Irwin Indus. Tool v. Department of Revenue

• Decision Date: 11 September 2009
• Docket Number: No. 08-0750.,No. 1-07-3331.,1-07-3331.,08-0750.
• Parties: IRWIN INDUSTRIAL TOOL CO., f/k/a American Tool Companies, Inc., as Successor By Merger to ATC Air, Inc., Plaintiff-Appellee v. The DEPARTMENT OF REVENUE, Brian Hamer, as Director of Revenue, and Alexei Giannoulias, as State Treasurer, Defendants-Appellants.
• Court: United States Appellate Court of Illinois

915 N.E.2d 789

IRWIN INDUSTRIAL TOOL CO., f/k/a American Tool Companies, Inc., as Successor By Merger to ATC Air, Inc., Plaintiff-Appellee v. The DEPARTMENT OF REVENUE, Brian Hamer, as Director of Revenue, and Alexei Giannoulias, as State Treasurer, Defendants-Appellants.

No. 1-07-3331.

No. 08-0750.

Appellate Court of Illinois, First District, Sixth Division.

September 11, 2009.

Lisa Madigan, Attorney General, State of Illinois, Michael A. Scodro, Solicitor General and Diane M. Potts, Assistant Attorney General, Chicago, IL, for Defendants-Appellants.

David A. Hughes, Horwood Marcus & Berk Chartered, Chicago IL, for Plaintiff-Appellee.

Justice JOSEPH GORDON delivered the opinion of the court:

This appeal concerns an attempt by the defendants, the Illinois Department of Revenue (hereinafter the Department), Brian Hamer, as the Director of Revenue, and Alexei Giannoulias, as the Illinois State Treasurer, to impose a use tax, penalty and interest on the purchase price of an airplane acquired by the plaintiff, ATC Air, Inc. (hereinafter ATC Air), a former subsidiary of Irwin Industrial Tool Co., formerly known as American Tool Companies, Inc. (hereinafter Irwin). The plaintiff owned the aircraft in question from April 12, 2000, through April 30, 2002 (the relevant time period). Following an audit, the Department issued a notice of tax liability to the plaintiff, assessing $536,950 in taxes based upon the purchase price of the airplane, in addition to $500 in late filing penalties, and $275,869.94 in accrued interest pursuant to section 3 of the Illinois Use Tax Act (UTA) (35 ILCS 105/3 (West 2006)), for a total of $813,319.94. The plaintiff paid the total amount owed to the Department, but did so under protest pursuant to the State Officers and Employees Money Disposition Act (Protest Monies Act) (30 ILCS 230/2a.1 (West 2006)), filing a six-count complaint with the circuit court seeking reimbursement. Only counts III and IV of the plaintiff's six-count complaint are relevant for purposes of this appeal. The remaining counts are still before the trial court. In count III, the plaintiff asserted that the use tax imposed by the Department did not meet the requirements of article I, section 8 of the Constitution, i.e., the commerce clause (U.S. Const., art. I, § 8) because there was no substantial nexus between the airplane and Illinois so as to permit the Department to tax the plaintiff's use of the aircraft in this state. Alternatively, in count IV, the plaintiff argued that even if there was a substantial nexus so as to subject the plaintiff to the Illinois use tax, the tax amount imposed by the Department was unconstitutional under the commerce clause (U.S. Const., art. I, § 8) because it was not "fairly apportioned," i.e., it was based on the entire purchase price of the airplane, rather than on the plaintiff's actual use of the airplane in Illinois.

After agreeing to stipulated facts, the parties filed cross-motions for summary judgment on counts III and IV of the plaintiff's complaint. The circuit court granted the Department's summary judgment motion on count III, holding that a substantial nexus existed between the aircraft and Illinois so as to subject the plaintiff, as the owner of the aircraft, to Illinois tax liability. The circuit court then went on to grant the plaintiff's motion for summary judgment on count IV, finding that the Department could tax only 4% of the airplane's value based on the percentage of time that the airplane spent on the ground in Illinois. The circuit court subsequently denied the Department's motion to reconsider its decision with respect to count IV, and additionally found that, pursuant to Supreme Court Rule 304(a) (210 Ill.2d R. 304(a)), there was no just cause for delay in appealing its ruling. Both parties now appeal contending that summary judgment on both counts should have been made in their favor. For the reasons that follow, we affirm in part and reverse in part.

I. BACKGROUND

1. Stipulated Facts

The record below reveals the following stipulated and undisputed facts. Prior to merging with ATC Air, in October 2003, the plaintiff, Irwin, was an international corporation that manufactured and distributed tools through its many domestic and foreign subsidiaries. Irwin's domestic subsidiaries included: (1) American Tool Cos. of Arkansas Inc. (a manufacturer of screws and nut drive bits located in Lexa, Arkansas, with inventory in Greenfield, Indiana); (2) Bergman Tool Manufacturing Co., Inc. (a manufacturer of tools in Buffalo, New York); (3) Chesco Corp. (a manufacturer of tools in Beatrice, Nebraska, with inventory in Greenfield, Indiana); (4) Peterson Manufacturing Co. (a manufacturer of vices, grip-locking clamps and wrenches in Dewitt, Nebraska, with inventory in Greenfield, Indiana); (5) Peterson Development Corp. (a research and development facility, responsible for inventing the vice-grip in Dewitt, Nebraska); (6) Prosnip Corp. (a manufacturer of cutting tools in Beatrice, Nebraska, with inventory in Greenfield, Indiana); (7) Irwin Co. (a manufacturer of, inter alia, taps, dies, bolt extractors, twist drills, in Gorham, Maine; Cumberland, Wisconsin; and Wilmington, Ohio); (8) Unibit Corp. (a manufacturer of drill bits and pliers in Dewitt, Nebraska, with inventory in Greenfield, Indiana), and (9) ATC Air.

Irwin initially had corporate offices in Nebraska, Florida, Ohio, and Wisconsin. Irwin's worldwide administrative headquarters, including its finance, accounting, marketing, human resources and other administrative departments, as well as executives such as the company's comptroller, were all located in Lincoln, Nebraska. Irwin's office in Kenosha, Wisconsin, eventually became the company's North American headquarters.

In 1995, when Irwin relocated its North American headquarters to Ohio, Irwin's chairman and chief executive officer (CEO), Alan Peterson, opened an office in Hoffman Estates, Illinois.¹ Initially, this office accommodated only Peterson, his secretary and a small administrative staff, but in 2000, Irwin's chief financial officer (CFO), chief operating officer (COO) and general counsel were all moved from the Lincoln, Nebraska office to the Hoffman Estates office. Consequently, after 2000, of Irwin's seven corporate officers, four had offices in Illinois: (1) CEO, Alan Peterson; (2) COO and President, Jawad Nunes; (3) CFO, Clark Chandler; and (4) corporate vice president (VP) and general counsel, William L. Hoese. Of the remaining three officers, two were in Nebraska (assistant treasures, David Gentry and Tera Beermann), and one was in Del Mar, California (secretary William Wright). In addition, of Irwin's four corporate directors, two were in Illinois, one was in Nebraska, and one was in California. Nevertheless, in the relevant time period, the Nebraska office remained Irwin's largest office in terms of the number of employees.

Before merging with Irwin, ATC Air was a wholly owned subsidiary of Irwin, incorporated in Nebraska (in 1987), with the sole corporate purpose of providing air transportation services to Irwin and its affiliated companies. Alan Peterson was ATC Air's sole director and its chairman and CEO. ATC Air's other officers were Irwin officers.

ATC Air did not operate as an interstate carrier for hire within the meaning of section 3-60 of the UTA (35 ILCS 105/3-60 (West 2006)). ATC Air maintained all of its business records at its office in Lincoln, Nebraska. Between 2000 and 2002, ATC Air had seven employees including pilots and maintenance workers, all of whom lived and worked in Nebraska.

On December 10, 1999, ATC Air executed an aircraft purchase agreement to acquire a Hawker 800 XP from Raytheon Aircraft Co., located in Wichita, Kansas. Vice president and general counsel Hoese signed the contract on ATC Air's behalf, listing ATC Air's address as 2800 West Higgins Road, in Hoffman Estates, Illinois. The promissory note, guaranty, and security agreement for the aircraft, as well as the trade-in-agreement, reflected the address in Hoffman Estates. The purchase price for the airplane was $7,520,710. ATC Air accepted delivery of the aircraft in Little Rock, Arkansas, and then immediately flew the plane to Lincoln, Nebraska, where it was hangered.

On April 12, 2000, ATC Air registered the aircraft with the Federal Aviation Administration (FAA) by filing an aircraft bill of sale and an aircraft registration application with the FAA. Both documents reflected the Hoffman Estate's office as ATC Air's address. On June 5, 2000, ATC Air filed an amendment to both the aircraft bill of sale and the aircraft registration application changing the address from the Hoffman Estate's office to the Lincoln, Nebraska, office. From that point on, ATC Air's registration applications and bills of sale reflected the Nebraska address.

ATC Air owned the airplane from April 12, 2000, through April 30, 2002. The airplane was used for three primary purposes: customer visits, transporting ATC employees from one location to another, and matters relating to acquisitions and lawsuits. The passengers that flew on the aircraft included (1) 77 Irwin employees; (2) 20 customers; (3) 5 officers; (4) 4 directors; (5) 3 outside counsel; (6) 9 outside consultants and accountants; (7) 1 shareholder/owner; and (8) 6 friends and/or relatives of the foregoing passengers. All maintenance on the aircraft was done in Nebraska.

Between April 12, 2000, and April 30, 2002, from its hangar in Lincoln, Nebraska, the aircraft flew a total of 290 days, flying to locations throughout the United States, Canada, and Mexico, specifically including flights to Illinois. The flight log for this relevant period attached to the stipulated facts by the parties reveals a total of 734 flight segments, of which 269 originated or ended at an Illinois airport.

On April 25, 2002, ATC Air filed a Nebraska personal property tax return and claimed an exemption for the aircraft. ATC...