Sales Tax State Activity Update - September 2004

Illinois Use Tax on Tugboats Violates Commerce Clause

Illinois Appellate Court recently held that use tax on fuel purchased by river tugboats violates Commerce Clause.

American River Transportation Company operates a line of tugboats on the Mississippi, Illinois, and Ohio Rivers. Illinois Department of Revenue conducted an audit of the taxpayer and assessed use tax, interest, and penalties, totaling $890,372, for diesel fuel and supplies used by its tugboats in Illinois waterways.

The taxpayer paid the assessed amounts under protest and filed a complaint in the circuit court, seeking injunctive relief and alleging that the Department's imposition of the use tax violated the Commerce Clause. The trial court agreed with the taxpayer and denied the Department's motion. The Department appealed.

The Appellate Court affirmed the judgment of the lower court by stating that a State must meet the four-prong test as laid out in the Complete Auto Transit case. The Department met only three out of four criteria. The Department’s unmet fourth test requires that a tax be fairly related to the service provided by the state. The taxpayer does not benefit from any services provided by the state. Therefore, the imposition of the use tax by the Department violates the Commerce Clause.

The opinion is available at : http://www.state.il.us/court/Opinions/AppellateCourt/2004/2ndDistrict/July/Html/2021290.htm

(Appellate Court Of Illinois, American River Transportation Company v. Glen L. Bower, Department of Revenue {No. 2-02-1290 } Filed 07/21/04) 09/04

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