Court Opinion

ID: 9860484
Source: CourtListenerOpinion
Date Created: 2023-09-24 23:23:16.712782+00
Date Added: 2024-06-11T11:15:51.935487
License: Public Domain

JUSTICE T. O’BRIEN, dissenting in part: I respectfully dissent from the majority opinion to the extent that it holds that a multistate corporation must establish that it actually "paid a tax” in another State in order to be considered "taxable” under the Illinois version of the "throwback rule.” Prior to 1957, the various States labored under diverse and often conflicting methods of dividing the total taxable income of a corporation engaged in multistate operations. In an effort to alleviate inconsistencies and prevent double taxation, the National Conference of Commissioners of Uniform State Laws recommended the adoption of the Uniform Division of Income for Tax Purposes Act (Uniform Act). The Uniform Act proposed uniform principles of allocation to ensure that 100% of a corporation’s income, neither more nor less, was taxable by States having jurisdiction to levy taxes. Illinois is among the majority of States adopting the Uniform Act’s approach to income apportionment. Section 304 of the Illinois Income Tax Act (Act) sets forth the statutory methodology for allocating the income of a multistate business subject to this State’s income tax. (Ill. Rev. Stat. 1983, ch. 120, par. 3 — 304 (now, as amended, 35 ILCS 5/304(a) (West 1992)).) The allocation is expressed in terms of a percentage of three factors which are intended to represent the fractional share of a corporation’s in-State business activity. Specifically, the Act provides that a multistate corporation’s taxable 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 the sales factor (if any), and the denominator of which is 3 reduced by the number of factors which have a denominator of zero.” (Ill. Rev. Stat. 1983, ch. 120, par. 3 — 304(a) (now, as amended, 35 ILCS 5/304(a) (West 1992)).) This apportionment is best expressed by the following formula: [[Image here]] 3 The Act explains further that the ILLINOIS SALES numerator is determined by the total sales of tangible personal property in this State. A sale of tangible personal property occurs in this State if "(i) [t]he property is delivered or shipped to a purchaser *** within this State regardless of the f.o.b. point or other conditions of the sale; or (ii) [t]he property is shipped from an office, store, warehouse, factory or other place of storage in this State and *** the person is not taxable in the state of the purchaser.” (Emphasis added.) (Ill. Rev. Stat. 1983, ch. 120, par. 304(a)(3)(B).) It is the sales occurring under subsection (ii), i.e., property shipped from this State to a purchaser in a State where the corporation is not taxable, which are "thrown back” to Illinois to be added into the ILLINOIS SALES numerator for the purpose of determining the net income tax. The dispositive issue in this case is the meaning of the term "taxable” as used in section 304 (a)(3)(B)(ii). Contrary to the position of the Illinois Department of Revenue, plaintiff taxpayers contend the actual payment of taxes in a destination State is irrelevant in determining whether a corporation is "taxable” in that State. I agree. The Illinois Income Tax Act itself defines "taxable” as follows: "(f) Taxability in other state. For purposes of allocation of income pursuant to this Section, a taxpayer is taxable in another state if: (1) In that state he is subject to a net income tax, a franchise tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax; or (2) That state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, that state does or does not.” (35 ILCS 5/303(f) (West 1992).) Thus, in order for a taxpayer to be considered "taxable” in another State, the taxpayer must show that (a) the other State has in fact levied one of the taxes listed in subsection (1) against him or (b) the other State has jurisdiction under subsection (2) to levy all net income tax against him regardless of whether the other State does or does not levy such a tax. The critical inquiry under subsection (2) is not whether the taxpayer has in fact paid a net income tax in another State; indeed, the existence of such a tax is irrelevant to a finding of taxability. Rather, the determinative question is whether the other State has "jurisdiction” to subject the taxpayer to a net income tax. Jurisdiction in this context is governed primarily by Public Law No. 86 — 272. (Pub. L. No. 86 — 272 § 101, 73 Stat. 555, 15 U.S.C. § 381 et seq. (1988).) This Federal statute prohibits a State from imposing a net income tax on foreign corporations deriving income from interstate commerce in the State where the only corporate activities in that State amount to the mere solicitation of orders for sales of tangible personal property. In the instant case, the Illinois Department of Revenue concedes that the taxpayers’ activities exceeded the mere solicitation requirement of Public Law No. 86 — 272 in all of the destination States. Consequently, those States had jurisdiction to subject the taxpayers to a net income tax, and the taxpayers are therefore deemed to be "taxable” in those States. It necessarily follows that the sales of tangible personal property in the destination States cannot be "thrown back” to Illinois and should not have been included in the ILLINOIS SALES numerator. The overwhelming majority of other jurisdictions which have considered the determination of taxability under the same or substantially the same taxing provisions, I believe, have reached the same conclusion advanced in this dissent; namely, a corporation is "taxable” in the destination State if that State possesses jurisdiction to subject the corporation to a net income tax regardless of whether the corporation actually pays the tax. The bases underlying these decisions are not only the plain and unambiguous language of the tax provisions, but also the fact that a determination of taxability predicated upon proof of payment of taxes could lead to an impermissible double taxation. For example, the taxpayers in the instant case may still be required to pay a net income tax in certain of the destination States despite the fact that Illinois has already exacted the same tax. The Illinois Department of Revenue’s reliance on GTE Automatic Electric, Inc. v. Allphin (1977), 68 Ill. 2d 326, 369 N.E.2d 841, is, I believe, misplaced.1 In GTE, the issue before the court was the proper allocation of drop shipment or "nowhere sales,” i.e., the shipment of tangible personal property from an inventory in a State where the corporation was not taxable to a purchaser in another State where the corporation was again not taxable. Clearly, under "nowhere sales” the corporation could never suffer the risk of double taxation since both the State of origin and the destination State lacked even the jurisdiction to tax the corporation. I further believe that GTE court did not consider, indeed it was not necessary to pass upon, the category of "throw back sales” at issue in this case. GTE, therefore, offers nominal precedence. Therefore, I respectfully dissent in part.  The Department’s reliance on 86 Ill. Adm. Code § 100.3200 (1992-93), which requires the payment of taxes as a prerequisite to taxability, is also misplaced since a regulation cannot alter the clear terms of the statute which it purports to interpret.