,
    Retail Sales Tax Division, 
    317 Md. 3
    , 
    561 A.2d 1034
    (App. 1989);
    Kellogg Co. v. Department of Treasury, 
    204 Mich. App. 489
    , 
    516 N.W.2d 108
    (1994); Miller v. Commissioner of Revenue, 
    359 N.W.2d 620
    (Minn. 1985); Tennessee Gas Pipeline Co. v. Marx, 
    594 So. 2d 615
    (Miss. 1992); Director of Revenue v. Superior Aircraft Leasing
    Co., 
    734 S.W.2d 504
    (Mo. 1987); KSS Transportation Corp. v.
    Baldwin, 
    9 N.J. Tax 273
    (1987); PPG Industries, Inc. v. Tracy, 
    74 Ohio St. 3d 449
    , 1996–Ohio–116 ; House of Lloyd v. Commonwealth,
    
    684 A.2d 213
    (Pa. 1996).
    In opposition to this overwhelming weight of authority, Irwin
    cites to only one Alabama case, Boyd Brothers Transportation, Inc.
    v. State Department of Revenue, 
    976 So. 2d 471
    , 482 (Ala. App.
    2007), where the appellate court held that an unapportioned flat use
    tax on the value of trucks discriminated against interstate commerce.
    We find, however, that the appellate court in Boyd Brothers deviated
    from a decision of its own supreme court, which expressly rejected an
    apportionment claim where a credit system was in place. See Ex
    Parte Fleming Foods of Alabama, Inc v. Department of Revenue, 
    648 So. 2d 577
    , 579 (Ala. 1994) (“ ‘The provision of a credit in a use tax
    statute for sales or use tax paid to another state makes a use tax
    externally consistent, as much as such a provision avoids actual
    multiple taxation’ ” (emphasis in original)), quoting 68 Am. Jur. 2d
    Sales & Use Tax §188 (1973). Moreover, while Boyd Brothers was
    decided after Fleming Foods, the decision did not even address the
    issue of credit provisions in lieu of apportionment.
    -15-
    Consequently, we conclude that Illinois’ use tax based on the full
    purchase price of the airplane is externally consistent and thus fairly
    apportioned because no tax has been paid on the airplane to any other
    state, and even if it had been, the Use Tax Act provides an exemption
    for sales or use taxes paid to other states. Accordingly, we find that
    the appellate court properly reversed that portion of the circuit court’s
    judgment limiting the use tax to 4% of the airplane’s purchase price.
    CONCLUSION
    For the foregoing reasons, we affirm the judgment of the appellate
    court.
    Affirmed.
    -16-
    

Document Info

Docket Number: 109300 Rel

Filed Date: 9/23/2010

Precedential Status: Precedential

Modified Date: 3/3/2016

Authorities (23)

Oklahoma Tax Commission v. Jefferson Lines, Inc. , 115 S. Ct. 1331 ( 1995 )

D. H. Holmes Co., Ltd. v. McNamara , 108 S. Ct. 1619 ( 1988 )

People v. Graves , 235 Ill. 2d 244 ( 2009 )

C & P TELEPHONE v. Comptroller , 317 Md. 3 ( 1989 )

Frank W. Whitcomb Construction Corp. v. Commissioner of ... , 144 Vt. 466 ( 1984 )

Director of Revenue v. Superior Aircraft Leasing Co. , 1987 Mo. LEXIS 318 ( 1987 )

Yamaha Corp. of America v. State Board of Equalization , 73 Cal. App. 4th 338 ( 1999 )

Henneford v. Silas Mason Co. , 57 S. Ct. 524 ( 1937 )

Gen. Motors v. CITY & CTY. OF DENVER , 990 P.2d 59 ( 1999 )

Complete Auto Transit, Inc. v. Brady , 97 S. Ct. 1076 ( 1977 )

BOYD BROS. TRANS. v. State Dept. of Revenue , 2007 Ala. Civ. App. LEXIS 413 ( 2007 )

Service Merchandise Co. v. Arizona Department of Revenue , 188 Ariz. 414 ( 1996 )

Kellogg Co. v. Department of Treasury , 204 Mich. App. 489 ( 1994 )

Ex Parte Fleming Foods of Alabama, Inc. , 648 So. 2d 577 ( 1994 )

Miller v. Commissioner of Revenue , 359 N.W.2d 620 ( 1985 )

In Re Tax Appeal of Taylor Crane & Rigging, Inc. , 22 Kan. App. 2d 27 ( 1995 )

Wabash Power Equipment Co. v. Lindsey , 897 So. 2d 621 ( 2004 )

Tennessee Gas Pipeline Co. v. Marx , 594 So. 2d 615 ( 1992 )

Quill Corp. v. North Dakota Ex Rel. Heitkamp , 112 S. Ct. 1904 ( 1992 )

Brown's Furniture, Inc. v. Wagner , 171 Ill. 2d 410 ( 1996 )

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