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Armour Pharmaceutical Company v. Department of Revenue

April 13, 2001

ARMOUR PHARMACEUTICAL COMPANY, PLAINTIFF-APPELLEE AND CROSS-APPELLANT,
v.
THE DEPARTMENT OF REVENUE AND KENNETH ZEHNDER, DIRECTOR OF THE DEPARTMENT OF REVENUE, DEFENDANTS-APPELLANTS AND CROSS-APPELLEES.



The opinion of the court was delivered by: Justice O'brien

Appeal from the Circuit Court of Cook County.

Honorable Thomas P. Quinn, Judge Presiding.

The Illinois Department of Revenue (the Department) appeals an order of the circuit court reversing the Department's finding that alcohol used by Armour Pharmaceutical Company (Armour) in making certain pharmaceutical products is subject to a use tax. Armour cross-appeals the portion of the order of the circuit court affirming the Department's finding that Armour utilized an unauthorized method of computing and reporting its use tax liability.

On appeal, the Department argues that the circuit court erred in determining that the alcohol at issue was a "by-product of manufacturing" excepted from taxation under section 2 of the Use Tax Act (35 ILCS 105/2 (West 1998)). On cross-appeal, Armour argues that the Department and the circuit court erred in rejecting Armour's methodology for recovering overpayments of its use tax. We affirm on the appeal and on the cross-appeal.

Armour manufactured pharmaceutical products derived from human plasma. As part of its manufacturing process, Armour employed alcohol to separate human plasma into various "fractions." During the fractionation process, the alcohol became contaminated with human proteins.

During the last stage of the process, Armour recycled the alcohol by removing it from the plasma products and sending it to an "alcohol recovery system" where Armour removed all remaining human proteins. Armour sold the recycled alcohol to unrelated manufacturers.

Through a series of accounting procedures, Armour effectively paid no use tax on the recycled alcohol. The Use Tax Act (35 ILCS 105/3 (West 1998)) imposes a tax upon the privilege of using tangible personal property purchased at retail from a retailer. In order to avoid multiple taxation of the same personal property as it moves through the chain of production, only those transactions involving a consumer of the personal property are subject to taxation. Container Corp. of America v. Wagner, 293 Ill. App. 3d 1089, 1093 (1997). Thus, the Use Tax Act makes a statutory exception for property that is resold or incorporated into the other property for resale. Container Corp., 293 Ill. App. 3d at 1093. Specifically, section 2 of the Use Tax Act excludes from taxation any personal property "resold as an ingredient of an intentionally produced product or by-product of manufacturing." (Emphasis added.) 35 ILCS 105/2 (West 1998).

Armour determined that the recycled alcohol was a "by-product of manufacturing," which is excluded from taxation under section 2 of the Use Tax Act. See 35 ILCS 105/2 (West 1998). The Department disagreed and issued a notice of tax liability. Armour filed a timely protest to the Department's notice.

An administrative hearing was held. The Department's administrative law judge (ALJ) found that the recycled alcohol was subject to use taxation and that Armour's method of use tax accounting and reporting was not authorized by law. The ALJ recommended that the notice of tax liability be upheld in its entirety. The Department accepted the ALJ's recommendation.

Armour filed a complaint for administrative review. The circuit court reversed the Department's finding that the recycled alcohol was subject to use taxation and affirmed the Department's finding that Armour had used an unauthorized method of computing and reporting its use tax liability. The Department appeals the portion of the circuit court's order reversing its finding that the recycled alcohol is subject to use taxation. Armour cross-appeals the portion of the circuit court's order affirming the Department's finding that Armour used an unauthorized method to compute and report its use tax liability.

First, we address the Department's appeal. In reviewing a final decision under the Administrative Review Law (735 ILCS 5/3~101 et seq. (West 1996)), we review the agency's decision and not the circuit court's determination. XL Disposal Corp. v. Zehnder, 304 Ill. App. 3d 202, 207 (1999). The agency's decisions on questions of fact are entitled to deference and are reversed only if they are against the manifest weight of the evidence. Abrahamson v. Illinois Department of Professional Regulation, 153 Ill. 2d 76, 88 (1992). Where the agency decides a mixed question of fact and law, the decision is reversed only if it is clearly erroneous. City of Belvidere v. The Illinois State Labor Relations Board, 181 Ill. 2d 191 (1998). Where there is no question of fact, and the issue is one of law only, the agency's decision is reviewed de novo. Envirite Corp. v. Illinois Environmental Protection Agency, 158 Ill. 2d 210, 214 (1994).

The Department argues that the clearly erroneous standard of review, as set forth in City of Belvidere, applies here. The issue in City of Belvidere was whether the city's refusal to engage in collective bargaining with the union over the city's decision to contract out paramedic services to a private ambulance company amounted to an unfair labor practice in violation of the Illinois Public Labor Relations Act (Act) (5 ILCS 315/1 et seq. (West 1994)). City of Belvidere, 181 Ill. 2d at 202. In resolving the issue, the court noted that the Illinois State Labor Relations Board ( Board) had made a factual determination that the city's decision affected wages, hours and other conditions of employment pursuant to section 7 of the Act. City of Belvidere, 181 Ill. 2d at 201, 205. The court further noted that the Board's finding concerned a question of law because the phrase "wages, hours and other conditions of employment" was a legal term that required interpretation. City of Belvidere, 181 Ill. 2d at 205. Therefore, the court held that the Board's determination was a mixed question of fact and law for which the clearly erroneous standard of review was appropriate. City of Belvidere, 181 Ill. 2d at 205.

By contrast, here we are not asked to review any factual findings made by the Department. Rather, the issue before us only involves a question of law, specifically, whether Armour's recycled alcohol is a "by-product of manufacturing" excepted from use taxation under section 2 of the Use Tax Act. Therefore, our standard of review is de novo.

Section 2 of the Use Tax Act does not define "by-product of manufacturing." Where a statutory term is undefined, that term must be given its ordinary and properly understood meaning. Union Electric Co. v. Department of Revenue, 136 Ill. 2d 385, 397 (1990). The term "by-product" is ordinarily understood to mean "a secondary or additional product: something produced (as in ...


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