Granite City Steel Co. v. Department of Revenue

Decision Date18 March 1964
Docket NumberNo. 38159,38159
Citation30 Ill.2d 552,198 N.E.2d 507
PartiesGRANITE CITY STEEL COMPANY, Appellee, v. The DEPARTMENT OF REVENUE et al., Appellants.
CourtIllinois Supreme Court

William G. Clark, Atty. Gen., Springfield (William C. Wines, Raymond S. Sarnow, Richard A. Michael, Edward A. Berman, and A. Zola Groves, Asst. Attys. Gen., of counsel), for appellants.

Randall Robertson, Granite City, and William R. Bascom and William C. Connett, IV, St. Louis, Mo. (Bryan, Cave, McPheeters & McRoberts, St. Louis, Mo., of counsel), for appellee.

SCHAEFER, Justice.

In this administrative review action the circuit court of Madison County quashed a final assessment of use tax and penalties made by the Department of Revenue against the plaintiff, Granite City Steel Company, on certain out of state purchases of metallurgical coal and coke. The revenue is involved, and the Department has appealed directly to this court.

The plaintiff is engaged in the business of manufacturing pig iron and steel in Illinois. It produces pig iron by heating iron ore, coke and limestone in blast furnaces. The purpose of the limestone is to 'flux off' the impurities in the iron ore. The coke performs two functions: first, it is burned to produce the heat necessary to melt the iron and induce the desired chemical reaction, and second, in the process of burning, carbon from the coke is infused into the iron. Carbon is an essential ingredient in finished pig iron. The plaintiff obtains some of the coke that it uses by purchasing metallurgical coal and converting it into coke in its own by-product coke ovens. In the process of conversion, the coal yields a number of volatile by-products, such as benzol, gas and napthalene, as well as coke. These volatile substances, and a very small amount of the coke, are sold. The great bulk of the coke thus produced is used by plaintiff in the production of pig iron. The plaintiff also purchases coke, and all of its purchased coke is used in manufacturing pig iron. The pig iron is either sold by the plaintiff as such, or is further refined and sold as steel.

The issue in this case involves the liability of the plaintiff for an assessment of use tax and penalties totaling $128,963.18 which was imposed on a portion of plaintiff's purchases of metallurgical coal and coke from out of state sellers during the period July 1, 1956, to June 30, 1959. The Department concedes that the amount of coal and coke that was actually resold in some form, whether as volatile by-products, as coke, or as carbon in the finished pig iron, is not subject to the use tax. The dispute concerns the plaintiff's liability for the tax on that portion of coal and coke that is consumed in production processes, is not resold in any form and does not appear in the finished product. The assessment was based upon the company's production figures for the calendar year 1959, a typical year. These figures indicated that approximately 33.5 per cent of plaintiff's purchases of coal was resold either as volatile matter, coke or carbon in pig iron. Accordingly, the base for the Department's assessment on purchases of metallurgical coal was the total purchase price less 33.5 per cent. The assessment on purchases of coke was based on the total purchase price less 4 per cent, which percentage is the percentage by weight of carbon in the finished pig iron.

We are thus concerned with purchased products, part of which are used and consumed in the process of manufacture, and part of which are resold, either as by-products or as an ingredient in the finished product. With respect to such a purchase, it is the contention of the plaintiff, which the trial court sustained, that if any part of a purchased commodity is intended to and must necessarily be incorporated in an end product which is resold, the entire commodity is not taxable. And since in this case some part of the purchased coal and coke was incorporated in products that were resold, no tax is due. It is the contention of the Department that the statute excludes from taxation only that part of the purchased commodity that is resold as a by-product or becomes an ingredient in an end product that is resold. And since in this case the coke, whether purchased or converted from coal, performs both a 'use function' by providing heat and a 'resale function' by providing carbon which was incorporated into the finished product, the Department contends that the part which was consumed in furnishing heat is taxable.

The Use Tax Act provides that 'A tax is imposed upon the privilege of using in this State tangible personal property purchased at retail * * * from a retailer.' (Ill.Rev.Stat.1961, chap. 120, par. 439.3.) 'Use' is basically defined as 'the exercise by any person of any right or power over tangible personal property incident to the ownership of that property, * * *.' The statute, however, contains the following relevant qualification of that basic definition: "Use' shall not mean * * * the physical incorporation of tangible personal property, as an ingredient or constituent, into other tangible personal property (a) which is sold in the regular course of business or (b) which the person incorporating such ingredient or constituent therein has undertaken at the time of such purchase to cause to be transported in Interstate Commerce to destinations outside the State of Illinois.' Ill.Rev.Stat.1961, chap. 120, par. 439.2

We have been referred to no decision that deals squarely with this situation and these contentions. Both parties rely upon Smith Oil and Refining Co. v. Department of Finance, 371 Ill. 405, 21 N.E.2d 292, which arose under the Retailers' Occupation Tax Act. There the question was the taxability of core oil sold to foundries for the purpose of making cores used in molding iron. The cores were composed of sand, and the core oil was added to bind the grains of sand together. Under high temperatures a small but undetermined amount of the core oil decomposed and was absorbed in the iron castings in the form of carbon. It was held that the sales of core oil measured a tax. The court pointed out that it was not shown that the core oil was used for the purpose of increasing the carbon content of the casting, and said: 'Before a commodity can be said to have been resold as an ingredient of the finished product, it must be shown to have been used with the intention that it should become a part of it, and not solely for some other and distinct purpose.' (371 Ill. at 408, 21 N.E.2d at 294.) The court also pointed out that the amount of carbon that became an ingredient of the iron castings was insignificant and could be regarded as de minimis. In the Smith case the court did not reach the issue now before us. The record in the present case makes it clear that it is intended and necessary that a part of the coke in question should be incorporated in the pig iron as carbon, and that it is also intended that most of the coke should be consumed in the process of supplying heat. In the Smith case, moreover, the question concerned the taxability of the entire amount of core oil sold, and no attempt was made to determine taxability on the basis of the particular uses to which the purchased property was put.

The plaintiff relies heavily upon State v. Southern Kraft Corp., 243 Ala. 223, 8 So.2d 886. The statute there involved excluded from the use tax 'sales at wholesale' which were defined as the purchase of property which 'becomes an ingredient or component part' of property manufactured or compounded for sale. The finished product was Kraft...

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  • Lpfc v. Department of Revenue
    • United States
    • United States Appellate Court of Illinois
    • January 9, 2008
    ...and construction of one provision is relevant in the construction of its complement. See Granite City Steel Co. v. Department of Revenue, 30 Ill.2d 552, 558, 198 N.E.2d 507 (1964). Since LPFC addresses only the Retailers' Tax Act, we refer only to that statute but acknowledge that our inter......
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    ...are complementary taxing statutes which are In pari materia and must be construed accordingly. (Granite City Steel Co. v. Department of Revenue (1964), 30 Ill.2d 552, 198 N.E.2d 507; Spring Hill Cemetary v. Ryan (1960), 20 Ill.2d 608, 170 N.E.2d 619; People ex rel. Nordstrom v. Chicago and ......
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