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The City of Kankakee, An Illinois Municipal Corporation v. the Department of Revenue

April 15, 2013


Appeal from the Circuit Court of the 21st Judicial Circuit, Kankakee County, Illinois, Circuit No. 11-MR-495 Honorable Adrienne W. Albrecht, Judge, Presiding.

The opinion of the court was delivered by: Justice O'brien

JUSTICE O'BRIEN delivered the judgment of the court, with opinion.

Justice Holdridge concurred in the judgment and opinion.

Justice McDade dissented, with opinion.


¶ 1 Plaintiff City of Kankakee filed a complaint seeking review of a tax revenue adjustment made against it by defendant Illinois Department of Revenue and to enjoin the Department from adjusting the tax revenues. The trial court granted a preliminary injunction in favor of Kankakee that prevented the tax adjustment. The Department brought this interlocutory appeal. We affirm.


¶ 3 In November 2011, defendant the Illinois Department of Revenue (the Department) issued a "Long Term Distribution Adjustment" letter to plaintiff City of Kankakee, asserting that the Department had erroneously disbursed $540,811 in sales tax revenues to Kankakee that should have been reported to Glendale Heights. The letter informed Kankakee that it would recoup the erroneous distribution from Kankakee over an eight-month period and set the repayment amounts the Department would deduct from monthly sales tax distributions to Kankakee beginning in December 2011. The letter further stated that it could not disclose any additional information pursuant to the confidentiality provisions in the Retailers' Occupation Tax Act (ROTA) (35 ILCS 120/11 (West 2010)) under which the revenues in question were collected.

¶ 4 In December 2011, Kankakee filed a six-count complaint seeking administrative review of the Department's adjustment of tax revenues, a writ of prohibition, and the issuance of preliminary and permanent injunctions to halt the adjustment. Kankakee asserted the trial court had jurisdiction under the Administrative Review Law (Review Act) (735 ILCS 5/3-101 et seq. (West 2010)) and alleged, in part, that the adjustment letter was a final administrative decision amenable to administrative review and that any recoupment by the Department was barred by the six-month limitations period in section 6z-18 of the State Finance Act (30 ILCS 105/6z-18 (West 2010)) and section 8-11-16 of the Illinois Municipal Code (65 ILCS 5/8-11-16 (West 2010)). The complaint also challenged the Department's determination that the sales were located in Glendale Heights and not in Kankakee. Attached to Kankakee's complaint was the affidavit of its mayor, in which she attested that if the Department's adjustments were made as per the adjustment schedule, Kankakee "will be forced to severely cut essential City services, including Police, Fire, Public Utilities and Health, Life, Safety regulations"; Kankakee "will be unable to replace this income from any other source," and "the cut in services referred to above will severely impact the safety and welfare" of Kankakee's citizens and will "create an imminently dangerous condition in the City."

¶ 5 Kankakee also filed a motion for a preliminary injunction and a temporary restraining order (TRO) to enjoin the Department from enforcing the adjustment schedule. The Department filed a response in opposition to Kankakee's motion. It argued that Kankakee would be unjustly enriched were the injunction to issue because Kankakee was not entitled to the tax revenues the Department was attempting to recoup. It explained that the adjustment it sought from Kankakee differed from a misallocation, that Kankakee had no right to contest the adjustment, and that Kankakee could not establish its right to a preliminary injunction. The Department attached to its response an affidavit of Brenda Towers, the manager of its local tax allocation division who conducted the audit that resulted in the distribution adjustment letter. She attested to the following. Her division makes monthly adjustments to tax revenue allocations made to municipalities, counties, and other local governmental units. The adjustments are either "corrections of prior misallocations between units of local government" or "recoupment of taxes based on tax returns adjusted in the course" of a Department audit or by a taxpayer's refund claim or amended return. Misallocations are corrected through the "Taxpayer Location Verification" (TLV) process pursuant to section 8-11-16 of the Illinois Municipal Code (65 ILCS 5/8-11-16 (West 2010)). Under the TLV process, the Department annually sends out a list of the names and addresses of all ROTA-registered retailers engaged in business in the municipality. The Department sends monthly updates indicating additions and deletions. The Department corrects any misallocations for a six-month period prior to discovery of the error. For adjustments made through the audit process or by submission of an amended return by the taxpayer, the allocations will be corrected for "all periods covered by the amended return." Large adjustments may be prorated for repayment. The adjustment for Kankakee resulted from a finalized audit agreed to by the Department and the taxpayer. Towers further averred that the offsets were calculated as $180,536 as a refund or credit to the taxpayer based on a refund claim; $211,066 from the taxpayer "correcting or changing, from Kankakee to Glendale Heights, the location from which the sales were made," and $149,208 from ROTA taxes reported to Kankakee but that were out-of-state sales subject to the Use Tax (35 ILCS 105/1 et seq. (West 2010)). Because the tax revenues have been redistributed according to the Department's readjustments, the State would be required to "cover the amount that was previously distributed to Kankakee," and Kankakee would be "enriched with sales taxes revenues for sales that did not occur in Kankakee."

¶ 6 Kankakee replied to the Department's response and submitted an affidavit from its attorney, Patrick Power, in which he attested that he had a November 16, 2011, telephone conversation with Towers, who stated the tax claim was for the 2003 through 2005 tax periods and that the retail taxpayer had signed a waiver allowing Towers to discuss the audit with Kankakee and its agents.

¶ 7 A hearing ensued on Kankakee's motion for a preliminary injunction. Kankakee argued that the trial court had jurisdiction under the Review Act (735 ILCS 5/3-101 et seq. (West 2010)). It also argued, in part, that the Department's adjustment was time-barred based on the six-month limitations period per section 6z-18 of the State Finance Act (30 ILCS 105/6z-18 (West 2010)). The Department maintained that Kankakee had no right to administrative review, and alternatively, that the six-month limitations period did not apply. Following the hearing, the trial court found that the proposed tax adjustment was subject to administrative review, citing the Illinois Administrative Procedure Act (5 ILCS 100/1-1 et seq. (West 2010) (see 35 ILCS 120/11a (West 2010)), and if administrative review did not apply, jurisdiction was proper under the court's original jurisdiction. The trial court also found that Kankakee established a reasonable likelihood of success on the merits of its substantive claim, noting that the Towers affidavit contradicted the adjustment letter, the Power affidavit demonstrated a likelihood that the Department's claim was time--barred under the statutory limitations period, and the affidavit of Kankakee's mayor established Kankakee would suffer irreparable harm if the injunction did not issue. Regarding the statute of limitations, the trial court reasoned that a limitations period was imposed on the Department through statutory amendment, which legislatively overruled City of Champaign v. Department of Revenue, 89 Ill. App. 3d 1066 (1980). The trial court preliminarily enjoined the Department from enforcing the adjustment pending further court order.

¶ 8 The Department filed a motion to dissolve or modify the preliminary injunction, arguing that the injunction was improperly issued, that Kankakee's complaint was barred by sovereign immunity, and in the alternative, that Kankakee was entitled to only contest the $211,066 of the adjustment based on sales that should have been reported to Glendale Heights and that the other amounts were not taxable transactions to which Kankakee would have been entitled to any sales tax revenues. The Department's motion was heard and denied. It followed with this interlocutory appeal.


¶ 10 The issues on appeal are whether the trial court erred in granting Kankakee's request for a preliminary injunction and in denying the Department's request to modify it. Before considering the merits of the appeal, we must determine the Department's challenge to the trial court's subject matter jurisdiction. The Department argues that the trial court lacked jurisdiction under both the Review Act (735 ILCS 5/3-101 et seq. (West 2010)) and the trial court's original jurisdiction.

¶ 11 Subject matter jurisdiction concerns the authority of the court " 'to hear and determine cases of the general class to which the proceeding in question belongs.' " (Internal quotation marks omitted.) Crossroads Ford Truck Sales, Inc. v. Sterling Truck Corp., 2011 IL 111611, ¶ 27 (quoting In re M.W., 232 Ill. 2d 408, 415 (2009)). Trial courts have original jurisdiction of all justiciable matters except those exclusively within the jurisdiction of the Illinois Supreme Court and may review administrative actions "as provided by law." Ill. Const. 1970, art. VI, § 9. Trial courts may be divested of their original jurisdiction by the legislature where it places original jurisdiction in an administrative agency. Employers Mutual Cos. v. Skilling, 163 Ill. 2d 284, 287 (1994). A statute that divests the trial court of original jurisdiction must do so explicitly. Skilling, 163 Ill. 2d at 287. Where a statute creating or empowering an administrative agency expressly adopts the Review Act, it governs review of final administrative decisions. 735 ILCS 5/3-102 (West 2010); Fontana v. Highwood Police Pension Board, 296 Ill. App. 3d 899, 901 (1998). We review questions of jurisdiction de novo. Crossroads Ford Truck Sales, Inc. 2011 IL 111611, ¶ 26.

¶ 12 We must answer the jurisdictional question in the context of the relevant provisions of the applicable statutes. The Department collects the tax revenues at issue per its authority under the State Finance Act (Finance Act) (30 ILCS 105/1 et seq. (West 2010)) and corrects distribution errors as authorized under the Department of Revenue Law (20 ILCS 2505/2505-1 et seq. (West 2010)). The tax it claims to have erroneously distributed to Kankakee was collected as a retailers' occupation tax under the ROTA (35 ILCS 120/1 et seq. (West 2010)). As directed under the Finance Act, the Department distributes a portion of the ROTA revenues to the municipalities and counties in which the sales occurred. 30 ILCS 105/6z-18 (West 2010). Under the Department of Revenue Law, the Department may correct any errors in distribution between municipalities and counties and where state taxes are incorrectly credited as municipal or county taxes. 20 ILCS 2505/2505-475 (West 2010).

ΒΆ 13 The trial court determined that administrative review was proper because the Illinois Administrative Procedure Act applies to all rules and procedures of the Department under the ROTA. The Administrative Procedure Act establishes procedures for agency rulemaking and administrative hearings but it does not adopt the Review Act. Moreover, although section 12 of the ROTA adopts the Review Act for review of final administrative decisions, the Department's authority to distribute and adjust tax revenues is conferred under the Finance Act and the Revenue Law. Neither of the applicable provisions of the Finance Act or the Revenue Law adopts the Review Act. See 30 ILCS ...

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