Mel-Park Drugs, Inc. v. Department of Revenue

• Decision Date: 30 July 1991
• Docket Number: No. 1-89-1938,MEL-PARK,1-89-1938
• Citation: 577 N.E.2d 1278,218 Ill.App.3d 203,160 Ill.Dec. 707
• Parties: , 160 Ill.Dec. 707 DRUGS, INC., Plaintiff-Appellant, v. The DEPARTMENT of REVENUE and Roger Sweet, Director, Defendants-Appellees.
• Court: United States Appellate Court of Illinois

Page 1278

577 N.E.2d 1278

218 Ill.App.3d 203, 160 Ill.Dec. 707

MEL-PARK DRUGS, INC., Plaintiff-Appellant, v. The DEPARTMENT of REVENUE and Roger Sweet, Director Defendants-Appellees.

No. 1-89-1938.

Appellate Court of Illinois,

First District, Second Division.

July 30, 1991.

Gerald W. Shea, Ira A. Rogal, Shea, Rogal & Associates, Ltd., Westchester, for plaintiff-appellant.

Roland Burris, Atty. Gen., Robert J. Ruiz, Sol. Gen. (Gerald S. Post, Asst. Atty. Gen., of counsel), for defendants-appellees.

Justice COCCIA delivered the opinion of the court:

Plaintiff, Mel-Park Drugs, Inc., ("Mel-Park") appeals from a judgment entered by the circuit court of Cook County on administrative review affirming the decision of an administrative law judge ("ALJ") upholding an assessment by the Department of Revenue ("Department"), against plaintiff in the amount of $179,069.36. The Department assessed plaintiff for tax deficiencies, penalties, and interest under the Service Occupation Tax ("SOT"), Retailer's Occupation Tax ("ROT"), Municipal Retailer's Occupation Tax ("MROT"), and parallel retailer's and service occupation taxes under the Regional Transportation Authority Tax Act ("RTA").

Mel-Park Drugs is a pharmacy located in Melrose Park, Illinois. It sells prescription and nonprescription medicines and drugs, food, liquor, cigarettes, newspapers, and miscellaneous nonfood and nondrug items, and also provides film processing services. Lee Alport is a pharmacist who works at Mel-Park and is one of its owners. Alport prepared and filed Mel-Park's monthly state tax returns. In September 1983, the Department began a field audit of Mel-Park's sales and service tax returns.

The auditor, Eileen McGinnis, found that for the 35-month period from July 1, 1981, through May 31, 1984, Mel-Park had underpaid its Retailer's Occupation Tax ("ROT") obligation by $63,227.23 (Ill.Rev.Stat.1989, ch. 120, par. 440 et seq.) and underpaid its Service Occupation Tax ("SOT") obligation by $5,998.30 (Ill.Rev.Stat.1989, ch. 120, par. 439.101 et seq.). McGinnis also found that Mel-Park had underpaid its Municipal Retailer's Occupation Tax ("MROT") (Ill.Rev.Stat.1989, ch. 24, par. 8-11-1) and Municipal Service Occupation Tax ("MSOT") (Ill.Rev.Stat.1989, ch. 24, par. 8-11-5) obligations by $19,523.31, and underpaid its Regional Transportation Authority Retailer's Occupation Tax ("RTA ROT") (Ill.Rev.Stat.1989, ch. 111 2/3, par. 704.03(e)) and Service Occupation Tax ("RTA SOT") (Ill.Rev.Stat.1989, ch. 111 2/3, par. 701.03) obligations by $19,522.60. At the conclusion of the audit McGinnis prepared corrected tax returns.

On April 1, 1985, the Department issued notice of the above-described tax liabilities to Mel-Park. The total balance due was $108,271.44 plus penalties and interest, for a grand total of $171,372.07 through April 30, 1985, with interest accumulating. On April 15, 1985, Mel-Park requested a hearing, which was held July 31, 1986. Thereafter, plaintiff filed its brief on September 2, 1986, and the Department entered a "Hearing Disposition" on or about August 14, 1987, and a "Final Assessment" on or before October 15, 1987.

Section 4 of the Retailer's Occupation Tax Act (Ill.Rev.Stat.1989, ch. 120, par. 443) provides, with regard to the examination and correction of tax returns, that:

"As soon as practicable after the return is filed, the Department shall examine such return and shall, if necessary, correct such return according to its best judgment and information, which return so corrected by the Department shall be prima facie correct and shall be prima facie evidence of the correctness of the amount of tax due, as shown therein.

* * * * * *

Proof of such correction by the Department may be made at any hearing before the Department or in any legal proceeding by a reproduced copy or computer print-out of the Department's record relating thereto in the name of the Department under the certificate of the Director of Revenue. If reproduced copies of the Department's records are offered as proof of such correction, the Director must certify that those copies are true and exact copies of records on file with the Department. If computer print-outs of the Department's records are offered as proof of such correction, the Director must certify that those computer print-outs are true and exact representations of records properly entered into standard electronic computing equipment, in the regular course of the Department's business, at or reasonably near the time of the occurrence of the facts recorded, from trustworthy and reliable information. Such certified reproduced copy or certified computer print-out shall without further proof, be admitted into evidence before the Department or in any legal proceeding shall be prima facie proof of the correctness of the amount of tax due, as shown therein."

The above-quoted section is incorporated by section 12 of the Service Occupation Tax Act (Ill.Rev.Stat.1989, ch. 120, par. 439.112). Similarly, the pertinent provisions of the ROT Act are incorporated by reference in the MROT and the RTA Acts. Elkay Manufacturing Co. v. Sweet (1990), 202 Ill.App.3d 466, 470, 147 Ill.Dec. 718, 720, 559 N.E.2d 1058, 1060.

The Department's submission of corrected returns establishes its prima facie case. (Young v. Hulman (1968), 39 Ill.2d 219, 234 N.E.2d 797; Central Furniture Mart, Inc. v. Johnson (1987), 157 Ill.App.3d 907, 910, 109 Ill.Dec. 869, 871, 510 N.E.2d 937, 939.) As summarized in Masini v. Department of Revenue (1978), 60 Ill.App.3d 11, 14, 17 Ill.Dec. 325, 328, 376 N.E.2d 324, 327 the statute has been strictly construed insofar as establishing a prima facie case is concerned; Illinois courts have uniformly sustained a prima facie case based on corrected tax returns.

In Masini v. Department of Revenue this court stated that while there is no statutory requirement that the Department substantiate the basis for the corrected return or produce the auditor who computed it in order to support its prima facie case, when the corrected return is called into question, the method employed by the Department in correcting the taxpayer's return must meet some minimum standard of reasonableness, citing Fillichio v. Department of Revenue (1958), 15 Ill.2d 327, 155 N.E.2d 3; Elkay Manufacturing Co. v. Sweet, 202 Ill.App.3d 466, 470, 147 Ill.Dec. at 720, 559 N.E.2d at 1060. The reasonableness standard is based upon the statutory provision which requires the Department to correct returns "according to its best judgment and information." Masini v. Department of Revenue, 60 Ill.App.3d at 14, 17 Ill.Dec. at 328, 376 N.E.2d at 327.

In the case at bar, Mel-Park seeks to overturn the final assessment on the basis that the audit was conducted by unreasonable methods and its returns were not corrected according to the Department's "best judgment and information." Therefore, Mel-Park argues, the Department has failed to establish a prima facie case that the amount of tax due is correct. Alternatively, Mel-Park argues that it has overcome any prima facie case the Department has established and the Department has not proved its final assessment to be correct.

In order to address these claims we must review the evidence presented at the administrative hearing in the case at bar.

At the hearing the auditor, Eileen McGinnis, testified. Also, her audit summary and the audit papers were introduced into evidence. McGinnis found that Mel-Park's records were incomplete such that, of the 35-month audit period, she was able to test-check only three months, November 1981, March 1983, and February 1984. Most notably lacking from the records submitted were daily cash register tapes showing gross sales receipts, and daily register tapes showing prescription costs. In addition, McGinnis noted a discrepancy between Mel-Park's federal income tax return and its monthly state tax return, which was the result of an unorthodox practice of "netting out" prescription service fees, cigarettes, and newspapers from the total amount reported on line one of the state return for gross retail sales receipts. Further, McGinnis testified that Mel-Park essentially took a double deduction for purposes of calculating its SOT liability, by reporting only 50% of its prescription costs as the taxable base for the SOT and then taking 50% of that figure as its liability. Mel-Park had, in effect, merged the Illinois Administrative Code's actual cost method (Method No. 2) and the estimated 50% of gross receipts method (Method No. 3) when calculating its SOT liability. Thus, McGinnis had to reconstruct the gross sales receipts and prescription and nonprescription sales receipts from the incomplete documents provided to her.

McGinnis attempted to reconstruct the correct gross sales receipt figure by using check registers and matching purchase invoices for the three test months. She attempted to check purchases to verify the percentage of food, prescription drugs and nonprescription drugs purchased. She categorized the purchases for the test months and concluded that food and drug purchases were 36.5% of the total purchases for those months and, therefore, 63.5% of the total purchases were for nonfood and nondrug items. She then derived the average drug purchases from the food and drug purchases, concluding that 59% of the food and drug purchases were for drugs. Thus, she estimated that about 22% (21.5%) of Mel-Park's total sales receipts were from the sale of drugs. Using this basis, she estimated Mel-Park's gross retail sales, calculated its liability and corrected its returns. As previously stated, McGinnis concluded that the underpaid liability was in the amount of $108,271.44.

McGinnis' cross-examination hearing testimony acknowledged that she had lumped together food and nonprescription drugs in the same category with prescription drugs. In a second category she placed all other nonfood items, such as liquor, newspapers, magazines, cigarettes, and...