Appeal from the Circuit Court of Sangamon County, the Hon.
Simon L. Friedman, Judge, presiding.
JUSTICE UNDERWOOD DELIVERED THE OPINION OF THE COURT:
Rehearing denied December 10, 1982.
Plaintiff, Mobil Oil Corporation, brought an action in the circuit court of Sangamon County under "An Act in relation to the payment and disposition of moneys received by officers and employees of the State of Illinois by virtue of their office or employment," commonly referred to as the "Monies Act" (Ill. Rev. Stat. 1977, ch. 127, par. 170 et seq.) to compel the return of approximately $8 million which it paid under protest pursuant to an assessment by the Department of Revenue under the Use Tax Act (Ill. Rev. Stat. 1979, ch. 120, par. 439.1 et seq.). The tax was assessed upon Mobil's use of three "refinery fuels," which are produced incidentally during the process of refining crude oil. The court held that the Department violated provisions of the Illinois Administrative Procedure Act (Ill. Rev. Stat. 1979, ch. 127, par. 1001 et seq.) when it developed its policy and method of imposing the tax, and that, if the use of refinery fuels was taxable at all, the Department did not use the proper method of calculating the tax. The court held that Mobil was entitled to a refund of the tax paid under protest, plus interest. The Department appealed, and Mobil cross-appealed, asserting that the Use Tax Act is unconstitutionally ambiguous as applied to the facts of this case. We allowed the Department's motion for direct appeal under Rule 302(b) (73 Ill.2d R. 302(b)). American Airlines, Inc., has, by leave of court, filed an amicus brief limited to disposition of income earned on the protest fund.
The facts of this case are undisputed although the conclusions drawn by the parties differ. For the purpose of refining it into saleable products, Mobil purchases crude oil from various producers, including Illinois producers, and from "resellers" who act as middlemen between producers and refineries. All the crude oil is refined; none is used in its unrefined state, and none is left over after the refinery process is complete. However, not all of the crude oil can be successfully refined into saleable products, and some of those products have no market value.
Three products of the refinery process are used by Mobil in the refinery, are not resold in any form, and are at issue here as the subject of the use tax. Two of them, catalytic coke and process gas, are waste products which have no market value. The third, heavy oil, is a by-product which can be and is sold to heavy industry as a high sulphur fuel, but it commands a much lower market price than the "premium products" (e.g., gasoline, jet fuel, diesel fuel, and home heating oil). The catalytic coke, process gas and heavy oil, called "refinery fuels" because Mobil burns them for heat, are derived from crude oil, but, because they are chemically different from crude oil (different in molecular structure), they are said not to "exist" in the crude oil. They are, however, produced solely from the material that makes up the crude oil; no other matter is added to crude oil which becomes a part of these refinery fuels. A brief description of the refining process will indicate how these fuels are produced and used.
The refining process begins with the distillation of crude oil which yields several products, some of which are sold without further refining. One of the distillates, gas oil, is further refined in the fluid catalytic cracking (FCC) unit. Gas oil is injected under pressure into the FCC unit at approximately 650° F. It vaporizes upon contact with a sand-like catalyst, heated to about 1250° F, which is also circulated through the FCC unit. The catalyst causes the vaporized gas oil molecules to be "cracked" that is, chemically altered into smaller, lighter molecules. The catalyst, although it causes the chemical reaction, does not itself become a part of the newly formed substances, nor is it either chemically altered or consumed by the reactions. It does, however, become neutralized by a fine coating of carbon, released from the gas oil as it is cracked, which adheres to it. This coating is called "catalytic coke."
Because it is not economically feasible to discard the spent catalyst, Mobil regenerates it by oxidizing the catalytic coke; the regenerated catalyst is recirculated in the FCC unit. The oxidation of the catalytic coke creates heat which maintains the temperature of the catalyst, thus sustaining the operation of the FCC unit. Two waste gases, carbon monoxide and carbon dioxide, are also produced from the oxidation of catalytic coke. They are very hot and must be cooled before release to the atmosphere. (Carbon monoxide, a poison, is burned before the gas is cooled.) The gases are routed through a boiler for this purpose, and their heat is used to generate steam for the refinery's steam system.
Process gas is produced in the FCC unit and two other refinery units. It is a highly contaminated, flammable mixture of gases. Mobil does not have the capability of storing it and cannot sell it. Before it can be safely vented or "flared" to the atmosphere it must be burned. Mobil uses the heat generated by the burning in the refinery process.
Heavy oil is also produced in the refining of crude oil. Although its market value is low compared to the premium products, it can be sold as an industrial fuel. Mobil, however, does not sell all of its production of heavy oil; some is burned, and the heat is used in the refinery.
The Department assessed Mobil's use of these refinery fuels according to a formula which, in essence, was based upon the difference between the volume of crude oil purchased and the volume of products resold, measured by the purchase price of crude oil. The cornerstone of Mobil's argument is that the refinery fuels, catalytic coke, process gas and heavy oil, do not exist as such in the crude oil it purchases. Upon this premise rest its arguments that the Use Tax Act does not apply to the use of refinery fuels, and that if it does apply, the Department incorrectly valued them.
The Use Tax Act imposes a tax upon "the privilege of using in this State tangible personal property * * * purchased at retail from a retailer." (Ill. Rev. Stat. 1979, ch. 120, par. 439.3.) Mobil contests the application of this language arguing that since catalytic coke, process gas and heavy oil do not "exist" in crude oil, they could not have been purchased, and, in any event, the crude oil was not purchased at retail from a retailer.
In American Can Co. v. Department of Revenue (1971), 47 Ill.2d 531, this court rejected the argument that the use of a material in a form or identity different from that in which it existed at the time of purchase cannot be taxed. Although in that case the material at issue had undergone a physical change in form, we see no reason to differentiate between the chemical change here and the physical change in American Can. While catalytic coke, process gas and heavy oil may not exist in the chemical sense in crude oil, they are produced from it by chemically restructuring the molecules therein. The substance purchased as crude oil contains the substance which in its restructured form constitutes catalytic coke, process gas and heavy oil, and it is entirely clear to us that the refinery fuels were purchased in the statutory sense when the crude oil was bought. In American Can we were concerned with purchased materials which were put together before their use (raw materials to make machinery); we see no reason to reach a different result where the purchased material is altered before use.
Mobil also argues that it did not purchase crude oil "at retail" because its sole purpose in purchasing crude oil is to refine it, not to use it. Under section 2 of the Act "sale at retail" is defined as "any transfer of the ownership of or title to tangible personal property to a purchaser, for the purpose of use, and not for the purpose of resale in any form as tangible personal property to the extent not first subjected to a use for which it was purchased, for a valuable consideration: Provided that the property purchased is deemed to be purchased for the purpose of resale, despite first being used, to the extent to which it is resold as an ingredient of an intentionally produced product or by-product of manufacturing. * * *" (Ill. Rev. Stat. 1979, ch. 120, par. 439.2.) This court has held that a single sale is not an indivisible unit but taxability is determined by the uses to which the property is put. (Columbia Quarry Co. v. Department of Revenue (1968), 40 Ill.2d 47, 51; Granite City Steel Co. v. Department of Revenue (1964), 30 Ill.2d 552, 559.) In Granite City this court rejected a "dominant purpose" test urged by the taxpayer which would have resulted in excluding an entire purchase from the use tax if a portion of it was incorporated into a finished product for re-sale, even if the remaining portion was "used" within the meaning of the Act. In Columbia Quarry this court followed the same reasoning in upholding an assessment under the Retailers' Occupation Tax Act (Ill. Rev. Stat. 1961, ch. 120, par. 440) upon that portion of the purchased material which was used by the buyer and did not become part of a saleable product. In both of these cases the property purchased underwent chemical changes (metallurgical coal to coke in Granite City; limestone to calcium oxide and carbon dioxide in Columbia Quarry), and in both the chemically altered remainder, used but not resold, was held taxable. Despite Mobil's contrary contention, we believe these two cases are fundamentally indistinguishable from the one before us. In all three cases, the purchaser intends to use the material purchased in both its original and in its chemically altered form. The fact that the factor motivating ...