The opinion of the court was delivered by: Justice Campbell
APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY. HONORABLE JOANNE L. LANIGAN, JUDGE PRESIDING.
Plaintiff Hartmarx Corporation and Subsidiaries (Hartmarx) appeals an order of the circuit court of Cook County affirming a decision by the Illinois Department of Revenue (Department). The Department ruled that sales shipped from Illinois by a member of Hartmarx's unitary business group to purchasers located outside Illinois should be "thrown back" to Illinois for inclusion in the numerator of the taxpayer's combined Illinois sales factor, where the taxpayer was not separately subject to tax in the destination State. The Department also assessed penalties for Hartmarx's failure to include such sales in its taxable income.
The record on appeal shows that Hartmarx is a Delaware corporation with its principal place of business in Illinois. Hartmarx is part of a unitary business group engaged in the apparel industry nationwide. The members of the unitary business group include (but are not limited to) Hart, Schaffner & Marx (HS&M) and Fashionaire Apparel, Inc. ("Fashionaire"). Section 502(e) of the Illinois Income Tax Act (Tax Act) provides in part as follows:
"(e) For taxable years ending on or after December 31, 1985, and before December 31, 1993, taxpayers that are corporations *** that are members of the same unitary business group may elect to be treated as one taxpayer for purposes of any original return, amended return which includes the same taxpayers of the unitary group which joined in the election to file the original return, extension, claim for refund, assessment, collection and payment and determination of the group's tax liability under this Act." 35 ILCS 5/502 (West 1996).
Hartmarx made this statutory election in each of the taxable years 1986-91.
In calculating corporate income tax pursuant to the Tax Act, an entity conducting business in more than one state uses a three-factor formula to determine what proportion of income is attributable to the various States. 35 ILCS 5/304(a) (West 1996). Specifically, the statute provides that:
"If a person other than a resident derives business income from this State and one or more other states, then, except as otherwise provided by this Section, such person's business income shall be apportioned to this State by multiplying the income by a fraction, the numerator of which is the sum of the property factor (if any), the payroll factor (if any) and 200% of the sales factor (if any), and the denominator of which is 4 reduced by the number of factors other than the sales factor which shall have a denominator of zero ***.
(A) The sales factor is a fraction, the numerator of which is the total sales of the person in this State during the taxable year, and the denominator of which is the total sales of the person everywhere during the taxable year.
(B) Sales of tangible personal property are in this State if:
(i) The property is delivered or shipped to a purchaser, other than the United States government, within this State ***; or
(ii) The property is shipped from an office, store, warehouse, factory or other place of storage in this State and *** the person is not taxable in the state of the purchaser." 35 ILCS 5/304(a)(3)(A),(B) (West 1996).
Section 304 also provides in part as follows:
"(e) Combined apportionment. Where 2 or more persons are engaged in a unitary business ***, a part of which is conducted in this State by one or more members of the group, the business income attributable to this State by any such member or members shall be apportioned by means of the combined apportionment method." 35 ILCS 5/304(e) (West 1996).
During the tax years 1986-91, HS&M and Fashionaire sold goods shipped from Illinois to customers in states where HS&M and Fashionaire were not subject to taxation, but other members of the unitary business group were subject to taxation. Hartmarx did not include such sales in the numerator of the unitary business group's sales factor.
Following an audit of Hartmarx's books and records, the Department determined that Hartmarx improperly excluded the aforementioned sales from the numerator of the unitary business group's sales factor. The Department ruled that, under the "throwback rule" embodied in section 304(a)(3)(B), Illinois was authorized to include in the sales factor of the apportionment formula those sales of property shipped from Illinois to purchasers in States where that specific subsidiary was not taxable. Thus, the Department issued notices of deficiencies to the unitary business group for the tax years 1986-90, proposing assessments of $900,040 in tax and $102,820 in penalties. Hartmarx timely filed protests of these determinations.
Following a consolidated hearing on the protests, the administrative law judge (ALJ) recommended that the notices of deficiencies be affirmed, except that sales made by HS&M and Fashionaire to customers in States where the sellers were taxable would be excluded and that the penalty for tax year 1986 would be abated. The Director of the Department accepted the ALJ's recommendation.
Hartmarx then sought administrative review of the ruling, arguing that the throwback of these foreign destination sales was inappropriate, because other members of the unitary business group were taxable in those jurisdictions. The circuit court affirmed the Department, ruling that this court's decisions in Beatrice Companies, Inc. v. Whitley, 292 Ill. App. 3d 532, 685 N.E.2d 958 (1997), and Dover Corp. v. Department of ...