Elkay Mfg. Co. v. Sweet

• Decision Date: 27 August 1990
• Docket Number: No. 1-89-2251,1-89-2251
• Citation: 147 Ill.Dec. 718,202 Ill.App.3d 466,559 N.E.2d 1058
• Parties: , 147 Ill.Dec. 718 ELKAY MANUFACTURING COMPANY, Plaintiff-Appellant, v. Roger D. SWEET, Director, and the Department of Revenue of the State of Illinois, Defendants-Appellees.
• Court: United States Appellate Court of Illinois

Page 1058

559 N.E.2d 1058

202 Ill.App.3d 466, 147 Ill.Dec. 718

ELKAY MANUFACTURING COMPANY, Plaintiff-Appellant, v. Roger D. SWEET, Director, and the Department of Revenue of the State of Illinois, Defendants-Appellees.

No. 1-89-2251.

Appellate Court of Illinois First District, First Division.

Aug. 27, 1990.

Martin, Craig, Chester & Sonnenschein, Chicago (Thomas H. Donohoe, of counsel), for plaintiff-appellant.

Neil F. Hartigan, Atty. Gen., Robert J. Ruiz, Sol. Gen. (Ann Plunkett-Sheldon, Asst. Atty. Gen., of counsel), for defendants-appellees.

Presiding Justice BUCKLEY delivered the opinion of the court:

This action arises from the circuit court's affirmance on administrative review of the decision of the Illinois Department of Revenue (the Department) assessing Elkay Manufacturing Company (plaintiff) a $62,016.21 tax deficiency on certain sales under the Municipal Retailers' Occupation Tax Act (MROT Act) (Ill.Rev.Stat.1987, ch. 24, par. 8-11-1) and the Regional Transportation Authority Retailers' Occupation Tax Act (RTA Act) (Ill.Rev.Stat.1987, ch. 111 2/3, par. 704.03(e)). Plaintiff appeals from the circuit court's ruling, contending that (1) the retail sales tax acts do not apply to plaintiff's wholesale business, and (2) the administrative ruling that plaintiff's sales are taxable as retail sales is against the manifest weight of the evidence. We affirm.

In late 1984 and early 1985, the Department conducted an audit of plaintiff, an Illinois corporation which manufactures stainless steel sinks, water coolers, and faucets. As a result of the audit, the Department determined that plaintiff had not paid taxes for the period January 1, 1981, through December 31, 1984, under the MROT and RTA Acts on certain sales of water coolers made to Hinckley & Schmitt. ¹

At the administrative hearing on the deficiency, the Department introduced into evidence its "Correction of Returns or Determination of Tax Due," indicating plaintiff's MROT and RTA deficiencies on sales to Hinckley & Schmitt. Lucy Knight, a senior auditor for the Department, testified that after examining plaintiff's books and records, she prepared a "Summary Analysis of Tax Liability" as to the deficiencies. Knight concluded that the sales were taxable as retail sales, as opposed to nontaxable purchases for resale, from an October 28, 1976, letter she found when examining the books in October 1984. This letter, signed by David Chelnick, Hinckley & Schmitt's controller, stated that Hinckley & Schmitt had paid "use tax * * * on all coolers purchased from [plaintiff]."

Knight further testified that she informed plaintiff of the letter in September 1985, after which plaintiff sent a blanket resale certificate to Hinckley & Schmitt. Knight testified that, upon observing the returned resale certificate bearing the signature of Chelnick, she informed plaintiff that she would not accept the certificate due to her belief that the sales were not made in good faith since plaintiff had the 1976 letter already in its possession at the time of the sales. Knight stated, over objection, that she telephoned Chelnick after plaintiff had expressed opposition to her position. Chelnick informed her that Hinckley & Schmitt did not resell the water coolers but leased them, that they continued to pay use tax on the water coolers, and that he "would never sign" a resale certificate as to the coolers in issue.

Edward J. Styka, the attorney representing plaintiff, introduced into evidence exhibits on behalf of plaintiff and made certain representations regarding the exhibits. Styka represented that plaintiff obtained from Hinckley & Schmitt a letter, dated December 10, 1976, containing their sales tax number and, on May 30, 1985, an undated resale certificate. Styka also tendered an exhibit he prepared summarizing for the audit years plaintiff's total sales and total reported taxable sales, excluding the sales to Hinckley & Schmitt, to support his argument that plaintiff was a wholesaler not subject to retail tax. The summary indicated that plaintiff's taxable (retail) sales represented less than .10% of plaintiff's total annual sales.

In rebuttal, Knight testified that included in Styka's nontaxable sales figures were sales from their out-of-state subsidiaries which could have been retail sales but would not have been taxable in Illinois. Glennon Taylor, an audit supervisor for the Department, testified that the return reporting plaintiff's taxable and gross receipts, from which Styka had made his analysis, included interstate commerce sales as part of the gross receipts. Taylor estimated, under an analysis computing the percentage of taxable receipts to the total wholesale sales, that the percentage of taxable receipts to the total wholesale sales, that the percentage of taxable sales more closely approximated 1% of the total sales.

At the close of the hearing, the Administrative Law Judge (ALJ) found plaintiff to be liable for the MROT and RTA tax deficiencies claimed by the Department. The ALJ found that the sales in issue were not nontaxable resale sales but taxable sales to an end user. The ALJ stated that the best evidence of such was the October 28, 1976, letter, and that Hinckley & Schmitt did not execute a valid resale certificate. The circuit court, in affirming the Department's decision, found that the Department's determination as to plaintiff's liability was not against the manifest weight of the evidence and that the MROT and RTA Acts applied to plaintiff's sales to Hinckley & Schmitt.

In reviewing plaintiff's claims on appeal of the circuit court's ruling, we need only consider the Retailers' Occupation Tax Act (the ROT Act) (Ill.Rev.Stat.1987, ch. 120, par. 440 et seq.) because the MROT and RTA Acts incorporate by reference the pertinent provisions of the ROT Act. (See Dearborn Wholesale Grocers, Inc. v. Whitler (1980), 82 Ill.2d 471, 478, 45 Ill.Dec. 892, 893, 413 N.E.2d 370, 371.) The ROT Act is entitled "An Act in relation to a tax upon persons engaged in the business of selling tangible personal property to purchasers for use or consumption." (Ill.Rev.Stat.1987, ch. 120, par. 440.) Its provisions impose a tax upon persons "engaged in the business of selling tangible personal property at retail." Ill.Rev.Stat.1987, ch. 120, par. 441.

We will consider first plaintiff's contention that the Department's decision that plaintiff's sales to Hinckley & Schmitt are taxable retail sales is against the manifest weight of the evidence. In reviewing the evidence offered at the administrative hearing, we are directed by the following established law. The Department's corrected return is deemed to be prima facie evidence of the correctness of the amount of tax due (Ill.Rev.Stat.1987, ch. 120, par. 443), and its prima facie case is established by simply submitting the corrected return into evidence at the hearing (Central Furniture Mart, Inc. v. Johnson (1987), 157 Ill.App.3d 907, 910, 109 Ill.Dec. 869, 871, 510 N.E.2d 937, 939). Where a corrected return is challenged, the record must only demonstrate that the Department's method of preparing the corrected return meets some minimum standard of reasonableness. (Central Furniture, 157 Ill.App.3d at 910, 109 Ill.Dec. at 871, 510 N.E.2d at 939; Smith v. Department of Revenue (1986), 143 Ill.App.3d 607, 611, 97 Ill.Dec. 846, 849, 493 N.E.2d 653, 656; Puleo v. Department of Revenue (1983), 117 Ill.App.3d 260, 266, 72 Ill.Dec. 743, 747, 453 N.E.2d 48, 52.) Once a prima facie case has been established, the taxpayer thereupon bears the burden of overcoming this evidence by showing the transaction to be nontaxable. Illinois Cereal Mills, Inc. v. Department of Revenue (1983), 99 Ill.2d 9, 16, 75 Ill.Dec. 391, 394, 457 N.E.2d 385, 388; United Air Lines, Inc. v. Johnson (1981), 84 Ill.2d 446, 455, 50 Ill.Dec. 631, 636, 419 N.E.2d 899, 904; Howard Worthington Inc. v. Illinois Department of Revenue (1981), 96 Ill.App.3d 1132, 1134, 52 Ill.Dec. 167, 169, 421 N.E.2d 1030, 1032.

In the case at bar, the Department submitted at the administrative hearing the corrected return made by its auditor indicating that plaintiff had failed to pay taxes on retail sales of water coolers made to Hinckley & Schmitt. The record does not demonstrate that the auditor's methods failed to meet a minimum standard of reasonableness. The auditor testified that, after inspecting plaintiff's books and records, she concluded that the sales in issue were retail sales from a 1976 letter signed by Hinckley & Schmitt's controller which indicated that Hinckley & Schmitt had paid use tax to the State on all of the coolers it purchased from plaintiff. ² The auditor testified that she rejected a resale certificate subsequently procured by plaintiff in 1985 because the 1976 letter had been in plaintiff's possession at the time of the sales and because, upon her inquiry, Hinckley & Schmitt's controller stated that he would never sign a resale certificate as to the coolers and reaffirmed that Hinckley & Schmitt continued to pay use tax on the coolers. ³ Because the record does not demonstrate that the methods employed by the auditor were unreasonable, it is evident that the Department established its prima facie case. It was then incumbent upon plaintiff to overcome the Department's prima facie case.

Before looking to the evidence offered by plaintiff to overcome the Department's prima facie case, we will address two issues raised by plaintiff which may be pertinent to our analysis. Plaintiff first argues that it was fundamentally unfair that the ALJ ruled that plaintiff did not have a valid resale certificate when in the presentation of the Department's prima facie case it presented the theory that a valid resale certificate had not been taken in good faith. Plaintiff misplaces its reliance on the principle set forth in A.R. Barnes & Co. v. Department of Revenue (1988), 173 Ill.App.3d 826, 123 Ill.Dec. 410, 527 N.E.2d 1048, and Cartwright v....