Appeal from the Circuit Court of Sangamon County; the Hon.
Jerry S. Rhodes, Judge, presiding.
JUSTICE WEBBER DELIVERED THE OPINION OF THE COURT:
Plaintiff-taxpayer filed a complaint for administrative review in the circuit court of Sangamon County challenging a ruling of the defendant, Illinois Department of Revenue (Department), that plaintiff was not entitled to claimed use tax exemptions. The Department's ruling was based upon a finding that plaintiff's photofinishing business was a service occupation and plaintiff was not engaged in manufacturing such that machinery purchased by plaintiff qualified for the use tax exemptions sought. On review, the trial court found the Department's decision to be against the manifest weight of the evidence and ordered the final assessments of the Department set aside; the Department appeals.
Plaintiff is a North Carolina corporation licensed to do business in the State of Illinois and is engaged primarily in the business of photofinishing. In 1980 plaintiff purchased the two pieces of equipment in dispute for use in its photofinishing operations: an automatic color printer and a photographic paper processor. This machinery was installed in plaintiff's Jacksonville, Illinois, photofinishing plant.
Plaintiff filed exemption certificates with the Department, claiming a use tax exemption for 31.25% of the cost of the equipment pursuant to section 3 of the Use Tax Act (Ill. Rev. Stat. 1983, ch. 120, par. 439.3). A subsequent audit by the Department resulted in the disallowance of the claimed exemptions and the issuance of a notice of tax liability for the use tax deficiency.
Plaintiff then filed a protest with the Department and requested a hearing on the matter. Following the administrative hearing, the Department hearing officer entered findings of fact and law and recommended that the claimed exemptions be denied. The Department adopted that recommendation and issued a final assessment of tax deficiency in the amount of $4,130.83. This action ensued with the results described above.
The facts of this case, adduced at the administrative hearing, are essentially undisputed. Plaintiff offers its photofinishing services to approximately 675 retail dealers throughout the central Illinois area, such as drugstores, supermarkets, camera stores, etc. Plaintiff picks up the customers' film at the dealer's location, does the photofinishing at its Jacksonville plant, and delivers the processed film to the dealer within a 24- or 48-hour period. In 1980 plaintiff processed over 1,000,000 rolls of film and produced nearly 30,000,000 photographic prints.
When film reaches the plaintiff's plant, it is first sorted by film size and type. The film is then spliced onto 200-foot reels of like film after having been marked with an identification imprint. The first step in the actual photofinishing process is the production of color negatives by the film processor in which the exposed film is treated in a solution known as a developer.
After the negatives are produced they are run through an automatic printer (such as the one in dispute) at speeds of up to 10,000 prints per hour. At the same time, unexposed photographic paper is fed through the machine and light passes through the negatives, exposing the paper to the images on each negative.
Following exposure in the printer, the photographic paper is processed using a machine such as the second one involved in this case. The paper is fed through the paper processor which treats the paper with various chemical solutions. The paper and negatives are then run through a cutting machine, and the color prints are reunited with the corresponding negatives. The prints are then inspected and packaged for delivery to the dealer.
The raw materials used in photofinishing include the sensitized photographic paper and the various chemicals and dyes used in developing and processing the customer's film. Many of the chemicals and the paper itself are transferred to the ultimate consumer as part of the finished product. Of the total price charged to plaintiff's dealers, 28% represents the cost of materials and 16% represents the cost of labor.
Photofinishing is essentially an automated process, and there is no engineering or design work involved. There is no individualized piecework, such as tinting, coloring, or retouching of pictures or negatives. Plaintiff's employees perform routine labor tasks, such as loading and operating the machines.
At the administrative hearing the Department presented its prima facie case for the tax deficiency by presenting its records of the audit performed by a Department employee. The Department did not present evidence designed to rebut the plaintiff's assertion that photofinishing is primarily a manufacturing process and not a service-oriented business.
Following the administrative hearing, the hearing officer entered his recommendation that the use tax exemption claimed by plaintiff for the photographic printer and the paper processor be denied. This recommendation was based upon the hearing officer's factual finding that:
"[Plaintiff's photofinishing] process entails the normal functions of developing film and preparing either a slide or print therefrom. The basic difference, I find, between the way Taxpayer performs these functions and a small volume serviceman photo-processor performs these functions is the fact that due to the volume of Taxpayer business Taxpayer does it at very high speed and in great volume. I therefore find that Taxpayer is a ...