APPELLATE COURT OF ILLINOIS, FIFTH DISTRICT
506 N.E.2d 795, 154 Ill. App. 3d 129, 107 Ill. Dec. 52 1987.IL.496
Appeal from the Circuit Court of Monroe County; the Hon. Dennis J. Jacobsen, Judge, presiding.
PRESIDING JUSTICE KARNS delivered the opinion of the court. KASSERMAN and WELCH, JJ., concur.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE KARNS
The Department of Revenue of the State of Illinois (the Department) appeals from an order of the circuit court of Monroe County reversing its denial of credit claims in the amount of $44,364.08 for retailers' occupation tax paid by Columbia Quarry Company (plaintiff) with respect to eight separate sales of limestone. The circuit court reversed the rulings of the Department on the basis that the sale of the limestone was exempt from taxation pursuant to section 1a of "An Act in relation to a tax upon persons engaged in the business of selling tangible personal property to purchasers for use or consumption" (Ill. Rev. Stat. 1983, ch. 120, par. 440a) (hereinafter Retailers' Occupation Tax Act) as part of a system and method used for the purpose of reducing air pollution. We affirm.
Between August 1980 and February 1983, plaintiff made eight separate sales of limestone to Central Illinois Light Company for use in its Duck Creek pollution control facility. Plaintiff collected $44,364.08 in use tax from CILCO and paid $44,364.08 in retailers' occupation tax to the Department. Plaintiff issued CILCO an unconditional promissory demand note for the amount of use tax collected and then filed claims for credit with the Department. The Department denied the claims. Plaintiff filed a protest and requested an administrative hearing. The hearing referee also recommended that plaintiff's claims for credit not be allowed. The referee found that the limestone used in the Duck Creek operation was a chemical, and on the basis of Rule 130.335 of the Illinois Administrative Code, which denies tax exempt status to chemicals used in the operation of pollution control equipment, concluded the limestone did not qualify as a pollution control facility within the purview of section 1a of the Retailers' Occupation Tax Act. In accordance with the recommendation of the hearing referee, the Department issued a final determination denying plaintiff's claims for credit. Plaintiff, in turn, sought administrative review of the Department's final determination. The circuit court concluded the limestone was part of a system and method used for the purpose of reducing air pollution and was therefore tax exempt. In its order reversing the Department's rulings, the court further stated Rule 130.335 was a restrictive interpretation of section 1a that was both erroneous and arbitrary.
The Department argues on appeal the limestone in question is merely a chemical additive to CILCO's pollution control facility and as such does not qualify for exemption pursuant to section 1a of the Retailers' Occupation Tax Act as a "system, method, construction, device or appliance appurtenant thereto" utilized for the primary purpose of reducing air pollution.
Section 1a of the Retailers' Occupation Tax Act, which exempts pollution control facilities from the retailers' occupation tax, defines pollution control facilities as:
"any system, method, construction, device or appliance appurtenant thereto sold or used or intended for the primary purpose of eliminating, preventing, or reducing air and water pollution . . . or for the primary purpose of treating, pretreating, modifying or disposing of any potential solid, liquid or gaseous pollutant which if released without such treatment, pretreatment, modification or disposal might be harmful, detrimental or offensive to human, plant or animal life, or to property." (Ill. Rev. Stat. 1983, ch. 120, par. 440a.)
The Department has further refined this definition by promulgating Rule 130.335 of the Illinois Administrative Code which states in part:
"This exemption includes not only the pollution control equipment itself, but also replacement parts therefor, but does not extend to chemicals used in any such equipment, to fuel used in operating any such equipment, nor to any other tangible personal property which may be used in some way in connection with such equipment, but which is not made a physical component part of the equipment itself." (86 Ill. Admin. Code 130.335 (1985).)
The issue before us then is whether CILCO's use of the limestone falls within the purview of Rule 130.335, and if so, whether Rule 130.335 is a proper interpretation of section 1a. We begin by analyzing the use and function of limestone in the Duck Creek operation.
The limestone purchased by CILCO from plaintiff was utilized by CILCO exclusively in the limestone scrubbers at its Duck Creek power generating facility. The scrubber equipment, which has been certified by the Illinois Environmental Protection Agency as a pollution control facility, removes sulfur dioxide, a pollutant, from the flue gas at the plant. The system essentially consists of two parts: the limestone grinding and handling facility and the "box" where the limestone reacts with the flue gas to remove the sulfur dioxide. The limestone is first dumped into a feed box where it is ground to a fine powder and mixed with water before reaching a storage tank. It then becomes the main feed stock for the scrubber system. The scrubber itself can be characterized as a "black box." Flue gas enters from one end of the box and the limestone slurry (ground limestone mixed with water) enters from the ...