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08/28/89 the New Yorker Magazine, v. the Department of Revenue

August 28, 1989




Before considering the New Yorker's constitutional claims, we address its contention that the circuit court erred in finding that the Department correctly applied the Act's apportionment provisions. The decision for the years 1975-77 found that the New Yorker failed to include as a sale of tangible personal property in the sales factor of the apportionment formula its advertising income and its total newsstand and subscription sales that were shipped from its printer but were not taxed in other jurisdictions. The decision for the years 1979-81 similarly taxed the New Yorker, except that its newsstand and subscription sales from the shipment of its printer were included only for the period January 1, 1979, to September 8, 1979, due to a 1979 statutory amendment to the Act.


543 N.E.2d 957, 187 Ill. App. 3d 931, 135 Ill. Dec. 389 1989.IL.1320

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


JUSTICE BUCKLEY delivered the opinion of the court. MANNING, P.J., and O'CONNOR, J., concur.


This action arises from the circuit court's affirmance on administrative review of the Illinois Department of Revenue's (the Department's) decisions regarding two tax deficiencies issued to the New Yorker Magazine, Inc. (the New Yorker). The New Yorker is a unitary business, operating in more than one State, which engages in the business of publishing a magazine known as "The New Yorker." It derives its business revenue from subscriptions, newsstand sales and advertising, and pays taxes on its business income to five States, including Illinois.

The New Yorker appeals the circuit court's decision, contending that (1) the circuit court erred in finding that the Department properly apportioned its receipts from advertising space, subscription sales and newsstand sales under the Illinois Income Tax Act (the Act) (Ill. Rev. Stat. 1985, ch. 120, par. 1-101 et seq.), and (2) the Act is unconstitutional as applied to the New Yorker in the instant case. We affirm.

The Department issued a tax deficiency notice to the New Yorker for the years 1975-77 and another for the years 1979-81. After administrative hearings were held for both audit periods, a January 18, 1985, decision issued assessing the New Yorker $56,279 for the first period and a March 31, 1986, decision issued assessing it $39,325 for the second period. Both decisions increased the New Yorker's tax liability to Illinois because the New Yorker underreported its sales under the Act's three-factor apportionment formula.

The Act contains a three-factor formula that apportions income of a corporation engaged in a multistate business. The formula, adopted from the language of the "Uniform Division of Income for Tax Purposes," includes sales, property and payroll factors. Under this formula, each of these factors is considered as a fraction. The numerator of each fraction is the Illinois portion of the value, while the denominator represents the total value in all jurisdictions. The resulting percentage represents the taxing percentage on the taxpayer's business activity in Illinois. Ill. Rev. Stat. 1985, ch. 120, par. 3-304(a)(3).

Illinois' power to apportion the income of an integrated, multistate business, as well as that of other States, is restricted by the commerce clause and due process clause of the United States Constitution. (U.S. Const., art. I, § 8, cl. 3; U.S. Const., amend. XIV.) These clauses require a "minimum connection" between the interstate activities and the taxing State and a "rational relationship" between the income attributed to that State and the intrastate values of the enterprise. (ASARCO, Inc. v. Idaho State Tax Comm'n (1982), 458 U.S. 307, 328, 73 L. Ed. 2d 787, 802, 102 S. Ct. 3103, 3115; Exxon Corp. v. Wisconsin Department of Revenue (1980), 447 U.S. 207, 219-20, 65 L. Ed. 2d 66, 79, 100 S. Ct. 2109, 2118; Moorman Manufacturing Co. v. Bair (1978), 437 U.S. 267, 273, 57 L. Ed. 2d 197, 204, 98 S. Ct. 2340, 2344.) The Constitution, however, imposes no single formula on the States because of the difficulties in arriving at precise territorial allocations of value (Container Corp. v. Franchise Tax Board (1983), 463 U.S. 159, 164, 77 L. Ed. 2d 545, 552, 103 S. Ct. 2933, 2939), although an application of an apportionment formula will be struck down where the taxpayer can prove by clear and cogent evidence that the income attributed to the State is out of appropriate proportion to the business transacted in the State or has led to a grossly distorted result. Container Corp., 463 U.S. at 164, 77 L. Ed. 2d at 552, 103 S. Ct. at 2939-40; Butler Brothers v. McColgan (1942), 315 U.S. 501, 507, 86 L. Ed. 991, 996, 62 S. Ct. 701, 704.

The business activities of the multistate business here are conducted as follows: The New Yorker is headquartered in New York, its corporate domicile. Its management and editorial functions are performed in New York, including the acceptance of subscriptions, the selection of magazine materials, the preparation of the copy and layouts for printing, the execution and approval of advertising contracts, and the approval of advertising copy. It maintains six branch offices for advertising solicitations, one of which is located in Chicago, Illinois. These offices employ 7% of the New Yorker's personnel, with the remaining percentage of the personnel employed in New York.

The printing of the magazine is contracted to R.R. Donnelley & Sons, Inc., a commercial printer located in Chicago. Galleys from the printing are sent to New York for proofreading. One of five production supervisors from New York is at the printing plant on a rotating basis to resolve manufacturing problems and to aid in the magazine's prompt distribution. One clerical employee of the New Yorker is permanently assigned to Illinois to perform duties such as typing, checking the number of issues printed each week, calculating and recording weekly lineage, and maintaining offset evaluation records.

Upon printing, "newsstand" copies are shipped from the printer to wholesalers in various parts of the country pursuant to instructions given by Curtis Circulation Company (Curtis), an independent contractor and a Philadelphia-based circulation company under contract with the New Yorker to sell its magazine. The New Yorker instructs Curtis as to the quantity of issues to be ...

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