Northwest Airlines Inc. v. Dept. of Revenue

FIFTH DIVISION
March 20, 1998

No. 1-96-4267

NORTHWEST AIRLINES, INC. and ) Appeal from the
REPUBLIC AIRLINES, INC., ) Circuit Court of
) Cook County.
Plaintiffs-Appellees, )
)
v. ) No. 93 L 50535
)
THE DEPARTMENT OF REVENUE OF )
THE STATE OF ILLINOIS, ) The Honorable
) Randye A. Kogan,
Defendant-Appellant. ) Judge, Presiding.

JUSTICE HOURIHANE delivered the opinion of the court:

Plaintiffs, Northwest Airlines, Inc. (Northwest) and
Republic Airlines, Inc. (Republic) (collectively referred to as
taxpayers), filed a complaint for administrative review,
challenging a decision of the Illinois Department of Revenue
(Department) which found that "flyover miles" must be included in
the numerator of the apportionment fraction applicable to
transportation services set forth in section 304(d) of the
Illinois Income Tax Act (Act) (35 ILCS 5/304(d) (West 1996)).
Flyover miles are miles accrued by "overflights"--flights which
do not depart from or land in Illinois, but whose normal route is
over Illinois.
The circuit court concluded that flyover miles are not
properly included in the apportionment numerator and reversed the
Department's decision. The Department appeals. We affirm.
BACKGROUND
Northwest is a Minnesota corporation with its principal
place of business in Minneapolis. Republic was a Wisconsin
corporation with its principal place of business in Minneapolis
which was merged into Northwest. During the relevant tax years,
both commercial airlines operated in various states, including
Illinois, and were required to apportion their business income to
Illinois using the one-factor apportionment formula for
transportation companies set out in section 304(d) of the Act.
This section states, in relevant part:
"Business income derived from furnishing
transportation services *** 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) (1996).[fn1]
The Department issued notices of deficiency for tax years
1983 through 1987 in the aggregate amount of approximately
$750,000. The deficiencies reflect several adjustments to the
taxpayers' returns. In particular, the Department adjusted each
tax year to include flyover miles in the Illinois apportionment
fraction numerator.
The taxpayers timely protested the Department's adjustment
based on its inclusion of flyover miles. The parties proceeded
before the administrative law judge (ALJ) on a joint stipulation
of facts, exhibits, and testimony. In his recommended decision,
the ALJ concluded that section 304(d) of the Act authorized the
inclusion of flyover miles in the numerator of Illinois'
apportionment fraction. Specifically, the ALJ rejected the
taxpayers' contention that flyover miles are not in Illinois, but
rather are in federal air space. The ALJ further found that the
inclusion of flyover miles in the Illinois numerator facilitates
100% apportionment, is not preempted by federal law, and does not
run afoul of the Commerce Clause. Finally, the ALJ found that
penalties were proper. On May 4, 1993, the Director of the
Department adopted the ALJ's recommended decision.
On administrative review, the circuit court looked to the
statutory language and concluded that flyover miles are not "in"
Illinois. The circuit court also found that Illinois case law
requires a nexus between the overflights and this state. See GTE
Automatic Electric, Inc. v. Allphin, 68 Ill. 2d 326, 369 N.E.2d 841 (1977) (hereafter GTE); Lakehead Pipe Line Co. v. Department
of Revenue, 192 Ill. App. 3d 756, 549 N.E.2d 598 (1989). On
October 4, 1994, the court issued its memorandum and decision
reflecting its findings, but remanded the matter to the
Department for a determination of whether flyover miles should be
included in the apportionment formula pursuant to section 304(f)
of the Act. Section 304(f) provides for alternative methods of
apportionment in certain circumstances. 35 ILCS 5/304(f) (West
1996).
On remand, the ALJ found that the Department had not
satisfied the prerequisites in order to invoke an alternative
apportionment method under section 304(f). The ALJ also
revisited the penalties issue and recommended that penalties be
abated. On June 19, 1996, the Director adopted the ALJ's
recommended decision on remand and the matter was returned to the
circuit court for final disposition.
On November 4, 1996, the circuit court entered its final
judgment order reversing the Department's May 4, 1993, decision.
The Department appeals. 735 ILCS 5/3-112 (1996); 155 Ill. 2d R.
301.
ANALYSIS
Interpretation of a statute is a question of law. Branson
v. Department of Revenue, 168 Ill. 2d 247, 254, 659 N.E.2d 961
(1995). As the agency charged with administration and
enforcement of the Act, the Department's interpretation of the
Act is relevant and will receive some deference on review.
However, the Department's interpretation is not binding on this
court and review proceeds de novo. Branson, 168 Ill. 2d at 254;
Thomas M. Madden & Co. v. Department of Revenue, 272 Ill. App. 3d
212, 215, 651 N.E.2d 218 (1995).
Tax laws must be strictly construed; they must be given a
reasonable construction, without bias or prejudice against either
the State or the taxpayer, in order to effectuate the intent of
the legislature. Van's Material Co. v. Department of Revenue,
131 Ill. 2d 196, 202, 545 N.E.2d 695 (1989); United Legal
Foundation v. Department of Revenue, 272 Ill. App. 3d 666, 677,
650 N.E.2d 1064 (1995). Where there is doubt, tax statutes will
be construed most strongly against the government and in favor of
the taxpayer. Van's Material Co., 131 Ill. 2d at 202.
We turn first to the language of the statute, the best
evidence of the legislature's intent. Kraft, Inc. v. Edgar, 138 Ill. 2d 178, 189, 561 N.E.2d 656 (1990). If the language is
clear and unambiguous, the statute will be construed according to
its terms, without resorting to aids of construction. Branson,
168 Ill. 2d at 254.
Section 304(d) of the Act provides that the numerator in the
apportionment fraction is the revenue miles of the airline "in
this State". "Revenue mile", in turn, is defined as "the
transportation of 1 passenger or 1 net ton of freight the
distance of 1 mile for a consideration." 35 ILCS 5/304(d) (West
1996). Significantly, no reference is made in the statutory
definition to flyover miles, overflights, or flights which land
in or depart from this state.
In construing the statutory language, the circuit court
initially determined that, had the legislature intended to
include flyover miles in the apportionment numerator, it would
have used the appropriate language--"above" Illinois, "over"
Illinois, or "in [Illinois] air space". Since the legislature
sought to include only those revenues miles "in" Illinois, the
court concluded that flyover miles should be excluded. However,
as the Department correctly argues, all the airline mileage at
issue here is necessarily "over" this state, "above" this state,
or "in [Illinois] air space". Thus, it is erroneous to conclude
that flyover miles should be excluded simply on the basis of an
"in" versus "over" analysis.
We note that our construction of section 304(d) of the Act
cannot be based solely on the statutory language. Proper
interpretation must also include the nature, object and
consequences of construing this provision one way as opposed to
another. Mulligan v. Joliet Regional Port District, 123 Ill. 2d 303, 313, 527 N.E.2d 1264 (1988). In this regard, it is presumed
that the legislature intended to enact an effective law. Thus,
an interpretation which renders a statute unconstitutional or
otherwise invalid or ineffective should be discarded. People v.
Williams, 119 Ill. 2d 24, 28, 518 N.E.2d 136 (1987); In re
Annexation of Territory to City of Park Ridge, 260 Ill. App. 3d
384, 389, 632 N.E.2d 194 (1994). Because we find that the
interpretation urged by the Department is inconsistent with
Illinois Supreme Court precedent we must discard it in favor of
the interpretation advanced by the taxpayers.
In GTE our supreme court considered whether certain drop-
shipment sales should be excluded in computing the total sales of
the taxpayer in this State for purposes of the three-factor
apportionment formula set out in article 3 of the Act. The drop-
shipment sales at issue occurred where taxpayer's suppliers
shipped the goods from a point outside Illinois to a destination
also outside Illinois, and where the taxpayer was not taxed in
either the state of origin or the state of destination.
The taxpayers argued, inter alia, that the nexus between
Illinois and the drop-shipment sales provided an insufficient
constitutional basis on which to include such sales in the
apportionment formula. The court responded:
"On this record we cannot determine what
plaintiff's business activity in this State has
been with respect to these 'drop-shipment' sales,
and this can be determined in a hearing before the
Department. We hold, however, that the mere fact
that both the origin and destination of these
sales were outside Illinois does not show that
there were not sufficient local activities within
Illinois to form a sufficient nexus between the
Illinois income tax and transactions in Illinois
by which the tax is measured." (Emphasis added.)
GTE, 68 Ill. 2d at 340.
Although the Department maintains that the nexus requirement
is satisfied where the corporation avails itself of the privilege
of carrying on business in this state, GTE plainly requires
something more, i.e., there must be a nexus with the Illinois
transaction by which the tax is measured. In this case, there
must be a sufficient connection with the flyover miles generated
by the overflights.
Unlike the GTE case, the record before this court amply
demonstrates that the nexus requirement cannot be satisfied.
Flight plans for overflights are not filed with any Illinois
state or municipal authorities. There are no voice
communications with overflights, and such flights make no use of
Illinois facilities, services, or employees. There exists no
physical contact between overflights and this state, nor any
economic connection. We do not find the mere possibility that an
overflight will avail itself of services and facilities in this
state in the event of an unscheduled landing sufficient to
establish nexus. To the extent there is some uncertainty as to
what constitutes sufficient nexus, we need not reach that issue,
as here there is a total absence of any nexus between the
overflights and this state.
We are aware that the purpose of the Act is "to assure that
100%, and no more or no less, of the business income of a
corporation doing multistate business is taxed by the States
having jurisdiction to tax it." GTE, 68 Ill. 2d at 335. Thus,
"overlaps" and "gaps" in taxation are to be avoided. GTE, 68 Ill. 2d at 339. We are also aware that the exclusion of flyover
miles from the numerator of the apportionment fraction increases
the number of "nowhere miles" (miles not apportioned to any
taxing state), thus increasing the gap in taxation of airlines.
However, full apportionment cannot be achieved outside the
constitutional parameters established by our supreme court.
For the foregoing reasons, the order of the circuit court
reversing the May 4, 1993, decision of the Director of the
Department is affirmed.
Affirmed.
[fn1]Section 304(d) has not been changed substantively since
the tax years in question. See Ill. Rev. Stat. ch. 120,  3-
304(d) (1983).
[fn2]A gap exists because miles flown outside the United
States are included in the "everywhere miles" of the
apportionment denominator, but are not included in the numerator
of any taxing state.