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Colorcraft Corp. v. Dep't of Revenue

OPINION FILED MAY 21, 1986.

COLORCRAFT CORPORATION, INC., APPELLEE,

v.

THE DEPARTMENT OF REVENUE, APPELLANT.



Appeal from the Appellate Court for the Fourth District; heard in that court on appeal from the Circuit Court of Sangamon County, the Hon. Gerald S. Rhodes, Judge, presiding.

CHIEF JUSTICE CLARK DELIVERED THE OPINION OF THE COURT:

Colorcraft Corporation, the plaintiff taxpayer, filed exemption certificates claiming a use tax exemption for 31.25% of the cost of two pieces of equipment for use in its photofinishing business pursuant to section 3 of the Use Tax Act (Ill. Rev. Stat. 1983, ch. 120, par. 439.3). A subsequent audit by the defendant, the Department of Revenue (Department), resulted in the disallowance of the claimed exemptions and the issuance of a notice to Colorcraft of tax liability for the alleged use tax deficiency.

Colorcraft filed a protest with the Department and requested a hearing. After the hearing, the hearing officer entered findings of fact and law and recommended that the claimed exemptions be denied. The Department adopted the hearing officer's recommendation and made an assessment against Colorcraft for a tax deficiency in the amount of $4,130.83. Colorcraft filed a complaint in the circuit court of Sangamon County seeking review of the ruling of the Department. The circuit court found that the Department's decision was against the manifest weight of the evidence. The Department had found that Colorcraft's photofinishing business was a service occupation and that Colorcraft was not engaged in manufacturing so as to be allowed the claimed exemption for the use tax. The circuit court ordered the Department's assessment of tax deficiency set aside. The Department appealed to the appellate court.

The appellate court affirmed the circuit court, holding that "the Department's classification of photofinishing as a service occupation [was] unreasonable and that plaintiff [should] consequently [be] entitled to the use tax exemption for machinery and equipment used primarily in the manufacturing of tangible personal property." (136 Ill. App.3d 217, 225.) The Department filed a petition for leave to appeal in this court pursuant to our Rule 315 (87 Ill.2d R. 315), and we allowed its petition. We now reverse the appellate court.

The facts of the case are adequately set forth in the appellate court opinion, and we will only repeat them to the extent necessary to discuss the issues raised herein.

There are two issues before this court. The first issue is whether Colorcraft's photofinishing business is a service occupation or whether Colorcraft is engaged in manufacturing, thereby making the two pieces of equipment it purchased for use in its photofinishing business properly claimed exemptions. The second issue is whether the Department's reference in its brief to the United States Standard Industrial Classification Manual is improper.

Section 3 of the Use Tax Act provides:

"The tax imposed by this Act does not apply to the use of machinery and equipment primarily in the process of the manufacturing or assembling of tangible personal property for wholesale or retail sale * * *." Ill. Rev. Stat. 1983, ch. 120, par. 439.3.

Section 3 defines "manufacturing process" as follows:

"the production of any article of tangible personal property, whether such article is a finished product or an article for use in the process of manufacturing or assembling a different article of tangible personal property, by procedures commonly regarded as manufacturing, processing, fabricating, or refining which changes some existing material or materials into a material with a different form, use or name. In relation to a recognized integrated business composed of a series of operations which collectively constitute manufacturing, or individually constitute manufacturing operations, the manufacturing process shall be deemed to commence with the first operation or stage of production in the series, and shall not be deemed to end until the completion of the final product in the last operation or stage of production in the series." Ill. Rev. Stat. 1983, ch. 120, par. 439.3.

Section 3 defines "assembling process" as follows:

"the production of any article of tangible personal property, whether such article is a finished product or an article for use in the process of manufacturing or assembling a different article of tangible personal property, by the combination of existing materials in a manner commonly regarded as assembling which results in a material of a different form, use or name." Ill. Rev. Stat. 1983, ch. 120, par. 439.3.

As the appellate court noted, Colorcraft presented evidence at the hearing to demonstrate that photofinishing is essentially an automated process. Colorcraft contends that its business requires no engineering or design work, personal service, skill, or artistic ability. Colorcraft alleges that its employees perform routine labor tasks such as loading and operating the machines, rather than any individualized piecework such as tinting, coloring, or retouching of pictures or negatives.

The record discloses that the process used by Colorcraft is as follows. A customer brings his exposed film to one of the approximately 675 retail dealers throughout central Illinois that use Colorcraft's services. These dealers include drugstores, supermarkets, and camera shops. Colorcraft picks up the film at the dealer with the promise that it will be returned within 24 to 48 hours. Colorcraft sorts the film by size and type, marks it for identification, and ...


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