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04/23/87 the Bradford Exchange A.G. v. the Department of Revenue

April 23, 1987

THE BRADFORD EXCHANGE A.G., A SWISS CORPORATION, PLAINTIFF-APPELLANT

v.

THE DEPARTMENT OF REVENUE, JAMES DONNEWALD, TREASURER, DEFENDANT-APPELLEE



APPELLATE COURT OF ILLINOIS, FIRST DISTRICT, FOURTH DIVISION

508 N.E.2d 316, 155 Ill. App. 3d 674, 108 Ill. Dec. 155 1987.IL.535

Appeal from the Circuit Court of Cook County; the Hon. Earl Arkiss, Judge, presiding.

APPELLATE Judges:

JUSTICE JIGANTI delivered the opinion of the court. JOHNSON and LINN, JJ., concur.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE JIGANTI

The plaintiff, Bradford Exchange A.G. (taxpayer), brought these consolidated actions against the defendant, the Illinois Department of Revenue (Department), to recover $510,900.23 in retailers' occupation taxes, interest, and penalties which it paid under protest. In addition to seeking recovery of the sums paid, the taxpayer requested the trial court to declare the tax unconstitutional as applied to the taxpayer and to permanently enjoin the Department from the future imposition of the tax. The trial court denied the taxpayer's claims for relief on the merits and entered judgment in favor of the Department. The taxpayer has appealed, contending that: (1) the trial court erred in departing from the holding of the Illinois Supreme Court in Miehle Printing Press & Manufacturing Co. v. Department of Revenue (1960), 18 Ill. 2d 445, 164 N.E.2d 1, and applying instead the modern framework of tax analysis enunciated by the United States Supreme Court in Michelin Tire Corp. v. Wages (1976), 423 U.S. 276, 46 L. Ed. 2d 495, 96 S. Ct. 535; (2) the tax was unconstitutional even under the analysis set forth in Michelin ; (3) the tax violated the United States-Swiss tax treaty; (4) the tax violated the foreign commerce clause of the United States Constitution (U.S. Const., art. I, sec. 8, cl. 3); (5) there was no statutory basis for the imposition of retailers' occupation tax on the taxpayer; and (6) the trial court erred in giving retroactive application to its ruling that the tax was constitutional and in holding the taxpayer liable for interest and penalties on the retroactive tax.

The taxpayer is a Swiss corporation headquartered in Zug, Switzerland, and is engaged in the business of selling limited edition collectors' plates manufactured outside of the United States. The taxpayer is a subsidiary of Bradford Exchange, Limited (Limited), which solicits sales for the taxpayer by mailing the taxpayer's sales brochures and order cards to Illinois residents. Orders for the taxpayer's plates are returned to Limited's computer processing center in Morton Grove, Illinois. Limited collects the customer payments and deposits the funds in the taxpayer's Chicago bank account. The taxpayer then ships the imported plates to an independent fulfillment company in Ontario, Canada, which causes the plates to be forwarded either through a common carrier or through the mail to Illinois customers. Legal title and risk of loss passes to the customer in Canada when the plates are delivered to the common carrier. The taxpayer pays an import duty in the form of customs charges on the plates.

In 1982, the Department conducted an audit of Limited and questioned whether the taxpayer was liable for taxes under the Retailers' Occupation Tax Act (Ill. Rev. Stat. 1985, ch. 120, par. 440 et seq.) based on its sales of imported plates to Illinois customers. ROTA imposes a tax on the occupation of selling tangible personal property at retail and is measured by the gross receipts of the sales. Section 441 specifically provides, however, that "such tax is not imposed upon the privilege of engaging in any business in interstate commerce or otherwise, which business may not, under the constitution and statutes of the United States, be made the subject of taxation by this State." (Ill. Rev. Stat. 1985, ch. 120, par. 441.) In response to the Department's inquiry concerning the application of ROTA to the taxpayer, a vice-president of Limited wrote a letter stating that in Miehle Printing Press & Manufacturing Co. v. Department of Revenue (1960), 18 Ill. 2d 445, 164 N.E.2d 1, the Illinois Supreme Court held that the imposition of ROTA upon an importer engaged in the business of selling imported goods to Illinois customers violated the import-export clause of the United States Constitution (U.S. Const., art. I, sec. 10, cl. 2). Although the letter mentioned the United States Supreme Court decision in Michelin Tire Corp. v. Wages (1976), 423 U.S. 276, 46 L. Ed. 2d 495, 96 S. Ct. 535, it attempted to distinguish that decision on its facts. The letter further argued that the imposition of ROTA would violate the foreign commerce clause and the United States-Swiss tax treaty. In connection with its Discussion of the treaty, the letter stated that, "[s]ince Switzerland would not tax Illinois residents if the facts in the instant case were reversed, Illinois may not tax Swiss residents in the current situation." The Department completed its audit of Limited without issuing a notice of tax liability to the taxpayer.

On December 2, 1985, during a subsequent audit of Limited, the Department notified the taxpayer that it was liable for "Illinois Retailers' Occupation Tax, Municipal Retailers' Occupation Tax, and RTA Retailers' Occupation Tax" based on its sales of imported plates to Illinois customers. The Department stated its Conclusion that the evidence showed that the contract for the sale of the plates is formed in Illinois and that the taxes would apply unless the taxpayer "presents substantial evidence indicating that the offer or counter-offer is accepted by the seller outside of Illinois." The notice further stated that the taxes, plus interest and penalties, would be assessed for the period since July 1, 1981.

Upon receiving the notice, the taxpayer paid under protest taxes in the amount of $338,729.19 for the period from July 1, 1981, through March 31, 1986, and filed suit seeking recovery of the taxes as well as declaratory and injunctive relief. In a memorandum in support of the requested relief, the taxpayer stated that because the tax was unconstitutional, it was "unnecessary to determine whether there is an Illinois sale that suffices for statutory purposes."

On April 22, 1986, the trial court denied the taxpayer's motion for a preliminary injunction and granted judgment in favor of the Department in the amount of $338,729.19. In order to preserve the status quo, the court enjoined the Department from transferring that sum to the General Treasury during the pendency of this appeal.

The Department thereafter determined that the taxpayer owed $162,171.04 in interest and $17,539 in penalties for the period from July 1, 1981, through December 31, 1985. The taxpayer paid these amounts under protest and filed a second suit to recover them. On August 18, 1986, the trial court denied the taxpayer's request for a refund and enjoined the Department from transferring the $179,710.04 to the General Treasury. In this consolidated appeal, the taxpayer challenges both the imposition of the tax and its liability for the interest and penalties.

The taxpayer first contends that the Illinois Supreme Court decision in Miehle Printing Press & Manufacturing Co. v. Department of Revenue (1960), 18 Ill. 2d 445, 164 N.E.2d 1, held on facts indistinguishable from those in the case at bar that the imposition of ROTA on an importer engaged in the business of selling imported goods violates the import-export clause of the United States Constitution (U.S. Const., art. I, sec. 10, cl. 2). The taxpayer argues that Miehle has never been overruled and was therefore binding authority on the trial court. The Department disagrees, claiming that the United States Supreme Court decision in Michelin Tire Corp. v. Wages (1976), 423 U.S. 276, 46 L. Ed. 2d 495, 96 S. Ct. 535, expressly rejected the rationale employed in Miehle and adopted in its place an entirely new analysis for determining whether a State tax violates the import-export clause. The Department maintains that under these circumstances, the Miehle decision was no longer valid precedent and that the trial court acted properly in departing from it. A brief Discussion of the holdings in Miehle and Michelin is necessary for an understanding of this issue.

In Miehle, the State attempted to impose ROTA upon a taxpayer engaged in the business of importing European-made printing presses into Illinois for sale to Illinois customers. The taxpayer objected on the ground that any State tax on the imported presses would violate the import-export clause, which provides that: "o State shall, without the Consent of the Congress, lay any Imports or Duties on Imports or Exports, except what may be absolutely necessary for executing it's inspection Laws . . .." (U.S. Const., art. I, sec. 10, cl. 2.) At the time of the Miehle decision, the lead case involving the interpretation of the import-export clause was Brown v. Maryland (1827), 25 U.S. (12 Wheat.) 419, 419, 6 L. Ed. 678, which held that imported goods are immune from State taxation as long as they retain their status as imports by remaining in their original import packages. The Brown court reasoned that a tax upon "the property of the importer, in his warehouse, in the original form or package in which it was imported . . . is too plainly a duty on imports to escape the prohibition in the constitution." (25 U.S. (12 Wheat.) 419, 441-42, 6 L. Ed. 2d 678, 686.) This analysis became known as the "original package" doctrine and provided the sole rationale for the Illinois Supreme Court's decision in Miehle. In employing the original-package doctrine to hold the State ...


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