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Telco Leasing, Inc. v. Allphin

OPINION FILED MAY 14, 1976.

TELCO LEASING, INC., APPELLANT,

v.

ROBERT H. ALLPHIN, DIRECTOR OF THE DEPARTMENT OF REVENUE, ET AL., APPELLEES.



Appeal from the Circuit Court of Cook County; the Hon. Samuel B. Epstein, Judge, presiding. MR. JUSTICE CREBS DELIVERED THE OPINION OF THE COURT:

This is an appeal from an order of the circuit court of Cook County granting the defendants' motion for summary judgment.

The plaintiff is a corporation engaged in the business of leasing medical and scientific equipment and computers to hospitals, universities, laboratories and other institutions which provide health care services and research. Pursuant to lease agreements with certain nonprofit institutions, the plaintiff leased to those institutions equipment having a total cost of $1,943,535. The defendant Director of Revenue for the State of Illinois thereupon assessed use taxes in the amount of $77,741 against the plaintiff for the use of the leased equipment. The plaintiff subsequently paid under protest the assessed use taxes and an additional sum for penalty and interest.

The plaintiff filed a complaint for declaratory and injunctive relief alleging that the use taxes were improperly assessed. The complaint sought a declaration that the Illinois Use Tax Act is unconstitutional as applied to the plaintiff. The complaint also requested that the court grant an injunction restraining the defendants, the Director of Revenue, the Treasurer, and the Attorney General of the State of Illinois, from levying, imposing or collecting a use tax on the property leased by the plaintiff to nonprofit institutions. The complaint further requested an order restraining the Director of Revenue and Treasurer of the State of Illinois from transferring the sums paid by the plaintiff from the protest fund to the general revenue fund of the State of Illinois.

While this litigation was pending in the circuit court, the plaintiff was twice more assessed use taxes by the Director of Revenue for use of property leased to nonprofit institutions. The plaintiff also paid those taxes under protest. The circuit court granted temporary injunctions restraining the Director of Revenue from transferring the taxes to the State Treasurer for deposit in the general revenue fund.

Both parties filed motions for summary judgment, each alleging the absence of any genuine issue of material fact. The trial court granted the defendants' motion and ordered that the cause be dismissed with prejudice. We have granted the plaintiff's petition to appeal directly to this court.

The plaintiff contends that it should be exempt from the use tax assessed by the Director of Revenue because the property in question is leased to nonprofit, charitable institutions. Section 3 of the Use Tax Act, pursuant to which the Director of Revenue assessed taxes against the plaintiff, provides in pertinent part:

"A tax is imposed upon the privilege of using in this State tangible personal property purchased at retail from a retailer. Such tax is at the rate of 4 1/4% of the selling price of such property if purchased prior to October 1, 1969, and at the rate of 4% of the selling price of such property if purchased after September 30, 1969. * * *

The tax herein imposed does not apply to any governmental body, or to any corporation, society, association, foundation or institution organized and operated exclusively for charitable, religious or educational purposes, when using tangible personal property purchased at retail." (Ill. Rev. Stat. 1973, ch. 120, par. 439.3.)

Section 2 of the Use Tax Act defines the "use" of tangible personal property as follows:

"`Use' means the exercise by any person of any right or power over tangible personal property incident to the ownership of that property * * *." (Ill. Rev. Stat. 1973, ch. 120, par. 439.2.)

Rule 3 of the use tax rules and regulations of the Department of Revenue of the State of Illinois, a rule promulgated to govern application of the Use Tax Act to leased property, states in pertinent part:

"The use tax does not apply to the rental payments made by a lessee to a lessor. However, except as is noted in the next paragraph, the lessor is legally the user of the property and is taxable on the purchase price thereof."

The plaintiff argues that the charitable institutions to which it leases the equipment should be deemed the "users" of the property. The plaintiff asserts that several factors lead to that conclusion. It is argued that the plaintiff does not manufacture the equipment in question and purchases the equipment only after a charitable institution places an order for such equipment with the plaintiff. Property thus purchased is delivered directly from the manufacturer to the charitable institution, so that the plaintiff never actually takes physical possession of the equipment. The lease agreements between the plaintiff and its lessees grant the lessees options to purchase the leased equipment, and further provide that each lessee shall bear the obligation of all taxes imposed as an incident to the purchase, ownership, possession or use of the equipment. As a result, the plaintiff argues that, even though it is the legal owner of the property in question, the charitable institutions are the true "users" of the property.

We find the plaintiff's argument to be without merit. An analysis of the statutory definition of "use" leads us to the conclusion that the owner and lessor of property is the "user" of the property within the meaning of the Use Tax Act. As previously stated, section 2 of the Use Tax Act defines "use" as the exercise of some right or power over property "incident to the ownership of that property." It follows that only the owner of property can be a user within the meaning of the Act. In International Business Machines Corp. v. Department of Revenue, 25 Ill.2d 503, this court observed ...


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