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04/18/96 BROWN'S FURNITURE v. RAYMOND WAGNER

April 18, 1996

BROWN'S FURNITURE, INC., APPELLEE,
v.
RAYMOND WAGNER, DIRECTOR OF REVENUE, ET AL., APPELLANTS.



The Honorable Justice McMORROW delivered the opinion of the court:

The opinion of the court was delivered by: Mcmorrow

JUSTICE McMORROW delivered the opinion of the court:

In this appeal we are asked to decide whether Brown's Furniture, Inc. (Brown's Furniture), a retail furniture store located in Palmyra, Missouri, is compelled to collect Illinois use tax pursuant to the Use Tax Act (the Act) (35 ILCS 105/1 et seq. (West 1994)) on items which are purchased in its Missouri store and shipped into Illinois. The Department of Revenue of the State of Illinois (Department) audited Brown's Furniture's sales for the period from January 1, 1989, to October 31, 1989, and determined that it owed $47,460.62 in uncollected use tax, interest and penalties. Brown's Furniture filed suit for injunctive relief in the circuit court of Sangamon County against the Director of Revenue, the Department, and the State Treasurer (collectively, the defendants). *fn1 The suit contested the assessment of use tax liability. Following a two-day bench trial, the circuit court entered injunctive relief in favor of Brown's Furniture, holding that the Act was unconstitutional and that the Department was estopped from collecting the tax. Defendants appealed to this court. 134 Ill. 2d R. 302(a). For the reasons which follow, we reverse the judgment of the circuit court.

BACKGROUND

The following facts were produced at trial and are largely undisputed. Brown's Furniture is located in Palmyra, Missouri, approximately 15 miles southwest of Quincy, Illinois. Illinois residents frequently patronize Brown's Furniture, and their purchases comprise approximately 30% of the store's total sales. On a regular basis, Brown's Furniture delivers items purchased by Illinois residents into Illinois in its own trucks. During the 10-month audit period at issue here, from January 1, 1989, to October 31, 1989, Brown's Furniture made 942 deliveries of its merchandise, valued at more than $675,000, in Illinois. Brown's Furniture collected neither Illinois use tax nor Missouri sales tax on these sales.

When Brown's Furniture delivers its merchandise in Illinois, its employees unload the furniture from the truck and place it without any further installation inside the customer's residence. If the furniture has been scratched during shipping, the delivery persons may correct the scratches by using a special furniture marker, but they do not make any additional repairs. Furniture which has been extensively damaged in transit is returned to the Missouri store and, after being repaired, is returned to Illinois. Brown's Furniture also picks up furniture for repair if a problem arises subsequent to delivery. In addition, though it occurs infrequently, Brown's Furniture accepts payment on delivery, including checks drawn on Illinois banks.

Brown's Furniture advertises extensively in Illinois. During the 10-month audit period, Brown's Furniture had 2,800 individual advertisements in Illinois media outlets. These outlets included two television stations located in Illinois, four radio stations and a Quincy, Illinois, newspaper. Brown's Furniture owns no property in Illinois, has no offices or plants in Illinois, and employs no permanent or part-time sales force in Illinois. Brown's Furniture has made use of the Illinois courts on at least one occasion by filing a small claims suit.

Prior to 1975, Brown's Furniture voluntarily collected Illinois use tax on deliveries which it made into Illinois. See 35 ILCS 105/6 (West 1994). In 1974, Brown's Furniture began receiving complaints from its Illinois customers that other Missouri stores were not collecting the use tax. In response, Brown's Furniture requested clarification of its tax collection duties from both the Department and from the Missouri Department of Revenue. By way of letter dated September 15, 1975, the Department informed Brown's Furniture that it was under no obligation to collect Illinois use tax. Similarly, in a letter dated August 29, 1975, the Missouri Department of Revenue told Brown's Furniture that its deliveries into Illinois were "export sales" not subject to Missouri's sales tax. Accordingly, Brown's Furniture collected neither Illinois use tax nor Missouri sales tax on its Illinois deliveries. In 1978, a Department agent visited Brown's Furniture in a personal capacity to purchase furniture. In an unofficial conversation with a Brown's Furniture vice-president, the agent confirmed that the store was not required to collect Illinois use tax.

In 1984, Harvey's Furniture, a retail furniture store located in Quincy, complained to the Department about Brown's Furniture's failure to collect the use tax. As an Illinois retailer, Harvey's Furniture was subject to the Retailers' Occupation Tax Act (35 ILCS 120/1 et seq. (West 1994)). The store also collected Missouri use tax on deliveries which it made into Missouri. In response to the complaint from Harvey's Furniture, the Department attempted to audit Brown's Furniture's sales. Brown's Furniture resisted the audit. In August 1984, accountants employed by Brown's Furniture sent a letter to the Department in which they maintained that Brown's Furniture's activities in Illinois did not justify requiring it to register as a use tax collector. The Department's response, dated October 9, 1984, indicated that Brown's Furniture was required to collect the tax. Thereafter, Brown's Furniture continued to correspond with the Department and to contest the attempted audit. Eventually, for reasons unclear from the record, the matter was dropped by the Department.

In 1985, the Act was amended to require use tax collection from out-of-state merchants who engage in activities in Illinois which would subject them to use tax collection responsibilities if engaged in within their own state. Pub. Act 84-430. § 1, eff. September 16, 1985, codified at 35 ILCS 105/2 (West 1994). At the time this legislation was enacted, Missouri required any out-of-state vendor who regularly delivered property into Missouri by means other than common carrier or the United States mail to collect its use tax. Mo. Code Regs. tit. 12, § 10-4.085 (1989). Thus, under the amendment, Brown's Furniture was obligated to collect Illinois use tax. Brown's Furniture learned of the amendment and, on advice of counsel, registered with the Department to collect the tax. Through its attorneys, Brown's Furniture also wrote to the Department questioning the constitutionality of the amendment. The Department's reply, dated April 8, 1986, acknowledged possible constitutional problems with Missouri's position requiring use tax collection from out-of-state vendors. However, the Department's reply also stated that, in light of the amendment to the Act and Missouri's position on use tax collection, Brown's Furniture was required to register as an Illinois use tax collector.

From 1986 through 1988, Brown's Furniture collected and remitted Illinois use tax. During this time, several Illinois customers complained to Brown's Furniture that it was the only Missouri furniture store in the area which was collecting the tax. Some customers also accused Brown's Furniture of pocketing the collected use tax. In December 1988, Brown's Furniture phoned the Department's tax service desk to ask for clarification on whether it was required to collect the tax. In the phone call, Brown's Furniture described its operations in general terms, but did not specify the extent of its activities in Illinois. In response, Brown's Furniture was allegedly told that it did not have to collect the use tax and that it should mark its next return as "final." Brown's Furniture did so.

A short while later, the Department received a complaint from Harvey's Furniture in Quincy regarding Brown's Furniture's decision to cease collecting use tax. On this occasion, Harvey's Furniture had complained to its Representative in the General Assembly, Jeff Mays, who in turn had referred the complaint to the Department. In April 1989, one of the Department's auditors contacted Brown's Furniture to discuss an audit of Brown's Furniture's sales. Brown's Furniture informed the auditor of its phone conversation with a Department employee at the tax service desk and its continuing objections to the Department's position that it was required to collect the use tax. Nevertheless, Brown's Furniture agreed to be audited. The audit began on October 31, 1989, and was concerned only with the imposition of use tax on deliveries made into Illinois during the 10-month period from January 1, 1989, to October 31, 1989. On the basis of the audit, the Department concluded that Brown's Furniture was liable for § 47,460.62 in uncollected use tax, interest and penalties. Brown's Furniture paid the assessment under protest.

On March 23, 1990, Brown's Furniture filed a complaint for injunctive relief against the Department. After a two-day bench trial in February 1994, the circuit court of Sangamon County entered an injunction ordering a refund of the tax monies paid by Brown's Furniture. The court determined that there was insufficient nexus between Brown's Furniture and Illinois to justify imposing the responsibility of collecting the use tax and, therefore, that the Act, as applied to Brown's Furniture, contravened the commerce clause of the United States Constitution (U.S. Const., art. I, § 8). The court also held that the Act facially discriminates against interstate commerce. The court further concluded that the Act had not been "uniformly applied to all businesses in the same or similar situations" as Brown's Furniture and that, based on varying representations which it had made to Brown's Furniture, the Department was estopped from collecting the tax. Defendants' appeal ensued. 134 Ill. 2d R. 302(a).

ANALYSIS

Illinois' use tax is imposed "upon the privilege of using in this State tangible personal property purchased at retail from a retailer ***." 35 ILCS 105/3 (West 1994). The tax functions as a necessary corollary to the Retailers' Occupation Tax Act (35 ILCS 120/1 et seq. (West 1994)), the principal means in Illinois for taxing the retail sale of tangible personal property. The purpose of the use tax is

"primarily to prevent avoidance of the [retailers' occupation] tax by people making out-of-State purchases, and to protect Illinois merchants against such diversion of business to retailers outside Illinois" Klein Town Builders, Inc. v. Department of Revenue, 36 Ill. 2d 301, 303 (1966).

See also 2 J. Hellerstein & W. Hellerstein, State Taxation par. 16.01 (1992). The use tax is imposed at the same rate as the Retailers' Occupation Tax. 35 ILCS 105/3-10; 120/2-10 (West 1994).

The ultimate incidence of the use tax falls upon the consumer. However, because of the impracticality of collecting the tax from individual purchasers, the burden of its collection is imposed upon the out-of-state vendor. See National Geographic Society v. California Board of Equalization, 430 U.S. 551, 555, 51 L. Ed. 2d 631, 636, 97 S. Ct. 1386, 1389-90 (1977). In Illinois, section 3-45 of the Act provides the statutory mechanism for collection of the use tax. That section states, in part, that the tax "shall be collected from the purchaser by a retailer maintaining a place of business in this State ***." 35 ILCS 105/3-45 (West 1994).

Brown's Furniture contends that it is not a "retailer maintaining a place of business" in Illinois and thus is not subject to the provisions of the Act. Section 2 of the Act includes the following definition of "a retailer maintaining a place of business in this State":

"A retailer having or maintaining within this State, directly or by a subsidiary, *** any agent or other representative operating within this State under the authority of the retailer or its subsidiary, irrespective of whether such *** agent or other representative is located here permanently or temporarily, or whether such retailer or subsidiary is licensed to do business in this State." (Emphasis added.) 35 ILCS 105/2 (West 1994).

Because the Act does not provide a definition for the term "operating," we give that word its ordinary and popularly understood meaning in light of the statute's purpose. In re Estate of Callahan, 144 Ill. 2d 32, 43, 161 Ill. Dec. 339, 578 N.E.2d 985 (1991). "To operate" is to perform a work or labor. Webster's Third New International Dictionary 1580 (1993). When employees of Brown's Furniture made deliveries in Illinois during the 10-month audit period, they were "operating" within the State as that term is ordinarily understood. Thus, Brown's Furniture's deliveries in Illinois bring it within the ambit of the Act. We note that this construction of the Act is in accord with the policies of the majority of our sister states. See, e.g., Ind. Code Ann. § 6-2.5-3-1(c)(2) (Burns 1995) (defining a retail merchant "engaged in business" in the state as one who delivers personal property within the ...


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