Irwin Indus. Tool Co. v. Ill. Dept. of Revenue
| Decision Date | 23 September 2010 |
| Docket Number | No. 109300.,109300. |
| Citation | 938 N.E.2d 459,345 Ill.Dec. 20,238 Ill.2d 332 |
| Parties | 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. |
| Court | Illinois Supreme Court |
David A. Hughes, Jennifer A. Zimmerman, Horwood Marcus & Berk Chtrd, of Chicago, for appellant.
Lisa Madigan, Atty. Gen., of Springfield (Michael A. Scodro, Solicitor General, Paul Berks, Asst. Atty. General, of Chicago, of counsel), for appellees.
[345 Ill.Dec. 22, 238 Ill.2d 333]
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
[345 Ill.Dec. 23, 938 N.E.2d 462]
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 airplaneand 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.
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 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
[345 Ill.Dec. 24, 938 N.E.2d 463]
contract, promissory note, guaranty, security agreement, trade-in agreement, and bill of sale listedATC 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 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
[345 Ill.Dec. 25, 938 N.E.2d 464]
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 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) (...
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