United States v. Department of Revenue of State of Ill.

• Decision Date: 24 February 1961
• Docket Number: No. 60 C 1365.,60 C 1365.
• Citation: 191 F. Supp. 723
• Parties: UNITED STATES of America and Olin Mathieson Chemical Corporation v. DEPARTMENT OF REVENUE OF the STATE OF ILLINOIS and Andrew Fasseas, Director of Revenue.
• Court: U.S. District Court — Northern District of Illinois

191 F. Supp. 723

UNITED STATES of America and Olin Mathieson Chemical Corporation v. DEPARTMENT OF REVENUE OF the STATE OF ILLINOIS and Andrew Fasseas, Director of Revenue.

No. 60 C 1365.

United States District Court N. D. Illinois, E. D.

February 24, 1961.

R. Tieken, U. S. Atty., and Harvey Silets, Asst. U. S. Atty., Chicago, Ill., for United States.

John Caruthers, East Alton, Ill., for Olin Mathieson.

William L. Guild, Atty. Gen. of Illinois, and William C. Wines, Asst. Atty. Gen., for State of Illinois.

Before KNOCH, Circuit Judge, LA BUY and ROBSON, District Judges.

LA BUY, District Judge.

Jurisdiction to hear the above matter is invoked pursuant to §§ 1345, 1331, and 1332 of the Judicial Code, 28 U.S.C.A. The complaint prays that this court declare the provisions of the Illinois Retailers' Occupation Tax Act (ch. 120, § 440 ff., Smith-Hurd Ann. Stats.) unconstitutional, void and of no effect in so far as they permit taxation of receipts from sales of tangible personal property to the United States or the taxation of such sales, and to enjoin the assessment and collection thereof.

Briefly, it is alleged that for a period of three months in 1957 the plaintiff, Olin Mathieson Chemical Corporation, designed, manufactured, sold and delivered in Illinois to the United States Air Force aircraft engine starter cartridges required by the United States for national defense; that the amount paid by the United States therefor was $901,204.08; that the State of Illinois claims an occupation tax thereon in the sum of $27,036.12, which amount has not been paid because the United States has instructed Olin Mathieson to refuse to pay any part thereof; that several hundred persons and firms in addition to Olin Mathieson are engaged in making sales at retail of tangible personal property in Illinois to the United States which property is and will be required to further the national defense and perform other governmental functions; that the United States has instructed these vendors to refuse to pay taxes on receipts from sales to it.

It is further alleged that under the provisions of existing contracts, the United States is obligated to reimburse Olin Mathieson and other vendors if they should be required to pay any taxes under the Act. The parties have stipulated that in addition to Olin Mathieson there are more than 1440 persons or firms in the State of Illinois engaged in sales to agencies of the Department of Defense, including the United States Air Force, United States Army, United States Navy, and the Military Petroleum Supply Agency; that the total amount of these contracts is in excess of $623,655,000.

The United States contends that the inclusion of such a tax on proceeds from sales to the Federal Government is in violation of the Constitution of the United States because (1) it results in discrimination against the United States and those with whom it deals in that the Illinois Retailers' Occupation tax is not imposed on proceeds from sales made "to the State of Illinois, any county, political subdivision or municipality thereof, or to any instrumentality or institution of any of the governmental units aforesaid, * * *" (§ 441, Ch. 120, Smith-Hurd Ann. Stats.), and (2) violates the immunity from state and local taxation to which the United States is entitled. It is also stated that there exists no plain, speedy and efficient remedy which plaintiffs may pursue in the courts of Illinois.

Defendants, by motion to dismiss, assail the jurisdiction of this court to entertain this controversy. The reasons therefor are (1) the United States is not a proper party plaintiff for it is not a taxpayer under the Illinois law; (2) § 1341, 28 U.S.C.A., proscribes the jurisdiction of this court to enjoin or otherwise prevent the collection of taxes claimed to be due under state law and said section applies to suits brought by the United States as well as suits brought by others; (3) plaintiffs have a plain, speedy and efficient remedy for contesting the liability for such taxes in the state courts; and (4) the plaintiff, Olin Mathieson, is within the inhibition of the Eleventh Amendment to the Constitution of the United States and cannot bring suit against the State of Illinois.

In the alternative, defendants urge dismissal of the claim on its merits for the reason (1) the Illinois occupation tax applies to all retailers of the class described in the complaint who are engaged in the transactions alleged therein, and therefore these taxes do not discriminate against the sovereignty of the United States; and (2) it fails to state a claim upon which relief can be granted.

In United States v. Livingston, D.C.S.C.1959, 179 F.Supp. 9, affirmed per curiam, 364 U.S. 281, 80 S.Ct. 1611, 4 L.Ed.2d 1719, rehearing denied 364 U. S. 855, 81 S.Ct. 35, 5 L.Ed.2d 79, the court held that § 1341, 28 U.S.C.A., proscribing federal court jurisdiction in suits to enjoin collection of taxes where a plain, speedy and efficient remedy exists in the state courts is not applicable to the United States. It is implicit in § 1341, as it is in any action brought by the sovereign, that the interest of the United States must be of the kind to support its presence as a party litigant. United States v. San Jacinto Tin Co., 1887, 125 U.S. 273, 285, 8 S.Ct. 850, 31 L.Ed. 747; United States v. Beebe, 1887, 127 U.S. 338, 8 S.Ct. 1083, 32 L.Ed. 121.

Where a taxpayer is singled out and treated differently from all those similarly situated because he transacts business with the United States, as is alleged here, such action discriminates not only against him but also against the United States. Pacific Co. v. Johnson, 1932, 285 U.S. 480, 493, 52 S.Ct. 424, 76 L.Ed. 893; United States v. Allegheny County, 1943, 322 U.S. 174, 64 S.Ct. 908, 88 L. Ed. 1209; United States v. City of Detroit, 1957, 355 U.S. 466, 473, 78 S.Ct. 474, 2 L.Ed.2d 424; Phillips Chemical Co. v. Dumas Independent School Dist., 1960, 361 U.S. 376, 80 S.Ct. 474, 4 L. Ed.2d 384. Furthermore, the United States is a proper party plaintiff because it has a substantial pecuniary interest in the outcome of this suit for it is obligated by contract to reimburse the taxpayer.

We conclude that the interest of the United States in this suit is direct and substantial and that it is a proper party litigant. We are further persuaded by the reasoning in the Livingston case,^* supra, that § 1341 does not deprive this court of jurisdiction. United States v. United Mine Workers of America, 1947, 330 U.S. 258, 67 S.Ct. 677, 91 L.Ed. 884; United States v. Woodworth, 2 Cir., 1948, 170 F.2d 1019.

In order to resolve the contentions of the defendants in their entirety, however, we proceed to determine the efficacy of the argument that a plain, speedy and efficient remedy exists in the courts of Illinois. Such determination bears also on the exercise of judicial discretion which must guide us, as a federal court of equity, in determining whether or not we should grant or withhold a remedy which is within our equity power to give. Toomer et al. v. Witsell et al., 1948, 334 U.S. 385, 68 S.Ct. 1156, 92 L. Ed. 1460; Great Lakes Dredge & Dock Co. v. Huffman, 1942, 319 U.S. 293, 301, 63 S.Ct. 1070, 87 L.Ed. 1407. The defendants rely on Owens-Illinois Glass Co. v. McKibbin, 1943, 385 Ill. 245, 52 N.E. 2d 177, to establish that Olin Mathieson has recourse to the courts of Illinois to enjoin the tax collection without the necessity of depositing the tax moneys due. In Goodyear Tire & Rubber Co. v. Tierney, 1952, 411 Ill. 421, 427, 104 N.E.2d 222, the Illinois Supreme Court ruled that application for injunction is available only to a taxpayer when the tax is unauthorized by law, i. e., imposed when not provided for, or is levied on property which is exempt. Owens-Illinois Glass Co. v. McKibbin, supra, 385 Ill. at page 256, 52 N.E.2d at page 182; Acme Printing Ink Co. v. Nudelman, 1939, 371 Ill. 217, 20 N.E.2d 277. In the instant case it is conceded by plaintiffs that Olin Mathieson is a retailer subject to the occupation tax of Illinois. Therefore, it may not invoke the remedy of injunctive relief in the courts of Illinois.

A remedy by way of protest, hearing and court review are provided for by the Illinois Retailers' Occupation Tax Act and may be pursued without prior payment of any part of the assessment. If a taxpayer fails to pay such tax at the time he files his return, he incurs a penalty of 10 per cent on the amount of the tax due. §§ 442, 444, Ch. 120. In addition, § 444a provides that the Department shall have a lien on all present and subsequently acquired real and personal property of the taxpayer for any unpaid tax and penalty, which lien becomes effective upon the termination of any review proceedings. A taxpayer may file suit under the Administrative Review Act, S.H.A. ch. 110, § 264 et seq., without payment or deposit of the moneys due, but is required to file a bond in the amount of the unpaid tax and penalty or, in lieu of such bond, an order will be entered imposing a lien upon the taxpayer's present and subsequently acquired real and personal property. § 451, Ch. 120. The Act does not provide that the taxpayer may recover the cost of such bond. A failure to provide interest on a tax refund has been considered by the courts as evidence that a taxpayer does not have a plain, speedy and efficient remedy. United States v. Livingston, supra; cf. Southern Ry. Co. v. Query, D.C.S.C., 1927, 21 F.2d 333, 342. It is the court's view that failure to provide for cost of the required bond is analogous to a failure to provide for recovery of interest on a tax refund.

It is urged that plaintiffs have available the remedy of declaratory judgment. The availability of that remedy in tax cases is uncertain. In Goodyear Tire & Rubber Co. v. Tierney, supra, 411 Ill. at page 430, 104 N.E.2d at page 226, the Supreme Court of Illinois observed that courts should proceed cautiously in tax cases in order to avoid...