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11/26/97 ZENITH ELECTRONICS CORPORATION v.

November 26, 1997

ZENITH ELECTRONICS CORPORATION, PLAINTIFF-APPELLEE,
v.
THE DEPARTMENT OF REVENUE, DEFENDANT-APPELLANT.



APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY. HONORABLE ALEXANDER P. WHITE, JUDGE PRESIDING.

Rehearing Denied November 26, 1997. Released for Publication January 22, 1998.

The Honorable Justice McNAMARA delivered the opinion of the court. Wolfson, P.j., and Burke, J., concur.

The opinion of the court was delivered by: Mcnamara

The Honorable Justice McNAMARA delivered the opinion of the court:

Defendant, the Illinois Department of Revenue (Department), appeals from an order of the trial court upon administrative review reversing the Department's decision that plaintiff, Zenith Electronics Corp. (Zenith), is liable to pay taxes on certain trays Zenith uses to protect cathode ray tubes. The court found that the Department's determination that the trays were subject to taxation under the Use Tax Act (35 ILCS 105/1 et seq. (West 1992)) and/or the Retailers' Occupation Tax Act (ROTA) (35 ILCS 120/1 et seq. (West 1992)) was against the manifest weight of the evidence. The Department appeals, contending that the trial court erred in reversing the Department's decision that the trays were not exempt from taxation as equipment used primarily in the manufacturing or assembling of tangible personal property. We affirm the trial court.

The record reveals that Zenith has a plant located in Melrose Park, Illinois, where it manufactures color cathode ray tubes (CRTs) used in television and computer monitors. Zenith manufactures and assembles televisions at another plant in Springfield, Missouri. The Springfield plant was a "matched facility" in that it was designed to handle the CRT production from the Melrose plant. In 1986, 77% of the CRTs manufactured at the Melrose plant were shipped to Zenith's Springfield plant. In 1987, 51% of the Melrose plant's production went to Springfield, and, in the first six months of 1988, Springfield received 52% of the Melrose plant's output. The other CRTs produced at the Melrose plant were sold to third parties, including subsidiaries of Zenith.

The evidence shows that CRTs are extremely fragile. They are essentially glass surrounding a vacuum and are likely to implode if not properly protected. Zenith previously used cardboard trays to protect the CRTs, but now uses specially designed plastic trays for this purpose. When CRTs come off the production line at the Melrose plant, they are placed in the trays, which handle from six to eight CRTs each. A "tray set" consists of several plastic trays stacked on top of each other. Each tray set weighs about 60 pounds and is purchased by Zenith from an unrelated company. The tray sets are immediately loaded onto trucks for delivery to the Springfield plant or other third-party manufacturers. Once CRTs are shipped to the Springfield plant and other third parties, the tray sets are generally sent back to the Melrose plant for reuse.

Following an audit at Zenith for the time period of January 1, 1986, through June 30, 1988, the Department issued a notice of tax liability informing Zenith that it was liable to pay taxes on the trays. Zenith filed a timely protest based on its claim that the trays were not subject to taxation under the manufacturing and assembling exemptions to the Use Tax Act (35 ILCS 105/3-5(18), 3-50 (West 1992)) and the ROTA (35 ILCS 120/2-5(14), 2-45 (West 1992)). Following an administrative hearing on Zenith's claim, the Department issued its decision accepting the administrative law judge's recommendation that Zenith be denied exemption. Zenith thereafter filed a complaint for administrative review in the circuit court of Cook County. Following a hearing on Zenith's complaint, the trial court reversed the Department's decision, finding it against the manifest weight of the evidence. This appeal followed.

An administrative agency's decision may be reversed only if it is factually against the manifest weight of the evidence. Thomas M. Madden & Co. v. Department of Revenue, 272 Ill. App. 3d 212, 651 N.E.2d 218, 209 Ill. Dec. 290 (1995). Where no factual dispute exists, and the question raised on review is purely legal, such as statutory construction, our review is de novo. Madden, 272 Ill. App. 3d at 215, 651 N.E.2d at 220. Here, the parties agreed that the facts are not in dispute and the trial court adopted the findings of fact made by the administrative law judge. Thus, we are faced only with the question of whether the trays used to protect CRTs are exempt from taxation under the manufacturing and assembling exemptions to the Use Tax Act (35 ILCS 105/3-5(18), 3-50 (West 1992)) and the ROTA (35 ILCS 120/2-5(14), 2-45 (West 1992)). The parties acknowledge that these exemptions contain identical language. Accordingly, while we will address the question in terms of the use tax, our decision is applicable to both acts.

To determine whether the trays are exempt involves engaging in the analysis conducted by the supreme court in Van's Material Co. v. Department of Revenue, 131 Ill. 2d 196, 545 N.E.2d 695, 137 Ill. Dec. 42 (1989), where the same statutory provisions were at issue. The court's analysis entailed analyzing the exemption itself to determine the boundaries of the statute and then deciding if the statutory exemption was applicable to that particular case. Van's Material, 131 Ill. 2d at 201, 545 N.E.2d at 698; Madden, 272 Ill. App. 3d at 215, 651 N.E.2d at 220.

Under the Use Tax Act, a tax is imposed "upon the privilege of using in this State tangible personal property." 35 ILCS 105/3 (West 1992). According to the manufacturing and assembling exemption, the tax does not apply to "manufacturing and assembling machinery and equipment used primarily in the process of manufacturing or assembling tangible personal property for wholesale or retail sale or lease." 35 ILCS 105/3-5(18)(West 1992). This exemption "includes machinery and equipment which replaces machinery and equipment in an existing manufacturing facility as well as machinery and equipment that are for use in an expanded or new manufacturing facility." 35 ILCS 105/3-50 (West 1992). The exemption also defines "manufacturing process" and "assembling process" in the following manner:

"(1) 'Manufacturing process' means the production of an article of tangible personal property, whether the 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 a procedure commonly regarded as manufacturing, processing, fabricating, or refining that changes some existing material into a material with a different form, use, or name. In relation to a recognized integrated business composed of a series of operations that collectively constitute manufacturing, or individually constitute manufacturing operations, the manufacturing process commences with the first operation or stage of production in the series and does not end until the completion of the final product in the last operation or stage of production in the series. ***

(2) 'Assembling process' means the production of an article of tangible personal property, whether the 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 that results in an article or material of a different form, use, or name." 35 ILCS 105/3-50 (West 1992).

In analyzing these provisions, the Van's Material court applied the following principles of ...


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