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H.D. v. Department of Revenue

June 05, 1998


The opinion of the court was delivered by: Justice Doyle

Appeal from the Circuit Court of Lake County.

No. 96--MR--28

Honorable Charles F. Scott, Judge, Presiding.

Plaintiff, H.D., Ltd., appeals from an order of the circuit court of Lake County in an administrative review action. The order affirmed a decision of the Illinois Department of Revenue (Department) that plaintiff owed Retailer's Occupation Tax (ROT) deficiencies and entered judgment assessing plaintiff $65,854.66 for ROT deficiencies, interest, and penalties.

Plaintiff raises the following issues on appeal: (1) whether the circuit court erred when it denied plaintiff's motion for a default judgment and allowed the Department to enter its appearance and file its answer after the statutorily required time for doing so had expired; and (2) whether the Department's decision that plaintiff owed ROT deficiencies was against the manifest weight of the evidence and contrary to law because the Department erred when it determined that the ROT applied to plaintiff's activities.

The Department conducted an audit of plaintiff's ROT payments for the period from July 1988 through June 1992. Based on the audit, the Department issued a notice of tax liability assessing $122,380 against plaintiff for tax deficiencies, interest, and penalties.

Plaintiff protested the notice of tax liability, and the Department conducted a hearing on the matter. At the hearing, the parties made three stipulations. The parties first stipulated to the amounts of plaintiff's purchases of goods for retail sales for each of the periods in question. The parties next stipulated to a total amount for unreported receipts by plaintiff during the audit period and the calculation and categorization of these unreported receipts on a monthly basis as either retail sales or some other category. Finally, the parties stipulated that the amounts shown on certain schedules were correct allocations of plaintiff's total gross sales and that these amounts would be adjusted to account for unreported income.

The Department then presented its prima facie case. The Department's prima facie case consisted of a six-page document entitled "Correction and/or Determination of Tax Due" showing the amount of tax deficiencies and penalties that plaintiff allegedly owed for the audit period.

At the hearing, Karen Tennill, a Department auditor who conducted the audit of plaintiff's ROT payments, and Tennill's supervisor, John Cooper, testified for the Department. Tennill was also called by plaintiff to testify.

In summary, the pertinent testimony of Cooper and Tennill was as follows: the audit was based on plaintiff's sales invoices that were provided to Tennill by plaintiff's bookkeeper and accountant; the invoices showed that plaintiff was engaged in various activities including exterior landscaping, the rental of plants, and the sale of plants and related materials for indoor use by purchasers; the tax deficiencies calculated by the Department involved only the portion of plaintiff's business relating to the sale of plants and related material for indoor use by the purchasers; plaintiff's invoices for these sales generally showed a single rate for the sale, i.e., the invoices did not separate out things such as maintenance or service agreements; if a sales invoice did show a separate maintenance agreement, the Department determined that the ROT did not apply to that part of the invoice; an audit narrative completed by Tennill showed that plaintiff claimed to be a "serviceman"; however, the narrative also showed that plaintiff reported sales shown on the invoices as subject to the ROT; and the Department levied penalties for fraud against plaintiff because one of plaintiff's attorneys submitted an altered set of invoices that attempted to specify the cost of goods sold on the invoices.

Fritz Peltonen testified for plaintiff. Peltonen's testimony included the following: he is a space and occupancy planner currently employed by Citibank; he has purchased goods and services for indoor use from plaintiff for about 10 years; when making these purchases from plaintiff, he relies on plaintiff to design, install, and maintain plant arrangements in various spaces inside buildings owned or occupied by Citibank; he uses plaintiff to do this primarily for the service plaintiff provides; the services provided by plaintiff include regularly watering and inspecting the plants in the arrangements and replacing plants if necessary.

Jon Crim also testified for plaintiff. Crim's testimony included the following: he is plaintiff's president and sole stock owner; he considers himself to be an interior and exterior landscape contractor; at one time, plaintiff paid taxes on the entire invoice amount for its indoor landscaping activities, but, on the advice of an accountant, plaintiff later began to pay taxes only on the cost price of the goods it sold when engaged in these activities; with respect to the sales of interior plant arrangements, plaintiff designs, delivers, and installs the plants and then services and maintains the plants; Crim believes that customers who hire plaintiff for indoor landscaping activities do so primarily for the services plaintiff provides because, if the customers just wanted plants, they could purchase them cheaper elsewhere; plaintiff did not intend to deceive the Department by adding the cost of goods to its invoices; and the altered invoices were intended only to clarify what plaintiff was doing.

Following the hearing, the administrative law Judge who conducted the hearing issued a recommended Disposition. The recommended disposition stated that the first issue to be decided was whether plaintiff, when it was engaging in indoor landscaping activities, was engaged in retail sales and therefore was subject to the ROT or whether plaintiff was engaged in a service occupation and therefore was subject to the Service Occupation Tax (SOT) rather than the ROT. A second issue identified by the administrative law Judge was whether the Department erred when it imposed fraud penalties on plaintiff. The recommended disposition resolved these issues by determining that the Department correctly decided that plaintiff was subject to the ROT but that the Department erred when it imposed fraud penalties on plaintiff.

The Department subsequently accepted the administrative law Judge's recommended Disposition, and it became the Department's final administrative decision. On December 12, 1995, the Department issued a final assessment against plaintiff indicating that plaintiff owed a total of $107,665.99 in tax delinquencies, penalties, and interest. The Department subsequently issued a corrected final assessment with the same effective date. The corrected final assessment ...

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