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03/10/95 CRAFTMASTER v. ILLINOIS DEPARTMENT REVENUE

March 10, 1995

CRAFTMASTER, INC., PLAINTIFF-APPELLEE
v.
ILLINOIS DEPARTMENT OF REVENUE, DOUGLAS L. WHITLEY, DIRECTOR OF REVENUE, AND PATRICK QUINN, TREASURER, STATE OF ILLINOIS, DEFENDANTS-APPELLANTS



Appeal from Circuit Court of Sangamon County. No. 92TX1. Honorable Sue E. Myerscough, Judge Presiding.

Honorable James A. Knecht, P.j., Honorable Carl A. Lund, J., Honorable John T. McCULLOUGH, J., Lund and McCULLOUGH, JJ., concur.

The opinion of the court was delivered by: Knecht

PRESIDING JUSTICE KNECHT delivered the opinion of the court:

In December 1993, the circuit court ruled in favor of plaintiff Craftmasters, Inc., in its challenge to the disallowance by the Department of Revenue (Department) of exemptions from retailer's occupation tax for (1) sales of building materials which plaintiff physically incorporated into real estate within an enterprise zone but purchased outside the jurisdiction which established the enterprise zone, and (2) specially manufactured items; and (3) awarded costs to plaintiff. The Department appeals. We affirm on (2) above and reverse on (1) and (3).

Plaintiff, a building contractor in Decatur, Illinois, specializes in the sale and installation of roofing and sheet metal at commercial establishments throughout central Illinois. Plaintiff purchases building materials which are used in construction and in making special order items for customers. Plaintiff obtains materials from suppliers located both in and outside Decatur.

In some cases plaintiff designs and fabricates equipment for retail sale, as when a customer engages plaintiff to design and fabricate a product to meet a special need. The Department has conceded these transactions are exempt from the retailer's occupation tax as "specialty manufacturing" where special skill on the part of plaintiff is required in the process of fabrication. 86 Ill. Adm. Code ยง 130.2115(b) (1992-93).

Plaintiff also incorporates building materials into the real estate of customers through remodeling, rehabilitation and construction. These transactions are the basis of this dispute. Plaintiff's customers who were located within the Decatur enterprise zone submitted enterprise zone certification to plaintiff for invoicing purposes on purchases of building materials which were physically incorporated by plaintiff into real estate located in the enterprise zone.

The Department performed an audit of plaintiff's sales tax account for the period of July 1, 1987, through June 30, 1990. After the audit, the Department issued plaintiff a notice of tax liability for sales and use tax, penalties, and interest in the amount of $56,679. Plaintiff paid the notice under protest.

The Department disallowed exemptions claimed by plaintiff (1) on sales of building materials which plaintiff incorporated into real estate within the Decatur enterprise zone in those cases where plaintiff had purchased such materials from suppliers outside Decatur; and (2) from sales tax claimed by plaintiff on fabricated specialty items which were sold at retail.

In January 1992, plaintiff filed a complaint in the circuit court seeking a refund and a declaration the taxes were wrongfully assessed. The Department's answer asserted the disputed sales of building materials incorporated into real estate by plaintiff were not retail sales since they did not involve the transfer of tangible personal property. The Department argued the transfer which was determinative of whether the sales of such materials were exempt from the retailer's occupation tax under the enterprise zone exemption was plaintiff's purchase of the materials from its suppliers. The Department allowed the exemption where plaintiff's supplier was located in Decatur, but denied it where the supplier was located outside Decatur.

At a bench trial in October 1993, the parties agreed the material facts were not in dispute, and the Department's tax calculations were correct if its interpretation of the applicability of the exemption was correct.

At trial plaintiff called the Department auditor as an adverse witness. He testified the disputed transactions would have been exempt from retailer's occupation tax if plaintiff had issued separate invoices for labor and materials for the installation work performed for customers within the enterprise zone. The Department disavowed this testimony. The Department argued plaintiff was not a retailer selling building materials to its customers, but was a construction contractor in those situations where it incorporated building materials into the real estate of its customers, because plaintiff in those circumstances was converting tangible personal property into real estate and was therefore taking the materials off the market in the form of personal property.

The circuit court entered judgment in favor of plaintiff in the amount of $57,389.42, including interest and penalties. Costs were also awarded to plaintiff. This appeal followed.

When the facts are undisputed, exemption from taxation is a question of law. City of Chicago v. Illinois Department of Revenue (1992), 147 Ill. 2d 484, 491, 590 N.E.2d 478, 481, 168 Ill. Dec. 841 (dealing with the exemption of property from property taxes); Harrisburg-Raleigh Airport Authority v. Department of Revenue (1989), 126 Ill. 2d 326, 331, 533 N.E.2d ...


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