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

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
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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.
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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
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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,
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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
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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
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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
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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.
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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
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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
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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
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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
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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.
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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.
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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.
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