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Ill. Cereal Mills, Inc. v. Dep't of Revenue





Appeal from the Appellate Court for the Fourth District; heard in that court on appeal from the Circuit Court of Edgar County, the Hon. Richard E. Scott, Judge, presiding.


The plaintiff, Illinois Cereal Mills, filed a complaint against the defendant, the Department of Revenue (Department), for administrative review in the circuit court of Edgar County, to set aside an assessment of taxes, penalties and interest of $67,135.05 under the Retailers' Occupation Tax Act (Ill. Rev. Stat. 1979, ch. 120, par. 440 et seq.), the Municipal Retailers' Occupation Tax Act (Ill. Rev. Stat. 1979, ch. 24, par. 8-11-1), and the Use Tax Act (Ill. Rev. Stat. 1979, ch. 120, par. 439.1 et seq.). Holding for the plaintiff, the circuit court modified the assessment. The appellate court reversed (106 Ill. App.3d 53), and we granted the plaintiff's petition for leave to appeal under Rule 315 (87 Ill.2d R. 315). We granted leave to the Illinois Wholesaler-Distributors Association and the Illinois Soft Drink Association to file briefs amici curiae. Their briefs support the plaintiff.

The plaintiff is engaged principally in manufacturing corn products. The plaintiff sells to other manufacturers who process the product and resell it primarily as livestock feed. The Department conducted a field audit of the plaintiff's sales revenues for the period from January 1, 1974, through February 28, 1977. The Department's auditor disallowed $710,830 in sales, the greater portion of which the plaintiff asserted to be nontaxable as sales for resale. The Department issued a notice of tax liability, to which the plaintiff filed a protest and requested an administrative hearing. Following a hearing, the hearing officer recommended a final assessment of approximately $67,000, and the Department issued a final assessment for that amount. The assessment included a claimed indebtedness under the Use Tax Act (Ill. Rev. Stat. 1979, ch. 120, par. 439.1 et seq.). The use tax assessment has not been challenged on this appeal. The Municipal Retailers' Occupation Tax Act incorporates by reference all the provisions of the Retailers' Occupation Tax Act which are pertinent to this case, and therefore only the latter, referred to hereafter as "the Act," need be cited and considered.

At the hearing, the Department asserted that approximately $710,000 in sales, most of which were claimed by the taxpayer to be nontaxable as sales for resale, were taxable. The Department's evidence consisted mainly of testimony of its auditor, Burl Good, his audit, and corrected returns. The auditor found that, considering the nature of the products sold and the large amounts purchased, the sales in question appeared to be sales for resale. However, he concluded that the plaintiff was liable for the retailers' occupation tax because the resale certificates (which we will later refer to) did not comply with the documentation and verification requirements of section 2c of the Act (Ill. Rev. Stat. 1979, ch. 120, par. 441c). In some instances the auditor found the resale certificates were improper because they were not signed by the purchasers from the taxpayer but by those to whom the purchasers had resold the products. In other cases the certificates lacked registration or resale numbers or were not dated.

The plaintiff presented testimony from certain of its officers, employees and purchasers that the sales in question had been almost entirely sales for resale. The plaintiff acknowledged liability for taxes on approximately $113,000 in sales revenue from retail sales which were, the plaintiff stated in oral argument, principally accommodation sales made for good-will purposes. Some of that testimony was to the effect that registration numbers could not be obtained for some of the questioned sales because the purchasers had later gone out of business. The plaintiff also introduced invoices for sales in the questioned audit period, as well as affidavits and testimony from purchasers, to show that these sales were, in fact, for resale. The taxpayer's December 1975 tax return was also admitted into evidence. As we noted, the plaintiff admitted that it had made some retail sales, but in December 1975, as an example, taxable retail sales amounted to only .66% of receipts from the taxpayer's total sales for the month of over $4 million. The plaintiff argues that this is not only representative of its own yearly retail sales percentage, but it also states that the practice of other Illinois wholesalers is likewise to make minimal amounts of retail sales and that such sales constitute about the same percentage of their total sales.

The hearing officer adopted the auditor's recommendation that the certificates of resale not be accepted, and found that the taxpayer had not satisfactorily documented the resale character of its sales under section 2c of the Act (Ill. Rev. Stat. 1979, ch. 120, par. 441c). The Department accepted the hearing officer's recommended assessment of $67,000 based on sales of $710,830.

Before the circuit court the plaintiff acknowledged its retailers' occupation tax liability for $26,000, representing admitted retail sales of approximately $113,000. The plaintiff challenged, however, the balance of the assessment, i.e., $41,000, saying that the balance represented not retail sales, but sales for resale. The circuit court agreed with the plaintiff, but the appellate court reversed as to the claimed sales for resale and reinstated the challenged assessment balance of $41,000 (106 Ill. App.3d 53, 57-58).

The taxpayer contends (1) that sections 1 and 2c of the Act do not apply to it, as it is a wholesaler making tax-exempt sales for resale, with only an insignificant percentage of its sales being sales for retail; (2) if section 2c does apply to it, the section's requirements are not mandatory and noncompliance with its provisions simply creates a presumption of tax liability that may be rebutted, which the plaintiff's evidence in fact accomplished; (3) if noncompliance with requirements of section 2c renders sales for resale per se taxable, then section 2c violates section 13 of article IV of the Constitution of Illinois, or (4) section 2c violates the uniformity clause of the Constitution of Illinois and the equal protection clause of the United States Constitution, or (5) it violates the export clause of the United States Constitution, and (6) the Department should be collaterally estopped from raising certain issues on appeal.

The interpretation and applicability of section 2c are central to the questions on this appeal. The section was added to the Act in 1965 (1965 Ill. Laws 116), and as amended in 1967 (1967 Ill. Laws 257) it reads:

"If the purchaser is not registered with the Department as a taxpayer, but claims to be a reseller of the tangible personal property in such a way that such resales are not taxable under this Act or under some other tax law which the Department may administer, such purchaser (except in the case of an out-of-State purchaser who will always resell and deliver the property to his customers outside Illinois) shall apply to the Department for a resale number. * * *

Upon approval of the application, the Department shall assign a resale number to the applicant and shall certify such number to him. * * *

Except as provided hereinabove in this Section, no sale shall be made tax-free on the ground of being a sale for resale unless the purchaser has an active registration number or resale number from the Department and furnishes that number to the seller in connection with certifying to the seller that any sale to such purchaser is nontaxable because of being a sale for resale."

Section 2 of the Act (Ill. Rev. Stat. 1979, ch. 120, par. 441) states the persons liable for the tax. The opening sentence of section 2 reads:

"A tax is imposed upon persons engaged in the business of selling tangible personal property at retail at the rate of [a given percentage] of the gross receipts from such ...

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