Liquid Air Corp. v. Johnson, 1-90-2988
| Decision Date | 31 December 1992 |
| Docket Number | No. 1-90-2988,1-90-2988 |
| Citation | 608 N.E.2d 558,240 Ill.App.3d 722 |
| Parties | , 181 Ill.Dec. 485 LIQUID AIR CORPORATION, a Delaware Corporation, and Cardox Corporation, a Delaware Corporation, Plaintiffs-Appellants, v. J. Thomas JOHNSON, individually and as Director, Department of Revenue of the State of Illinois; James H. Donnewald, individually and as State Treasurer of Illinois and of the Department of Revenue of the State of Illinois; and the Department of Revenue of the State of Illinois, Defendants-Appellees. |
| Court | United States Appellate Court of Illinois |
Schopf & Weiss, Chicago (Steven A. Weiss, Bradley P. Nelson, of counsel), for plaintiffs-appellants.
Roland W. Burris, Atty. Gen., Rosalyn B. Kaplan and John A. Morrissey, Chicago, of counsel), for defendants-appellees.
The resolution of this dispute turns on the proper construction of certain provisions of the Retailers' Occupation Tax Act (ROTA) (), which imposes a tax upon the gross receipts received by persons who sell tangible personal property at retail. The taxpayers, the Liquid Air Corporation and its subsidiary, the Cardox Corporation, brought this suit to challenge the Department of Revenue's taxation of customer fees collected for the use of storage equipment. The Department decided that the fees were taxable because they constituted an inseparable element of the taxpayers' cost of selling its products. The taxpayers argued that these fees were bona fide rental payments which were exempt from taxation under the ROT regulations. (86 Ill.Adm.Code § 130.2010 (1986).) Agreeing with the Department of Revenue, the trial court held that the fees in question were taxable, granted summary judgment in favor of the Department, and denied the taxpayers' motion for summary judgment.
We reverse.
The taxpayers are in the business of selling industrial gases in liquid form to customers throughout the United States. Because they must be maintained at low temperatures and high pressure, these products cannot be stored in conventional vessels. Instead, the liquid gases are stored in large cryogenic tanks that can sustain the necessary temperature and pressure. Therefore, the taxpayers' customers cannot accept delivery of the liquid gases unless they have the appropriate storage facilities on their premises.
Liquid Air and Cardox provide customers with the option of leasing storage facilities, but they do not require their customers to lease storage facilities exclusively from Liquid Air and Cardox. Customers are free to lease or purchase storage equipment from any vendor they choose. Approximately 25 customers purchase the taxpayer's products without leasing any storage facilities from the taxpayers. A few other customers lease storage facilities from the taxpayers, but do not purchase any product from the taxpayers. Those customers who choose to lease storage facilities from the taxpayers are charged a monthly rental fee, in addition to the price charged for the amount of product purchased.
The price charged for product purchased and the amount of rent charged for the use of storage facilities are negotiated and set separately. The taxpayers' salesmen negotiate the product price with the customer first. Product price is based upon the quality of product purchased, transportation expenses incurred in delivering the product to the customer's location, and market competition. After a customer decides to purchase product from the taxpayers, the salesmen discuss storage facilities. Facility rental fees are calculated based on the cost of the tank, depreciation, maintenance, insurance and taxes.
The taxpayers bill their customers separately for the amount of product purchased and for the facility fees. The facility fee is a fixed amount per month; it is invoiced monthly, in advance. If customers have their own storage tanks, they are not charged a facility fee. Conversely, customers who lease storage tanks from the taxpayers In contrast to the monthly facility charge, the taxpayers often bill customers for the product purchased several times per month; product billing is based upon the frequency of product delivery. When no deliveries of product are made during a month, however, the customer must still pay the monthly facility rental fee for use of the storage tanks.
[181 Ill.Dec. 487] but purchase products from other suppliers, pay only a monthly facility fee.
After conducting an audit of the taxpayers' Retailers' Occupation Tax returns for the years 1982 through 1984, the Department of Revenue issued amended returns assessing a tax liability of $423,524 for the Liquid Air Corporation and $125,433 for the Cardox Corporation. Cardox paid $86,514 of this amount under protest (the amount attributed to tax on facility rental fees), and Liquid Air paid $312,280 under protest. Liquid Air and Cardox have paid additional amounts, under protest, covering Retailers' Occupation Tax on facility rental fees in 1986 and thereafter.
On June 10, 1986, the taxpayers, filed a complaint against the defendants alleging, inter alia, that the Department of Revenue's assessment of the Retailers' Occupation Tax on facility fees it collected for customer use of storage systems was improper. Both parties filed motions for summary judgment. On October 2, 1990, the circuit court granted the defendant's motion for summary judgment and denied taxpayers' motion.
The Department admitted in the circuit court that some of the facility fees received by the taxpayers should not have been taxed under the Retailers' Occupation Tax. The Department had imposed the tax on all facility rental fees, even on fees for storage of product where the sale of the stored product had not been taxed because of a resale certificate or other exemption. Defendants conceded below that the Retailers' Occupation Tax should not be imposed on facility fees when the purchase of the product is not taxed because of a resale certificate or other exemption. In its final judgment order, the circuit court ordered that these improperly assessed taxes be returned to the taxpayers.
OPINIONThe facts are not in dispute. The sole issue before this court is the proper classification of the facility fees collected by Liquid Air and Cardox. If the facility fees are properly classified as a part of the expenses that the plaintiff must incur in order to sell industrial gases, the facility fees are taxable under the Retailers' Occupation Tax Act. On the other hand, if the facility fees are bona fide lease payments, the fees are exempt from taxation under the ROTA.
The ROTA imposes a five percent tax upon the "gross receipts" obtained by persons engaged in the business of selling tangible personal property at retail. (Ill.Rev.Stat.1985, ch. 120, par. 441.) A "sale at retail" is defined as "any transfer of ownership of or title to tangible personal property to a purchaser, for the purpose of use or consumption * * * " (Ill.Rev.Stat.1985, ch. 120, par. 440.) The "amount of sale" is the consideration received for the sale "without any deduction [for] the cost of the property sold, the cost of materials used, labor or service cost or any other expense whatsoever * * * " (Ill.Rev.Stat.1985, ch. 120, par. 441).
Rental fees and lease payments are expressly excluded from taxation under section 130.2010 of the ROT regulations. Section 130.2010 provides that persons who, under bona fide agreements, rent or lease the use of tangible personal property to others are not engaged in the business of selling tangible personal property within the meaning of ROTA, and are not required to remit the Retailers' Occupation Tax on the gross receipts from such transactions. 86 Ill.Adm.Code § 130.2010 (1986)
Recently, the Fourth District addressed the application of the ROTA provisions to facility fees like the ones at issue here. (See Airco v. Illinois Department of Revenue (1991), 223 Ill.App.3d 386, 165 Ill.Dec. 583, 584 N.E.2d 1017.) In Airco, the court unanimously held that facility fees are not taxable under the ROTA where customers are not required to rent equipment from the industrial gas supplier, but instead, are free to purchase and use their own equipment. (Airco, 223 Ill.App.3d at 392-93, 165 Ill.Dec. at 587, 584 N.E.2d at 1021.) (Emphasis added.) We believe that Airco is dispositive of the issue before the court.
The facts in Airco are virtually identical to those in the instant case. In fact, Airco is one of taxpayers' competitors. In Airco, as in the present case, the plaintiff was engaged in the business of selling industrial gases which were generally sold in liquid form. The plaintiff's products would only remain in liquid form when stored at temperatures below zero degrees Fahrenheit. Therefore, in order for plaintiff's customers to accept delivery of the liquid gases, they had to have insulated storage facilities on their premises.
Like the taxpayers, Airco gave its customers the option of purchasing their own storage system, or renting one from Airco. If the customer rented storage equipment from Airco, they were charged a facility fee in addition to the cost of the liquid gases. Thus, the agreement between Airco and its customers, like the one between the taxpayers and their customers, contained two separately negotiated prices: one price for the purchase of liquid gases; and a separate price for the use of storage equipment.
The facts were not disputed in Airco; the sole issue on appeal was whether the facilities fees charged by Airco for the rental of storage equipment were subject to taxation under the ROTA. (Airco, 223 Ill.App.3d at 387-88, 165 Ill.Dec. at 584-85, 584 N.E.2d at 1018-19.) In Airco, the Department of Revenue made essentially the same argument that it is making now on appeal. The Department asserted that facility fees were actually an inseparable element of Airco's cost of...
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