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.


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


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.


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.

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