City of Chi. v. City of Kankakee

• Citation: 2019 IL 122878,433 Ill.Dec. 73,131 N.E.3d 112
• Decision Date: 21 March 2019
• Docket Number: Docket No. 122878
• Parties: The CITY OF CHICAGO et al., Appellees, v. The CITY OF KANKAKEE et al., Appellants.
• Court: Supreme Court of Illinois

2019 IL 122878

131 N.E.3d 112

433 Ill.Dec. 73

The CITY OF CHICAGO et al., Appellees,

v.The CITY OF KANKAKEE et al., Appellants.

Docket No. 122878

Supreme Court of Illinois.

Opinion filed March 21, 2019

Scott C. Solberg, of Eimer Stahl LLP, of Chicago, for appellant City of Kankakee.

James A. Murphy, of Mahoney, Silverman & Cross, LLC, of Joliet, for appellant Village of Channahon.

Scott A. Browdy and Brian L. Browdy, of Ryan Law Firm, LLP, of Chicago, for appellant Inspired Development LLC.

Steven P. Blonder, of Much Shelist, P.C., of Chicago, for appellants MTS Consulting, LLC, et al.

Edward N. Siskel, Acting Corporation Counsel, of Chicago (Benna Ruth Solomon, Myriam Zreczny Kasper, and Julian N. Henriques Jr., Assistant Corporation Counsel, of counsel), for appellee City of Chicago.

Michael Lorge, Corporation Counsel, of Skokie (James McCarthy, Assistant Corporation Counsel, of counsel), for appellee Village of Skokie.

Kimball R. Anderson, Loren G. Rene, and Cara A. Lawson, of Winston & Strawn LLP, Mark P. Rotatori and Morgan R. Hirst, of Jones Day, Charles K. Schafer and Scott J. Heyman, of Sidley Austin LLP, Catherine A. Battin, of McDermott, Will & Emery LLP, and Daniel M. Blouin and William I. Goldberg, of Seyfarth Shaw LLP, all of Chicago, for amicus curiae Internet Retailers.

Gino L. DiVito, Daniel I. Konieczny, and Jordan E. Wilkow, of Tabet DiVito & Rothstein LLC, and Timothy L. Bertschy, John P. Heil Jr., and Brett M. Mares, of Heyl, Royster, Voelker & Allen, P.C., both of Chicago, for amicus curiae Regional Transportation Authority.

JUSTICE THEIS delivered the judgment of the court, with opinion.

¶ 1 Plaintiff municipalities brought this cause of action against defendant municipalities and brokers seeking to recover tax revenue purportedly owed to them under the Use Tax Act ( 35 ILCS 105/1 et seq. (West 2016) ). The circuit court of Cook County dismissed plaintiffs' claims with prejudice and denied plaintiffs leave to file a fourth amended complaint. The appellate court reversed and remanded. 2017 IL App (1st) 153531, ¶ 45, 417 Ill.Dec. 126, 87 N.E.3d 410. For the reasons that follow, we reverse the judgment of the appellate court and affirm the judgment of the circuit court.

¶ 2 BACKGROUND

¶ 3 This case concerns two types of Illinois state taxes: a "retailers occupation tax," more commonly known as "sales tax," authorized by the Retailers' Occupation Tax Act (ROTA) ( 35 ILCS 120/1 et seq. (West 2016) ), and the "use tax" authorized by the Use Tax Act (UTA) ( 35 ILCS 105/1 et seq. (West 2016) ). Sales tax is imposed on the sale of tangible personal property purchased in Illinois. 35 ILCS 120/2 (West 2016). In contrast, use tax is imposed on the privilege of using in Illinois tangible personal property purchased at retail from a retailer outside the state. 35 ILCS 105/3 (West 2016). Pursuant to UTA, retailers who have a sufficient physical presence in Illinois and have out-of-state facilities from which Internet, telephone, and mail order sales are made of tangible personal property to be used in Illinois must collect a use tax from the purchaser, and that tax is remitted to the Illinois Department of Revenue (IDOR). The purpose of the use tax is " ‘primarily to prevent avoidance of [the sales] tax by people making out-of-State purchases, and to protect Illinois merchants against such diversion of business to retailers outside Illinois.’ " Performance Marketing Ass'n v. Hamer , 2013 IL 114496, ¶ 3, 375 Ill.Dec. 762, 998 N.E.2d 54 (quoting Klein Town Builders, Inc. v. Department of Revenue , 36 Ill.2d 301, 303, 222 N.E.2d 482 (1966) ).

¶ 4 Under the respective statutes, the general rate set in Illinois for both sales tax and use tax is 6.25% of the sale price of the item with 5% allocated to the State. 35 ILCS 105/3-10 (West 2016) ; 35 ILCS 120/2-10 (West 2016) ; 30 ILCS 105/6z-18 (West 2016). At issue here is a dispute about what happens to the remaining 1.25%. Under ROTA, the remaining amount is distributed geographically to the municipality (1%) and county (0.25%) where the sale of the item actually occurred. 30 ILCS 105/6z-18 (West 2016).

¶ 5 The distribution of funds under UTA is more complicated. Unlike the local share of sales tax, which is distributed entirely where the sale takes place, under UTA, the remaining 1.25% share of the use tax is distributed in the following percentages: 20% of the fund goes to Chicago, 10% to the Regional Transportation Authority Occupation and Use Tax Replacement Fund (RTA Fund), 0.6% to the Madison County Mass Transit District, and $ 3.15 million to the Build Illinois Fund. The balance of the fund is distributed to all other municipalities (except Chicago) based on their proportionate share of the state population. Id. § 6z-17. Consequently, a municipality receives a larger amount from a local sale subject to the sales tax than from a comparable sale subject to the use tax.

¶ 6 In 2011, this litigation began as three separate cases filed by the Regional Transportation Authority (RTA) (No. 11 CH 29744), the City of Chicago (No. 11 CH 29745), and Cook County (No. 11 CH 34266). The cases were consolidated by the trial court. This appeal concerns only the case brought by the City of Chicago and the Village of Skokie, which was added as a plaintiff in 2012.

¶ 7 In December 2013, plaintiffs filed their third amended complaint against the City of Kankakee and the Village of Channahon (municipal defendants) and MTS Consulting, LLC, Inspired Development, Minority Development Co., Corporate Funding Solutions, and Capital Funding Solutions (broker defendants). Plaintiffs claimed that defendants were unjustly enriched through a scheme under which the situs of retail sales was misreported, which deprived plaintiffs of their statutory share of the Illinois use tax.

¶ 8 Plaintiffs alleged in the third amended complaint that beginning in 2000, in order to convince retailers to make sales that would be sourced to their towns, Kankakee and Channahon, either directly or through the broker defendants, entered into rebate agreements with retailers under which the municipalities would return a portion of the sales tax to the retailer. Plaintiffs further alleged that defendants used the rebate agreements to divert tax revenue from plaintiffs through a wrongful "use tax-sales tax swap." According to plaintiffs, defendants encouraged and assisted Internet retailers to manipulate the system by misreporting the situs of the sale in order to swap the state use tax for the state sales tax.

¶ 9 Plaintiffs further alleged that little or no meaningful sales activity took place in the offices maintained in Kankakee and Channahon on behalf of the Internet retailers. They were maintained for the sole purpose of having the Internet retailers obtain a tax rebate from the municipality. Plaintiffs alleged that, although the Internet retailers' acceptance of customer orders occurred outside of Illinois, they reported to IDOR that sales took place in Kankakee or Channahon, thus subjecting those sales to sales tax, rather than use tax. These activities, plaintiffs claimed, had the effect of wrongfully taking what should have been plaintiffs' local share of the use tax and diverting it to defendant municipalities in the form of their share of the sales tax, thereby unjustly enriching defendants.

¶ 10 Count I of the two-count third amended complaint was against defendants for unjust enrichment. Plaintiffs sought a declaration that certain Internet retailers were subject to the state use tax, rather than the state sales tax; the imposition of a constructive trust on all sales tax revenue received by Kankakee, Channahon, and the brokers as a result of the Internet retailers being subject to the state sales tax rather than the state use tax; and compensatory damages in the amount of use tax revenue plaintiffs lost as a result of the use tax-sales tax swap.¹

¶ 11 In April 2015, plaintiffs sought leave to file a fourth amended complaint. The proposed fourth amended complaint asserted claims against four groups of defendants: the previously identified municipal defendants; the broker defendants;² 11 Internet retailer defendants;³ and three groups of operating and procurement company defendants.⁴ Counts I, III, V, and VII of the proposed fourth amended complaint sought declaratory relief. Specifically, plaintiffs sought a declaration that certain sales of Internet retailer defendants and certain purchases of operating procurement company defendants were subject to state use tax. Counts II, IV, VI, and VIII raised a claim for unjust enrichment and sought a constructive trust and restitution. In those counts, plaintiffs sought to impose a constructive trust on all sales tax revenue received by the municipal and broker defendants as a result of the purported unjust enrichment, an equitable accounting, and the return of the property to plaintiffs as restitution from the municipal and broker defendants.

¶ 12 On October 9, 2015, the trial court denied plaintiffs' motion for leave to file their fourth amended complaint and dismissed plaintiffs' claims with prejudice. The trial court found that plaintiffs' claims for declaratory action failed because the conduct of which plaintiffs complained ceased in 2014. Thus, the purpose of the declaratory action—to allow the court to address a controversy after a dispute has arisen but before action is taken by the parties—would not be served.

¶ 13 As to plaintiffs' claims against the municipal defendants, the trial court dismissed them because it found that IDOR has exclusive jurisdiction over tax distribution cases. It held that plaintiffs were attempting to judicially preempt IDOR's authority to audit tax payments and to redistribute amounts collected, by attempting to bypass IDOR, which has both the authority and the expertise to do that job. The trial court also found that a ruling in plaintiffs' favor would require defendant municipalities to repay IDOR the local share that purportedly was...