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Subway Restaurants of Bloomington-Normal, Inc. v. Topinka

June 07, 2001


Appeal from Circuit Court of McLean County No. 97TX3 Honorable John P. Freese, Judge Presiding.

The opinion of the court was delivered by: Presiding Justice Steigmann

In June 1997, plaintiff, Subway Restaurants of Bloomington-Normal, Inc. (Subway), filed a complaint against defendants, Judith Baar Topinka, the State Treasurer, Kenneth H. Zehnder, the Director of the Illinois Department of Revenue, and the Illinois Department of Revenue (collectively Department), seeking the return of $64,851 under the Retailers' Occupation Tax (ROT) Act (35 ILCS 120/1 through 14 (West 1996)) and interest thereon, which Subway had previously paid under protest. The parties later filed cross-motions for summary judgment, and in July 2000, the trial court granted Subway's motion for summary judgment. The Department appeals, and we reverse and remand with directions.


The following facts appear in the parties' jointly filed stipulation of facts. In July 1995, Subway agreed to lease space from Illinois State University (University), an exclusively educational institution, in four of its on-campus student residence halls and operate a Subway restaurant in each of those locations. (Shortly after entering into the leases with the University, Subway entered into contracts with Douglas and Cynthia Barch to operate and manage the four restaurants. The Barches are not parties to this appeal.)

Through the lease agreements, the University sought to provide its students, faculty, and staff members with a dining option in addition to the University-run cafeterias. The four leases, which were identical, provided that the relationship between the University and Subway was that of lessor and lessee. The University did not assist Subway in operating or managing the four on-campus restaurants, and Subway did not produce any food products for distribution by the University. The prices charged at the on-campus restaurants were consistent with the prices charged at seven other Subway restaurants located near the University. However, pursuant to the leases, the University reserved the right to review Subway's prices and menu format.

Subway purchased its products and supplies for all of its local restaurants from the same supplier, and Subway did not purchase any supplies in conjunction with, or in the name of, the University. Subway used its own equipment and personal property to make its food products, and Subway was responsible for maintaining its equipment and furniture.

Subway hired its own employees to work at the on-campus restaurants and provided them with uniforms and training in the same way it did at its other restaurants. However, under the leases, Subway was required to give hiring preference to the University's students.

As lessor of the property, the University was obligated to provide Subway with utilities and garbage removal. Pursuant to the leases, Subway operated the on-campus restaurants only when the University's students were present in the residence halls--that is, during the academic term and during move-in days immediately preceding the start of classes. During such times, the on-campus restaurants were open to members of the general public as well as the University's students, faculty, and staff members.

Subway was responsible for paying all taxes on its sales and operations. As lessee, Subway also was responsible for maintaining insurance on all its furniture, fixtures, equipment, and inventory. It also had to pay for and carry general public liability insurance.

The leases also contained the following provisions: (1) Subway was prohibited from acting as an agent of the University; (2) Subway functioned as a lessee and independent contractor for the University; (3) "no employee of [Subway could] be deemed an employee of [the University] for any purpose"; (4) Subway was required to conform to all rules and regulations of the University; (5) Subway would allow the University to inspect the premises at any time; and (6) Subway was required to submit all disputes and questions to the University's residence hall food service director for resolution.

In August 1995, Subway opened a restaurant in each of the four residence halls. Any patron of the on-campus Subway restaurants could pay cash for his or her food and beverages. (Between August 1, 1995, and March 31, 1996, Subway collected and remitted $258,223 in ROT based on cash sales at the on-campus restaurants. That ROT is not at issue in this case.)

Each student who entered into a room and board contract with the University was issued a computerized declining balance debit card (debit card) with an initial balance ranging from $759 to $1,030 per semester (depending upon which residence hall the student lived in). Those students could use their debit cards to purchase food and beverages, which the University was obligated to provide them under the room and board contracts. They could use their debit cards at the on-campus Subway restaurants, the University-run cafeterias, or a combination of both. Each time a student purchased food and beverages with his debit card, the total purchase amount was automatically deducted from the debit card's account balance.

In addition, students, faculty, and staff members who did not reside in the residence halls could establish debit card accounts by depositing funds with the University. The deposited amount would then appear as a balance on the individual's debit card. These debit-card holders, like students with room and board contracts, could purchase food and beverages from either the on-campus Subway restaurants or the University-run cafeterias by using their debit cards.

Pursuant to the leases, Subway reported the monthly gross transactions from the on-campus restaurants to the University. After totaling all debit-card sales, the University kept a 2 1/2% transaction fee and remitted the balance to Subway.

Sometime during 1997, the Department conducted an audit of Subway's sales tax records for the period January 1994 through October 1996. The Department later issued a notice of tax liability based upon Subway's failure to pay ROT for the period August 1995 through March 1996 for food purchased with University-issued debit cards. According to the Department, Subway owed $58,088 in ROT, plus $6,763 in interest, totaling $64,851. In May 1997, Subway paid that amount to the State Treasurer under protest. 30 ILCS 230/2a (West 1996).

In June 1997, Subway filed a complaint against the Department, seeking the return of $64,851 in ROT and interest. In the complaint, Subway alleged that it did not owe ROT for student purchases with a debit card because Subway served as the University's agent. The trial court later enjoined the State Treasurer from transferring the money into the treasury's general fund. In October 1998, the parties jointly filed a stipulation of facts.

In November 1998, Subway filed a motion for summary judgment, and in March 1999, the Department filed a motion for summary judgment. In November 1999, the trial court conducted a hearing on the cross-motions for summary judgment and took the matter under advisement. In July 2000, the court granted Subway's motion and denied the Department's motion, finding that "[t]he obligation to pay for the food is [the University's] and [Subway] is exempt from [ROT]." This appeal followed.


A. Standard of ...

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