APPEAL from the Circuit Court of Cook County; the Hon. WILLIAM
V. BROTHERS, Judge, presiding.
MR. CHIEF JUSTICE SCHAEFER DELIVERED THE OPINION OF THE COURT:
Acting upon its interpretation of our decision in Modern Dairy Co. v. Department of Revenue, 413 Ill. 55, the Department of Revenue has sought to impose the retailers' occupation tax upon sales of tangible personal property by suppliers to persons who retransfer such property in the course of "service occupations." In this case and the companion consolidated cases, Material Service Corp. v. Hollingsworth, No. 32795, and Chicago Fire Brick Co. v. Hollingsworth, No. 32796, the position taken by the Department is challenged.
The plaintiffs in this case are pharmaceutical companies and other supply houses, who sell medicines, bandages, dressings, splints, braces, and other medical supplies, as well as foods, to doctors and hospitals who apply or serve these products to their patients. Sometimes patients are charged for each specific item used, and sometimes on the basis of a flat charge which includes all medical services and supplies. Some patients are "charity cases" and pay nothing for the care they receive.
The dispute over the taxability of sellers of medical supplies to doctors and hospitals has a long history. Prior to 1941, taxability was denied in Mallen Co. v. Department of Finance, 372 Ill. 598. In 1941, the rules of the Department were changed to impose a tax upon sales of medical supplies to doctors and hospitals. This change in the rules was based upon that portion of the 1941 amendment to section 1 of the Retailers' Occupation Tax Act which extended the statutory definition of "use or consumption" to the employment of tangible personal property by persons engaged in service occupations. (Laws of 1941, p. 1079.) This part of the 1941 amendment fell in Stolze Lumber Co. v. Stratton, 386 Ill. 334, and nontaxability of the medical suppliers was reaffirmed in Huston Brothers Co. v. McKibbin, 386 Ill. 479.
In the meantime, the plaintiffs instituted this action in the circuit court of Cook County. On November 22, 1944, that court entered a decree holding that under the Stolze Lumber Co. and Huston Brothers Co. cases the plaintiffs were not subject to the retailers' occupation tax on the basis of sales made to doctors and hospitals who retransferred the supplies to paying patients. When the Department took the position that the immunity provided by the Huston Brothers Co. case did not extend to sales to charitable institutions because the retransfers were without consideration, the plaintiffs filed a supplemental complaint, and by an order entered June 20, 1947, the circuit court extended its injunction to all sales to doctors and hospitals who retransferred the supplies to patients, whether or not the patients paid for the supplies. No appeal was prosecuted from the 1944 or 1947 decrees of the circuit court of Cook County.
After our decision in Modern Dairy Co. v. Department of Revenue, 413 Ill. 55, the Department promulgated Bulletin No. 11, which purports to impose the tax on sales by suppliers to persons engaged in service occupations who retransfer the property, whether or not the retransfer is for a valuable consideration. The defendants then filed motions in the circuit court to vacate the injunctive orders of 1944 and 1947. On November 20, 1952, the circuit court, on the basis of the Modern Dairy Co. case, entered an order vacating its 1947 injunction as to future sales of supplies to be retransferred without charge. The court refused, however, to vacate its injunction as to sales made prior to November 20, 1952, and ordered that the injunction continue in full force as to those prior sales. On December 18, 1952, the court found that the sales to doctors and hospitals who retransferred the supplies to paying patients were sales for resale and therefore were not taxable, and denied the defendants' motion to vacate the injunction order of 1944, pertaining to such sales. Defendants appeal from the order of the circuit court of Cook County entered December 18, 1952, and from that part of the order entered November 20, 1952, which leaves the injunction in effect as to sales for retransfer without charge which were made prior to the date of that order.
We shall first consider whether the tax applies to suppliers selling to persons engaged in service occupations who retransfer the products sold for a valuable consideration in connection with the rendition of services. Defendants take the position that Modern Dairy Co. v. Department of Revenue, 413 Ill. 55, compels the conclusion that sales to those engaged in service occupations are "for use and consumption" and "not for resale in any form as tangible personal property." Plaintiffs, on the other hand, contend that a retransfer for a valuable consideration is a "resale" which, by the terms of the statute, immunizes the supplier from the tax.
The Retailers' Occupation Tax Act (Ill. Rev. Stat. 1951, chap. 120, pars. 440 et seq.) 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." (Emphasis supplied.) The act (section 2) imposes a tax "upon persons engaged in the business of selling tangible personal property at retail * * *." (Emphasis supplied.) Section 1 of the act defines "sale at retail" to mean "any transfer of the ownership of, or title to, tangible personal property to the purchaser, for use or consumption and not for resale in any form as tangible personal property, for a valuable consideration." (Emphasis supplied.) "Sale at retail," however, is also defined to include "any transfer of the ownership of, or title to, tangible personal property to a purchaser, for use or consumption by any other person to whom such purchaser may transfer the tangible personal property without a valuable consideration."
Modern Dairy Co. concerned the taxability of a dairy which sold milk to a State mental hospital. The hospital transferred the milk without consideration to patients for consumption. We held that the dairy was subject to a tax measured by these sales. The terms of that portion of the 1941 amendment to the act, which defined "sale at retail" to include transfers "to a purchaser, for use or consumption by any other person to whom such purchaser may transfer the tangible personal property without a valuable consideration," were squarely applicable to the transactions before us. It was argued, however, that the amendment was invalid because it was not within the title of the act. In resolving that question, we traced the history of the act from its origin in 1933. We observed that the title of the act refers to persons engaged in the business of selling property to purchasers "for use or consumption" and noted that the term "sale at retail" does not appear in the title of the act. We then considered the decisions of this court which had applied a strict and narrow definition to the words "use" and "consumption," and pointed out that those words are used in the disjunctive in the title of the act. "Reviewing our previous decisions and the actions of the legislature retrospectively," we concluded that "it was not the intention of the legislature to use the terms `user or consumer' in the title of the act in the strict and narrow construction which this court placed upon those terms in the earlier cases culminating in the decision of the Stolze Lumber Co. case." (413 Ill. at 65.) Defining the word "use" as including "any employment of a thing which took it off the retail market so that it was no longer the object of a tax on the privilege of selling it at retail" we held that the 1941 amendment, which defined sale at retail to include sales for retransfer without consideration, was within the title, was otherwise valid, and was applicable to the transaction before us.
Defendants' case rests largely upon certain statements made by this court in the Modern Dairy Co. case. We have examined those statements. In context they relate only to the position of the court with respect to the scope of the title of the act, and specifically to the proper definition to be given to the phrase "use or consumption" as it appears in the title. Thus, defendants stress the sentence "Considered in this sense it seems obvious that the legislature intended and the act contemplates the use or consumption of the property which took it off the retail market so that it would no longer be an object of the tax." (413 Ill. at 65-66.) When it is recalled that the problem in that case concerned the validity of the extended definition of "sale at retail" to includes sales where property was retransferred without charge a problem which stemmed from decisions of this court which had unduly narrowed the scope of the act as expressed in its title it is apparent that this statement related to the unsoundness of a narrow construction and the propriety of a broad definition of the phrase "use or consumption" in the title of the act. Nothing in the opinion, however, suggests that the broadened definition of "use or consumption" in the title eliminates the tax liability tests set up in the body of the act.
Taxability resulted in Modern Dairy Co. because the tax was imposed by the language of the statute. Before the tax falls on the transactions here involved the defendants must show not only that there is a sale "for use or consumption" as defined in the Modern Dairy Co. case, but also that the transaction is taxable under the statute. That burden has not been met in this case. The tax is imposed upon "persons engaged in the business of selling tangible personal property at retail in this State." (Section 2.) "Sale at retail" is defined as "any transfer of the ownership of, or title to, tangible personal property to the purchaser, for use or consumption and not for resale in any form as tangible personal property, for a valuable consideration." (Section 1.) The sweep of the phrase "use or consumption" as it appears in the definition of a sale at retail is qualified by the following clause, which excludes sales for resale for a consideration. As the act reads, a person is not engaged in the business of selling at retail unless he transfers tangible personal property (1) for use or consumption and (2) not for resale in any form as tangible personal property. Both tests must be met to justify the imposition of the tax. This was pointed out in Modern Dairy Co.: "It will therefore be seen that while the title of the act requires a taxable sale to be to the purchaser for use or consumption (as the legislature intended these terms to be construed) this definition of `Sale at retail' imposed the additional requirement that the sale be `not for resale in any form as tangible personal property, for a valuable consideration.'" 413 Ill. at 59-60.
Referring to Modern Dairy Co. v. Department of Revenue, 413 Ill. 55, Fefferman v. Marohn, 408 Ill. 542, and Robertson Products Co. v. Nudelman, 389 Ill. 281, the defendants assert that "this Court's three most recent pronouncements upon the general intendment and import of the phrase `use or consumption,' leave no doubt that, whatever may be the implication of prior decisions, there is certainly no such `resale of commodities' as will exempt the supply house from the tax unless the re-transfer is for a direct and specific charge and there is probably no such resale even though a direct and specific charge is made where the transfer is a minor incident of the rendition of services." We do not read those cases as formulating the broad proposition urged by the defendants. Two of the three cases involved subsequent retransfers without consideration and, contrary to the defendants' contention, expressly recognized that a retransfer for a valuable consideration exempts the prior sale. In the Fefferman case we stated that "Appellants argue, and we believe are supported by previous decisions on the subject, that what is meant by the buyer's being the `ultimate user and consumer' is that the buyer must not further transfer the commodity purchased for a consideration." (408 Ill. at 546.) The distinction between a gratuitous retransfer and one for valuable consideration was noted further in Modern Dairy Co. 413 Ill. at 67: "It is true that the entire scheme of the act will make vendors liable for the tax on some sales to the institutions and not liable on other identical sales, depending upon whether the institution transfers to a paying patient or a charity patient."
In Robertson Products Co. v. Nudelman, 389 Ill. 281, the supply house sold paper napkins, tissue, towels, cups, and plates to hotels and office buildings. We held the supplier subject to the tax because "No thought of transfer or resale is indulged. Hotels and office buildings are not in the business of selling paper napkins, tissue, cups, plates and the like, but they are in the business of running a hotel or an office building or the like. We are of the opinion it is in this sense that they may be said to consume these articles. Nor is this to be confused with the materials used by contractors which go to make up a given object sold to a consumer. The items here considered are simply a part of the equipment of hotels and office buildings just as the contractor's tools are a part of his equipment." 389 Ill. at 286.
The single attempt by the legislature to impose the tax on suppliers making sales to persons engaged in service occupations who retransfer the supplies for a valuable consideration in connection with the rendition of services came in 1941. At that time the General Assembly added the following paragraph to section 1 of the act: "`Use or consumption,' in addition to its usual and popular meaning, shall be construed to include the employment of tangible personal property by persons engaged in service occupations (including construction contracting and other service occupations of like character,) trades or professions, in the rendering of services, where as a necessary incident to the rendering of such services, transfer of all or of a part of the tangible personal property employed in connection with the rendering ...