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Witte Brothers Exchange, Inc. v. Department of Revenue

Court of Appeals of Illinois, First District, Sixth Division

September 30, 2013

WITTE BROTHERS EXCHANGE, INCORPORATED, Plaintiff-Appellee,
v.
THE DEPARTMENT OF REVENUE, BRIAN HAMER, as Director of Revenue, and DAN RUTHERFORD, as Treasurer of the State of Illinois, Defendants-Appellants.

Appeal from the Circuit Court of Cook County No. 11 L 50282 Honorable Robert Lopez Cepero, Judge Presiding.

JUSTICE REYES delivered the judgment of the court, with opinion. Presiding Justice Rochford and Justice Hall concurred in the judgment and opinion.

OPINION

REYES JUSTICE

¶ 1 Plaintiff-appellee Witte Brothers Exchange, Inc. (Witte Brothers or plaintiff), an interstate trucking company, initiated this action against defendants-appellants the Illinois Department of Revenue, Brian Hamer as its director, and Dan Rutherford as Treasurer of the State of Illinois (collectively the Department) to recover funds submitted under protest following an audit during which the Department concluded Witte Brothers failed to include in the numerator of its apportionment factor the miles driven through Illinois without picking up or delivering goods, otherwise known as pass-through miles.[1] The trial court granted plaintiff's motion for summary determination and concluded the Department could not tax pass-through miles under section 304(d)(1) of the Illinois Income Tax Act (Tax Act) (35 ILCS 5/304(d)(1) (West 2010)). The Department appeals, contending the trial court erred in granting summary determination because the language of section 304(d)(1) demonstrates pass-through miles are revenue miles "in this State, " and thus the appropriate taxes were assessed in this matter. For the reasons which follow, we reverse the determination of the trial court.

¶ 2 BACKGROUND

¶ 3 In 2009, the Department audited plaintiff for the tax years ending September 30, 2005,

September 30, 2006, and September 30, 2007. On December 7, 2009, the Department forwarded to plaintiff a notice of proposed deficiency which stated plaintiff owed $77, 281 in unpaid income tax plus a penalty of $11, 592 because plaintiff failed to include pass-through miles in the numerator of the apportionment factor as required in section 304(d)(1) of the Tax Act. The relevant portion of section 304(d)(1) states:

"Such business income (other than that derived from transportation by pipeline) shall be apportioned to this State by multiplying such income by a fraction, the numerator of which is the revenue miles of the person in this State, and the denominator of which is the revenue miles of the person everywhere. For purposes of this paragraph, a revenue mile is the transportation of 1 passenger or 1 net ton of freight the distance of 1 mile for a consideration." (Emphasis added.) 35 ILCS 5/304(d)(1) (West 2010).

¶ 4 On January 31, 2011, the Informal Conference Board rendered its decision that no amendments would be made to the plaintiff's proposed tax adjustment. The decision stated:

"The ICB concludes the following: 1. In that Witte Bros. Exchange, Inc. is carrying on its interstate transportation service business in Illinois when passing through Illinois, via Illinois highways, every Illinois 'pass-through mile' has nexus with Illinois. The requisite nexus is supplied if a corporation avails itself of the substantial privilege of carrying on business within the taxing state. [Citation.] Traversing Illinois, via Illinois highways, without an Illinois pick-up or delivery is the exercise of that privilege. 2. In that Witte Bros. Exchange, Inc. derived income from its customers while hauling freight across Illinois, its Illinois 'pass-through miles' are 'revenue miles of the person in this State' and are included in the Witte Bros. Exchange, Inc. transportation apportionment factor numerator as required by 35 ILCS 5/304(d)(1)."

¶ 5 On February 8, 2011, the Department forwarded to plaintiff a notice of audit results requesting payment of $77, 282 in unpaid taxes, $35, 836 in interest, and $23, 185 in penalties for a total payment of $136, 303. Plaintiff timely paid the assessment, but did so under protest.

¶ 6 On March 16, 2011, plaintiff filed a complaint in the law division of the circuit court of Cook County against the Department pursuant to the State Officers and Employees Money Disposition Act (Protest Monies Act) (30 ILCS 230/1 et seq. (West 2010)). Plaintiff sought a preliminary injunction, abatement of penalty fees and interest, a determination that the income tax was erroneously assessed, and a declaration that the Tax Delinquency Amnesty Act ((35 ILCS 735/3-1 et seq) (West 2010)) is unconstitutional.[2]

¶ 7 The trial court granted plaintiff a preliminary injunction restraining the Department from transferring plaintiff's payment out of the protest fund pending a final disposition in the case. Plaintiff then filed a motion for summary determination pursuant to section 2-1005(d) of the Code of Civil Procedure (Code) (735 ILCS 5/2-1005(d) (West 2010)) seeking a ruling on whether the Department used the proper method to calculate its Illinois tax liability. Relying on Northwest Airlines, Inc. v. Department of Revenue, 295 Ill.App.3d 889, 894 (1998), which ruled an airline was not required to pay taxes under section 304(d)(1) when its airplanes did not depart or land in Illinois, but merely flew over the state, plaintiff maintained these flyover miles were identical to pass-through miles and therefore plaintiff correctly excluded these miles from the numerator of the apportionment factor. In comparing fly- over miles to pass-through miles, plaintiff argued the logical result is that airplanes, which do not take off from or land in Illinois, are not taxed for flyover miles. Therefore, plaintiff concluded, trucks which do not pick up or deliver goods in Illinois should not be taxed on pass-through miles. Plaintiff further argued the Illinois General Assembly's 2007 amendment of section 304 of the Tax Act supports the argument that pass-through miles were not intended to be included in the numerator of the apportionment factor for taxes incurred prior to December 31, 2008, because the General Assembly added section 304(d)(3), which expressly included pass-through miles as miles driven in Illinois after December 31, 2008.

¶ 8 In response, the Department contended Illinois pass-through miles must be included in the numerator of the apportionment factor because the statute provides the numerator shall be "the revenue miles of the person in this State." 35 ILCS 5/304(d)(1) (West 2010). A "revenue mile" is defined by the statute as the "transportation of 1 passenger or 1 net ton of freight the distance of 1 mile for a consideration." Id. The Department argued the purpose of section 304(d)(1) is to apportion to Illinois that part of a multistate taxpayer's income reflecting the amount of income earned in Illinois over the amount of income earned everywhere. Excluding pass-through miles would create "nowhere income, " which is essentially income that is taxed by no state and would be contrary to the goal of full apportionment. The Department distinguished the holding in Northwest Airlines, arguing the case was considered on constitutional grounds and not based on the statutory construction of section 304(d)(1). Lastly, the Department contended the amendments to section 304 were clarifications and any other interpretation would be contrary to full apportionment.

¶ 9 In reply, plaintiff asserted the General Assembly created two distinct formulas when amending section 304 to include section 304(d)(3). Therefore, plaintiff argued, it is against statutory construction and impossible for section 304(d)(1) and section 304(d)(3) to have the same interpretation.

ΒΆ 10 After the matter was fully briefed, the trial court set plaintiff's motion for summary determination for oral argument. On the date of hearing, the trial court extended the briefing schedule, allowing both parties ...


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