Zenith Electronics Corp. v. Department of Revenue

FOURTH DIVISION
November 26, 1997





No. 1-96-0326

ZENITH ELECTRONICS CORPORATION, ) APPEAL FROM THE
) CIRCUIT COURT OF
Plaintiff-Appellee, ) COOK COUNTY
)
v. )
)
THE DEPARTMENT OF REVENUE, ) HONORABLE
) ALEXANDER P. WHITE
Defendant-Appellant. ) JUDGE PRESIDING.

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 (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
(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 "[m]anufacturing 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 statutory construction:
"[T]his court has long held that '[t]axing
statutes are to be strictly construed. Their
language is not to be extended or enlarged by
implication, beyond its clear import. In
cases of doubt they are construed most
strongly against the government and in favor
of the taxpayer.' [Citations.]
In strictly construing the similar
provisions of the Use Tax Act and ROTA, the
primary rule is to ascertain and give effect
to the intention of the legislature, and that
inquiry must begin with the language of the
statute. [Citations.] In addition to
considering the language of the statute, a
court may properly consider the purpose to be
attained by the law, the necessity for the
law and the evils sought to be remedied.
[Citations.] The legislative history or
background of a statute (e.g., legislative
committee reports as well as House and Senate
floor debates) may be an instructive resource
in ascertaining the legislative intent.
[Citation.] We also note that, generally,
administrative interpretations of a statute
promulgated by the agency charged with the
administration and enforcement of the statute
receive some respect and deference from the
courts, but they are clearly not binding on
the courts. [Citations.] In addition, this
court has noted that '[a]dministrative rules
can neither limit nor extend the scope of a
statute.' [Citation.]" Van's Material, 131 Ill. 2d at 202-03, 545 N.E.2d at 698-99.
The Van's Material court also discussed exemptions:
"'A person claiming an exemption from
taxation has the burden of proving clearly
that he comes within the statutory exemption.
Such exemptions are to be strictly construed,
and doubts concerning the applicability of
the exemptions will be resolved in favor of
taxation.'" Van's Material, 131 Ill. 2d at
216, 545 N.E.2d at 705, quoting United Air
Lines, Inc. v. Johnson, 84 Ill. 2d 446, 419 N.E.2d 899 (1981).
Applying these principles, the Van's Material court
concluded that the three phrases forming the "gist" of the
manufacturing exemption are: (1) "tangible personal property,"
(2) "process of manufacturing or assembling," and (3)
"primarily." Van's Material, 131 Ill. 2d at 203, 545 N.E.2d at
698. The court then determined that the taxpayer had carried its
burden of showing that a ready-mix concrete truck fell within the
exemption. Specifically, the court held that the truck, in
mixing sand, limestone, water, and cement into concrete, was a
machine primarily used in the manufacture of tangible personal
property. Van's Material, 131 Ill. 2d at 216-17, 545 N.E.2d at
704-05. Recently, the second district of this court also focused
on these three terms in determining whether a slip form paver
used to smooth concrete in a roadway was subject to the use tax.
Madden, 272 Ill. App. 3d at 216, 651 N.E.2d at 220. While the
taxpayer relied heavily on Van's Material, the Madden court found
that, unlike the ready-mix truck used in the production of
concrete (which was tangible personal property), the slip form
paver was used in the production of a roadway (which was real
property). Madden, 272 Ill. App. 3d at 218, 651 N.E.2d at 221-
22. Thus, as the slip form paver was not used in the
manufacturing or assembling of tangible personal property, the
paver did not qualify under the manufacturing exemption to the
Use Tax Act. Madden, 272 Ill. App. 3d at 219, 651 N.E.2d at 222.
As in Van's Material and Madden, we must focus in the
present case on the terms "tangible personal property," "process
of manufacturing or assembling," and "primarily" in determining
whether the trays used by Zenith fall within the manufacturing
and assembling exemption. The Department argues that the
exemption is inapplicable because the trays are neither used in
the manufacture of CRTs at the Melrose plant nor are they used in
the assembly of television sets at the Springfield plant.
Instead, the Department argues, the primary use of the trays is
"to transport the separately marketable and marketed" CRTs. The
Department points out that, during the audit period, the CRTs
produced at the Melrose plant were increasingly being sold to
outside entities. The Department also asserts that Zenith's
portrayal of itself as solely a manufacturer of television sets
is wholly inconsistent with the evidence in the record. Where
the trays are primarily used for, and essential to, only the
transportation of completed CRTs from the Melrose plant to
various receiving plants, the Department argues, the trays are
not equipment primarily used in a manufacturing or assembling
process.
Zenith responds that the trial court properly held that the
tray sets were equipment used in the manufacture of television
sets, and argues that, contrary to the Department's argument, its
production of television sets involves manufacturing at both its
Melrose plant and Springfield plant. Zenith points to the
statutory language that "[i]n 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." 35 ILCS
105/3-50 (West 1992). Zenith argues that, where it produces
television sets through a "series of operations" that
"collectively constitute manufacturing," the Department cannot
seriously claim that the collective integrated operations at the
Melrose and Springfield plants do not constitute the manufacture
of television sets. Zenith also argues that the Department's
reliance on its regulation denying exemption to equipment used to
"transport work in process, or semi-finished goods, between
plants" (86 Ill. Adm. Code 130.330(d)(4)(F) (1985)) is defeated
by the administrative law judge's finding of fact that "[t]he
tray sets are used by Zenith to protect the CRT from damage
during transportation that would render *** [the] CRT
unacceptable to worthless." (Emphasis added). As the trial
court held, Zenith argues, the record clearly establishes that
the trays were specifically designed for the "protection" of CRTs
and, unlike a vehicle, which may constitute equipment used "to
transport," the trays are immobile, making the Department's
finding that the trays were used to transport the CRTs against
the manifest weight of the evidence.
After consideration of the parties' arguments, as well as a
close reading of the pertinent statutory provisions, the
Department's regulations, relevant case law, and the trial
court's 17-page memorandum decision, we conclude, as the trial
court did, that the tray sets were primarily used in an exempt
manner. According to the administrative law judge's findings of
fact, a majority of the CRTs produced at the Melrose plant were
sent to Springfield during the audit period. The administrative
law judge also found that the primary purpose of the tray sets
was to "protect" the CRTs, as they are extremely fragile and have
a tendency to implode. Ten to twelve truckloads of CRTs were
sent to Springfield daily during the audit period. Those CRTs
then became part of television sets, which the Department does
not dispute are tangible personal property. According to the
relevant statute, use tax does not apply to equipment used
primarily in the process of manufacturing or assembling tangible
personal property. 35 ILCS 105/3-50 (West 1992). Also according
to the statute, "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." 35 ILCS 105/3-
50 (West 1992). Applying this language to the factual situation
before us, we can only conclude, as the trial court did, that the
trays were primarily used in a manufacturing or assembling
process.
The Department, however, also relies heavily on its own
rules and regulations in support of its argument that the trays
were not primarily used in an exempt manner. Specifically, the
Department points to the following language of the Administrative
Code:
"By way of illustration, and not limitation, the
following activities will generally not be considered
to be manufacturing:
* * *
E) The use of machinery or equipment to
store, convey, handle or transport finished
articles of tangible personal property to be
sold or leased after completion of the
production cycle;
F) The use of machinery or equipment to
transport work in process, or semi-finished
goods, between plants." 86 Ill. Adm. Code
130.330(d)(4)(E)(F) (1985).
We agree with the trial court, however, that these
regulations do not have the effect of taking the tray sets
outside the use tax manufacturing and assembling exemption.
First, subsection (E) is inapplicable because the tray sets going
to the Springfield plant were not storing, conveying, handling,
or transporting finished articles to be sold or leased. Instead,
the tray sets going to Springfield contained CRTs that would
undergo further manufacturing before becoming part of a
television sets. We also find persuasive the trial court's
reasoning as to why subsection (F) is inapplicable. The trial
court explained:
"The record clearly establishes the trays
were specifically designed for the protection
of CRTs. Taxpayer [Zenith] was the first
manufacturer to design plastic trays for this
purpose and they are now an industry
standard. The ALJ expressly found the trays
'are used by [Taxpayer] to protect the CRT
from damage during transportation.' This
finding does not equate to the trays being
used to transport the CRTs as the trays
themselves are immobile. The word
'transport,' as commonly used, means to carry
from one place to another, and is generally
accomplished by means of a vehicle. See,
Webster's Third New International Dictionary
(1986). The finding of the Director,
affirming the finding of the ALJ, that the
trays were used to transport the finished
CRTs, was against the manifest weight of the
evidence."
Like the trial court, we also conclude that, while the trucks
transporting the CRTs from the Melrose plant to the Springfield
plant would not have been exempt, the tray sets, themselves
immobile, had the primary purpose of protecting the CRTs and that
purpose was essential to the manufacturing or assembling process
of television sets.
Finally, we find it noteworthy that the supreme court in
Van's Material expressly refused to apply some of the
Department's regulations. Specifically, the court held that
"[t]he Department's rules and regulations limiting manufacturing
to a fixed location and attempting to define 'commonly regarded'
by its own limited definition are unduly restrictive in the light
of the statutory language." Van's Material, 131 Ill. 2d at 209,
545 N.E.2d at 702. In so holding, the court stressed that it has
long held that administrative rules may not limit the scope of a
statute. Van's Material, 131 Ill. 2d at 209, 545 N.E.2d at 702.
Moreover, the court stated that "[e]ven if the regulations were
not determined to be unduly restrictive, we are not bound by the
Department's interpretations of the statute." Van's Material,
131 Ill. 2d at 209-10, 545 N.E.2d at 702.
Turning back to the present case, we conclude, as the trial
court did, that the Department's interpretation of the
manufacturing and assembling exemption as it related to the tray
sets used by Zenith to protect CRTs was against the manifest
weight of the evidence. Put another way, we hold, as the trial
court did, that Zenith has carried its burden of proving that the
tray sets were exempt from taxation under the Use Tax Act (35
ILCS 105/1 et seq. (West 1992)) and the ROTA (35 ILCS 120/1 et
seq. (West 1992)) as equipment used primarily in the
manufacturing or assembling of tangible personal property.
Accordingly, for the reasons set forth above, the judgment
of the circuit court of Cook County is affirmed.
Affirmed.
WOLFSON, P.J., and BURKE, J., concur.