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08/15/88 A. R. Barnes and Company, v. the Department of Revenue

August 15, 1988





527 N.E.2d 1048, 173 Ill. App. 3d 826, 123 Ill. Dec. 410 1988.IL.1254

Appeal from the Circuit Court of Cook County; the Hon. Mary M. Conrad, Judge, presiding.


PRESIDING JUSTICE CAMPBELL delivered the opinion of the court. BUCKLEY and O'CONNOR, JJ., concur.


Plaintiff, A. R. Barnes and Company, a printing broker, appeals from a judgment entered by the circuit court on administrative review which affirmed a determination by the Department of Revenue that plaintiff owed the DOR for overcollection of service occupation tax from its customers during the tax period of July 1981 through July 1984. On appeal, plaintiff contends that: (1) the DOR wrongfully added a new charge alleging improper recordkeeping after the hearing on the original charge of overcollection; (2) the circuit court's decision was contrary to the manifest weight of the evidence; and (3) the DOR failed to prove that plaintiff's manner of recordkeeping violated any legal requirements. For the following reasons, we affirm the judgment of the circuit court.

As a printing broker, plaintiff is subject to the service occupation tax , imposed pursuant to the Service Occupation Tax Act (the SOT Act) (Ill. Rev. Stat. 1985, ch. 120, par. 439.101 et seq.) on all persons engaged in the business of making sales of service. The SOT is intended to place servicemen, such as plaintiff, on a tax parity with retailers to the extent they transfer tangible personal property to the ultimate consumer as an incident to the sale of service. The SOT is either collected from the serviceman by his supplier, who then remits it to the DOR, or is remitted directly to the DOR by the serviceman after the transfer of the property to a purchaser. (Hagerty v. General Motors Corp. (1974), 59 Ill. 2d 52, 319 N.E.2d 5.) During the tax period in question, the SOT statutory rate was 4% and then increased to 5% effective January 1, 1984. Pursuant to customary practice, the SOT for a printing broker is assessed on 40% of its gross sales. In the present case, plaintiff collects the SOT directly from its customers. Pursuant to section 3 of the SOT Act, if a company collects more SOT from a customer than the actual statutory SOT liability, the customer has a legal right to claim a refund of the overcollected amount or, if the overcollection is not refunded to the customer, the company is liable to pay such amount to the DOR.

In November 1984, following an audit of plaintiff's books and records for the tax period of July 1981 through July 1984, the DOR concluded that plaintiff had been collecting SOT on 100% of its gross sales instead of the required 40% and remitting only 40% to the DOR. As a result, on December 26, 1984, the DOR issued notices of tax liability to plaintiff for the extra 60%. Plaintiff protested the DOR's finding and requested an administrative hearing.

At the hearing, Phillip Solars, supervising tax auditor for the DOR, testified that the determination of overcollection was predicated on the manner in which plaintiff invoiced its customers. In particular, plaintiff had an entry line on its invoices entitled "tax and miscellaneous" which allegedly combined the applicable SOT plus any other nonprinting expenses such as warehousing the customer's forms. Solars stated that on each invoice in question, the amount entered as "tax and miscellaneous" was equivalent to an SOT tax on the total amount billed for services, rather than on just 40% of the total gross sales. Solars further testified that when the SOT increased during the period in question, the total "tax and miscellaneous" amount on plaintiff's invoices increased an equivalent amount. Solars also stated that invoices marked "exempt" or "nontaxable" contained no miscellaneous charges. When Solars and John Thomas, the DOR auditor who actually had performed the audit of plaintiff's books, asked plaintiff for an explanation as to the coincidence of equivalent figures, they were not given a satisfactory answer. However, the record does not indicate what answer was given.

Plaintiff's president, Gerald Herr, testified that the "tax and miscellaneous" charge consists of SOT plus costs of warehousing and related services to the customer for forms management. Herr stated that he combined the tax and miscellaneous costs for two reasons: (1) to prevent the customer from calculating the company's costs; and (2) to separate services which are not subject to salesmen's commissions. Further, he was reluctant to reprogram the computer system to separate the two entries because of the expense involved in doing so. Herr stated that the current system had just been set up after the last DOR audit a few years ago on the suggestion of the DOR auditor that the two entries be combined. Herr further explained that the "miscellaneous" charge does not appear on invoices for tax-exempt organizations because: (1) forms are usually directly shipped and the warehousing services are not used; or (2) if the services are used, no attempt is made to recoup their costs because the organizations are charities.

Plaintiff's auditor, Thomas Lydon, testified that plaintiff carries the amount collected under the invoice entry "tax and miscellaneous" on its general ledger as an account entry entitled "sales tax and miscellaneous." Further, the ledger reflects the total amounts collected as a credit and total amount of SOT remitted as a debit. State and Federal taxes are paid on the amount collected for plaintiff's costs in warehousing and forms management. When queried as to how the SOT was calculated, Lydon presented contradictory explanations. On direct, Lydon stated that he calculated the SOT on 40% of the taxable sales. On redirect, he stated that the SOT is calculated on 40% of the taxable sales plus tax and miscellaneous.

After reviewing all of the evidence, the hearing officer concluded that plaintiff's arguments were not persuasive and that it was "clear" that plaintiff was charging SOT on 100% of its gross sales rather than 40% and not passing on the extra 60% to the DOR. In affirming the hearing officer's determination, the trial court stated:

"Neither the testimony of taxpayer's president or accountant nor its documentary exhibits sufficiently establish the nature of the overcollection as a warehousing service charge. The record is devoid of any statements or affidavits from customers attesting to their understanding that the overcollection was a warehousing service charge. No customer warehousing contracts were introduced into evidence. No evidence was offered to show that a service charge for warehousing was customary in the printing business. And, none of the evidence established a relationship between the cost of warehousing, the service charge and the customer usage of warehousing. There is, however, evidence in the record to establish that some large customers refused to remit more than the 'prevailing rate of tax' to taxpayer. And, taxpayer did not pursue a service charge collection against those customers.", Plaintiff's timely appeal followed.

Initially, plaintiff argues that the DOR wrongfully added a new charge to the administrative proceedings after the hearing. Specifically, plaintiff claims that the DOR's memorandum of law, filed after the hearing, added a charge alleging that plaintiff had violated relevant statutes and regulations relating to methods of recordkeeping in addition to the original overcollection charge. In our view, the record does not support plaintiff's contention. The DOR's memorandum of law specifically stated: "The sole issue for review in this case is whether the treatment of [sales tax and miscellaneous] figures constitutes sales tax which should be remitted in full to the Department of Revenue." In other words, the issue is whether overcollection occurred. Logically, the only manner in which to determine whether overcollection occurred is to review the relevant books and records which plaintiff has a duty to maintain pursuant ...

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