American Aviation Supply v. Illinois Department of Revenue

2024 IL App (1st) 230072

FOURTH DIVISION
Order filed: February 29, 2024

No. 1-23-0072
______________________________________________________________________________

IN THE

APPELLATE COURT OF ILLINOIS

FIRST DISTRICT
______________________________________________________________________________

AMERICAN AVIATION SUPPLY, LLC, ) Petition for Review of Order
) of the Illinois Independent
Petitioner, ) Tax Tribunal.
)
v. ) Nos. 21TT27, 21TT54
)
ILLINOIS DEPARTMENT OF REVENUE, ILLINOIS )
INDEPENDENT TAX TRIBUNAL, ) Brian F. Barov,
) Administrative Law Judge,
Respondents. ) presiding.

JUSTICE HOFFMAN delivered the judgment of the court, with opinion.
Presiding Justice Rochford and Justice Ocasio concurred in the judgment and opinion.

OPINION

¶1 In this petition for direct administrative review of a final decision of the Illinois

Independent Tax Tribunal (“the Tribunal”), the petitioner, American Aviation Supply, LLC

(“American”), challenges the Tribunal’s determination that a sales tax exemption for property that

is bought and temporarily stored in-state before being transported and used out of state did not

apply to its customers’ purchases of aviation fuel because the fuel was not consumed solely outside

of the state. We affirm the Tribunal’s decision.
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¶2 The factual history of this case is brief and not in dispute. At issue is the interpretation and

application of an exemption contained in the Retailers’ Occupation Tax Act (“ROTA”) (35 ILCS

120/1 et seq. (West 2010)). The ROTA generally requires retailers to pay a tax on the sale of

personal property within the state of Illinois. See 35 ILCS 120/2 (West 2022). It is complemented

by the Use Tax Act (“UTA”) (35 ILCS 105/1 et seq. (West 2022)), which imposes a tax on the in-

state use of property that was purchased outside of the state. Together, the ROTA and UTA form

what is commonly referred to as the Illinois “sales tax.” Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d

351, 362 (2009).

¶3 Among the ROTA’s exemptions is one that, during the relevant time period of 2011 to

2016, exempted “personal property purchased from an Illinois retailer by a taxpayer engaged in

centralized purchasing activities in Illinois who will, upon receipt of the property in Illinois,

temporarily store the property in Illinois (i) for the purpose of subsequently transporting it outside

this State for use or consumption thereafter solely outside this State.” 35 ILCS 120/2-5(38) (West

2010). This “expanded temporary storage exemption” (“ETS Exemption”) also provides that the

Director of the Department of Revenue shall “issue a permit to any taxpayer in good standing with

the Department who is eligible for the exemption under this paragraph (38),” and that the permit

“shall authorize the holder, to the extent and in the manner specified in the rules adopted under

this Act, to purchase tangible personal property from a retailer exempt from the taxes imposed by

this Act.” Id. Notably, as one of the “rules adopted under this act,” the Department promulgated a

rule (“the Permitting Regulation”) stating that “[i]f an Expanded Temporary Storage Permit holder

knows that a certain percentage of all his or her purchases from a given seller will qualify for the

expanded temporary storage exemption, he or she may provide a blanket certificate of expanded

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temporary storage stating that a designated percentage of purchases qualify for the expanded

temporary storage exemption.” 86 Ill. Adm. Code 150.310(a)(6)(D)(ii).

¶4 American is a Delaware LLC and a wholly owned subsidiary of American Airlines, Inc. It

operated in Illinois as an aviation fuel retailer during the relevant time period of 2011 to 2016.

During that time, American sold fuel to American Airlines and U.S. Airways, Inc. (together “the

Airlines”), who took delivery of the fuel in Illinois and temporarily stored it in consortium tanks

at O’Hare International Airport (“O’Hare”) in Chicago before loading the fuel into airplanes

operating out of the airport. According to the Airlines, only 2% of the fuel purchased from

American and loaded into planes at O’Hare was consumed inside the state of Illinois, with the

remaining 98% being consumed after the planes left the state’s airspace.

¶5 In 2010 and 2014, the Airlines obtained permits from the Illinois Department of Revenue

(“the Department”) pursuant to section 2-5(38) of the ROTA certifying that 98% of their purchased

fuel was consumed outside the state of Illinois. The Airlines considered that portion to be exempt

from the retailers’ occupation tax. After being provided with the Airlines’ permits, American

sought reimbursement from the Department of approximately $162.7 million in occupation taxes

that it had paid on its fuel sales to the Airlines between 2011 and 2016, plus interest. The

Department denied the refund claims based on its interpretation of existing law, including section

2-5(38) and the case of United Air Lines v. Mahin, 49 Ill. 2d 45 (1971) (United I), which will be

discussed further in our analysis to follow.

¶6 American then petitioned for review with the Tribunal. The parties conducted discovery,

submitted joint stipulations of fact, and then filed cross-motions for summary judgment. In support

of its case, American argued that the plain text of section 2-5(38) of the ROTA and the Permitting

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Regulation allowed for its fuel sales to the Airlines to be divided into taxable and non-taxable

portions in accordance with what has been called the “burn-off rule,” with only the fuel used or

“burned off” while in Illinois being subject to tax. American also contended that United I was not

applicable to the facts of this case because it concerned the “use” of fuel, which was interpreted to

include the loading of fuel into the planes’ tanks, while the ETS Exemption concerns

“consumption,” which occurs both inside and outside of Illinois. After holding oral argument on

the motions, the Tribunal granted the parties leave to submit supplemental authority on whether

construing the ETS Exemption as exempting the percentage of the fuel consumed solely outside

of Illinois unconstitutionally discriminated against interstate commerce.

¶7 After the parties filed their supplemental authority, the Tribunal issued its ruling denying

American’s motion for summary judgment and granting the Department’s. The Tribunal

concluded that American’s fuel sales to the Airlines did not qualify for the ETS Exemption because

the fuel was not consumed “solely” outside of Illinois. The Tribunal also rejected American’s

contention that the Permitting Regulation supported its view that the temporarily stored fuel could

be divided into taxable and tax-exempt portions, with the Tribunal explaining that American’s

reading of the Permitting Regulation would expand the governing statute in an impermissible

manner. Finally, the Tribunal opined that American’s interpretation of the ETS Exemption would

likely result in unconstitutional economic discrimination under the commerce clause of the United

States Constitution (U.S. Const., art. I, § 8) because it would give an advantage to in-state retailers.

The Tribunal, therefore, affirmed the Department’s denial of American’s refund claims. This

petition for review pursuant to Supreme Court Rule 335(a) (eff. July 1, 2017) follows.

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¶8 When, as in this case, parties file cross-motions for summary judgment, they agree that

only a question of law is involved and invite a decision based upon the record. Pielet v. Pielet,

2012 IL 112064, ¶ 28. The Tribunal’s decision on a question of law is reviewed de novo.

Horsehead Corp. v. Department of Revenue, 2019 IL 12415, ¶ 27 (citing Elementary School

District 159 v. Schiller, 221 Ill. 2d 130, 142 (2006)).

¶9 The instant case presents a question of statutory construction. We are not bound by the

Tribunal's interpretation of a statute, but, due to its expertise on tax law, the Tribunal’s

“interpretation is relevant where there is reasonable debate about the statute's meaning.” Id. In

addition to the consideration we give the Tribunal’s interpretation, we grant even greater deference

to that of the Department. Indeed, “[e]ven where review is de novo, an agency's construction is

entitled to substantial weight and deference. Courts accord such deference in recognition of the

fact that agencies make informed judgments on the issues based upon their experience and

expertise and serve as an informed source for ascertaining the legislature's intent.” Provena

Covenant Medical Center v. Department of Revenue, 236 Ill. 2d 368, 387 n.9 (2010)

¶ 10 Before beginning our analysis, it is necessary to provide additional background information

regarding the ROTA, the UTA, and the case of United I, which interpreted the UTA’s similarly-

worded temporary storage exemption. The UTA was enacted in 1955 as a complement to the

ROTA. United I, 49 Ill. 2d at 46. While the ROTA imposed a tax on the sale of property within

the state of Illinois, the UTA taxed the in-state use of property that was purchased out of state for

the purposes of “preventing evasion of retailers' occupation tax by persons making out-of-state

purchases of tangible personal property for use in Illinois, and of protecting Illinois merchants

against diversion of business.” Id. at 46–47.

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¶ 11 Unlike the ROTA, at least as it was composed at the relevant time in United I, the UTA

contained a temporary storage exemption providing that the use tax would not be imposed on “the

temporary storage, in this State, of tangible personal property which is acquired outside this State

and which, subsequent to being brought into this State and stored here temporarily, is used solely

outside this State.” Id. at 47; see also Ill. Rev. Stat. 1955, ch. 120, ¶ 439.3. From the time that it

was enacted, as it relates to common carriers such as airlines, the Department interpreted the tax

as only applying to the portion of fuel consumed in or over Illinois. United I, 49 Ill. 2d at 48. As

mentioned previously, this was known as a the “burn-off” rule. Id. However, in 1963 the

Department changed its interpretation and abandoned the burn-off rule, declaring by bulletin that

“[t]he Department's position is that temporary storage ends and a taxable use occurs when the fuel

is taken out of storage and placed into the tanks of the airplane, railroad engine or truck. At this

point the fuel is converted into its ultimate use, and, therefore, a taxable use occurs in Illinois.” Id.

In other words, the exemption would apply “only if the temporarily stored fuel is transported out

of the state for use elsewhere by some means other than placing it in equipment which would

consume it.” Id.

¶ 12 United Air Lines, Inc. (“United”), challenged this new interpretation in court, ultimately

reaching the Supreme Court of Illinois, which upheld the Department’s new application of the

statute. The court found the statute’s language to be “plain, simple and unambiguous” and read it

as providing that “the temporary storage and the withdrawal therefrom are not taxable uses, if the

property in question is to be used solely outside the State.” Id. at 55. According to our supreme

court, if United were to temporarily store fuel in Illinois, transport the fuel from Illinois to

Wisconsin, and then load it into a plane there, “neither the storage, nor the withdrawal, nor the

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transportation of the fuel outside the State would be uses subject to the tax.” Id. But United was

not storing its fuel “with any intention that the fuel will be used solely outside this state.” Id.

“Rather, the fuel [was] stored here only to facilitate United's operations from the O'Hare and

Midway airports within the State.” Id. That form of storage, the supreme court concluded, did not

qualify for the temporary storage exemption, and “either the storage itself or the withdrawal

therefrom are uses which may be taxed” under the UTA. Id. at 56.

¶ 13 The two justices writing our supreme court’s per curiam opinion in United I also opined

that the burn-off rule was likely unconstitutional as a violation of the commerce clause of the U.S.

Constitution. Id. at 51–53. On appeal of our supreme court’s decision, the United States Supreme

Court removed that concern and held that there was no constitutional barrier to the use of the burn-

off rule. United Air Lines, Inc. v. Mahin, 410 U.S. 623, 632 (1973) (United II). In light of that

holding, the Supreme Court vacated our supreme court’s ruling and remanded for the two justices

to reconsider their decision. Id. On remand, the Supreme Court of Illinois stated simply that “[t]he

conclusions of those justices is that the current interpretation of the [UTA] and the application of

it by the Department are not improper.” United Air Lines, Inc. v. Mahin, 54 Ill. 2d 431, 432 (1973)

(United III).

¶ 14 In 2001, the ROTA was amended to add the ETS Exemption contained in section 2-5(38),

and the temporary storage exemption contained in section 3-55(j) of the UTA was amended to be

practically identical. See Public Act 92-488 (eff. Aug. 23, 2001).

¶ 15 With that history in mind, we now turn to the case before us. In urging reversal of the

summary judgment entered by the Tribunal in favor of the Department, American raises two

arguments in support of its refund claims. First, it contends that the ETS Exemption contains what

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it calls a “timing rule” that limits the scope of the word “solely” in a manner that the UTA’s

exemption at issue in United I did not. Second, American asserts that the Department’s Permitting

Regulation is consistent with and supports its interpretation that only the fuel consumed inside

Illinois is subject to the ROTA. We disagree.

¶ 16 “The fundamental rule of statutory interpretation is to ascertain and effectuate the

legislature's intent.” Horsehead, 2019 IL 124155, ¶ 37 (citing Comprehensive Community

Solutions, Inc., v. Rockford School District No. 205, 216 Ill. 2d 455, 473 (2005)). “The plain

language of the statute remains the best indication of this intent. [Citation.] Where the language of

a statute is clear, we may not read into it exceptions that the legislature did not express, and we

will give it effect as written. [Citation.] We also will give undefined statutory terms their ordinary

meanings. [Citation.]” Id.

¶ 17 The plain language of the ETS Exemption contained in section 2-5(38) of the ROTA is, in

our opinion, clear and unambiguous. Again, it states that property is exempt from the occupation

tax when it is purchased from an Illinois retailer and the purchaser will, “upon receipt of the

property in Illinois, temporarily store the property in Illinois (i) for the purpose of subsequently

transporting it outside this State for use or consumption thereafter solely outside this State.” With

instruction from United I, which we find applicable to the present case and informative regarding

the meaning and significance of the use of “solely,” we read this language as exempting property

that is purchased and temporarily stored in Illinois and then solely used or consumed entirely

outside of the state. As it relates to aviation fuel, when fuel is removed from its temporary storage,

loaded into a plane at O’Hare, and then consumed partly in Illinois, that fuel does not qualify for

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the ETS Exemption because it was not transported outside of the State for consumption “solely”

outside of Illinois.

¶ 18 American raises two arguments in support of its contrary reading of section 2-5(38), but

neither changes our interpretation of the meaning of the statute’s plain language. First, it argues

that a “timing rule” limits the ETS Exemption’s use of “solely” in a manner that the exemption

contained in the UTA that was at issue in United I did not. Specifically, American contends that

by using “thereafter” following “transporting” in the phrase “for the purpose of subsequently

transporting it outside this State for use or consumption thereafter solely outside this State,” the

statute only requires that the fuel be used solely outside of Illinois after it is transported out of the

state. In other words, according to American, the ETS Exemption “allows some of the fuel to be

consumed in Illinois without destroying the exemption for the fuel that is transported outside of

Illinois for consumption thereafter solely outside Illinois” and that the use of “solely” merely

means that “the fuel transported outside of Illinois cannot be returned later to Illinois for use or

consumption in Illinois.”

¶ 19 In our view, however, the statute’s use of “thereafter” is consistent with the Tribunal’s view

that the entire use or consumption of the property at issue must be outside of the state of Illinois.

As we read the statute, the meaning of “thereafter” is that the use or consumption will be after

transportation outside the state, not before, and that the use or consumption will be entirely outside

the state. Stated differently, in order to qualify for the ETS Exemption, the purpose of the

temporary storage must be for future transportation outside of Illinois for use or consumption

solely and entirely outside of the state.

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¶ 20 Second, American argues that the Permitting Regulation supports its view that the fuel

consumed out of state is eligible for the ETS Exemption. As we recited earlier, the Permitting

Regulation promulgated by the Department provided that “[i]f an Expanded Temporary Storage

Permit holder knows that a certain percentage of all his or her purchases from a given seller will

qualify for the expanded temporary storage exemption, he or she may provide a blanket certificate

of expanded temporary storage stating that a designated percentage of purchases qualify for the

expanded temporary storage exemption.” 86 Ill. Adm. Code 150.310(a)(6)(D)(ii). American

contends, therefore, that through the Permitting Regulation the Department has confirmed that the

ETS Exemption may apply on a percentage basis. Again, we do not share American’s view of the

issue.

¶ 21 While it is true that the Permitting Regulation allows purchasers to certify that they believe

that only a portion of a given purchase will be tax exempt, that is not inconsistent with our and the

Department’s reading of section 2-5(38). Our supreme court’s analysis in United I is again

instructive on this issue. There, the court explained that a party would not run afoul of the “solely”

language in the UTA’s similar temporary storage exemption if it were to withdraw fuel from

storage, transport it to another state, and then load it into a plane there for use solely outside of

Illinois. United I, 49 Ill. 2d at 55. Thus, if the Airlines were to have purchased fuel from American,

temporarily stored it in Illinois, transported a portion of it to Wisconsin, and then used that portion

in planes there, that portion of the purchase would qualify for the ETS Exemption. In such a

scenario, it would be proper for the Airlines to certify, pursuant to the Permitting Regulation, that

the percentage of the purchase being transported to Wisconsin was tax exempt. Thus, the

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Permitting Regulation is consistent with our reading of section 2-5(38) and with the Department’s

interpretation and application of the statute.

¶ 22 In addition to those two primary arguments, American also asserts that the legislative

history of the storage exemptions contained in the ROTA and UTA supports its reading of the ETS

Exemption. However, because we do not view section 2-5(38) as ambiguous, “we cannot resort to

extrinsic aids such as legislative history.” Cripe v. Leiter, 291 Ill. App. 3d 155, 159 (1997).

Therefore, we will not engage in that analysis.

¶ 23 Finally, American appears to argue that it is entitled to an abatement of the occupation

taxes that it paid on its fuel sales to the Airlines between 2011 and 2016 based on the provisions

of section 4(c) of the Taxpayers’ Bill of Rights, which provides that the Department has the power

and duty to “abate taxes and penalties assessed based upon erroneous written information or advice

given by the Department.” 20 ILCS 2520/4(c) (West 2022). American’s argument based on section

4(c) appears to be premised on the contention that the Permitting Regulation is either invalid or

inconsistent with the statutory ETS Exemption. Having found that the Department’s interpretation

of the ETS Exemption found in section 2-5(38) of the ROTA is consistent with the unambiguous

language of the statute and that the Permitting Regulation is consistent with that interpretation, we

reject American’s argument that it is entitled to relief based on the Taxpayers’ Bill of Rights.

¶ 24 “Under Illinois law, taxation is the rule, and exemption is the exception.” Horsehead, 2019

IL 124155, ¶ 33. “If there is any doubt as to applicability of an exemption, it must be resolved in

favor of requiring that tax be paid.” Provena, 236 Ill. 2d at 388 (citing Streeterville Corp. v.

Department of Revenue, 186 Ill. 2d 534, 539 (1999) (Harrison, J., dissenting, joined by

McMorrow, J.)).

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¶ 25 Further, because we can decide this case on non-constitutional grounds, we also will not

address the parties’ arguments regarding whether American’s interpretation of the ETS Exemption

would run afoul of the commerce clause of the U.S. Constitution. See U.S. Const., art. 1, § 8, cl. 3;

People v. Bass, 2021 IL 125434, ¶ 30 (“[T]his court's long-standing rule is that cases should be

decided on nonconstitutional grounds whenever possible, reaching constitutional issues only as a

last resort. [Citation.] Consequently, courts must avoid reaching constitutional issues unless

necessary to decide a case. [Citation.]”).

¶ 26 Based on the foregoing analysis, we conclude that the plain language of section 2-5(38)

supports the Department’s interpretation of the statute, and based on that interpretation, the fuel at

issue did not qualify for the ETS Exemption because, after being loaded into the Airlines’ planes

in Illinois, it was consumed partly in Illinois. As a consequence, we affirm the decision of the

Tribunal denying American’s motion for summary judgment and granting the Department’s cross-

motion for summary judgment.

¶ 27 Tribunal decision affirmed.

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American Aviation Supply v. Illinois Department of Revenue 2024 IL App (1st) 230072

Petition for Review of Order of the Illinois Independent Tax Tribunal; Nos. 21TT27, 21TT54
Brian F. Barov, Administrative Law Judge, presiding.

Appellants: Mary A. McNulty (admitted pro hac vice)
Lee S. Meyercord (admitted pro hac vice)
HOLLAND & KNIGHT LLP
1722 Routh Street, Suite 1500
Dallas, Texas 75201
Phone: (214) 969-1700

William F. Farley
Holland & Knight LLP
150 N. Riverside Plaza, Suite 2700
Chicago, Illinois 60606
Phone: (312) 263-3600

Appellee: KWAME RAOUL Attorney General State of Illinois
JANE ELINOR NOTZ Solicitor General
100 West Randolph Street 12th Floor
Chicago, Illinois 60601
Phone: (312) 814-3312

BRIDGET DIBATTISTA Assistant Attorney General
100 West Randolph Street 12th Floor
Chicago, Illinois 60601
Phone: (312) 814-2130

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