Archer Daniels Midland Co. v. City of Chicago

FIFTH DIVISION
Filed: 12/31/97

No. 1-96-3861

ARCHER DANIELS MIDLAND COMPANY; BEST ) APPEAL FROM THE
FOODS, a unit of CPC International, ) CIRCUIT COURT OF
Inc.; FORD MOTOR COMPANY; LTV STEEL ) COOK COUNTY
COMPANY; and PRECOAT METALS DIVISION )
of SEQUA CORPORATION, )
)
Plaintiffs-Appellants, )
)
v. )
)
CITY OF CHICAGO; PEOPLES GAS LIGHT AND )
COKE COMPANY; and JUDITH C. RICE, )
Revenue Director of the City of Chicago, ) HONORABLE
) ALEXANDER P. WHITE,
Defendants-Appellees. ) JUDGE PRESIDING.

PRESIDING JUSTICE HOFFMAN delivered the opinion of the court:

We are called upon in this appeal to determine whether the
Chicago Gas Use Tax Ordinance (Ordinance), which imposes a tax on
the use or consumption of natural gas purchased at retail, is an
invalid occupational tax under the provisions of Art. VII, section
6(e) of the Illinois Constitution (Ill. Const. 1970, art. VII, sec.
6(e)) and, if it is not, whether the tax, nonetheless, violates the
uniformity clause of the Illinois Constitution (Ill. Const. 1970,
art. IX, sec. 2). For the reasons which follow, we determine that
the subject tax is a valid tax upon the use and consumption of a
tangible commodity, and affirm the judgment of the circuit court.
Because this matter was disposed of at the trial level upon
the defendants' motions to dismiss pursuant to section 2-615 of the
Code of Civil Procedure (735 ILCS 5/2-615 (West 1994)), the only
question before this court is whether the dismissed counts state
causes of action upon which relief can be granted. Burdinie v.
Village of Glendale Heights, 139 Ill. 2d 501, 565 N.E.2d 654
(1990); Janes v. First Federal Savings & Loan Association, 57 Ill. 2d 398, 312 N.E.2d 605 (1974). The issue is one of law and our
review is de novo. Metrick v. Chatz, 266 Ill. App. 3d 649, 651-52,
639 N.E.2d 198 (1994).
Prior to 1980, natural gas used in the City of Chicago (City)
had to be purchased from a local public utility. The gross
receipts of these utilities are subject to the City's Municipal
Occupation Tax (Occupation Tax) "imposed upon all persons engaged
in the business of distributing, supplying, furnishing or selling
gas for use or consumption within the corporate limits of the city
***." Chicago Municipal Code, sec. 3-40-040 (1994). Since the
Illinois Public Utilities Act allows local public utilities to
"pass through" such taxes to their customers (see 220 ILCS 5/9-221
(West 1994)), all purchasers of natural gas in the City paid the
tax on their purchases during this time period.
After federal deregulation of the natural gas industry through
the Natural Gas Policy Act of 1978 (15 U.S.C. sec. 3301 et seq.
(1994)), large consumers of natural gas in Illinois began to
purchase gas directly from sellers located in the gas producing
states, rather than from local public utilities. Under the
provisions of the Commerce Clause of the United States Constitution
(U.S. Const. Art. I, Sec. 8), out-of-state sellers are not subject
to the Occupation Tax (Caterpillar Tractor Co. v. Department of
Revenue, 47 Ill. 2d 278, 282, 265 N.E.2d 675 (1970)) and,
accordingly, the City consumers purchasing gas from out-of-state
utilities avoided paying the tax. However, the City consumers who
purchase their natural gas from local public utility companies
continue to pay the Occupation Tax.
On November 17, 1993, the Chicago City Council introduced an
ordinance, which taxes "the privilege of using or consuming in the
city gas that is purchased in a sale at retail." Chicago Municipal
Code, sec. 3-41-030(A) (1994). The Ordinance is not based on gross
receipts or the price of natural gas but, rather, on the quantity
of gas consumed by purchasers. The tax rate is 1.5 cents per
therm. Chicago Municipal Code, sec. 3-41-030(A) (1994).
To prevent multiple taxation, the retail purchaser of natural
gas is exempt from taxation under the Ordinance if the seller of
the gas is subject to the Occupation Tax on the sale of gas and
that tax is passed through to the purchaser. Chicago Municipal
Code, sec. 3-41-030(E)(1) (1994). In other words, purchasers
required to pay the Occupation Tax pursuant to the pass through
provisions of section 9-221 of the Illinois Public Utilities Act
(220 ILCS 5/9-221 (West 1994)) are exempt from taxation under the
Ordinance. In fact, the Ordinance specifically provides for a
"complementary relation" with the Occupation Tax. Chicago
Municipal Code, sec. 3-41-040 (1994).
The Ordinance provides that "[t]he ultimate incidence of and
liability for payment on the tax is upon the retail purchaser," and
"nothing in this chapter shall be construed to impose a tax on the
occupation of distributing, supplying, furnishing, selling or
transporting gas." Chicago Municipal Code, sec. 3-41-030(B)
(1994). The Ordinance does not impose any tax collection duties on
sellers or transporters of gas; rather, it authorizes the City to
enter into a contractual arrangement with a local public utility as
an independent contractor to collect the tax upon delivery to the
retail purchaser. Chicago Municipal Code, sec. 3-41-030(A)(1)
(1994). If the City enters into such an agreement, the retail
purchaser pays the tax to the utility and the utility remits the
tax to the City. Chicago Municipal Code, secs. 3-41-030(C)(1), 3-
41-050(A)(2) (1994).
It is undisputed that the City's Director of Revenue entered
into a contract with People's Gas Light and Coke Company (People's
Gas) to collect taxes imposed under the Ordinance and remit the
funds to the City. The plaintiffs in this action are large
consumers of natural gas who purchase gas at retail outside of
Illinois for use in their businesses in the City. The gas is then
delivered by interstate pipeline to People's Gas.
According to the plaintiffs, once their natural gas is in the
pipeline, it is fungible and indistinguishable from gas being
transported to People's Gas customers who purchase their gas in the
City. The plaintiffs further allege that People's Gas includes the
tax imposed by the Ordinance in its current billings for delivery
of the plaintiffs' gas. Based on the foregoing allegations, the
plaintiffs contend in count I of the complaint that the Ordinance
is an unconstitutional occupation tax under Article VII, section
6(e) of the Illinois Constitution since it has not been authorized
by the General Assembly.
The plaintiffs further allege in count II of the amendment to
the complaint that, as purchasers of gas from out-of-state sellers,
they pay both the tax imposed under the Ordinance and the
Occupation Tax on gas transportation services provided by People's
Gas. They contend that the Ordinance violates the uniformity
clause of the Illinois Constitution (Ill. Const. 1970, art. IX,
sec. 2) because the tax creates a classification that is not based
on a real and substantial difference between those parties taxed
and those not taxed, and because the tax bears no reasonable
relationship to the object of the legislation or public policy.
The plaintiffs presented additional arguments in counts III
and IV of the amendment to the complaint under the Commerce Clause
of the U.S. Constitution (U.S. Const., art. I, sec. 8) and sections
1983 and 1988 of the Civil Rights Act of 1871 (42 U.S.C. sec. 1983,
1988), respectively. However, since the plaintiffs presented no
arguments relevant to these issues in their appellate brief, they
are waived on appeal. 134 Ill. 2d R.341(e)(7).
We initially consider whether the plaintiffs' argument that
the City's Ordinance is an unauthorized tax on the occupation of
sellers of natural gas states a cause of action on which relief may
be granted. The City is a home-rule municipality. See Landmarks
Preservation Council v. City of Chicago, 125 Ill. 2d 164, 178, 531 N.E.2d 9 (1988). Our supreme court has stated that home rule units
have the same powers as the sovereign, except where such powers are
limited by the General Assembly. Triple A Services, Inc. v. Rice,
131 Ill. 2d 217, 230, 545 N.E.2d 706 (1989). The power to tax, one
of the home-rule powers enumerated in Article VII, sec. 6(a) of the
Illinois Constitution, is restricted by section 6(e) which states
that "[a] home rule unit shall have only the power that the General
Assembly may provide by law *** to impose taxes upon or measured by
income or earnings or upon occupations." Ill. Const. 1970, art.
VII, sec. 6(e). The plaintiffs contend that the Ordinance is
invalid because it is an occupational tax not authorized by the
General Assembly.
The City counters that a tax cannot be an 'occupation' tax
within the meaning of Article VII, section 6(e) unless it is
imposed on businesses engaged in the occupation of selling the
commodities or services taxed. Ill. Const. 1970, art. VII, sec.
6(e). Instead, the City argues the Ordinance here is a tax on the
plaintiffs for tangible personal property which they purchase out-
of-state but consume within the City.
Our courts have defined tangible personal property to mean
that which "may be seen, weighed, measured and estimated by the
physical senses and which is capable of being possessed ***." In
re Estate of Berman, 39 Ill. App. 2d 175, 178, 187 N.E.2d 541
(1963). Previous cases have ruled that sales of property in a
gaseous state are tangible personal property. See e.g.
Northwestern Steel & Wire Co. v. Department of Revenue, 120 Ill.
App. 3d 461, 458 N.E.2d 168 (1983) (gaseous oxygen is tangible
personal property within the meaning of the Illinois Use Tax Act);
Keystone Consolidated Industries, Inc. v. Allphin, 45 Ill. App. 3d
714, 359 N.E.2d 1202 (1977) (oxygen and nitrogen are tangible
person property). We find no distinguishing factors between
oxygen, nitrogen, and natural gas for purposes of this issue and,
therefore, conclude that natural gas is also tangible personal
property.
A tax on tangible personal property is not an occupation tax
so long as the ordinance enacting it declares that its legal
incidence falls on the purchaser, rather than the seller. Illinois
Gasoline Dealers Ass'n v. City of Chicago, 119 Ill. 2d 391, 398-
401, 519 N.E.2d 447 (1988). Moreover, in order for a tax to be
occupational within the meaning of article VII, section 6(e) of the
Illinois Constitution, a plaintiff must establish that the tax
regulates a given occupation, or imposes a tax for the privilege of
engaging in a given occupation, or imposes a tax on the privilege
of engaging in the business of selling services. Illinois Gasoline
Dealers, 119 Ill. 2d at 399-400. The tax here is clearly on the
consumer, or purchaser, of the gas, not the provider or transporter
of the gas, as the tax amount is determined by the quantity of
therms of gas purchased out-of-state by the plaintiffs for their
consumption in the City. Since the tax is clearly placed on the
consumer, it is valid under Article VII, section 6(e) of the
Illinois Constitution, and can in no way be construed as an
unconstitutional service occupation tax upon a public utility.
Taking the verified facts alleged in the complaint as true and
correct under the provisions of section 2-615 of the Code (735 ILCS
5/2-615 (West 1994)), we must reject the plaintiffs' allegations on
this issue and affirm the trial court's judgment denying
reconsideration of its dismissal of count I of the plaintiffs'
complaint.
We next address the plaintiffs' contention, presented in count
II of the amendment to the complaint, that the Ordinance is
unconstitutional under Article IX, Section 2 of the Illinois
Constitution, ie. the uniformity clause, which provides:
"In any law classifying subjects or objects of non-
property taxes or fees, the classes shall be reasonable
and the subjects and objects within each class shall be
taxed uniformly. Exemptions, deductions, credits,
refunds, and other allowances shall be reasonable." Ill.
Const. art. IX, section 2.
"To survive scrutiny under the uniformity clause, a nonproperty tax
classification must be based on a real and substantial difference
between the people taxed and those not taxed, and the
classification must bear some reasonable relationship to the object
of the legislation or to public policy." Allegro Services, Ltd. v.
Metropolitan Pier and Exposition Authority, 172 Ill. 2d 243, 250,
665 N.E.2d 1246 (1996). The plaintiff challenging a classification
has the burden of showing that it is arbitrary or unreasonable.
Geja's Cafe v. Metropolitan Pier and Exposition Authority, 153 Ill. 2d 239, 248, 606 N.E.2d 1212 (1992). A tax classification must be
upheld if any statement of facts can be conceived that would
reasonably sustain the classification. Geja's Cafe, 153 Ill. 2d at
248.
The uniformity clause was designed to enforce minimum
standards of reasonableness and fairness as between groups of
taxpayers. Geja's Cafe, 153 Ill. 2d at 252. The plaintiffs allege
that the Ordinance violates the uniformity clause because the tax
creates a classification that is not based on a real and
substantial difference between those parties taxed and those not
taxed, and because the tax bears no reasonable relationship to the
object of the legislation or public policy. However, we conclude
that the standards of reasonableness and fairness have been met in
this case. The Ordinance applies to those consumers who purchase
natural gas from out-of-state sellers and, therefore, are not
subject to the Occupation Tax imposed upon local retail purchasers
who buy from People's Gas. Chicago Municipal Code sec. 3-41-
030(E). The Ordinance is, therefore, consistent with tax
uniformity principles because these out-of-state purchases would
otherwise escape taxation completely. See e.g. IBM Corp. v.
Korshak, 34 Ill. 2d 595, 600-05, 217 N.E.2d 794 (1966). The
Ordinance ensures that all consumers of natural gas in the City are
subject to tax regardless of whether the gas is purchased from
People's Gas or from out-of-state sellers.
There are other distinct classifications between those who
purchase gas from People's Gas and those consumers, such as the
plaintiffs, who purchase gas from an out-of-state supplier. First,
the plaintiffs only utilize People's Gas to deliver their gas;
however, the People's Gas customers in the City that are exempt
from the Ordinance pay, not only for delivery, but also for the
additional costs incurred by People's Gas in acquiring the gas and
for other services typically provided by a public utility. Compare
Waukegan Community Unit School District 60 v. City of Waukegan, 95 Ill. 2d 244, 447 N.E.2d 345 (1983). We hold that the
classification between those subject to the Ordinance and those not
subject to the tax is neither arbitrary nor unreasonable.
The plaintiffs make the additional claim that the rate of the
City's Ordinance on their out-of-state gas purchases, 1.5 cents per
therm, "has been, and may frequently be higher than" the rate of
the City's Occupation Tax on gas sales, which is 8% of gross
revenues, depending on whether the pre-tax, market price of gas
rises or falls. The plaintiffs' allegations are speculative and
unsupported and, accordingly, are insufficient to support the
conclusion that the Ordinance is not based on real and substantial
differences between those taxed by the Ordinance and those not
subject to the tax. We conclude that the plaintiffs have not
alleged sufficient facts to support their legal conclusion that the
Ordinance violates the uniformity clause of the Illinois
Constitution. Therefore, we affirm the trial court's judgment
dismissing count II of the amendment to the complaint.
For the foregoing reasons, we affirm the judgment of the
circuit court of Cook County.
Affirmed.
THEIS and HOURIHANE, JJ., concur.