September 21, 2018

State and Local Tax this week

The September 21 edition of the  Illinois Register  did not contain any new rulemakings by t he Illinois Department of Revenue or the Department of Commerce and Economic Opportunity. 

Court cases

The Illinois Supreme Court released two tax-related opinions yesterday.  

People ex rel. Schad, Diamond & Shedden, P.C. v. My Pillow deals with the Illinois False Claims Act.  There was one issue before the court - where a relator in a successful qui tam action brought against a corporation for the benefit of the State of Illinois under the False Claims Act is a law firm, does Section 4(d)(2) of the Act entitle the law firm to an award of attorney fees for the service provided by the firm?  The court ruled that a law firm that represents itself in an action under the False Claims Act is not entitled to attorney fees.

As explained by the court, from the filing of the complaint to final judgment, Diamond the relator was represented by Diamond the law firm.  The court noted that during the trial Stephen Diamond served not only as lead trial counsel, but also testified as a witness and two other Diamond lawyers served similar dual roles, representing Diamond and also appearing as witnesses on its behalf.  The court concluded that "in every meaningful respect Diamond represented itself.

In ruling to uphold the appellate court, the Supreme Court opinion concluded "[h]aving elected to assume the dual role of litigant and lawyer, Diamond must be content with the percentage share of the ward is twas granted by the circuit court to compensate it for its efforts in collecting that sum.  As would be the case with any other pro se litigant, the law does not permit it to claim an additional amount as attorney fees for the work it did itself.

My Pillow was represented by Cate Battin of Illinois Chamber Tax Institute member law firm McDermott Will & Emery.

The Illinois Chamber of Commerce filed an amicus brief in support of My Pillow.  We were represented by David Hughes and David Ruskin of Tax Institute member law firm Horwood Marcus & Berk.

The Illinois Supreme Court ruled in   Oswald v. Hamer that the charitable hospital property tax exemption found at Section 15-86 of the Property Tax Code was not unconstitutional on its face.  

Section 6 of Article IX of the Constitution limits that power of the legislature with respect to property tax exemptions.  This provision provides in pertinent part that the General Assembly by law may exempt from taxation property used exclusively for charitable purposes.  

Section 15-86 of the Property Tax Code was enacted by the General Assembly after the Supreme Court's decision in Provena Covenant Medical Center v. Department of Revenue, 236 Ill. 2d 368.  The intent of the legislation was to provide, consistent with Provena, objective standards hospitals could follow to establish eligibility for the property tax exemption. 

Oswald challenged Section 15-86, contending the General exceeded its authority under the constitution in creating the property tax exemption. Oswald argued that the statutory exemption is unconstitutional on its face.

The legislation also established the same standards to be used in determining when a hospital qualifies for the exemption from sales taxes on purchases.  However, that portion of the legislation was not challenged because the General Assembly is not subject to the same constitutional limitations with respect to granting sales tax exemptions.

The court ruled against Oswald on the facial challenge.  As explained by the court "a statute is facially invalid only if no set of circumstances exists under which the statute would be valid." The plaintiff conceded that it is hypothetically possible for a hospital to satisfy the requirements of the statute and for the hospital to use its property exclusively for charitable purposes as required under the Article IX, Section 6 of the Illinois Constitution.

The court left the door open to future challenges to the act stating, "[w]hile it is possible that specific future applications of Section 15-86 may produce actual constitutional problems, it will be time enough to consider any such problems when they arise."

Tax Tribunal 

Two new decisions were posted by the Tribunal this week.

Safety Kleen Systems Inc. v. Department of Revenue  The Department of Revenue ("Department") issued a Notice of Tax Liability ("Notice") that assessed Safety-Kleen Illinois use tax, interest and penalties on its purchases of virgin solvent, machinery, equipment, chemicals, parts, and other tangible personal property for the tax reporting periods of January 1, 2010 through December 31, 2012. 

Safety-Kleen filed a multi-count petition in the Tax Tribunal challenging the Notice.  Count IV of the petition alleged, inter alia, that virgin solvent, which Safety-Kleen purchased outside of Illinois and supplied to out-of-state customers, was exempt from use tax under the temporary storage exemption found at section 355(e) of the Use Tax Act, 35 ILCS 105/3-55(e). 

The parties filed cross motions for summary judgment.  The Tribunal ruled in favor of the Department finding that Safety-Kleen was not entitled to the temporary storage exemption.

As explained in the decision:  "The Department assessed $1,162,335.43 in use tax on Safety-Kleen's purchase of virgin solvent for the tax periods in issue. The parties agreed that 88.46% of the virgin solvent Safety-Kleen purchased during the tax periods in issue was shipped outside of Illinois.    Accordingly, Safety-Kleen contends that, if the temporary storage exemption applies, it owes $134,133.51 in use tax from its virgin solvent purchases during the tax periods in issue."

In ruling for the Department, the Tribunal observed, "[t]he parties agree that the temporary storage exemption was not lost by blending the virgin solvent with the recycled solvent before sending the mixture out of Illinois the first time.  See Pet'r Mem. in Supp. of Mot. for Summ. J. at 8-9; Dep't Mot. for Summ. J. at 8.  But, because the temporary storage exemption can apply only once, if the property is returned to Illinois for further storage the exemption is lost.  Shared Imaging, LLC, 2017 IL App (1st) 152817, ¶ 44."

Redbox Automated Retail LLC v. Department of Revenue is a sales tax case that deals with the statute of limitations for filing claims for refund.   

The Illinois Department of Revenue conducted a sales and use tax audit of Redbox Automated Retail LLC for tax periods beginning in January of 2007 and ending in June 2010. During the audit, the parties executed multiple statute of limitations waivers, that ultimately extended the statute of limitations date to June 30, 2013. The audit resulted in Redbox being assessed use tax in the amount of $233,307. Redbox agreed to pay the proposed tax liability on February 28, 2013 and that liability was satisfied by September 10, 2013. 

 After the first audit was concluded, a second audit of Redbox was initiated by the Department in October 2013 that eventually covered successive tax periods beginning in July 2010 and ending in June 2014. 

During the second audit, Redbox raised the issue of whether certain use tax that Redbox had been continuously paying and which related to certain licensing agreement transactions, was appropriate and required. In 2016, while the second audit was still being conducted, the Department agreed with Redbox that no use tax was required to be paid on those licensing agreement transactions and, in July 2016, the Department agreed to refund $4,802,844 to Redbox for use tax related to those licensing agreements paid during the tax periods being covered by the second audit. 

On February 17, 2016, Redbox filed a Claim for Credit with the Department for $1,622,820 for use tax payments it made during the tax periods January 2007 through June 2010, which tax periods had been covered by the first audit. The claim was premised on the fact that Redbox paid use tax on licensing agreement transactions during those earlier tax periods just like it did during the later tax periods covered by the second audit and for which transactions Redbox successfully convinced the Department that it did not owe use tax.

The Department denied the entire Claim for Credit of $1,622,820.  Instead, the Department allowed a limited claim in the amount of $233,307, which was equal to the amount of tax paid by Redbox based on the first audit and which was paid within three years of when the Claim for Credit at issue was made.  The premise for the Department's denial of the entire claim is that it was made after the applicable statute of limitations period for making such a claim expired. 

In the present case, the parties extended the statute of limitations period that related to tax periods January of 2007 and ending in June 2010 (the first audit period) through multiple waivers. The final properly-executed written waiver of the statute of limitations fixed the final date for the statute of limitations period to be June 30, 2013. Redbox had until that date to file a refund claim for use taxes paid during the first audit period pursuant to that waiver. 

In ruling against Redbox, the Tribunal concluded that Redbox did not file its refund claim with the Department for use taxes paid throughout the first audit period until February 2016, two and a half years after the expiration of the waiver-extended statute of limitations date of June 30, 2013.

Redbox is represented by John Simpson of Illinois Chamber Tax Institute member law firm Sorling Northrup.