Appeal from the Circuit Court of Cook County. Honorable Alexander P. White, Judge Presiding.
The Honorable Justice McNULTY delivered the opinion of the court: Cousins, P.j., concurs. T. O'brien, J., dissents.
The opinion of the court was delivered by: Mcnulty
JUSTICE McNULTY delivered the opinion of the court:
The Illinois Department of Revenue (Department) issued notices of deficiencies to plaintiff Dover Corporation (Dover) and five of its subsidiaries, proposing income tax deficiencies for the taxable years ending in 1984 and 1985 in the amount of $176,914. Dover and its five subsidiaries filed protests, arguing that certain corporate income liabilities for 1984 and 1985 were taxable outside of Illinois and that certain types of Dover's income should be classified as nonbusiness income. The administrative law judge found in the Department's favor and the circuit court affirmed. We also affirm.
Dover is a Delaware corporation with a commercial domicile in New York. Dover is the parent corporation of plaintiffs Dieterich Standard Corporation, Tipper Tie, Inc., Universal Instruments Corporation, Dover Elevator International Company, and Dover Elevator Company. (Dover and these five corporations are referred to as Dover Taxpayers.) The Dover Taxpayers, along with other Dover subsidiaries, were members of a single unitary business group, the Dover Unitary Group. Dover is comprised of 13 divisions. The two divisions relevant to the instant proceedings are the Groen division (Groen) and the Bernard division (Bernard). Groen and Bernardengage in the manufacture and sale of fabricated metal products. Groen manufacturers and sells food service products (kettles, pans, etc.) and food process equipment for industrial use. In 1984 and 1985, one of Groen's manufacturing facilities was located in Elk Grove Village, Illinois. Bernard manufactures and sells welding accessory products and, in 1984 and 1985, had a facility in Belcher, Illinois.
Through Groen and Bernard, Dover sold its products and conducted its activities in 26 States and 13 foreign countries. The parties agree that the employees of Groen and Bernard engaged in activities in these destination States that exceeded the mere solicitation of sales as defined in Public Law 86-272 (15 U.S.C. §§ 381 through 384 (1988)).
The Department's auditor determined that sales from the Groen and Bernard divisions to certain States and foreign countries should be thrown back to Illinois to be included in the numerator of the sales factors for the Dover Taxpayers. The jurisdictions in which sales were thrown back are divided into two categories. Category 1 consists of jurisdictions in which Groen and Bernard made sales and where certain members of the Dover Unitary Group, although not the Dover Taxpayers, filed tax returns and paid income tax. The category 1 States are:
Alabama, Florida, Georgia, Idaho, Maryland, Minnesota, Missouri, New Hampshire, North Carolina, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Virginia, West Virginia, and Wisconsin.
Category 2 consists of jurisdictions in which the Groen and Bernard divisions made sales, but neither Dover nor any member of the Dover Unitary Group filed a tax return or paid taxes. The category 2 States are:
Alaska, Hawaii, Iowa, Maine, Montana, Nebraska, Nevada, South Dakota, Vermont, Australia, Canada, Denmark, Finland, France, Ireland, Italy, Japan, Mexico, Netherlands, Sweden, United Kingdom, and West Germany.
The administrative law judge found that sales in North Dakota should not be thrown back to Illinois since Dover presented evidence that it paid taxes there after the audit. The administrative law judge also found that sales from South Dakota and Nevada should not be thrown back to Illinois because during 1984 and 1985, neither of those States had enacted an income tax and the activities of Groen and Bernard employees exceeded the mere solicitation of sales in those States. The sales made by Groen and Bernard in the other category 1 and category 2 States were thrown back to the Illinois sales numerator since their activities in those destination States exceeded solicitation, they were subject to an income tax in those States and the Dover Taxpayers had not demonstrated that they paid taxes in those States. The administrative law judge also found that certain royalty income was business income. The circuit court affirmed.
The issues Dover raises on appeal are: (1) whether the Department improperly included in the Illinois sales factor those sales from Illinois to purchasers in destination States where Dover had not paid taxes; (2) whether Dover is considered taxable in certain destination States by virtue of the payment of income taxes by another corporate member of the Dover Unitary Group; and (3) whether certain royalty income from the licensing of technology is apportionable business income.
Dover first contends on appeal that the Department improperly determined that certain sales shipped from the Bernard and Groen Illinois facilities to purchasers in category 1 and category 2 States are throwback sales includable in the Illinois sales factor for apportionment purposes. The Uniform Division of Income for Tax Purposes Act (the Uniform Act), adopted in 1957 as a model act, sets forth guidelines for apportioning income when a corporation does business in different States. (7A U. L. A. 331 (1985).) Illinois apportionment statute is modeled after the Uniform Act and provides that when a corporation conducts business in more than one State, a three-factor formula is utilized to determine what proportion of income is attributable to the various States. (35 ILCS 5/304(a) (West 1992).) The Illinois Supreme Court has described the operation of section 304(a)'s three-factor formula:
"The formula-apportionment method prescribed by section 304(a) first requires that the taxpayer compute three factors, which are based on his property, payroll, and sales. The property factor is a fraction whose numerator is the taxpayer's Illinois property, and whose denominator is all of the taxpayer's property. The payroll and sales factors are computed similarly (i.e., Illinois payroll/all payroll; Illinois sales/all sales). Section 304(a) then requires the taxpayer to average the three factors, with the resulting fraction being the taxpayer's 'apportionment factor.' The section 304(a) apportionment factor is the percentage of the taxpayer's business income that will be taxed in Illinois." ( General Telephone Co. v. Johnson (1984), 103 Ill. 2d 363, 370, 469 N.E.2d 1067, 1070, 83 Ill. Dec. 133.)
Section 304(a)'s apportionment provision depends on voluntary self-reporting by the taxpayer.
The parties agree that sales of tangible personal property are excluded from the numerator of the Illinois sales factor if the property is delivered or shipped from a business location within Illinois and the seller is taxable in the destination state. (See 35 ILCS 5/304(a)(3)(B)(i), (a)(3)(B)(ii) (West 1992).) The parties disagree, however, as to the meaning of the term taxable. Section 3-303(f) of the Illinois Income Tax Act (Tax Act), which mirrors section 16 of the Uniform Act (7A U.L.A. § 16, (1985)), provides that for purposes of allocation, a taxpayer is taxable in another State if:
"(1) In that state he is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax; or
(2) That state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not." (35 ILCS 5/303(f) (West 1992).)
In addition, Public Law 86-272 prohibits a State from imposing a net income tax on a foreign taxpayer if its only in-State business activity is the solicitation of sales. (15 U.S.C. §§ 381 through 384 (1988).) Thus, States have jurisdiction to tax interstate companies when their in-State business activities exceed mere solicitation. The parties agree the Bernard's and Groen's activities in the destination States exceed mere solicitation.
Dover claims that according to the plain language of section 303(f), a taxpayer is taxable in the destination State if either: (1) the taxpayer actually is subject to and pays income tax in that State; or (2) the State possesses the jurisdiction to impose a tax on the taxpayer, regardless of whether the taxpayer in fact pays the tax or not. The Department, however, contends that the taxpayers in this case are not taxable in the destination State unless the taxpayers actually filed tax returns and paid income taxes in those States.
An administrative agency's interpretation of the law it administers must be afforded substantial weight. ( Illinois Consolidated Telephone Co. v. Illinois Commerce Comm'n (1983), 95 Ill. 2d 142, 447 N.E.2d 295, 69 Ill. Dec. 78.) An agency's interpretation represents an informed source for ascertaining legislative intent. ( Adams v. Jewel Cos. (1976), 63 Ill. 2d 336, 348 N.E.2d 161.) The Department's interpretation of section 303(f) is embodied by Illinois income tax regulation 100.3200(a), which provides in pertinent part:
"a taxpayer claiming to be taxable in another state under the tests set forth in (1) must establish not only that under the laws of such state is he subject to one of the specified taxes, but that he, in fact, pays such tax. If a taxpayer is subject to one of the taxes specified in (1) but does not, in fact, pay such tax, such taxpayer may not claim to be taxable in the state imposing such tax under the test set forth in (2). On the other hand, if a taxpayer is not subject in a given state to any of the taxes specified in (1) but such taxpayer establishes that his activities in such state are such as to give the state jurisdiction to subject him to a net income tax, then under the test set forth in (2), the taxpayer is taxable in such state, notwithstanding the fact that such state has not enacted legislation subjecting him to such tax. In the case of any state other than a foreign country or political subdivision thereof, the determination of whether such state has jurisdiction to subject the taxpayer to a net income tax will be determined under the Constitution and statutes of the United States. Such a state does not have jurisdiction to subject the taxpayer to a net income tax if it is prohibited from imposing such a tax by reason of the provisions of Public Law 86-272, 15 U.S.C. Sections 381-385. In the case of any foreign country or political subdivision thereof, the determination of whether such state has jurisdiction to subject the taxpayer to a net income tax will ...