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Nokomis Quarry Co. v. Department of Revenue

March 25, 1998


Appeal from the Circuit Court of Montgomery County. No. 96-MR-59 Honorable Mark M. Joy, Judge, presiding.

The opinion of the court was delivered by: Justice Kuehn

We are faced with one dispositive issue in this case: Whether two machines that plaintiff, Nokomis Quarry Company, uses in its quarry operation qualify for a manufacturing exemption from the use tax imposed by the Illinois Use Tax Act (the Act)(35 ILCS 105/1 et seq. (West 1994)). Specifically, defendant, the Department of Revenue of the State of Illinois (Department), appeals from the Montgomery County Circuit Court's order, upon administrative review, reversing the Department's decision that plaintiff's crawler dozer and wheel loader are not exempt from the use tax. We affirm.

The Department's decision is based upon undisputed facts. Plaintiff owns and operates a limestone quarry in Montgomery County. The quarry's limestone deposit sits in two layers separated by a layer of shale. The upper layer of limestone is buried underneath approximately 12 to 15 feet of soil. Once the soil is extracted, plaintiff removes the limestone by blasting with explosives. Its blasting method involves the systematic drilling of holes, the filling of these holes with an explosive charge, and the detonation of that charge. This explosion creates limestone fragments called "shot rock". After the explosion, plaintiff uses a D135A crawler dozer to push the shot rock off whatever ledge remains after the blast. Plaintiff then utilizes a WA-500 wheel loader to pick up the shot rock and transport it to a "crusher-sorter" machine, which crushes and/or sorts the rock into various sizes, as necessary. The crawler dozer and wheel loader are exclusively used for these purposes.

After an audit, the Department issued two tax-liability notices to plaintiff, assessing use tax on the crawler dozer and wheel loader for the period of January 1, 1991, to April 30, 1994. Plaintiff filed a timely protest to these notices, claiming that the two machines were used in manufacturing and, thus, were exempt from use tax.

On February 7, 1996, an administrative hearing was held on the issue of whether the two machines qualified for the manufacturing exemption from the use tax. Plaintiff presented the uncontroverted testimony of both its general manager, Ron Koehler, and a civil engineering expert, Richard Barksdale. Both Koehler and Barksdale testified that the blasting technique plaintiff utilizes is a form of crushing and that the resulting shot rock's size is determined by the placement of the explosive charges. Koehler further stated that the charges are placed 10 feet apart in order to produce shot rock of less than 150 pounds, in compliance with State "stone fill" specifications. The stone fill is used for erosion prevention along ditches and/or lakes. He noted that nearly all of this shot rock created by the initial blast could be sold without further processing, if warranted by consumer demand. In plaintiff's business, approximately 40 to 50% of this shot rock is sorted and sold without additional processing. The remainder of the shot rock is crushed further to create smaller-sized products for sale.

On June 13, 1996, the Department issued its final administrative decision, finding that the crawler dozer and wheel loader did not qualify for the manufacturing exemption. The Department determined that, because the manufacturing process originated at the crusher-sorter machine, plaintiff primarily used the crawler dozer and wheel loader to extract limestone prior to the manufacturing process. On July 5, 1996, the Department issued two final assessments of use tax due, totalling $40,822.93, including interest and penalties.

On August 9, 1996, plaintiff filed its complaint for administrative review in the Montgomery County Circuit Court. On March 19, 1997, the circuit court reversed the Department's final decision. Its order concluded that the machines qualified for a manufacturing exemption from the use tax because the manufacturing process actually began with the blasting. The Department now appeals this order, contending that the circuit court's reversal constitutes error.

An administrative agency's decision may be reversed only if it is factually against the manifest weight of the evidence or legally erroneous. Thomas M. Madden & Co. v. Department of Revenue, 272 Ill. App. 3d 212, 215, 651 N.E.2d 218, 219 (1995). Where, as here, facts are undisputed, a tax-exemption determination is a question of law and, as such, hinges solely on an application of the proper legal standard to those facts. City of Chicago v. Illinois Department of Revenue, 147 Ill. 2d 484, 491, 590 N.E.2d 478, 481 (1992); Our Savior Lutheran Church v. Department of Revenue, 204 Ill. App. 3d 1055, 1059, 562 N.E.2d 1198, 1199 (1990). Our review of an agency's statutory construction interpretation, a purely legal question, is de novo. Thomas M. Madden & Co., 272 Ill. App. 3d at 215, 651 N.E.2d at 219.

Plaintiff initially contends that prior Department decisions, as well as one of our unpublished orders, collaterally estop the Department from arguing that this case's facts do not warrant the manufacturing exemption from the use tax. We recognize that, just as prior decisions of this court, "administrative decisions have res judicata and collateral estoppel effect where the department's determination is made in proceedings which are adjudicatory, judicial, or quasi-judicial in nature." Marco v. Doherty, 276 Ill. App. 3d 121, 124-25, 657 N.E.2d 1165, 1168 (1995). However, the collateral estoppel doctrine applies to the relitigation of facts, not to questions of law. City of Chicago v. Chicago Fiber Optic Corp., 287 Ill. App. 3d 566, 576, 678 N.E.2d 693, 700 (1997); Deford-Goff v. Department of Public Aid, 281 Ill. App. 3d 888, 891, 667 N.E.2d 701, 703 (1996). This case does not require the relitigation of facts. Rather, it demands our statutory construction analysis of the Act (35 ILCS 105/1 et seq. (West 1994)), a question of law. Accordingly, because collateral estoppel is inapplicable, we must confront the merits of the Department's appeal.

Section 3 of the Act imposes a tax "upon the privilege of using in this State tangible personal property ***." 35 ILCS 105/3 (West 1994). However, Section 3-5(18) of the Act affords certain exemptions from this use tax:

"Use of the following tangible personal property is exempt from the tax imposed by this Act:

(18) Manufacturing and assembling machinery and equipment used primarily in the process of manufacturing or assembling tangible personal property for wholesale or retail sale ***." 35 ILCS 105/3-5(18) (West 1994).

For purposes of this exemption, section 3-50(1) of the Act further defines manufacturing process as follows:

(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, or individually constitute manufacturing operations, the manufacturing process commences with the first operation or ...

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