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Nw. Steel & Wire Co. v. Dep't of Rev.





Appeal from the Circuit Court of Whiteside County; the Hon. L.E. Ellison, Judge, presiding.


Northwestern Steel and Wire Company appeals from a judgment of the circuit court of Whiteside County in favor of the Department of Revenue of the State of Illinois entered in an administrative review proceeding in which Northwestern challenged the amount of tax applicable to gaseous oxygen supplied by Union Carbide to Northwestern's steel mill in Sterling, Illinois.

In 1971 Northwestern entered into an agreement with Union Carbide whereby Union Carbide would install an oxygen supply facility on land leased from Northwestern, and Northwestern would purchase oxygen as needed for its steel mill. The contract referred to Union Carbide as "Seller" and Northwestern as "Buyer." Pursuant to the terms of the agreement, Union Carbide installed oxygen facilities near Northwestern's steel mill premises. The oxygen plant converts the air surrounding it into gaseous or pure oxygen by removing nitrogen, argon, moisture and impurities from it. Gaseous oxygen is stored in two tanks which are part of Union Carbide's oxygen supply system.

The oxygen used by Northwestern is withdrawn from the tanks and piped to numerous outlets throughout the mill. When a cutting tool is connected to an oxygen outlet in the mill, the oxygen is ignited, creating an extreme heat which is concentrated on the material to be cut. The oxygen plant operates automatically. When a Northwestern employee turns on a valve at an oxygen outlet in the mill, thereby withdrawing gaseous oxygen from the storage tanks, the plant automatically produces and feeds into the storage tanks new gaseous oxygen to replace that which was used. Activation of the plant is controlled solely by Northwestern.

Liquid oxygen is used as a backup supply in the event of a breakdown in the oxygen plant generators or in the event of a demand on the plant that is greater than its capacity. Liquid oxygen is trucked from Chicago by Union Carbide and placed in special storage tanks which are part of the system. If Northwestern's usage exceeds the maximum capability of the oxygen plant to generate oxygen from air, the plant automatically converts liquid oxygen into gaseous oxygen and adds the gaseous oxygen to the appropriate storage tanks.

The agreement with Union Carbide provided for Northwestern to pay a facility charge of $26,886 per month whether any gaseous oxygen is delivered in a given month or not, and also provided for no payment in addition to the facility charge for the first 20,000,000 cubic feet of gaseous oxygen delivered in any month. Northwestern also had to pay an additional charge per cubic feet for liquid oxygen used when required by increased demand. Union Carbide is required to maintain the oxygen supply system and during maintenance shut downs of the oxygen-producing part of the system, Union Carbide must furnish the liquid oxygen as needed.

After Northwestern completed construction of a new 14-inch mill in 1975, Northwestern and Union Carbide entered into a new agreement by which Union Carbide would provide a liquid oxygen system with storage tanks and vaporizing equipment to convert liquid oxygen into gaseous oxygen. For this system Northwestern purchased the liquid oxygen, and Union Carbide trucked it to Sterling. This new facility is also totally automatic. The agreement required Northwestern to pay a facility charge of $1,025 per month plus a cubic foot charge for the liquid oxygen purchased from Union Carbide. Due to unfavorable business conditions, the new mill operated only six out of 26 months between May 1975 and June 1977, but the facility charge was paid every month.

The Illinois Department of Revenue conducted an audit during 1977, as a result of which Northwestern had to file an amended use tax return for the period from January 1, 1974, through June 30, 1977, and pay in excess of $82,000 taxes, penalties and interest. In November of 1977 Northwestern filed a claim for credit for the full amount paid. Northwestern based its claim for credit upon the assertion that the facility charges were rent payments, not part of the cost of the oxygen sold, and also that a use tax should not be imposed on the amount of gaseous oxygen transferred in excess of 20,000,000 cubic feet per month. That claim was denied. After a protest and an administrative hearing before a hearing officer, the claim was again denied.

After having exhausted its administrative remedies, Northwestern filed a complaint for administrative review in the circuit court of Whiteside County, and following a hearing, the trial court ruled that plaintiff does owe a use tax on the gaseous oxygen produced from the air under the 1971 agreement, but not on the gaseous oxygen produced from liquid oxygen under both the 1971 and 1975 agreements since Northwestern had already paid a use tax on the liquid oxygen when it was purchased and was not required to pay a second tax. This ruling eliminated the Department's claim as to oxygen supplied under the 1975 agreement, and reduced the claim as to the 1971 agreement, resulting in a credit of $1,586.62 against the use tax previously paid. The trial court also ruled that the facility charge is a part of the cost of the product.

Northwestern has appealed from the judgment of the circuit court, asserting (1) that gaseous oxygen is not tangible personal property within the meaning of section 3 of the Use Tax Act (Ill. Rev. Stat. 1977, ch. 120, par. 439.3); (2) that no transfer of gaseous oxygen from Union Carbide to Northwestern occurred; and (3) that the facility charge was rent and not part of the charge for transfer of ownership of gaseous oxygen. An integral part of Northwestern's argument on these issues is its contention that an earlier decision of this court, Keystone Consolidated Industries, Inc. v. Allphin (1977), 45 Ill. App.3d 714, 359 N.E.2d 1202, should be overruled. We do not agree, and we believe Keystone to be controlling in the case at bar.

• 1 Before considering the merits of Northwestern's contentions, we must first acknowledge the Department's assertion that Northwestern is attempting to raise the question of whether gaseous oxygen is tangible personal property for the first time upon appeal and that we should treat the issue as waived since it was not argued in the trial court or in the administrative proceedings. The briefs of the parties filed in the trial court are a part of the record, and they indicate that Northwestern's arguments assumed that gaseous oxygen is tangible personal property. Shortly before the trial court hearing, Northwestern did raise the issue of whether gaseous oxygen is tangible by means of a letter to the trial court. Presumably the trial court considered that issue (as well as the other issues) to have been disposed of by the decision in Keystone where this court stated: "The gases [oxygen and nitrogen] are tangible personal property and as such are subject to the use tax." (45 Ill. App.3d 714, 718, 359 N.E.2d 1202, 1205.) We do not believe the issue was in fact waived in the trial court, and in any event, in the exercise of our discretion, we choose to discuss this issue.

Northwestern submitted the appeal briefs from the Keystone case to the trial court, and they are included in the record on this appeal. On the basis of those briefs, Northwestern asserts here that the issue was not argued in Keystone and that, we there did not have the benefit of the authorities cited herein by Northwestern, and therefore we reached the wrong conclusion in Keystone. We believe that point is not well taken and overlooks the rather obvious fact that appellate courts> frequently do research beyond the briefs submitted to them, and sometimes of necessity rely upon authorities not cited by the parties to the appeal. We must, therefore, decline to presume that we erred in deciding an issue overlooked by the parties to an earlier appeal.

At this time we have considered the authorities cited by Northwestern. In addition, we think it important to note that one of the most elementary scientific principles is that gas is one of three forms of states of matter — the other two being liquid and solid. The primary authority relied upon by Northwestern is Farrand Coal Co. v. Halpin (1957), 10 Ill.2d 507, 104 N.E.2d 698, where the Illinois Supreme Court considered the meaning of the phrase "tangible personal property" in the context of the Retailers' Occupation Tax Act (Ill. Rev. Stat. 1955, ch. 120, par. 440 et seq.) in a case involving the taxability of electrical energy. The court first stated with approval the law definition from Webster's dictionary of "tangible" as consisting of or pertaining to matter or a material body, and then discussed the indicia of tangibility as gleaned from the testimony of expert witnesses:

"From the evidence it appears that although energy and mass are closely interrelated, indestructible, equivalent, interchangeable, directly proportional to and may be equated with each other, yet energy as such cannot be separated from mass or matter and stored, weighed, transported, handled, liquified, solidified, photographed, touched or otherwise perceived by the senses in its own right or capacity separate and apart from mass or matter. All witnesses who testified on the subject, including plaintiff's witnesses, agreed that energy cannot be separated from matter and tagged or otherwise physically identified in any way, cannot be located specially, and does not have dimensions. In all these respects energy falls short of fitting into the ordinary and popularly ...

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