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Jefferson Ice Co. v. Johnson

OPINION FILED DECEMBER 30, 1985.

JEFFERSON ICE COMPANY, APPELLANT,

v.

J. THOMAS JOHNSON, DIRECTOR OF REVENUE, APPELLEE.



Appeal from the Circuit Court of Cook County; the Hon. Earl Arkiss, Judge, presiding.

JUSTICE QUINLAN DELIVERED THE OPINION OF THE COURT:

The Illinois Department of Revenue assessed taxes in the amount of $42,195, plus interest and penalties, against Jefferson Ice Company, covering July 1, 1974, through 1977. The trial court affirmed the assessment on administrative revue. Jefferson appeals.

Jefferson is a manufacturer and distributor of ice, which sells ice at both wholesale and retail. During the years in question, Jefferson's reported gross sales receipts were $21,549,000. Jefferson claimed that $12,046,000 of those sales constituted sales for resale, which are not taxable. After an audit of September, 1976, the Department allowed $11,399,241 of the deductions claimed by Jefferson and disallowed $647,198 of those claimed deductions. Basically, the Department disallowed that portion of the claimed deductions because Jefferson had not submitted certificates of resale for those transactions. The amount of $477,063.74 of the disallowance of the claimed deductions came from Jefferson's "route" sales, and $170,135.26 of the disallowance came from sales from vending machines operated by Jefferson.

At the administrative hearing, the Department submitted into evidence corrected tax returns for the period in question. Mr. Gerald Pearce, the department's auditor who was responsible for the instant audit, testified that his audit uncovered "resales claimed in error" which accounted for the bulk of the assessment. Mr. Pearce defined the erroneous claims as resale deductions for which Jefferson did not have resale certificates. Mr. Pearce stated that he would have allowed the claimed deductions if Jefferson had presented resale certificates. Jefferson had given the witness invoices for the sales during the audit period, and Mr. Pearce testified he did not visit the customers to determine whether the various sales were for resale. Mr. Pearce also disallowed Jefferson's claimed 40% deduction for sales from its vending machines. This claimed percentage deduction was based, Jefferson employees told him, on an understanding between the department and Jefferson dating back to the mid-1960's.

Walter Sundmacher, assistant secretary of Jefferson, testified he worked for the company for 50 years and was familiar with most of Jefferson's customer accounts. He stated that in the 1960's, after a hearing before the Department, the Department and Jefferson agreed to assessing vending machine sales as 40% resale sales, and 60% retail sales. Because the customers of the vending machines paid in cash at times when the plant was closed, there was no way to determine who purchased the ice. When shown the invoices for route sales supplied to the Department's auditor, Mr. Pearce, Mr. Sundmacher stated that he could not tell from the invoices which sales were for resale. However, the list of customers in the invoices included gasoline stations, restaurants, and liquor stores which probably resell the ice. Jefferson's books indicated the company's determination of whether each sale was for resale, Mr. Sundmacher said. These records were not admitted into evidence. The witness further stated that if the Jefferson "felt" the ice was sold for resale, Jefferson would not charge tax. Jefferson services between 800 and 900 accounts daily, and sometimes Jefferson's drivers would have difficulty obtaining resale certificates because the customers did not want to be bothered. Even if the company did not receive resale certificates, it would not charge tax on sales which Jefferson believed to be for resale.

Mr. Ralph Jacobson, a hearing officer for the Department, testified he conducted the hearing concerning Jefferson in the mid-1960's. Mr. Jacobson stated that the 40%-60% division between wholesale and retail sales from the vending machines was based on a company survey of customers purchasing ice from the machine at that time.

• 1 The Revenue Code provides that the Department shall correct the retailers' occupational tax returns according to its "best judgment and information." (Ill. Rev. Stat. 1981, ch. 120, par. 443.) Such a filing establishes the department's prima facie case against the taxpayer. (Grand Liquor Co. v. Department of Revenue (1977), 67 Ill.2d 195, 367 N.E.2d 1238.) Jefferson argues that because the Department based its corrected returns on the lack of certificates of resale rather than the testimony of company officials, the Department failed to correct the returns according to its "best judgment and information," and thus a prima facie case was not established against Jefferson.

• 2, 3 A corrected return as prepared by the Department is also deemed prima facie correct. (Masini v. Department of Revenue (1978), 60 Ill. App.3d 11, 376 N.E.2d 324.) At the administrative hearing, the department will successfully establish its prima facie case simply by submitting the corrected tax return into evidence. (Howard Worthington, Inc. v. Department of Revenue (1981), 96 Ill. App.3d 1132, 1134, 421 N.E.2d 1030.) However, if a department's corrected return is challenged, the courts have required only that the method employed by the department in preparing the corrected return "must meet some minimum standard of reasonableness." Puleo v. Department of Revenue (1983), 117 Ill. App.3d 260, 266, 453 N.E.2d 48.

• 4 In the case at bar, Jefferson never challenged the method of preparing the corrected return by the audit of a single month, either at the time of the audit or at trial. Furthermore, the Department admitted into evidence the work papers of the auditor, who testified explaining the methods upon which he conducted the audit and the bases upon which he approved or dissallowed the claimed deductions. Therefore, we conclude that the Department has sufficiently established that the method used in preparing the corrected returns met the test of minimum reasonableness. Accordingly, the Department established its prima facie case.

• 5, 6 Once the Department has established its prima facie case, the burden shifts to the taxpayer to rebut it. (Howard Worthington, Inc. v. Department of Revenue (1981), 96 Ill. App.3d 1132, 1134, citing Anderson v. Department of Finance (1938), 370 Ill. 225, 18 N.E.2d 206; Masini v. Department of Revenue (1978), 60 Ill. App.3d 11, 376 N.E.2d 324.) Jefferson asserts that it successfully rebutted the prima facie case here, through testimony at the administrative hearing and by the fact that the Department erred in basing its final assessment simply on the presentation of certificates of resale to establish the deduction.

The Revenue Code provided in pertinent part:

"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." Ill. Rev. Stat. 1973, ch. 120, par. 441(c).

In Tri-America Oil Co. v. Department of Revenue (1984), 102 Ill.2d 234, 464 N.E.2d 1076, the supreme court held that the requirement that a company which is engaged in both wholesale and retail sales must present certificates of resale or it will be held liable for tax. The court wrote:

"Tri-America is engaged in the business of selling tangible personal property at both wholesale and retail, and therefore the provisions of the Retailers' Occupation Tax Act, including section 2c, are applicable to it and require it to obtain a resale tax certificate number from purchasers who purportedly intend to resell the product they purchase. If a purchaser does not have a resale number and therefore cannot comply with the requirements of section 2c by certifying to the seller who is operating as both a wholesaler ...


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