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Illinois Bell Telephone Co. v. Allphin

OPINION FILED MARCH 25, 1981.

ILLINOIS BELL TELEPHONE COMPANY, PLAINTIFF-APPELLEE AND CROSS-APPELLANT,

v.

ROBERT H. ALLPHIN, DIRECTOR OF THE DEPARTMENT OF REVENUE OF THE STATE OF ILLINOIS, ET AL., DEFENDANTS-APPELLANTS AND CROSS-APPELLEES.



APPEAL from the Circuit Court of Cook County; the Hon. EARL J. ARKISS, Judge, presiding.

MR. PRESIDING JUSTICE RIZZI DELIVERED THE OPINION OF THE COURT:

Plaintiff, Illinois Bell Telephone Company, seeks a declaratory judgment and an injunction enjoining defendant, the Director of the Department of Revenue, from attempting to collect tax liabilities assessed under the Messages Tax Act (Ill. Rev. Stat. 1979, ch. 120, par. 467.1 et seq.). Illinois Bell claims that certain revenues are not taxable under the Act and that the tax assessed against it is unauthorized by law. On one basic issue, the trial court directed Illinois Bell to pay $115,150,855 in back taxes, penalties and interest. On a second basic issue, the trial court found that Illinois Bell does not owe the approximately $13,160,000 claimed by the Department as additional tax liability, and the trial court permanently enjoined the Department from taking any action to collect that aspect of assessed tax liability. The parties have respectively appealed and cross-appealed, so that both issues are before us. As to the first basic issue, we reverse the order directing Illinois Bell to pay $115,150,855 in back taxes, penalties and interest. As to the second basic issue, we affirm the order enjoining the Department from taking any action to collect that aspect of assessed tax liability.

This complex and voluminous matter has been in litigation since 1973, and before this appeal, it was reviewed in part by the supreme court and remanded to the trial court. (Illinois Bell Telephone Co. v. Allphin (1975), 60 Ill.2d 350, 326 N.E.2d 737.) After a trial, this appeal ensued. In order to present the issues in a comprehensible manner, it is necessary to set forth relevant background facts involving the telephone industry and the Messages Tax Act.

There are approximately 1600 telephone companies in the United States. The largest of these companies is American Telephone and Telegraph. Illinois Bell is a subsidiary of AT&T. In Illinois, there are approximately 60 companies providing intrastate and interstate telephone services for the general public. Illinois Bell is one of these companies. The other companies are neither owned nor controlled by Illinois Bell or AT&T. Each of the Illinois companies operates a regulated telephone business within a geographically designated service area. Illinois Bell's service area encompasses approximately 20% of the Illinois geographic area, including almost all of Cook County.

Illinois Bell and the other 60 companies in Illinois are part of two separately regulated telephone networks: (1) a national telephone network; and (2) an intrastate telephone network. In the national network, the facilities of all the telephone companies in the United States, directly or by interconnection, form a single interstate network.

The companies in the national network share in all the interstate revenues that the network produces; revenues are not divided on a call by call basis. In regard to the sharing of revenues, AT&T, through its Long Lines Department, acts as a clearing house for the entire telephone industry. The interstate revenues are divided among the telephone companies pursuant to formulas contained in division of revenue contracts which allow each company to recover expenses incurred in providing interstate services, plus a reasonable return on the value of the property used in providing interstate services. The formulas used for the division of revenues are approved by the Federal Communication Commission.

Because telephone companies are public utilities, the rates they may charge are determined by administrative agencies. Regulatory authority is divided between State agencies and the Federal Communication Commission. In Illinois, the Illinois Commerce Commission establishes the rates for messages originating and terminating in Illinois; the Federal Communication Commission regulates the rates for messages that either originate or terminate outside of Illinois.

The dichotomy between interstate and intrastate telephone services is reflected historically in messages taxation in Illinois. The first occupation tax on receipts from the transmission of messages was provided in the Public Utilities Tax Act of 1935, *fn1 followed by the public utilities tax act of 1937 (Ill. Rev. Stat. 1937, ch. 120, par. 468 et seq.). These statutes imposed a tax, measured by a percentage of gross receipts, upon persons engaged in the business of transmitting telephone messages in Illinois. In 1935 and 1937, the Illinois Department of Finance issued regulations which provided that the tax was not imposed on revenues from the transmission of messages that either originated or terminated outside of Illinois.

In 1945, the public utilities tax act of 1937 was repealed, and the statute now commonly known as the Messages Tax Act was enacted. This Messages Tax Act, as amended, governs the taxation of telephone, telegraph and similar communications businesses. Ill. Rev. Stat. 1979, ch. 120, par. 467.1 et seq.

After the passage of the 1945 act, the Department issued regulations which provide that revenues from messages that either originate or terminate outside of Illinois are not subject to tax under the Act. Also, since 1945, the Department's regulations have required taxpayers to file monthly messages tax returns on forms prescribed and furnished by the Department. These tax return forms have continually prescribed that the taxpayer is to compute its taxable gross receipts by subtracting its receipts from services in interstate commerce, recorded on line 4(a), from the amount of total receipts, recorded on line 3A. Accordingly, since 1945, Illinois Bell has filed its monthly messages tax returns on the Department's tax return forms and has deducted its interstate revenues in computing its taxable gross receipts.

In 1970, and 1973, the Department audited Illinois Bell. At the conclusion of the audits, the Department issued notices of tax liabilities in which the Department disallowed Illinois Bell's deductions from gross receipts for the amounts it received under the division of revenue contracts for the transmission of interstate messages between July 1967 and June 1973. The Department also issued notices of tax liabilities for alleged revenues involving intrastate toll messages. Following the issuance of the tax liability notices, Illinois Bell filed this suit.

After a trial, the trial court entered an order and filed an opinion in which it found that the revenues recorded on line 4(a) of Illinois Bell's tax returns were properly classified as interstate revenues. However, the trial court also found that the Act imposes a tax on revenues from interstate messages and that, therefore, Illinois Bell's interstate revenues from 1967 to 1973 were subject to the messages tax. Accordingly, the trial court ordered Illinois Bell to pay $115,150, 855 to the Department of Revenue, which includes payment for back taxes for the period between July 1967 and June 1973, plus penalties and interest. This order and the trial court's findings relating to it constitute the first basic issue on appeal.

The first question we address is whether the Act imposes a tax on revenues from interstate messages. Section 2 of the Act is the section which imposes the tax. It states:

"A tax is imposed upon persons engaged in the business of transmitting messages in this State at the rate of 5% of the gross receipts from such business * * *. However, such tax is not imposed upon the privilege of engaging in any business in interstate commerce or otherwise to the extent to which such business may not, under the Constitution and statutes of the United States, be made the subject of taxation by this State." (Ill. Rev. Stat. 1979, ch. 120, par. 467.2.)

Specifically, the first sentence of this section imposes the tax and it clearly does not impose a tax on all revenues from the transmission of messages. Rather, it imposes a tax only on the transmission of messages in this State at the rate of 5% of the gross receipts from such business.

The history of messages taxation establishes that the phrase "transmitting messages in this State" means the transmission of messages which originate and terminate in the same State. In messages taxation, the distinction between messages which originate and terminate in one State, and messages which are interstate, has always been clearly recognized legislatively. Consequently, when a legislative body enacts a messages tax statute which imposes the tax on "transmitting messages in this State," it must be concluded that the legislature intended the tax to apply only to the transmission of messages which originate and terminate in that State. It follows that in this case, the Act only imposes the tax on revenues from the transmission of messages which originate and terminate in Illinois, and it does not impose the tax on revenues from the transmission of interstate messages.

• 1 In making its ruling, the trial court focused entirely on the exemption from taxation that is provided in the second sentence of section 2 of the Act. The trial court concluded that the Act, as enacted in 1945, exempted revenues from the transmission of interstate messages, *fn2 but because (according to the trial court) the United States Supreme Court, at some time after 1945, would constitutionally uphold such a tax on revenues from interstate messages, the taxing scope of the Act has expanded, sub silentio and at no definitive point in time, to impose the tax on revenues from interstate messages. We disagree.

The exemption from the taxation in the statute cannot expand the taxing scope of the statute. The Act has not been amended since it was enacted in 1945, except for a rate change from 3% to 5%. When statutory language has remained unchanged since enactment, it is the court's duty to continue to give effect to the original meaning of the statutory language, notwithstanding any intervening developments in the law not reflected in the statute. (See Roth v. Yackley (1979), 77 Ill.2d 423, 428, 396 N.E.2d 520, 522.) Also, since the time of its enactment, the Department has continuously interpreted the Act to mean that revenues from interstate messages are not subject to the messages tax. (See Department of Revenue Messages Tax Regulations, Article 12; 1980 Department of Revenue Tax Return Forms for Messages Tax Act, lines 3A and 4(a).) The fact that the statute has remained unaltered through successive sessions of the General Assembly since 1945 evidences legislative approval of the Department's continuous interpretation of the Act. See People ex rel. Spiegel v. Lyons (1953), 1 Ill.2d 409, 414, 115 N.E.2d 895, 898.

On appeal, the Department traces the judicial development of the confrontation between the commerce clause of the United States Constitution and State taxation of interstate activities, and concludes that the judicial interpretation of the commerce clause now, and since the early 1960's, would permit the taxation of the interstate activities here. *fn3 However, the issue in this case is not whether taxation of revenues from interstate messages is now, or has been since the early 1960's, constitutionally permissible under an appropriate statute. Rather, the issue is whether the Act as it is written imposes a tax on revenues from the transmission of interstate messages — and it does not.

• 2 The Department next contends that the division of revenue payments Illinois Bell receives for interstate messages may not be excluded from Illinois Bell's gross receipts because "with minor exception plaintiff's messages activity takes place wholly within the State of Illinois." *fn4 However, the Act, as it is written, simply does not impose a tax on receipts from the transmission of interstate messages, and it does not make any distinction between those taxpayers which operate entirely in Illinois and those which also have facilities or activities located outside Illinois. It follows that the location of Illinois Bell's facilities and activities is irrelevant in determining which revenues are subject to taxation under the Act.

The Department also claims that Illinois Bell failed to prove that the revenues at issue are from interstate messages, and that therefore the amounts should not be deducted from line 3A on the tax returns. In this regard, there was an express finding by the trial court "that the revenues which were designated [on the tax returns] as earned interstate revenues were the result of interstate activity." Significantly, the Department does not directly challenge this finding but merely ignores it. Moreover, the record sufficiently establishes that the revenues that are involved are from the transmission of interstate messages. At trial, these revenues were traced through Illinois Bell's bookkeeping system, and it was demonstrated how these revenues represented Illinois Bell's consideration, as determined under the division of revenue formulas approved by the FCC, for Illinois Bell's role in the transmission of interstate messages. We conclude that the trial court's finding on this point is supported by the record.

The Department also contends that Illinois Bell has failed to report its gross receipts for interstate messages, and therefore, that Illinois Bell "has no cause to complain that a series of tax returns without gross amounts are called into question." In particular, the Department states:

"The Department's position is that Bell, in its division of revenues with A.T. & T. [sic], utilizes a system of accounting which operates to deduct certain expense amounts from its messages revenues so that the `earned revenue' which it uses as its messages tax base, is a net amount, less than the `gross receipts' amount mandated by the Act. Bell thus pays less tax than the law requires.

It is important to note that Bell bills its customers an amount for toll messages services. These gross amounts never appear on the Messages Tax Returns filed by plaintiff. Rather, plaintiff reports `earned revenues,' which are totally incompatible with a gross receipts tax."

• 3 We find the Department's contention is without merit because the record manifests that Illinois Bell does report its gross receipts for interstate messages in accordance with the Department's own regulations and in accordance with the Act. Specifically, a telephone company's gross receipts for interstate messages is the share it receives and retains pursuant to the division of revenue formulas under the national network system. The Department's argument that a telephone company's billings in and of themselves represent the company's gross receipts for interstate messages is not in accord with the express definition of gross receipts as provided in the Department's own regulations. Article 10 of the Department's Messages Tax Regulations states:

"Article 10 — Transmission of Messages and Gross ...


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