Appeal from Circuit Court of Sangamon County No. 00TX001 Honorable Leo J. Zappa, Jr., Judge Presiding.
The opinion of the court was delivered by: Presiding Justice Myerscough
In October 1999, the Illinois Department of Revenue (Department) assessed plaintiff, Follett Corporation (Follett), a tax deficiency for tax years 1995, 1996, and 1997. The Department concluded that certain out-of-state sales made by plaintiff were subject to the sales "throw-back" rule in the Illinois Income Tax Act (Income Tax Act) (35 ILCS 5/304(a)(3)(B)(ii) (West 2000)) and, therefore, should be considered as Follett's Illinois sales in determining Follett's tax liability. Follett paid the tax under protest and filed a complaint in the trial court under the State Officers and Employees Money Disposition Act (30 ILCS 230/1 through 6a (West 2000)) to challenge the Department's assessment. In its complaint, Follett named the Department, its Director, and the State Treasurer as defendants and sought injunctive and declaratory relief. Follett and the Department then moved for summary judgment on the question of whether the sales "throw-back" rule applies to the sales at issue. In October 2002, the trial court granted summary judgment to the Department, concluding that the "throw-back" rule applies to the sales in question. Follett appeals, arguing the "throw-back" rule is not applicable. We affirm.
Follett, an Illinois corporation, has its headquarters in River Grove, Illinois. Follett provides a wide variety of products and services to schools, educators, libraries, and federal agencies and institutions through its affiliates and divisions. Follett and some of its affiliates operate as a unitary business group (hereinafter Follett Group). From 1995 to 1997, Follett made sales of goods that were delivered to other states in which Follett itself was not subject to tax, but another member of the Follett Group, Follett College Stores Corporation (Follett Stores), was taxed. Follett did not include these sales in its Illinois sales calculation, believing the Illinois sales "throw-back" rule was not applicable to these sales.
The Department, after conducting audits of the tax returns provided by Follett and its affiliates, determined that Follett should have included these sales in its Illinois sales calculation. The Department assessed Follett total unpaid tax liability of $341,363 for the 1995, 1996, and 1997 tax years relating to the application of the sales "throw-back" rule. The question before this court is whether the Department correctly applied the Illinois "throw-back" rule in assessing Follett the $341,363 tax deficiency.
1. Unitary Business Group
The Income Tax Act defines the term "unitary business group" as "a group of persons related through common ownership whose business activities are integrated with, dependent upon[,] and contribute to each other." 35 ILCS 5/1501(a)(27) (West 2000). Members of the group will not necessarily be subject to taxation by the same state or states.
For taxable years ending on or after December 31, 1993, section 502(e) of the Income Tax Act requires corporate members of the same unitary business group 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(e) (West 2000).
In this case, Follett and some of its affiliates, including Follett Stores, constituted a "unitary business group" as the term is defined in section 1501(a)(27) of the Income Tax Act. 35 ILCS 5/1501(a)(27) (West 2000). The Follett Group filed combined tax returns for determination of the group's tax liability as required by section 502(e) of the Income Tax Act (35 ILCS 5/502(e) (West 2000)).
2. Apportionment of a Taxpayer's Illinois Income
Section 304(a) of the Income Tax Act states:
"If a person other than a resident derives business
income from this State and one or more other states,
then, for tax years ending on or before December 30,
1998, and except as otherwise provided by this
[s]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 have a
denominator of zero and by an additional 2 if the
sales factor has a denominator of zero." 35 ILCS
5/304(a) (West 2000).
The property factor, the payroll factor, and the sales factor are all fractions: the property factor compares the average value of the "person's" property value in Illinois during the year to the value of its property everywhere; the payroll factor compares the amount of compensation the "person" paid in Illinois during the year to the amount of compensation it paid everywhere; and the sales factor compares the "person's" sales in Illinois during the year to its sales everywhere. 35 ILCS 5/304(a)(1) through (a)(3) (West 2000).
The parties maintain that this fraction formula can be expressed as follows:
Illinois Apportionment = Illinois Property/ Property Everywhere Illinois Payroll/ Payrol Everywhere Illinois Sales/ Sales Everywhere Illinois Sales/ Sales Everywhere
If a taxpayer is a member of a unitary business group that conducts some of its business in Illinois, section 304(e) of the Income Tax Act requires the use of the combined-apportionment method to determine the amount of business income that is attributable to Illinois by such a taxpayer. 35 ILCS 5/304(e) (West 2000). The Income Tax Act itself does not define what is the combined-apportionment method. The Supreme Court of Illinois, however, prescribed how to apply the "combined-apportionment" method under section 304(a) to determine an individual corporation's share of the group's Illinois income-tax liability in General Telephone Co. of Illinois v. Johnson, 103 Ill. 2d 363, 371-72, 469 N.E.2d 1067, 1071 (1984), as follows: "First, the business income of each corporate member of the group would be computed so that the total business income of the group could be derived. Then, to determine the apportionment factor for a group member subject to the Illinois income tax, the property, payroll, and sales factors would be computed by using the individual group member's Illinois property, payroll, and sales as numerators, and the entire unitary group's property, payroll, and sales as ...