APPELLATE COURT OF ILLINOIS, FOURTH DISTRICT
542 N.E.2d 492, 186 Ill. App. 3d 402, 134 Ill. Dec. 313 1989.IL.1163
Appeal from the Circuit Court of Sangamon County; the Hon. Simon L. Friedman, Judge, presiding.
JUSTICE KNECHT delivered the opinion of the court. McCULLOUGH, P.J., and GREEN, J., concur.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE KNECHT
Plaintiff filed a complaint for administrative review in the circuit court of Sangamon County seeking reversal of an administrative decision of the Department of Revenue which denied plaintiff a refund of $115,223 in municipal retailers' occupational tax and $115,224 in regional transportation authority retailers' occupational tax for the period of January 1, 1982, to April 30, 1985. The trial court reversed the administrative decision and found sections 270.115(b)(3) and 320.115(b)(3) of the Illinois Administrative Code (Code) (86 Ill. Adm. Code §§ 270.115(b)(3), 320.115(b)(3) (1985)) are invalid because they are (1) outside the scope of the corresponding MROT and RTA acts and (2) unreasonable, arbitrary and capricious regulations. The court ordered defendant to issue plaintiff a tax refund in the amount of $230,447, plus interest. Defendant appeals and we reverse.
The following are stipulated facts: Plaintiff Chemed Corporation, Inc. (Chemed), is a Delaware Corporation authorized to do business in Illinois. Defendant Illinois Department of Revenue (Department) is an administrative body charged by law with the duty of administrating the Illinois Retailers' Occupation Tax Act (Ill. Rev. Stat. 1987, ch. 120, par. 441), the RTA in the Regional Transportation Authority Act (Ill. Rev. Stat. 1987, ch. 111 2/3, par. 704.03(e)) and the MROT in the Illinois Municipal Code (Ill. Rev. Stat. 1987, ch. 24, par. 8-11-1).
During the period January 1, 1982, through April 30, 1985, Chemed engaged in business in Illinois through several unincorporated divisions, including DuBois Chemicals (DuBois), Vestal Laboratories, and Cambridge Scientific Industries. The receipts that are the basis of the tax assessed and which form the basis for this action were generated by DuBois sales only.
Through DuBois, Chemed manufactures and sells chemical cleaning compounds, coating compounds, specialty lubricants, water treatment chemicals, and floor care products. DuBois is engaged in retail and wholesale sales. Some of DuBois' Illinois customers who use DuBois products are subject to use tax while others are exempt. DuBois operates through two subdivisions, DuBois Industrial Chemicals (Industrial) and DuBois Institutional Chemicals (Institutional). Both are headquartered in and have their principal place of business in Cincinnati, Ohio. Industrial offers approximately 600 products and Institutional offers approximately 150 products.
Industrial and Institutional conduct business in Illinois through approximately 70 sales representatives who live throughout the State of Illinois and make personal calls on DuBois' Illinois customers. DuBois does not have a sales office in Illinois and its sales representatives are not provided office facilities within Illinois. The sales representatives are compensated on a commission basis and are responsible for paying all expenses incurred in the course of business.
An inventory of DuBois products was maintained during the audit period at a public warehouse, LaGrou Motor Service, Inc. (LaGrou), located in Chicago, Illinois. Other than offering warehousing services, LaGrou is in no way affiliated with Chemed. Chemed has no employees located at LaGrou. Chemed stocks approximately 250 different DuBois products (or only approximately one-third of the total number of DuBois products available) at the LaGrou warehouse. All products, the sale of which are at issue in this case, were manufactured outside Illinois, generally at the DuBois manufacturing facility in Sharonville, Ohio. The products were shipped by common carrier to LaGrou. Inventories at LaGrou were restocked an average of three times per week during the audit period.
Chemed markets its products in Illinois by one of four methods. First, direct sales are primarily generated in Illinois through the DuBois sales representatives who personally call on established and prospective customers. Orders are generally received verbally without the preparation of a formal purchase order. Sales representatives telephone the orders to Cincinnati, Ohio, for approval and processing. Prices for all products are set in Cincinnati, Ohio. Sales representatives have no authority to bind Chemed to any order. Once an order is accepted, delivery may come from inventories located at the LaGrou warehouse as well as out-of-State locations. Second, sales made to certain large customers are consummated through a bidding procedure whereby a DuBois employee located in Cincinnati, Ohio, prepares a bid based upon customer specifications. Once the bid is accepted, products are delivered to the customer from both the LaGrou warehouse or from other locations outside of Illinois. Third, sales proposals are sometimes submitted by DuBois to prospective customers. All proposals are prepared in Cincinnati for submission to prospective customers. Contracts are negotiated and accepted in Cincinnati, Ohio. Deliveries pursuant to this arrangement may come from the LaGrou warehouse as well as out-of-State locations. Finally, sales may be made via a national account. All national accounts are administered from Cincinnati, Ohio. The master contract is negotiated out of the DuBois office in Cincinnati, Ohio. Sales representatives receive implementing orders that must be forwarded to Cincinnati, Ohio, for approval. Products delivered pursuant to these contracts may come from both inventories located at the LaGrou warehouse as well as out-of-State locations.
After orders are accepted in Cincinnati, Ohio, Chemed's computer system generates an invoice and a bill of lading. The customers remit payments of their outstanding account balances to a lockbox maintained at the Fifth-Third Bank located in Cincinnati, Ohio. Occasionally, a customer may tender payment to a sales representative who then forwards the payment to the Cincinnati headquarters or lockbox.
When a decision is made in Cincinnati to ship products located at the LaGrou warehouse, bills of lading prepared in Cincinnati, Ohio, are transmitted to LaGrou with instructions to deliver the ordered products to the Illinois customers. All decisions regarding the source of the products shipped by Chemed to Illinois customers are made in Cincinnati, Ohio, based on factors such as aggregate shipping costs, size of shipment, and availability of goods at various inventory locations. All orders of 10,000 pounds or more are shipped directly from DuBois' manufacturing facility in Sharonville, Ohio, as are items not stocked at the LaGrou warehouse. Approximately 59% of DuBois' Illinois sales were shipped from the LaGrou warehouse during the period of January 1, 1982, through April 30, 1985. Deliveries made from the LaGrou public warehouse constitute the basis for the claimed erroneous payments of MROT and RTA.
Chemed timely filed combined sales, use, occupation, and transit tax returns with the Department for the period January 1, 1982, through April 30, 1985, reported taxes payable on each return, and paid the taxes so reported. An audit was conducted by the Illinois Department of Revenue for the period of January 1, 1982, through December 31, 1984. As a result of such audit, the Department determined that additional RTA and MROT were due. On or about May 30, 1985, Chemed filed an amended tax return reflecting the additional taxes and interest the Department declared due for the audit period. Thereafter, Chemed filed two claims for refund: (1) a claim for MROT in the amount of $138,908 and (2) a claim for RTA in the amount of $138,909. Both claims were based on Chemed's sales where orders were accepted and approved at Chemed's place of business in Cincinnati, Ohio, but filled with products located at the LaGrou warehouse in Chicago. Chemed's claims were denied in part on October 25, 1985, via a final administrative decision of the Department of Revenue. Chemed was awarded only a partial refund and was held liable for $115,223 in MROT and $115,224 in RTA for the audit period.
On June 26, 1987, Chemed filed a complaint for administrative review in the circuit court of Sangamon County. The trial court reversed the administrative decision of the Department and held the administrative regulations (86 Ill. Adm. Code §§ 270.115, 320.115 (1985)) were unreasonable, arbitrary and capricious, and outside the scope of their respective governing acts. (Ill. Rev. Stat. 1987, ch. 24, par. 8-11-6; Ill. Rev. Stat. 1987, ch. 111 2/3, par. 704.03(e).) The Department filed its notice of appeal on July 18, 1988.
The claimed erroneous tax payments in this case were made by Chemed pursuant to the MROT and RTA acts. The MROT and RTA acts impose occupational taxes upon persons "engaged in the business of selling tangible personal property at retail in the municipality" or "metropolitan region" . (Ill. Rev. Stat. 1987, ch. 24, par. 8-11-1; Ill. Rev. Stat. 1987, ch. 111 2/3, par. 704.03(e).) The Department regulations which determine jurisdiction under the MROT and RTA acts are contained respectively in sections 270.115 and 320.115 of the Code. (86 Ill. Adm. Code §§ 270.115, 320.115 (1985).) Hereinafter, citations will be made only to the regulation governing the MROT (86 Ill. Adm. Code 270.115(b)(3)) since, for purposes of this appeal, the scope of that regulation is virtually identical to that of the RTA regulation (86 Ill. Adm. Code § 320.115(b)(3)). Relevant portions of the MROT regulation pertaining to jurisdictional questions are reprinted as follows:
"a) Mere Solicitation of Orders Not Doing Business
1) For a seller to incur Municipal Retailers' Occupation Tax liability in a given municipality, the sale must be made in the course of such seller's engaging in the retail business within such municipality. In other words, enough of the selling activity must occur within the municipality to justify concluding that the seller is engaged in business within the municipality with respect to that sale.
b) Seller's Acceptance of Order
1) Without attempting to anticipate every kind of fact situation that may arise in this connection, it is the Department's opinion, that the seller's acceptance of the purchase order or other contracting action in the making of the sales contract is the most important single factor in the occupation of selling.
3) Regardless of the place at which the purchase order is accepted, where tangible personal property is located within a municipality at the time of its sale (or is subsequently produced in Illinois), then delivered in Illinois to the purchaser, and no other municipality or county in this State would receive or would have the power to impose Municipal or County Retailers' Occupation Tax with respect to such sale, the place where the property is located at the time of the sale (or subsequent production in Illinois) will determine where the seller is engaged in business for Municipal Retailers' Occupation Tax purposes with respect to such sale.
c) Some Considerations Which Are Not Controlling
2) The point at which the tangible personal property will be used or consumed and the place at which the purchaser resides are also immaterial in determining whether or not the seller incurs Municipal Retailers' Occupation Tax liability. Furthermore, the place at which the technical sale occurs (i.e., the place at which title passes) is not a decisive consideration since the phrase in the municipality in the Municipal Retailers' Occupation Tax Act refers only to the location of the occupation of selling that is being ...