United States: Illinois Appellate Court Holds Trucking Company Must Include Pass-Through Miles In Apportionment Factor Numerator

On September 30, the Illinois Appellate Court held that a trucking company's apportionment factor numerator must include miles driven through Illinois without picking up or delivering goods (pass-through miles).1 For the tax years in dispute, the Illinois apportionment statute for transportation services provided the numerator of the apportionment factor must be the "revenue miles of the person in this State." The Court concluded the pass-through miles were "in this State" because the taxpayer's trucks and employees maintained a physical and economic presence while driving through Illinois.

Background

In 2009, the Illinois Department of Revenue audited the taxpayer, an interstate trucking company, for the 2005 through 2007 tax years. Following the audit, the Department issued a notice of proposed deficiency claiming the taxpayer failed to include passthrough miles in the numerator of the apportionment factor as required by Illinois law. The Department's Informal Conference Board decided that no amendments would be made to the Department's proposed tax adjustment. After timely paying the assessment under protest, the taxpayer filed a complaint with the circuit court seeking a preliminary injunction, abatement of penalty fees and interest, and a determination that the income tax was erroneously assessed. The circuit court granted the taxpayer's preliminary injunction restraining the Department for transferring the taxpayer's payment out of the protest fund until there was a final disposition in the case.

The taxpayer subsequently filed a motion for summary determination that sought a ruling on whether the Department used the proper method to apportion income to Illinois. The circuit court granted the taxpayer's motion and held that the Department could not tax pass-through miles under the apportionment statute for transportation services that was in effect for taxable years ending before December 31, 2008. The Department timely appealed the circuit court's decision.

Illinois Apportionment Statute

For taxable years ending before December 31, 2008, Illinois law provided that business income derived from furnishing transportation services was apportioned to the 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."2 For taxable years ending on or after December 31, 2008, the legislature added a new statutory subsection providing that business income derived from transportation services is apportioned to the state by using a fraction, the numerator of which is: (i) all receipts from moving or shipping any item or substance that both originates and terminates in Illinois; and (ii) that portion of the gross receipts from moving or shipping any people, item or substance "that originates in one state or jurisdiction and terminates in another state or jurisdiction," that is determined by the ratio that the total miles traveled in Illinois bears to total miles everywhere.3 The denominator is all revenue derived from moving or shipping any people, item or substance.4

Pass-Through Miles Included in Apportionment Factor

The Illinois Appellate Court reversed the circuit court and held that the pass-through miles must be included in the numerator of the apportionment factor. In reaching its decision, the Appellate Court first considered the language of the apportionment statute for transportation services in effect for taxable years ending before December 31, 2008. Specifically, the Appellate Court examined the statutory language providing that the numerator is the "revenue miles of the person in this State."5 The Appellate Court previously had issued two published opinions that construed the statutory language of the transportation company apportionment formula as it relates to the type of miles that should be included. The two published opinions construed the transportation company apportionment formula as applied to airlines and pipelines.6

At the time the circuit court determined that pass-through miles could not be taxed under the apportionment statute, the only published case construing the transportation company apportionment statute was Northwest Airlines, Inc. v. Department of Revenue.7 In Northwest Airlines, the Illinois Appellate Court held that "flyover miles" for flights that neither originated nor terminated in Illinois should not be included in the numerator of the apportionment factor because there was insufficient nexus. The taxpayer in Northwest Airlines did not have any physical presence in or other connection to Illinois except for its airplanes' travel through Illinois' airspace.

Subsequent to the circuit court's decision, the Illinois Appellate Court issued a second opinion, Panhandle Eastern Pipeline Co. v. Hamer,8 which concerned the miles that should be included in the numerator of the apportionment factor. In Panhandle, the Appellate Court considered the related issue of whether the apportionment statute for pipeline companies included "flow-through" miles of natural gas in the numerator of the apportionment factor. Similar to the apportionment statute for transportation services, the apportionment statute for pipeline companies provided that the numerator was the "revenue miles of the person in this State."9 The Appellate Court held in Panhandle that the flow-through miles were properly included in the numerator of the apportionment factor. The Court distinguished Northwest Airlines by explaining that the airplanes made no physical contact with the state, but the pipeline had a physical presence in Illinois.

After considering Northwest Airlines and Panhandle, the Appellate Court accepted the Department's argument that the taxpayer's pass-through miles should be included in numerator of the apportionment factor. The pass-through miles satisfied the statutory language because they constituted "revenue miles of the person in this State." The taxpayer attempted to distinguish the pass-through miles from the flow-through miles that were included in the apportionment factor in Panhandle. Under the taxpayer's argument, the flow-through miles were fixed in Illinois because the transportation of the gas was through pipelines, but the pass-through miles for a trucking company were not fixed because the taxpayer could decide whether to travel through Illinois.

The Appellate Court concluded that the taxpayer's pass-through miles established a physical and economic presence in Illinois that must be taxed. There was no authority to support the taxpayer's argument that the physical presence must be fixed within Illinois. The taxpayer's property and employees were physically present in Illinois because they used the state's infrastructure and roads. Also, the taxpayer conducted the economic activity of providing shipping services that involved travel through Illinois.

The taxpayer unsuccessfully argued that it could not be taxed on pass-through miles because no consideration was exchanged in Illinois. The Court noted that the statute does not provide that revenue miles are conditioned on the taxpayer generating income from people or entities within Illinois. As long as the taxpayer receives monetary compensation for its shipping services, pass-through miles must be included because these miles were traveled in Illinois for consideration. Furthermore, the inclusion of the pass-through miles in the apportionment factor was also supported by the purpose of the statute by preventing revenue from escaping taxation.

The Court also rejected the taxpayer's argument that the apportionment statute in effect for tax years prior to 2008 did not include pass-through miles because the statute for subsequent years specifically includes gross receipts from transportation that originates in one state and terminates in another state. In Panhandle, the Court considered and rejected this same argument. Even though the statute clearly includes pass-through miles for the 2008 and subsequent tax years, the statute did not apply to the tax years at issue in this case. The fact that the new formula specifically includes pass-through miles did not mean that the former formula excluded these miles.10

Commentary

In light of the Appellate Court's decision last year in Panhandle involving an apportionment statute with similar language, this decision is not completely surprising. The trucking company's facts fell somewhere between the facts of Northwest Airlines, in which the airline was passing over the state airspace without taking off or landing in Illinois, and thus in the view of the court having no connection with Illinois, and Panhandle, in which the natural gas, a fungible product, was passing through the state via pipelines and pumping stations maintained by the pipeline company's employees on land leased and easements obtained by the pipeline company. In the instant case, the pass-through miles at issue did not involve pickups or deliveries in Illinois, but the trucks did pass through the state on roads built and maintained by the state.

Similar to Panhandle, this case concerned the interpretation of an Illinois apportionment statute that applied to tax years prior to 2008. As noted by the Court, Illinois has enacted different apportionment provisions that apply to transportation services for the 2008 and subsequent years. However, the reasoning in this case may be considered by courts in other states that still apply an apportionment methodology similar to the pre-2008 statute. Also, taxpayers currently under audit for pre-2008 tax years may need to consider this decision.

Although the apportionment statute that applies to transportation services for the 2008 and subsequent tax years clearly includes pass-through miles, there is uncertainty surrounding the application of the current statute. For example, the meaning of the "total miles everywhere" language has been the subject of debate. The absence of regulations for the transportation services apportionment formula contributes to the uncertainty faced by transportation companies. As a result, transportation companies might be required to resort to litigation to obtain clarity.

Footnotes

1. Witte Brothers Exchange, Inc. v. Department of Revenue, Illinois Appellate Court, 1st Dist., No. 1-12- 0850, Sep. 30, 2013.

2. 35 ILL. COMP. STAT. 5/304(d)(1). Note that this provision did not apply to income derived from transportation by pipeline.

3. 35 ILL. COMP. STAT. 5/304(d)(3).

4. Id.

5. 35 ILL. COMP. STAT. 5/304(d)(1).

6. Prior to the instant case, an Illinois appellate court had only dealt with the pass-through miles of a trucking company in an unpublished decision that by definition may not be cited as precedent. In Erieview Cartage v. Department of Revenue, 278 Ill. App. 3d 1123 (1996), an Illinois appellate court ruled that a trucking company was not taxable on pass-through miles.

7. 692 N.E.2d 1264 (Ill. App. Ct. 1998).

8. 981 N.E.2d 1107 (Ill. App. Ct. 2012).

9. 5 ILL. COMP. STAT. 5/304(d)(2). Similar to the apportionment statute for transportation services, this statute applied to taxable years ending before December 31, 2008. Both provisions were replaced by the new statute for apportioning transportation services (35 ILL. COMP. STAT. 5/304(d)(3)).

10 On appeal, the taxpayer also requested the Appellate Court to consider whether inclusion of the pass-through miles violated the Commerce Clause of the U.S. Constitution. The Appellate Court declined to consider this argument because the taxpayer did not raise this issue in the circuit court.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.