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American Stores Co. v. Illinois Department of Revenue

May 01, 1998

AMERICAN STORES COMPANY AND SUBSIDIARIES, PLAINTIFF-APPELLEE,
v.
ILLINOIS DEPARTMENT OF REVENUE AND SAM MCGAW, DIRECTOR OF REVENUE, DEFENDANTS-APPELLANTS.



Appeal from the Circuit Court of Cook County. Honorable John A. Ward, judge Presiding.

The opinion of the court was delivered by: Justice Hartman delivered the opinion of the court:

Plaintiff, American Stores Company and its subsidiaries (American), sought circuit court administrative review of the decision of the Department of Revenue (Department) disallowing an investment tax credit (ITC) for property American utilized during the 1984-87 taxable years. The court reversed the Department's decision, finding that the property qualified as property used in retailing pursuant to section 2-201(g) of the Income Tax Act (Ill. Rev. Stat. 1985, ch. 120, par. 2-201(g)) (section 2-201(g)). The Department appeals.

In November 1984, American acquired Jewel Companies, Inc. (Jewel), which is primarily engaged in the retail sale of food, drugs, and general merchandise for personal and household use. Jewel conducts its domestic operations through its divisions, which include Jewel Food Stores, and its wholly owned subsidiary corporations, including Osco Drug, Inc. (Osco). Jewel Food Stores operated approximately 190 supermarkets and, in conjunction with Osco, combination supermarket and retail drug stores in Illinois and other Midwestern states. Jewel Food Stores also owned and operated a warehouse, a truck maintenance facility, and several food manufacturing operations, as well as a fleet of trucks used to deliver inventory to its stores. The warehouse was used to supply merchandise to Illinois stores, and the maintenance facility serviced trucks and trailers used to deliver the merchandise to stores and food manufacturing plants. Osco operated approximately 300 retail drug stores in Illinois.

American timely filed income tax returns for the taxable years ending on January 31, 1983, January 28, 1984, November 16, 1984, February 2, 1985, February 1, 1986, and January 31, 1987. The Department conducted an audit of those returns, and issued notices of deficiencies to American on June 13, 1989, August 10, 1989, and January 25, 1990. American timely filed protests against all these notices, and filed claims for a refund.

One of the disputes between American and the Department involved ITCs claimed by Jewel and Osco against their personal property tax replacement income tax liability, imposed by section 2-201(c) of the Income Tax Act (Ill. Rev. Stat. 1985, ch. 120, par. 2-201(c)) (section 2-201(c)). Jewel and Osco claimed the ITCs for buildings, machinery, and equipment acquired and placed in service in its Illinois retail business. The items claimed amenable to ITC treatment included semi-trailers used to haul inventory between suppliers, stores, and the Jewel warehouse, and to haul recyclable material for recycling; warehouse equipment such as forklift trucks, warehouse racks, shelving used to store products, and office furniture and equipment; building costs for remodeling the warehouse, administrative offices, and storage garage; a mainframe computer used for administration and distribution of inventory; a pressure washer for cleaning truck parts; and a time management system used to keep track of the work hours of Jewel's truck drivers.

After auditing American, the Department allowed it to claim ITC credit for items used on retail floor areas of the stores, but disallowed all other items claimed as an ITC. The Department categorized the disallowed property as (1) store equipment not located on retail floor areas; (2) warehouse and related equipment; (3) transportation facilities and related equipment; and (4) office equipment. The Department asserted that this property did not qualify for ITC because it was not used "in retailing" as required by section 2-201(g).

American requested an administrative hearing to review the Department's decision, where it introduced the testimony of Hugh Muncy, a former president of the Illinois Retail Merchants Association, David Vite, the Association's current President, and the former senior vice president of Jewel, Gene B. Kilham. Each witness defined "property used in retailing" to include the machinery, equipment, and offices used to carry out functions such as accounting, purchasing, risk management, marketing strategies, personnel functions, and legal matters, which they said were essential parts of the retailing business. Nevertheless, the administrative law Judge (ALJ) ruled in favor of the Department on the ITC and other issues. The Director of the Department accepted the ALJ's recommendations and adopted its decision.

American filed a complaint in the circuit court, seeking administrative review of the Director's ruling pursuant to the Administrative Review Law (735 ILCS 5/3-101 et seq. (West 1992)). While the case was pending, the parties settled all tax issues with the exception of the ITC question and the Department's assessment of penalties against American. In a written decision, the circuit court reversed the administrative ruling, holding that American was entitled to claim ITCs for the disputed property. The court also reversed a portion of the Department's decision assessing penalties against American.

On appeal, the Department argues that the circuit court's interpretation of section 2-201(g) unduly expanded the term "retailing" to include all property used in support of retailing, an interpretation the Department contends is supported by neither the plain language nor the legislative history of section 2-201(g). Section 2-201 imposes a personal property tax replacement income tax on every corporation, partnership, and trust that earns or receives income in this state. Section 2-201(g) allows for an investment tax credit (ITC) against this tax "for investment in qualified property." "Qualified property" is defined as: "property which: *** is used in Illinois by the taxpayer in manufacturing operations or in mining coal or fluorite, or in retailing." (Emphasis added.) Ill. Rev. Stat. 1985, ch. 120, par. 2-201(g)(2)(d).

The term "retailing" includes:

"the sale of tangible personal property or services rendered in conjunction with the sale of tangible consumer goods or commodities." Ill. Rev. Stat. 1985, ch. 120, par. 2-201(g)(3).

In construing the scope of section 2-201(g), and determining whether the disputed property is subject to the ITC, this court's primary purpose must be to ascertain and give effect to the true intent and meaning of the legislature. People v. Frieberg, 147 Ill. 2d 326, 345, 589 N.E.2d 508 (1992); Powers v. Retirement Board of Policemen's Annuity & Benefit Fund, 249 Ill. App. 3d 280, 281, 618 N.E.2d 957 (1993). The statutory language is the best indication of the drafters' intent (People ex rel. Village of McCook v. Indiana Harbor Belt Railroad Co., 256 Ill. App. 3d 27, 29, 628 N.E.2d 297 (1994); Powers, 249 Ill. App. 3d at 281), and should be given its plain or ordinary and popularly understood meaning. Collins v. Board of Trustees of the Firemen's Annuity and Benefit Fund of Chicago, 155 Ill. 2d 103, 111, 610 N.E.2d 1250 (1993). In determining legislative intent, courts may look at the reason and necessity for the law, the evils sought to be remedied, and the purpose to be achieved. Frieberg, 147 Ill. 2d at 345. The legislative history or background of a statute also may be instructive. In re B.C., 176 Ill. 2d 536, 543, 680 N.E.2d 1355 (1997); Van's Material Co. v. The Department of Revenue, 131 Ill. 2d 196, 202, 545 N.E.2d 695 (1989) (Van's Material). Where the language of a statute is clear and unambiguous, it will be given effect without resort to other aids for construction. B.C., 176 Ill. 2d at 542; Powers, 249 Ill. App. 3d at 281. Taxing statutes must be construed strictly, and in cases of doubt will be construed most strongly against the government and in favor of the taxpayer. Van's Material, 131 Ill. 2d at 202.

The Department has provided varying interpretations of the term "in retailing." Its regulation defines "retailing" as "the sale of tangible personal property. It is not required that such tangible personal property be finished consumer goods, or that the property be sold to its ultimate consumer. For example, sales of tangible personal property for resale are included in the definition of retailing." 86 Ill. Admin. Code sec. 100.2900(c)(9) (1986). At the administrative hearing, the Department argued that qualified property must be associated with a specific retail sale, such as property used in retail floor areas. In the circuit court, however, the Department adopted a more expansive view, conceding that all property located at the site of a retail store qualified as property used "in retailing," but continuing to insist that the remaining three categories of property - warehouse equipment, transportation facilities and related equipment, and office equipment - did not qualify for ITC treatment.

Under the Administrative Review Law (735 ILCS 5/3-101 (West 1994)), judicial review extends to all questions of law and fact presented by the record before the court. Abrahamson v. Illinois Department of Professional Regulation, 153 Ill. 2d 76, 88, 606 N.E.2d 1111 (1992). An agency's interpretation of a statute it is charged with administering, where based on agency expertise, is entitled to some deference. An erroneous construction of a statute, however, is not binding on the court (Boaden v. Department of Law Enforcement, 171 Ill. 2d 230, 239, 664 N.E.2d 61 (1996)), and a decision based upon an erroneous, arbitrary, or unreasonable construction cannot be allowed to stand. Harrisburg-Raleigh Airport Authority v. Department of Revenue, ...


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