Square D Co. v. Johnson, 1-91-2381

• Decision Date: 25 August 1992
• Docket Number: No. 1-91-2381,1-91-2381
• Citation: 599 N.E.2d 1235,233 Ill.App.3d 1070
• Parties: , 175 Ill.Dec. 221 SQUARE D COMPANY, a Michigan Corporation, Plaintiff-Appellant/Cross-Appellee, v. J. Thomas JOHNSON, Director, Illinois Department of Revenue, and James H. Donnewald, Treasurer of the State of Illinois, Defendants-Appellees/Cross-Appellants.
• Court: United States Appellate Court of Illinois

Page 1235

599 N.E.2d 1235

233 Ill.App.3d 1070, 175 Ill.Dec. 221

SQUARE D COMPANY, a Michigan Corporation Plaintiff-Appellant/Cross-Appellee, v. J. Thomas JOHNSON, Director, Illinois Department of Revenue and James H. Donnewald, Treasurer of the State of Illinois, Defendants-Appellees/Cross-Appellants.

No. 1-91-2381.

Appellate Court of Illinois First District, Second Division.

Aug. 25, 1992.

Roland W. Burris, Atty. Gen., Rosalyn B. Kaplan, Sol. Gen., Chicago (Alison E. O'Hara, Asst. Atty. Gen., of counsel), for defendants-appellees.

Martin, Craig, Chester & Sonnenschein, Chicago (Thomas H. Donohoe, Daniel J. Slattery, of counsel), for plaintiff-appellant.

Justice DiVITO delivered the opinion of the court:

Plaintiff Square D Company (Square D) paid under protest Illinois State, Regional Transportation Authority (RTA), and Village of Palatine municipal use taxes imposed on its corporate jet by defendant Illinois Department of Revenue (Department). (Ill.Rev.Stat.1985, ch. 120, par. 439.3; Ill.Rev.Stat.1985, ch. 24, par. 8-11-6.) Thereafter, Square D sought an injunction in the circuit court for a refund of the use taxes and interest. On cross-motions for summary judgment, the circuit court granted the Department's motion, finding that the State use tax and the RTA use tax were correctly assessed against Square D; the court further granted Square D's motion for summary judgment with respect to Palatine's municipal use tax. Square D appeals the court's decision upholding the State and RTA use taxes, contending that (1) the Use Tax Act must be construed using a commerce clause analysis prevailing in 1955, when the Illinois Use Tax Act (Ill.Rev.Stat.1985, ch. 120, par. 439.1 et seq.) was enacted; (2) the 1967 Amendment to the Use Tax Act creating an exemption for interstate carriers for hire violates the constitutional requirement for uniform classifications; (3) the circuit court improperly imposed the RTA use tax on an aircraft registered in Michigan to a Michigan corporation; and (4) the statute of limitations applies to preclude tax liability where Square D made installment payments on the purchase price of the aircraft more than three years before the Department issued a notice of tax liability. The Department cross-appeals the court's reversal of the imposition of the municipal use tax, contending that the court improperly refused to impose the municipal use tax.

Square D, a Michigan corporation, manufactures electrical supplies and electronic components. Though its world headquarters are in Palatine, Illinois, it has manufacturing and distribution facilities in 25 states and several foreign countries.

On December 16, 1980, Square D paid Gulfstream America Corporation in Savannah, Georgia, $100,000 as a deposit towards the purchase of an airplane. On February 10, 1981, Square D contracted with Gulfstream America Corporation for the sale of a "Gulfstream III" jet ¹ for $9,917,797.91. The contract provided for a series of payments to be made prior to delivery of the jet. Square D subsequently paid each of the installment payments ², and on March 29, 1983, Gulfstream America Corporation presented Square D with the final invoice for the jet and notified Square D that the jet would be ready for delivery as of April 4, 1983.

On April 6, 1983 the jet was delivered to Square D in Savannah, Georgia. At the time of its delivery, Square D insured the jet with an aviation underwriter; the policy was in Square D's name, at its Palatine, Illinois address, though the jet was registered in Michigan, the state of Square D's incorporation. The policy provided, "[y]ou keep your aircraft principally in ILLINOIS."

Following delivery, Square D flew the jet from Savannah to Van Nuys, California for outfitting. There, the jet was equipped with radar and navigation devices, it was painted, and furniture was installed. Between March and October 1983, Square D paid in installments the price of the outfitting, totalling $1,934,830.

On October 4, 1983, the outfitting was completed and a Square D employee flew the jet to Las Vegas, Nevada and back to California for the purpose of inspecting the outfitter's work. Thereafter, the jet was flown to Wisconsin where a Square D executive boarded for a trip to Square D's plant in Oshkosh, Wisconsin. From Oshkosh, the jet was flown to Charlotte, North Carolina, where the passengers visited another Square D plant. The jet was then flown to Columbia, South Carolina, where Square D executives reviewed a manufacturing process. From Columbia, the jet traveled to Ashville, North Carolina so that the passengers could attend a meeting concerning Square D's world contractor program. On October 7, 1983, the jet was flown to Midway Airport in Chicago, Illinois. At no time did the jet transport Square D products rather, the jet was used solely by Square D employees for "business trips"--trips to other company locations, to business meetings, to "potential acquisitions," and to sales calls.

When not in service in interstate travel, the jet was kept in a hangar in Illinois, first at Midway airport and then at Waukegan airport. The flight from Midway to Waukegan, to transfer the jet to a Waukegan hangar, was the jet's only flight beginning and ending in Illinois. For the most part, required service and repairs were performed outside of Illinois.

The Department conducted a tax audit of Square D for the period from January 1983 through June 1985, and on March 2, 1986, it issued Square D a "Notice of Tax Liability" relating to the jet and assessing tax, interest, and penalties in the amount of $1,202,666.18. The amount of liability included State, municipal, and RTA use taxes.

On March 21, 1986, Square D paid that amount under protest and, on the same day, filed a complaint for injunctive relief. The complaint was comprised of four counts: the first count alleged that Square D was not liable for the use taxes because "under the Commerce Clause, Square D's use of the aircraft is not subject to either the Illinois Use Tax, the Municipal Use Tax or the RTA Use Tax"; count II alleged that the statute of limitations applicable to notices of tax liability prevented the taxing of payments made on the aircraft prior to January 1, 1983; count III alleged that Palatine's use tax was inapplicable because the aircraft was not used in Palatine; and the fourth count alleged that the RTA use tax was inapplicable because the aircraft was not titled or registered with an Illinois agency.

On March 21, 1986, the circuit court entered a preliminary injunction temporarily enjoining the Department from depositing the protested tax payment into the State treasury and from otherwise enforcing the notice of tax liability. On January 29, 1988, the court allowed Square D to plead a fifth count, alleging that the Illinois Use Tax Act's "rolling stock" exemption for an interstate carrier for hire was an unreasonable classification, thereby rendering use taxes such as those against Square D illegal and void.

Both parties filed motions for summary judgment supported by documentation. Following a hearing, on April 12, 1991, the circuit court issued its memorandum decision granting the Department's motion for summary judgment with respect to the State and RTA use taxes. Finding the Illinois Use Tax Act clear and unambiguous, the court refused to subject it to a statutory analysis prevailing at the time of its enactment; rather, the court applied current commerce clause principles to determine that the use taxes on the jet, though on an instrumentality of interstate commerce, were properly assessed because the taxes met the four-part test set forth in Complete Auto Transit, Inc. v. Brady (1977), 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (before a tax may be imposed upon an instrumentality of interstate commerce, a court must consider whether: (1) the tax is applied to an activity having a substantial nexus with the taxing State, (2) the tax is fairly apportioned, (3) the tax discriminates against interstate commerce, and (4) the tax is fairly related to the services provided by the State). The court further held that the interstate carrier for hire exemption in the Illinois Use Tax Act (Ill.Rev.Stat.1985, ch. 120, par. 439.3(b)) did not violate the constitutional requirement for uniform classification. Moreover, the court found that Square D, as a "resident" of Illinois, was required to register its jet in Illinois and was thus subject to RTA and municipal use taxes. The court entered summary judgment in favor of Square D as to Palatine's use tax, however, finding that because Square D did not "use" the jet in Palatine, it was not subject to the municipal use tax.

I.

Square D initially contends that the Illinois Use Tax Act does not apply to its jet because, at the time of the Illinois Use Tax Act's enactment in 1955, federal constitutional doctrine prohibited the taxing of an instrumentality of interstate commerce ³ which did not have a "taxable moment" in the taxing State. Square D thus argues that the circuit court erred in applying the Complete Auto four-part test to determine if the jet could be taxed and contends that, instead, the court should have determined whether the jet had a "taxable moment" in Illinois ⁴; Square D asserts that its jet never had a "taxable moment" in Illinois, and thus is not subject to use taxes.

In order to arrive at the conclusion that federal constitutional doctrine prevailing in 1955 controls (and thus the "taxable moment" doctrine applies), Square D maintains that the scope of the Illinois Use Tax Act's application to instruments of interstate commerce is controlled by two restraints: first, the power which the U.S. Constitution reserves to the states to tax instrumentalities of interstate commerce, as interpreted by the Supreme Court; and second, the extent to which the Illinois Legislature intended to exercise that power.

Relying upon Illinois Bell Telephone Co. v....