Illinois Official Reports

Appellate Court

Kishwaukee Auto Corral, Inc. v. Department of Revenue,

2021 IL App (1st) 200236

Appellate Court 

Caption

KISHWAUKEE AUTO CORRAL, INC., Petitioner, v. THE 

DEPARTMENT OF REVENUE and THE ILLINOIS 

INDEPENDENT TAX TRIBUNAL, Respondents.

District & No. First District, First Division 

No. 1-20-0236

Filed November 8, 2021

Decision Under 

Review

Petition for review of order of Illinois Independent Tax Tribunal, No. 

15-TT-234.

Judgment Reversed.

Counsel on

Appeal

Lane M. Gensburg and Anne J. Kim, of Gensburg Calandriello & 

Kanter, P.C., of Chicago, for petitioner.

Kwame Raoul, Attorney General, of Chicago (Jane Elinor Notz, 

Solicitor General, and David E. Neumeister, Assistant Attorney 

General, of counsel), for respondent Illinois Department of Revenue.

No brief filed for other respondent.
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Panel JUSTICE COGHLAN delivered the judgment of the court, with 

opinion.

Presiding Justice Hyman and Justice Walker concurred in the 

judgment and opinion.

OPINION

¶ 1 Petitioner Kishwaukee Auto Corral, Inc. (Kishwaukee), filed claims with the Illinois 

Department of Revenue (Department) for refunds of sales tax that it paid under the Retailers’ 

Occupation Tax Act (ROTA) (35 ILCS 120/1 et seq. (West 2018)) on vehicles sold through 

installment contracts that ended in the buyers’ default. The Department denied the claims, and 

Kishwaukee sought administrative review in the Illinois Independent Tax Tribunal (Tribunal). 

The Tribunal granted the Department’s motion for summary judgment, and Kishwaukee now 

appeals. As a matter of first impression, we find that Kishwaukee is entitled to the requested 

sales tax refunds under ROTA and reverse.

¶ 2 I. BACKGROUND

¶ 3 A. Stipulated Facts

¶ 4 The following facts are stipulated to by the parties. Kishwaukee is a used car dealership 

that sells cars via installment loan contracts. Thus, Kishwaukee is both a retailer and a lender. 

Since many of the buyers have poor credit, the loans have a high default rate, and Kishwaukee 

repossesses many of the cars before they are fully paid off.

¶ 5 As a seller of motor vehicles, Kishwaukee is required to pay Retailers’ Occupation Tax 

(ROT) on a transaction-by-transaction basis, meaning that when it enters into a contract with 

a buyer, it must pay the full amount of the owed tax up front. Kishwaukee then recovers from 

the buyer a portion of the ROT in each installment payment until the car is fully paid off. 

Conversely, in cases where the buyer defaults and Kishwaukee repossesses the car, 

Kishwaukee never recovers the full ROT from the buyer.

¶ 6 Prior to July 31, 2015, when a buyer defaulted on an installment sale, Kishwaukee would 

claim, and the Department would grant, a refund or credit of the ROT that Kishwaukee did not 

receive from the buyer. In its regulations, the Department characterized such refund claims as 

“bad debt credit” or, alternatively, “repossession credit.” See 86 Ill. Adm. Code 

130.1960(d)(1), amended at 24 Ill. Reg. 18376 (eff. Dec. 1, 2000).

¶ 7 Effective July 31, 2015, the legislature amended ROTA to add section 6d, which provides, 

in relevant part:

“(a) A retailer is relieved from liability for any tax that becomes due and payable if 

the tax is represented by amounts that are found to be worthless or uncollectible, have 

been charged off as bad debt on the retailer’s books and records in accordance with 

generally accepted accounting principles, and have been claimed as a deduction 

pursuant to Section 166 of the Internal Revenue Code on the income tax return filed by 

the retailer. A retailer that has previously paid such a tax may, under rules and 

regulations adopted by the Department, take as a deduction the amount charged off by 

the retailer.” (Emphasis added.) 35 ILCS 120/6d(a) (West 2018).
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See Pub. Act 99-217 (eff. July 31, 2015).

¶ 8 Following the enactment of section 6d, the Department amended its regulation to require 

that for claims after July 31, 2015, a retailer must both (1) charge off the bad debt on its books 

and (2) claim a deduction pursuant to section 166 of the Internal Revenue Code (26 U.S.C. 

§ 166 (2018)) on its federal income tax return to qualify for a refund of ROT paid on a defaulted 

installment contract. As amended, the regulation states that “[r]etailers or lenders that file 

federal returns on a cash basis and cannot claim a deduction pursuant to section 166 of the 

Internal Revenue Code are not eligible for the bad debt deduction.” 86 Ill. Adm. Code 

130.1960(d)(5)(B) (2018).

¶ 9 Kishwaukee is a cash basis taxpayer. Although retailers maintaining an inventory of 

personal property are typically required to file their federal income tax returns on an accrual 

basis, smaller taxpayers with annual gross receipts of less than $25 million per year, such as 

Kishwaukee, are allowed to file on a cash basis. For federal income tax purposes, cash basis 

taxpayers like Kishwaukee are not permitted to claim bad debt deductions on their federal 

income tax returns because they do not report receivables as income until actually received. 

¶ 10 Because Kishwaukee files its federal income tax returns on a cash basis, the Department 

denied Kishwaukee’s refund claims made after July 31, 2015, for ROT paid on repossessed 

cars, even though Kishwaukee charged off the defaulted loans in its internal books and records 

for financial accounting purposes.

¶ 11 B. Procedural History

¶ 12 On October 26, 2015, the Department issued a tentative claim denial to Kishwaukee for 

$61,312.89 in ROT prepaid on repossessed cars. On November 16, 2015, Kishwaukee timely 

filed a petition for review in the Tribunal. The parties filed cross-motions for summary 

judgment. As shall be discussed below, Kishwaukee challenged the Department’s 

interpretation of section 6d and also argued that if section 6d precluded it from obtaining 

refunds for prepaid ROT, its application in this case violates the uniformity clause of the 

Illinois Constitution by creating an arbitrary distinction between cash and accrual basis 

taxpayers.

¶ 13 On January 7, 2020, the Tribunal issued a final order granting the Department’s motion 

and denied Kishwaukee’s motion. Kishwaukee timely filed the instant appeal.

¶ 14 II. ANALYSIS

¶ 15 Kishwaukee argues that it is entitled to claim a refund for ROT paid on defaulted 

installment contracts under section 6d of ROTA. Alternatively, Kishwaukee argues that if 

ROTA does not permit Kishwaukee to claim such a refund, the statute’s application in this 

case violates the uniformity clause of the Illinois Constitution (Ill. Const. 1970, art. IX, § 2) 

because it creates an arbitrary distinction between accrual basis taxpayers (who can claim such 

refunds) and cash basis taxpayers (who cannot).

¶ 16 We review an administrative agency’s grant of summary judgment de novo (Prairie Rivers 

Network v. Illinois Pollution Control Board, 2016 IL App (1st) 150971, ¶ 23), meaning that 

we “review[ ] the matter anew—the same as if the case had not been heard before and as if no 
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decision had been rendered previously.” Ryan v. Yarbrough, 355 Ill. App. 3d 342, 346 (2005).1

The fundamental rule of statutory construction is to give effect to the legislators’ intent, which 

is best indicated by the plain language of the statute. City of Chicago v. Morales, 177 Ill. 2d 

440, 448 (1997). Where the language is clear, we must give it effect without adding limitations 

or conditions. Id. Where the language is ambiguous, we may consider extrinsic aids for 

construction, such as legislative history and the statute’s background. Tri-State Coach Lines, 

Inc. v. Metropolitan Pier & Exposition Authority, 315 Ill. App. 3d 179, 190 (2000). If a statute 

is “reasonably susceptible” to a constitutional construction, we must give it such a construction 

to affirm its constitutionality and validity. Morales, 177 Ill. 2d at 448.

¶ 17 Initially, with respect to Kishwaukee’s constitutional claim, we note that the Department 

failed to meet its burden of proof in the Tribunal. The uniformity clause provides: “In any law 

classifying the subjects or objects of non-property taxes or fees, the classes shall be reasonable 

and the subjects and objects within each class shall be taxed uniformly. Exemptions, 

deductions, credits, refunds and other allowances shall be reasonable.” Ill. Const. 1970, art. 

IX, § 2. To survive scrutiny under this clause, “a nonproperty tax classification must (1) be 

based on a real and substantial difference between the people taxed and those not taxed, and 

(2) bear some reasonable relationship to the object of the legislation or to public policy.” 

Arangold Corp. v. Zehnder, 204 Ill. 2d 142, 153 (2003). The taxing body bears the initial 

burden of producing a justification for the classification, whereupon the burden shifts to the 

challenging party to show that the taxing body’s justification is either legally insufficient or 

unsupported by facts. Id.

¶ 18 Before the Tribunal, the Department stated, without elaboration, that “there are clearly ‘real 

and substantial differences[’] between cash basis and accrual basis taxpayers.” The Department 

did not articulate those differences, nor did it assert, much less argue, that such differences 

bore a reasonable relationship to the object of the legislation or to public policy. Since the 

Department failed to meet its burden of proof, Kishwaukee convincingly argues that the 

Tribunal erred as a matter of law in granting summary judgment to the Department. 

Kishwaukee further asserts that the Department should be precluded from offering a 

justification for the classification for the first time on appeal, since Kishwaukee cannot now 

offer evidence in rebuttal.

¶ 19 However, it is a longstanding rule that courts avoid deciding cases on constitutional 

grounds except as a last resort. See People v. Bass, 2021 IL 125434, ¶¶ 30-31 (vacating 

portions of appellate court decision that unnecessarily dealt with constitutional issues). 

Therefore, we begin by considering the proper interpretation of section 6d(a), which provides, 

in relevant part:

“A retailer is relieved from liability for any tax that becomes due and payable if the tax 

is represented by amounts that are found to be worthless or uncollectible, have been 

charged off as bad debt on the retailer’s books and records in accordance with generally 

accepted accounting principles, and have been claimed as a deduction pursuant to 

Section 166 of the Internal Revenue Code on the income tax return filed by the retailer. 

A retailer that has previously paid such a tax may, under rules and regulations adopted 

1

The Department cites Horsehead Corp. v. Department of Revenue, 2019 IL 124155, ¶¶ 26-27, for 

the proposition that deference must be paid to decisions of the Tribunal. Horsehead was not a summary 

judgment case and, therefore, does not govern the standard of review in this appeal.
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by the Department, take as a deduction the amount charged off by the retailer.” 35 ILCS 

120/6d(a) (West 2018).

¶ 20 The Department admitted at oral argument before this court that it takes no issue with 

Kishwaukee’s recordkeeping or the veracity of its refund claims. Nevertheless, it argues that 

the language of section 6d(a) precludes cash basis taxpayers such as Kishwaukee from 

obtaining refunds. Section 166 of the Internal Revenue Code (26 U.S.C. § 166 (2018)) allows 

taxpayers to take a deduction for “[b]ad debts,” i.e., debts that are uncollectible. However, this 

does not apply to cash basis taxpayers such as Kishwaukee. Under the cash method of 

accounting, revenue is recorded when it is actually received and expenses are recorded when 

they are actually paid. Internal Revenue Serv., Publication 538, Accounting Periods & 

Methods, at 8-9 (rev. Jan. 2019), https://www.irs.gov/pub/irs-pdf/p538.pdf [https://perma.cc/

S687-5KTC]. By contrast, under the accrual method, revenue is recorded when the taxpayer 

has the legal right to receive it, and expenses are recorded when the taxpayer incurs the legal 

liability to pay them, even if no funds have yet been exchanged. Id. at 10-12. Because a cash 

basis taxpayer does not record revenue until it is received, it cannot claim a section 166 

deduction for recorded revenue that later becomes uncollectible.

¶ 21 Kishwaukee contends that it is entitled to take a deduction under the second sentence of 

section 6d(a), arguing that it is “[a] retailer that has previously paid such a tax” and has 

“charged off” the uncollectible amounts in its internal books and records for financial 

accounting purposes. On its face, the second sentence of section 6d(a) of ROTA does not 

require a section 166 of the Internal Revenue Code deduction as a prerequisite for recovery. 

Moreover, section 6d as a whole does not mention cash basis taxpayers, much less purport to 

bar them from obtaining refunds.

¶ 22 Thus, the language of the statute is ambiguous as to its impact on cash basis taxpayers, and 

it is appropriate for us to consider the statute’s legislative history as an interpretive aid. TriState Coach Lines, 315 Ill. App. 3d at 190. Representative DeLuca, a proponent of the bill, 

explained the bill’s purpose as follows:

“Under current law, a retailer that administers its own credit to consumers is entitled to 

take a credit or tax deduction for the sales tax paid by the retailer when the consumer 

defaults on the payment for the merchandise. Senate Bill 507 will clarify existing law 

by allowing a retailer that offers a store credit card, also known as a private label credit 

card, to consumers that is administered by a third party to obtain a credit or refund for 

the sales tax paid to the state after the consumer defaults on the payment of the 

merchandise. Senate Bill 507 will clarify that the retailer must have already written off

the underlying outstanding balance as bad debt on the retailer’s federal tax return before 

applying to the Illinois Department of Revenue for the sales tax deduction.” 99th Ill. 

Gen. Assem., House Proceedings, May 29, 2015, at 132-33 (statement of 

Representative DeLuca).

¶ 23 The following exchange then occurred between DeLuca and Representative Guzzardi:

“Guzzardi: *** [W]hat’s the impetus behind this change? Why is that a better way 

than the way it’s done now?

DeLuca: Because the retailer has paid the money to the state and it’s actually not 

the state’s money.

Guzzardi: How do you mean?
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DeLuca: The sales tax portion.

Guzzardi: Mmm mmm. Explain.

DeLuca: Because they defaulted the.

Guzzardi: Sorry.

DeLuca: .the purchaser defaulted on the payment. Did not pay the bill.

Guzzardi: Right.

DeLuca: .for the purchase.

Guzzardi: Okay. So, the point of this is the purchaser didn’t pay for the item.

DeLuca: That’s correct.

Guzzardi: The store didn’t get the value of the item and therefore, it shouldn’t be 

passing along a percentage.

DeLuca: That’s correct.

Guzzardi: .of that to the state in sales tax. Okay.

DeLuca: Yes.” Id. at 134-35 (statements of Representatives DeLuca and Guzzardi).

¶ 24 This dialogue clarifies that the purpose behind section 6d of ROTA was to ensure that 

retailers could get refunds of ROT prepaid on defaulted goods because “the retailer has paid 

the money to the state and it’s actually not the state’s money.” Notably, the purpose was not to 

prohibit cash basis taxpayers from obtaining such refunds. There was no discussion pertaining 

to cash basis taxpayers and no indication that the legislators considered the amendment’s 

potential impact on small businesses that file their federal income tax returns on a cash basis. 

Moreover, the purpose behind enactment of section 6d applies equally to both cash and accrual 

basis taxpayers. Regardless of the accounting method a retailer uses, it remains true that “[t]he 

store didn’t get the value of the item and therefore, it shouldn’t be passing along a percentage 

*** of that to the state in sales tax.”

¶ 25 In light of this clearly expressed legislative intent, we find that cash basis retailers, such as 

Kishwaukee, that prepay ROT on goods sold through installment contracts are entitled to “take 

as a deduction the amount charged off by the retailer” (35 ILCS 120/6d(a) (West 2018)) in the 

event of a buyer’s default.

¶ 26 The Department argues that recovery under the second sentence of section 6d(a) is 

conditioned upon rules and regulations adopted by the Department. After the enactment of 

section 6d, the Department adopted a regulation stating that “[r]etailers or lenders that file 

federal returns on a cash basis and cannot claim a deduction pursuant to section 166 of the 

Internal Revenue Code are not eligible for the bad debt deduction.” 86 Ill. Adm. Code 

§ 130.1960(d)(5)(B) (2018).

¶ 27 A reasonable construction of an ambiguous statute by the agency charged with its 

administration and enforcement can create a presumption of correctness, if contemporaneous, 

consistent, long-continued, and accompanied by legislative acquiescence (Citibank, N.A. v. 

Illinois Department of Revenue, 2017 IL 121634, ¶ 39). However, the Department’s regulation 

in this case is not reasonable. When Kishwaukee sells a car, it is required to pay ROT on the 

car’s entire value up front. If the buyer defaults and Kishwaukee repossesses the car, it resells 

the car and again pays the full ROT up front. To deny Kishwaukee a refund under these 

circumstances would be to allow the State double recovery, which is both unreasonable and 

contrary to the express intent of the legislature in enacting section 6d. Additionally, as pointed 
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out at oral argument, an accrual basis retailer selling and then repossessing the exact same car 

would be entitled to a refund, despite there being no difference in the taxes the retailer 

originally remitted to the State. Thus, section 130.1960(d)(5)(b) of Title 86 of the Illinois 

Administrative Code is neither a reasonable nor a persuasive interpretation of section 6d of 

ROTA.

¶ 28 III. CONCLUSION

¶ 29 For the foregoing reasons, we find that Kishwaukee is entitled to a refund of $61,312.89 in 

paid ROT claimed in this case. We further enjoin the Department from denying Kishwaukee’s 

subsequently filed and future refund claims on the grounds that Kishwaukee did not take a 

section 166 bad debt deduction on its federal income tax returns in connection with defaulted 

sales.

¶ 30 Reversed.