American Stores Co. v. Dept. of Revenue

May 1, 1998

1-96-4444

AMERICAN STORES COMPANY ) Appeal from the
and subsidiaries, ) Circuit Court of
) Cook County.
Plaintiff-Appellee, )
)
v. )
)
ILLINOIS DEPARTMENT OF REVENUE and )
SAM McGAW, Director of Revenue, ) Honorable
) John A. Ward,
Defendants-Appellants. ) Judge Presiding.

JUSTICE HARTMAN delivered the opinion of the court:
Plaintiff, American Stores Company and its subsidiaries
(American), sought circuit court administrative review of the
decision of the Department of Revenue (Department) disallowing an
investment tax credit (ITC) for property American utilized during
the 1984-87 taxable years. The court reversed the Department's
decision, finding that the property qualified as property used in
retailing pursuant to section 2-201(g) of the Income Tax Act (Ill.
Rev. Stat. 1985, ch. 120, par. 2-201(g)) (section 2-201(g)). The
Department appeals.
In November 1984, American acquired Jewel Companies, Inc.
(Jewel), which is primarily engaged in the retail sale of food,
drugs, and general merchandise for personal and household use.
Jewel conducts its domestic operations through its divisions, which
include Jewel Food Stores, and its wholly owned subsidiary
corporations, including Osco Drug, Inc. (Osco). Jewel Food Stores
operated approximately 190 supermarkets and, in conjunction with
Osco, combination supermarket and retail drug stores in Illinois
and other Midwestern states. Jewel Food Stores also owned and
operated a warehouse, a truck maintenance facility, and several
food manufacturing operations, as well as a fleet of trucks used to
deliver inventory to its stores. The warehouse was used to supply
merchandise to Illinois stores, and the maintenance facility
serviced trucks and trailers used to deliver the merchandise to
stores and food manufacturing plants. Osco operated approximately
300 retail drug stores in Illinois.
American timely filed income tax returns for the taxable years
ending on January 31, 1983, January 28, 1984, November 16, 1984,
February 2, 1985, February 1, 1986, and January 31, 1987. The
Department conducted an audit of those returns, and issued notices
of deficiencies to American on June 13, 1989, August 10, 1989, and
January 25, 1990. American timely filed protests against all these
notices, and filed claims for a refund.
One of the disputes between American and the Department
involved ITCs claimed by Jewel and Osco against their personal
property tax replacement income tax liability, imposed by section
2-201(c) of the Income Tax Act (Ill. Rev. Stat. 1985, ch. 120, par.
2-201(c)) (section 2-201(c)). Jewel and Osco claimed the ITCs for
buildings, machinery, and equipment acquired and placed in service
in its Illinois retail business. The items claimed amenable to ITC
treatment included semi-trailers used to haul inventory between
suppliers, stores, and the Jewel warehouse, and to haul recyclable
material for recycling; warehouse equipment such as forklift
trucks, warehouse racks, shelving used to store products, and
office furniture and equipment; building costs for remodeling the
warehouse, administrative offices, and storage garage; a mainframe
computer used for administration and distribution of inventory; a
pressure washer for cleaning truck parts; and a time management
system used to keep track of the work hours of Jewel's truck
drivers.
After auditing American, the Department allowed it to claim
ITC credit for items used on retail floor areas of the stores, but
disallowed all other items claimed as an ITC. The Department
categorized the disallowed property as (1) store equipment not
located on retail floor areas; (2) warehouse and related equipment;
(3) transportation facilities and related equipment; and (4) office
equipment. The Department asserted that this property did not
qualify for ITC because it was not used "in retailing" as required
by section 2-201(g).
American requested an administrative hearing to review the
Department's decision, where it introduced the testimony of Hugh
Muncy, a former president of the Illinois Retail Merchants
Association, David Vite, the Association's current President, and
the former senior vice president of Jewel, Gene B. Kilham. Each
witness defined "property used in retailing" to include the
machinery, equipment, and offices used to carry out functions such
as accounting, purchasing, risk management, marketing strategies,
personnel functions, and legal matters, which they said were
essential parts of the retailing business. Nevertheless, the
administrative law judge (ALJ) ruled in favor of the Department on
the ITC and other issues. The Director of the Department accepted
the ALJ's recommendations and adopted its decision.
American filed a complaint in the circuit court, seeking
administrative review of the Director's ruling pursuant to the
Administrative Review Law (735 ILCS 5/3-101 et seq. (West 1992)).
While the case was pending, the parties settled all tax issues with
the exception of the ITC question and the Department's assessment
of penalties against American. In a written decision, the circuit
court reversed the administrative ruling, holding that American was
entitled to claim ITCs for the disputed property. The court also
reversed a portion of the Department's decision assessing penalties
against American.
On appeal, the Department argues that the circuit court's
interpretation of section 2-201(g) unduly expanded the term
"retailing" to include all property used in support of retailing,
an interpretation the Department contends is supported by neither
the plain language nor the legislative history of section 2-201(g).
Section 2-201 imposes a personal property tax replacement
income tax on every corporation, partnership, and trust that earns
or receives income in this state. Section 2-201(g) allows for an
investment tax credit (ITC) against this tax "for investment in
qualified property." "Qualified property" is defined as:
"property which: *** is used in Illinois by
the taxpayer in manufacturing operations or in
mining coal or fluorite, or in retailing."
(Emphasis added.) Ill. Rev. Stat. 1985, ch.
120, par. 2-201(g)(2)(d).
The term "retailing" includes:
"the sale of tangible personal property or
services rendered in conjunction with the sale
of tangible consumer goods or commodities."
Ill. Rev. Stat. 1985, ch. 120, par. 2-
201(g)(3).
In construing the scope of section 2-201(g), and determining
whether the disputed property is subject to the ITC, this court's
primary purpose must be to ascertain and give effect to the true
intent and meaning of the legislature. People v. Frieberg, 147 Ill. 2d 326, 345, 589 N.E.2d 508 (1992); Powers v. Retirement Board
of Policemen's Annuity & Benefit Fund, 249 Ill. App. 3d 280, 281,
618 N.E.2d 957 (1993). The statutory language is the best
indication of the drafters' intent (People ex rel. Village of
McCook v. Indiana Harbor Belt Railroad Co., 256 Ill. App. 3d 27,
29, 628 N.E.2d 297 (1994); Powers, 249 Ill. App. 3d at 281), and
should be given its plain or ordinary and popularly understood
meaning. Collins v. Board of Trustees of the Firemen's Annuity and
Benefit Fund of Chicago, 155 Ill. 2d 103, 111, 610 N.E.2d 1250
(1993). In determining legislative intent, courts may look at the
reason and necessity for the law, the evils sought to be remedied,
and the purpose to be achieved. Frieberg, 147 Ill. 2d at 345. The
legislative history or background of a statute also may be
instructive. In re B.C., 176 Ill. 2d 536, 543, 680 N.E.2d 1355
(1997); Van's Material Co. v. The Department of Revenue, 131 Ill. 2d 196, 202, 545 N.E.2d 695 (1989) (Van's Material). Where the
language of a statute is clear and unambiguous, it will be given
effect without resort to other aids for construction. B.C., 176 Ill. 2d at 542; Powers, 249 Ill. App. 3d at 281. Taxing statutes
must be construed strictly, and in cases of doubt will be construed
most strongly against the government and in favor of the taxpayer.
Van's Material, 131 Ill. 2d at 202.
The Department has provided varying interpretations of the
term "in retailing." Its regulation defines "retailing" as
"the sale of tangible personal property. It
is not required that such tangible personal
property be finished consumer goods, or that
the property be sold to its ultimate consumer.
For example, sales of tangible personal
property for resale are included in the
definition of retailing." 86 Ill. Admin. Code
sec. 100.2900(c)(9) (1986).
At the administrative hearing, the Department argued that qualified
property must be associated with a specific retail sale, such as
property used in retail floor areas. In the circuit court,
however, the Department adopted a more expansive view, conceding
that all property located at the site of a retail store qualified
as property used "in retailing," but continuing to insist that the
remaining three categories of property - warehouse equipment,
transportation facilities and related equipment, and office
equipment - did not qualify for ITC treatment.
Under the Administrative Review Law (735 ILCS 5/3-101 (West
1994)), judicial review extends to all questions of law and fact
presented by the record before the court. Abrahamson v. Illinois
Department of Professional Regulation, 153 Ill. 2d 76, 88, 606 N.E.2d 1111 (1992). An agency's interpretation of a statute it is
charged with administering, where based on agency expertise, is
entitled to some deference. An erroneous construction of a
statute, however, is not binding on the court (Boaden v. Department
of Law Enforcement, 171 Ill. 2d 230, 239, 664 N.E.2d 61 (1996)),
and a decision based upon an erroneous, arbitrary, or unreasonable
construction cannot be allowed to stand. Harrisburg-Raleigh
Airport Authority v. Department of Revenue, 126 Ill. 2d 326, 331,
533 N.E.2d 1072 (1989). Moreover, administrative rules
interpreting a statute may neither limit nor extend the scope of
that statute. Van's Material, 131 Ill. 2d at 203.
In the present case, neither the plain language of section 2-
201(g), nor its legislative history, supports the Department's
distinction between property located at the site of the retail
store, and property located at a retailer's warehouse,
administrative offices, or transportation facilities. Section 2-
201(g) provides that qualified property must be used "in
retailing." Under section 2-201(g)(3), retailing specifically
encompasses "services rendered in conjunction with the sale" of
tangible personal property. Therefore, property used for the
purpose of obtaining the sale of tangible goods qualifies for the
tax credit.
Section 2-201(g) contains no limiting language requiring that
qualified property be located at the retail store. As noted above,
the General Assembly provided a more expansive definition of
"retailing" than suggested by the Department, allowing retailers to
claim an ITC not only for property used in "the sale of tangible
property," but also property used to perform "services rendered in
conjunction with the sale of tangible consumer goods or
commodities." This language includes property located at the
retail store site or off-site, and demonstrates the legislature's
intention that qualified property used "in retailing" includes any
property used by a retailer to obtain and complete a retail sale,
or to perform services in conjunction with the completion of such
a sale.
The Department claims the legislative history of section 2-
201(g) demonstrates that the General Assembly did not intend to
create an expansive definition of property used "in retailing."
During legislative debates over the personal property tax
replacement income tax, several legislators expressed concern that
allowing taxpayers to claim ITCs would reduce substantially the
amount of revenue received from that tax. 82nd Ill. Gen. Assem.,
Senate Proceedings, May 18, 1981, at 14, 16, 17. The State Senate
subsequently voted to reduce the rate of ITCs that a taxpayer could
claim, from one percent of the basis of qualified property to .5
percent. 82nd Ill. Gen. Assem., Senate Proceedings, May 18, 1981,
at 18. These debates do not establish legislative intent to limit
the scope of property that would qualify for use in retailing. In
addressing revenue concerns, legislators instead chose to decrease
the monetary amount of ITCs, rather than restrict the type or
location of property that qualified for ITCs.
The Department's argument for such a limitation is further
undermined by its position with regard to wholesale sellers who, by
their nature, do not sell goods from a retail store. The
Department acknowledges that the ITC applies to qualified property
used by wholesalers, but contends that "sales at a wholesaler's
place of business would be considered sales at a 'retail' site."
This interpretation of the term "retailing" would result in an
inconsistent application of section 2-201(g), in that property
located at a wholesaler's "place of business" could qualify for an
ITC, whereas identical property used by a retailer for analogous
purposes, but not located at the retail store, would not so
qualify. Further, property used at the site of a Jewel or Osco
store would qualify for an ITC although the same property, used for
the same purposes but located at the warehouse, administrative
offices, or transportation facilities, would not qualify for an
ITC. The Department offers no evidence, either from the language
of section 2-201(g) or its legislative history, that the General
Assembly intended such a dichotomy in dealing with wholesalers and
retailers, or in the treatment of property located at or away from
a retail store.
Moreover, such a restriction would punish unfairly larger
retailers who, unlike small retailers, do not store all their
personal property at the retail store site, and who require the use
of warehouses and transportation facilities to conduct retail
business. Undisputed evidence presented at the administrative
hearing established that Jewel and Osco could not conduct their
retailing business if they did not purchase trucks to transport the
goods to the retail stores, or provide adequate storage for the
goods at a warehouse until they could be transported to the various
stores by the trucks.
The Department criticizes the circuit court's interpretation
of and reliance on the supreme court's decision in Van's Material,
which the Department claims is distinguishable from the present
case. The court in Van's Material was faced with the issue of
whether the purchase of two ready-mix concrete trucks qualified for
a manufacturing exemption. The Department, relying on its own
regulations, argued for a narrow interpretation of the term
"manufacturing process," which the Van's Material court rejected,
finding that such an interpretation was not "inherently clear" from
the statutory language, and concluding that the Department's
regulations were "unduly restrictive." 131 Ill. 2d at 205-06, 209.
After construing the remaining portions of the statute providing
for the exemption, the court concluded that the exemption applied
to the purchase of the trucks. 131 Ill. 2d at 216-17.
In the present case, it does not "follow naturally" from the
language of section 2-201(g), as the Department urges, that the
General Assembly intended to limit property used in retailing to
property located at the site of the retail store. Furthermore, the
Department's narrow interpretation of section 2-201(g), and its
regulations further limiting the scope of that provision, are
unduly restrictive in light of the clear language allowing ITCs for
all property used in "the sale of tangible personal property or
services rendered in conjunction with the sale of tangible consumer
goods or commodities."
The Van's Material court concluded that the manufacturing
exemption applied to ready-mix concrete trucks because "[t]he
entire vehicle is essential to the process" of preparing concrete.
Van's Material, 131 Ill. 2d at 217. This conclusion reflected the
statutory requirement that the property be used "primarily" in the
manufacturing process. Employing a similar analysis, the circuit
court in the present case found that the property at issue had the
"predominant purpose" of furthering American's ability to sell its
products at retail, and "were at the very core" of its retail
business. In contrast to the manufacturing exemption at issue in
Van's Material, section 2-201(g) does not require that the property
be used "primarily" for retailing, or that the "predominant
purpose" of the property's use be for retailing. The statute
simply requires that the property be used in the sale of tangible
personal property, or in services rendered in conjunction with such
a sale.
In this case, undisputed evidence presented at the
administrative hearing established not only that the property at
issue was used in retailing, but also that the property was
essential to the retailer's retail operations, without which the
retailer could not conduct sales of goods. The Department erred in
disallowing ITCs for property located at the warehouse,
transportation facilities, and administrative offices.
In its notice of appeal, the Department requested review of
the circuit court's reversal of the imposition of penalties against
American. The Department waived that issue by failing to raise it
in its brief. 134 Ill. 2d R. 341(e)(7).
For the foregoing reasons, the circuit court's order reversing
the Department's decision is affirmed.
Affirmed.
HOFFMAN, P.J., and HOURIHANE, J., concur.