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03/31/87 Clark Oil & Refining v. J. Thomas Johnson

March 31, 1987





506 N.E.2d 1362, 154 Ill. App. 3d 773, 107 Ill. Dec. 307 1987.IL.397

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


JUSTICE RIZZI delivered the opinion of the court. WHITE and FREEMAN,* JJ., concur.


Plaintiff-taxpayer, Clark Oil & Refining Corporation, brought this tax protest action against J. Thomas Johnson, Director of the Department of Revenue of the State of Illinois, and James H. Donnewald, State Treasurer of the State of Illinois, to contest the validity of use taxes assessed against it. The $11,045,087.25 in taxes and interest for the period July 1, 1978, to June 30, 1981, were paid by Clark Oil under protest pursuant to "An Act in relation to the payment and Disposition of moneys received . . ." (the Monies Act) (Ill. Rev. Stat. 1981, ch. 127, par. 170 et seq.). The taxes were assessed on Clark Oil's use of certain "refinery fuels," which are products created incidentally to the oil-refining process. Following a bench trial, the trial court upheld the validity of the assessment, but provided for the return of $291,037.14 to Clark Oil due to an error in computation made by the Department of Revenue. Clark Oil appeals. The gist of the arguments raised by Clark Oil are that (1) the Use Tax Act (Act) (Ill. Rev. Stat. 1981, ch. 120, par. 439.1 et seq.) is unconstitutionally vague as applied; (2) the Department of Revenue's formula for calculating the use tax was unreasonable; (3) Public Act 83-614, which amended the Use Tax Act, should be applied here; and (4) the actual calculations made by the Department were arbitrary. We affirm.

During the taxable period at issue, Clark Oil purchased crude oil for the purpose of refining it into various marketable products at its Blue Island and Wood River refineries located in Illinois. The purpose of refining is to produce as many marketable products, and as much of such products, as is possible. Under current technology, however, three products which have little or no marketability are invariably produced during the refining process. These products are catalytic coke, process gas, and heavy oil, and they are sometimes generally referred to as refinery fuels because refineries have developed techniques to use them as energy sources for the refining process.

The presence of refinery fuels in the refineries may be briefly described as follows. At the beginning of the refining process, the crude oil is heated to a high temperature, and it travels to an atmospheric tower where a separation of components occurs. Some of these components proceed to a vacuum unit where vacuum gas oil is separated out and sent to the catalytic cracker or Fluid Catalytic Cracking unit . In the FCC unit, a catalyst, which is a very fine powder, is in constant motion, and it promotes the breakdown (or "cracking") of the molecules in the vacuum gas oil. As this process occurs, catalytic coke adheres to the catalyst, with the result that the catalyst is neutralized. Consequently, it is necessary to remove the catalytic coke from the catalyst. To this end, the catalytic coke is burned off and thereby converted into flue gas. The flue gas is then captured and used as an energy source to generate heat which is used in the refining process. There is no market for catalytic coke, and, therefore, catalytic coke has no market value.

Process gas is generated at various stages of the refining process. A substantial part of the process gas is captured and becomes an energy source when it is burned in heaters at various processing units. At times, more process gas is created than can be utilized, and in order not to violate Environmental Protection Agency regulations, Clark Oil flares the excess process gas, thereby dissipating it. Clark Oil does not derive any heat value from such flaring. Since Clark Oil's refineries are not proximate to facilities which use process gas as an energy source, it has no market for the process gas.

The third product which results from the refining process that is subject to the use tax is heavy oil. Some of the heavy oil which is produced is marketed. When the heavy oil is combined with a lower viscosity dilutant, it is sold by Clark Oil as No. 6 fuel oil. Also, some heavy oil is sold for use in asphalt products. Clark Oil uses heavy oil generated during the refining process when there is insufficient process gas available to satisfy a refinery's heating needs. In such situations, heavy oil is burned when it would be cheaper to do so than to purchase natural gas to meet heating demands.

The use tax at issue here was assessed by the Department pursuant to the Use Tax Act (Ill. Rev. Stat. 1981, ch. 120, par. 439.1 et seq.) on Clark Oil's use of its refinery fuels for heating purposes. The formula used by the Department to compute the tax was essentially based upon the difference between the volume of the crude oil purchased and the volume of marketable production adjusted for the expansion which occurs during the refining process, measured by the purchase price of the crude oil.

In its first argument, Clark Oil contends that the Use Tax Act is unconstitutionally vague to the extent that it does not provide how the selling price, *fn1 which is the measure of the tax due, should be allocated where, as here, the two parts of the purchased property are not physically the same. Under section 3 of the Use Tax Act (Ill. Rev. Stat. 1981, ch. 120, par. 439.3), "[a] tax is imposed upon the privilege of using in this State tangible personal property . . . purchased at retail from a retailer. Such tax is at the rate of 4% of the selling price of such property." Section 2 of the Act defines selling price as "the consideration for a sale valued in money." Ill. Rev. Stat. 1981, ch. 120, par. 439.2.

A legislative enactment is unconstitutionally vague if its terms are so indefinite that persons of common intelligence must necessarily guess at its meaning and differ as to its application. (Fagiano v. Police Board (1983), 98 Ill. 2d 277, 282, 456 N.E.2d 27, 29.) Here, the term "selling price" is specifically defined by the Act in a clear and unambiguous manner. We do not believe that the statute is unconstitutionally vague merely because its exact application to all factual variations is not delineated therein. See O'Connor v. A & P Enterprises (1980), 81 Ill. 2d 260, 269, 408 N.E.2d 204, 208.

Moreover, in Mobil Oil Corp. v. Johnson (1982), 93 Ill. 2d 126, 442 N.E.2d 846, the supreme court rejected a similar claim that the use tax as applied to the use of refinery fuels resulting from the process of refining crude oil was unconstitutionally vague. Clark Oil attempts to distinguish Mobil Oil on the basis that the Mobil Oil court was not apprised that "the part of the crude oil which became refinery fuels consumed by [the refinery] was not physically the same as the part which became marketable production resold by [the refinery]," while this fact was established in the present case. According to Clark Oil, although "[t]he majority did observe in Mobil that the refinery fuels were chemically different than the crude oil, different in molecular structure, . . . that was not to suggest that the part of the crude oil which became refinery fuels was chemically or physically different than the part which became marketable production." We believe that this argument is mere casuistry. The Mobil Oil decision evidences the supreme court's firm and complete understanding of the refining process and the difficulties inherent in determining the basis on which the use tax should be assessed. The court unequivocally concluded that while the refinery fuels may not exist in crude oil in the chemical sense, they are produced from crude oil during the chemical restructuring of molecules. (93 Ill. 2d 126, 132, 442 N.E.2d 846, 849.) Moreover, Clark Oil suggests that the partially ...

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