First Access Material Handling v. Wish
Annotate this Case
FIFTH DIVISION
FILED: 6/5/98
No. 1-97-2774
FIRST ACCESS MATERIAL HANDLING, ) Appeal from the
) Circuit Court of
Plaintiff-Appellant, ) Cook County.
)
v. )
) No. 95 L 50864
ERNEST R. WISH, Director, City of )
Chicago Department of Revenue, )
and the CITY OF CHICAGO DEPARTMENT OF )
REVENUE, ) Honorable
) Joanne L. Lanigan
Defendants-Appellees. ) Judge Presiding.
PRESIDING JUSTICE HOFFMAN delivered the opinion of the court:
The plaintiff, First Access Material Handling, appeals the
circuit court's order which affirmed the City of Chicago
Department of Revenue's (Department) assessment of taxes and
penalties against the plaintiff.
The plaintiff is a corporation engaged in the business of
leasing material handling equipment, primarily forklifts. While
all of its offices are located outside the city of Chicago, the
plaintiff leases forklifts to lessees in Chicago. Following an
audit, the Department assessed the plaintiff personal property
lease transaction taxes, use taxes for nontitled personal
property, interest on the overdue taxes, and late payment and
negligence penalties. As of July 31, 1995, the taxes, penalties
and interest due totalled $80,702.02.
On April 29, 1994, the plaintiff filed a protest and a
petition for a hearing. The plaintiff claimed that the
Department had improperly assessed lease transaction taxes on
hourly overtime charges which, it alleged, were not rental
charges but charges for maintenance. The plaintiff also claimed
that the Department had improperly used the full value of each
piece of equipment in calculating the amount of use tax due
rather than apportioning the tax to take into account the period
of time in which the equipment was actually used in Chicago. The
plaintiff maintained that, even if the taxes were properly
assessed, there was no basis to impose any penalties because it
reasonably believed it did not owe the taxes.
An administrative hearing before one of the Department's
hearing officers was conducted on April 11, 1995. Section 3-4-
340(H) of the Uniform Revenue Procedures Ordinance (Revenue
Ordinance) provides that, at such an evidentiary hearing:
"the tax determination and assessment and the
assessment of any nontax debt shall be prima facie
correct and the protesting party shall have the burden
of proving with books, records and other documentary
evidence that it is incorrect."
Chicago Municipal Code, 3-4-340(H) (1997).
Mark Bunetta, the Department revenue auditor who audited the
plaintiff, testified that he reviewed the plaintiff's general
ledgers, rental and sales invoices, and lease agreements.
Bunetta assessed the plaintiff $7,060.56 in use tax for nontitled
personal property (use tax) for the period of January 1992
through June 1993. He determined the plaintiff's use tax
liability by computing 1% of the purchase price of all equipment
used in Chicago during the audit period and on which, according
to the invoices, no sales tax had previously been paid. Bunetta
did not take into consideration the fact that the equipment was
used both inside and outside Chicago. Bunetta also assessed the
plaintiff interest, late payment penalties, and negligence
penalties on the unpaid use tax.
In addition to the use tax, Bunetta assessed the plaintiff
$33,486.94 in personal property lease transaction tax
(transaction tax) for the period January 1989 through November
1993, plus interest, late payment penalties, and negligence
penalties. Bunetta assessed the transaction tax because the
plaintiff had failed to self-assess and remit the transaction tax
due on overtime hourly rental charges it collected from its
customers. These overtime rental charges were recorded under the
rental revenue account in the plaintiff's general ledger and were
listed as long-term rental overtime charges on the plaintiff's
invoices. In the plaintiff's lease agreements with its
customers, the overtime charges were characterized as hourly
rental overtime charges for equipment used in excess of a
specified number of hours.
Bunetta's audit file, which was admitted into evidence,
contained a copy of an executed lease agreement between the
plaintiff, under its former name of ClarkLift of Chicago South,
Inc., and one of its customers. That lease, executed February
25, 1988, contained the following provision regarding hourly
overtime charges:
"13. OVERTIME CHARGE.
The hourly overtime charge provided in Section 12 shall
apply to each hour of use of any unit of equipment in
excess of 500/250 hours in any calendar quarter as
determined by the Hobbs Hour Meter or other mechanical
device used to record hours of use supplied with each
unit (herein called "hour meter"). *** LESSEE agrees
to pay said overtime rental charges within ten (10)
days from the date of LESSOR'S invoices therefor."
The plaintiff's treasurer, Al Wilkans, testified on the
plaintiff's behalf. According to Wilkans, a customer entering
into a long-term lease with the plaintiff has the option of
purchasing maintenance from the plaintiff or providing its own
maintenance. If the customer purchases maintenance service from
the plaintiff, that service is included in the lease rate. When
a customer wishes to purchase maintenance service with the lease,
the plaintiff surveys the customer's operation and asks the
customer how many hours it intends to use the equipment. Each
piece of equipment contains an hour meter and if the customer
uses the equipment in excess of the estimated number of hours, it
is charged an hourly overtime charge to compensate for the
additional maintenance required. If a customer does not request
maintenance services from the plaintiff, there is no limit to the
number of hours the customer can use the equipment for the base
rental fee. The transaction tax is collected on the base rental
fee but not on the hourly overtime charges.
Wilkans further testified that, from February 1992 onward,
the plaintiff ordered its equipment from Toyota Motor Credit
Corporation (Toyota). The plaintiff sold the equipment to
Toyota, who was the actual lessor. Toyota billed the customer
the base rate, plus the maintenance fee if applicable, and
forwarded the maintenance fee to the plaintiff. The plaintiff
billed its maintenance customers separately for overtime based on
the hour meter readings done by its maintenance staff. The
plaintiff did not record the maintenance charges under a separate
account in its books and records.
Wilkans testified that the Department audited the plaintiff
around 1984, at which time the plaintiff's leasing arrangements
were the same with respect to the overtime charges, and the
Department found the plaintiff to be in full compliance at that
time. Wilkans was not aware of the Chicago use tax until the
current audit.
The plaintiff submitted into evidence letters from two of
its customers, each of which stated that it understood the hourly
overtime charges were intended to offset additional maintenance
required when the equipment was used in excess of the estimated
number of hours. The plaintiff also submitted rental control
cards for the equipment on which the use tax was assessed. Those
records listed the names and/or locations of the customers to
whom the equipment was rented and the dates of each rental.
Wilkans testified that the cards recorded all rentals of a piece
of equipment from the date that it "came into [plaintiff's]
short-term fleet." Some of the forms contain a date listed at
the top, which Wilkans testified was the date that the piece of
equipment came into the fleet. The plaintiff also submitted a
blank copy of the lease agreement it uses with Toyota. Wilkans
testified that the plaintiff is listed as the lessor on these
leases. The blank lease contained boxes to indicate whether the
lease was or was not a full service maintenance agreement. The
lease also contained a provision, almost identical to the above-
quoted provision, regarding "an hourly overtime rate" and stating
that the lessee "agrees to pay said overtime rental charges
within 10 days from the date of LESSOR'S invoice for such
charges."
The hearing officer issued written recommendations and
findings of fact, recommending that the assessment of the
transaction and use taxes with penalties and interest be affirmed
and that interest continue to accrue on the unpaid balance. On
August 31, 1995, the defendant Ernest R. Wish, Director of the
Department, issued a final determination, adopting the hearing
officer's recommendations. The plaintiff filed a petition
entitled "petition for writ of certiorari and administrative
review" in the circuit court, and the circuit court affirmed the
Department's decision.
The actions of an administrative agency are generally
presumed to be reviewable unless there is a statutory bar to
review or statutory language making the agency's decision a
matter of unreviewable discretion. Hanrahan v. Williams, 174 Ill. 2d 268, 273, 673 N.E.2d 251, 254 (1996). We find no such
bar to review in the instant case. While the Department's
actions are reviewable, the Administrative Review Law does not
apply because it is not expressly adopted by the Chicago
ordinance creating the Department and conferring power upon it.
735 ILCS 5/3-102 (West 1996)); Chicago Municipal Code, Chapter 2-
80 (1997). When the statute creating or conferring power upon an
administrative agency does not expressly adopt the Administrative
Review Law or provide other means of review, then a common law
writ of certiorari is the appropriate method of reviewing the
agency's decision. Smith v. Department of Public Aid, 67 Ill. 2d 529, 540, 367 N.E.2d 1286, 1292-93 (1977). The standards of
review are essentially the same under a writ of certiorari and
the Administrative Review Law. Hanrahan, 174 Ill. 2d at 272.
When reviewing an administrative agency's decision, we are
limited to determining whether the decision is against the
manifest weight of the evidence. Przislicki v. City of Chicago,
212 Ill. App. 3d 661, 668, 571 N.E.2d 762, 767 (1991). We cannot
substitute our judgment for that of the agency, and if the record
contains evidence to support the agency's decision, we must
affirm. Abrahamson v. Illinois Department of Professional
Regulation, 153 Ill. 2d 76, 88, 606 N.E.2d 1111, 1117 (1992). We
review any legal questions presented de novo, and, while an
administrative agency's interpretation of a statute is relevant,
it is not binding on this court. Thomas M. Madden & Co. v.
Department of Revenue, 272 Ill. App. 3d 212, 215, 651 N.E.2d 218,
220 (1995); Branson v. Department of Revenue, 168 Ill. 2d 247,
254, 659 N.E.2d 961, 965 (1995).
We first address the plaintiff's arguments regarding the
assessment of the transaction tax. Section 3-32-030 of the
Chicago Personal Property Lease Transaction Tax Ordinance
(Transaction Tax Ordinance) provides that a 6% tax is imposed on
"(1) the lease or rental in the city of personal property, or (2)
the privilege of using in the city personal property that is
leased or rented outside the city." Chicago Municipal Code, 3-
32-030(A)(B)(1995). Furthermore, the Transaction Tax Ordinance
provides that "[i]t shall be the duty of each lessor to collect
the tax imposed by this chapter from the lessee at the time of
each lease or rental payment, and to remit the tax to the
department." Chicago Municipal Code, 3-32-070(A) (1995).
The plaintiff initially argues that if any transaction tax
is due, Toyota is liable for the tax because it is the actual
lessor of the forklifts. The defendants contend that the
plaintiff waived this issue by failing to raise it at the
administrative hearing or before the trial court. LaSalle
Partners, Inc. v. Illinois Property Tax Appeal Board, 269 Ill.
App. 3d 621, 631, 646 N.E.2d 935, 942 (1995) (an argument not
made at the administrative proceeding is waived); Rispoli v.
Police Board, 188 Ill. App. 3d 622, 634, 544 N.E.2d 1063, 1071
(1989) (argument not raised at administrative review in the trial
court deemed waived). Even if we were to consider the argument,
we would reject it. Wilkans' testified that the plaintiff sells
all of its equipment to Toyota, who is the actual lessor. One of
the plaintiff's exhibits was a blank copy of the lease it uses
with Toyota, on which the plaintiff is listed as the lessor and
Toyota is listed as the assignee of the lease agreement. The
plaintiff did not present any completed leases showing
assignments to Toyota. In addition, the plaintiff testified that
it billed and collected the overtime charges directly. There is
sufficient evidence in the record to support the conclusion that
the plaintiff was liable for the transaction tax.
The plaintiff next contends that the hourly overtime charges
in question are fees charged for maintenance rather than for the
use of the equipment and, therefore, are not subject to the
transaction tax. Section 3-32-020(J) of the Transaction Tax
Ordinance provides that the lease price, which is used to
calculate transaction tax liability,
"shall exclude separately stated charges not for the
use of personal property. If any separately stated
charge is not optional, it shall be presumed unless
proved otherwise that it is part of the charge for the
use of the personal property."
Chicago Municipal Code, 3-32-020(J) (1995). The defendants
concede that the transaction tax does not apply to service
charges, such as those for maintenance, but contend that the
record shows the hourly overtime charges were actually rental
charges.
In support of its claim that the hourly overtime charges
were not rental charges, the plaintiff relies on Wilkans'
testimony that a lessee under a long-term lease has the option of
leasing a forklift with or without maintenance and on the letters
submitted from two of its customers expressing their beliefs that
the hourly overtime charges were for maintenance.
The record, however, also contains two lease agreements,
each of which contain nearly identical provisions regarding the
hourly overtime charges. No mention of maintenance is made in
those provisions, and the hourly overtime charges are referred to
as "overtime rental charges." Based on the evidence, we do not
find the assessment of transaction taxes on the hourly overtime
charges to be against the manifest weight of the evidence.
We next address the plaintiff's contentions regarding its
use tax liability. Section 3-27-030(A) of the Chicago Use Tax
Ordinance for Nontitled Personal Property (Use Tax Ordinance)
provides for the imposition of tax "upon the privilege of using
in the city nontitled tangible personal property which is
purchased at retail on or after January 1, 1992 from a retailer
located outside the city." Chicago Municipal Code, 3-27-030(A)
(1992). The tax imposed is 1% of the selling price of the
personal property in question. Chicago Municipal Code, 3-27-
030(A) (1992).
The plaintiff argues that the defendants' method of
calculating its use tax liability violated its due process rights
under the United States and Illinois constitutions because the
tax as calculated by the Department does not accurately reflect
its activities in the City. The plaintiff claims that, rather
than assessing it 1% of the full purchase price of the equipment,
the Department should have apportioned the taxes to reflect the
percentage of time that the equipment was used inside the city of
Chicago. The defendants argue that the plaintiff has waived this
due process argument because it did not raise it at the
administrative hearing or before the trial court. See Jackson v.
Retirement Board of the Policeman's Annuity and Benefit Fund of
the City of Chicago, 293 Ill. App. 3d 694, 698, 688 N.E.2d 782,
785 (1997); S.W. v. Department of Children and Family Services,
276 Ill. App. 3d 672, 679, 658 N.E.2d 1301, 1307 (1995).
Assuming arguendo that the plaintiff did not waive this
issue, the Department's method of computing the plaintiff's use
tax liability did not violate its due process rights. Due
process requires that there must be a minimum connection between
the taxpayer and the taxing body and that any income attributed
to the taxing body must fairly reflect the taxpayer's activities
in the taxing body's jurisdiction. Quill Corp. North Dakota, 504 U.S. 298, 306, 119 L. Ed. 2d 91, 102, 112 S. Ct. 1904, 1909-10
(1992); Container Corp. of America v. Franchise Tax Board, 463 U.S. 159, 165-66, 77 L. Ed. 2d 545, 553, 103 S. Ct. 2933, 2940
(1983). The plaintiff contends that, while it had sufficient
contacts with Chicago to subject it to the tax, the Department's
failure to apportion the tax to reflect the period of time for
which the equipment was used in Chicago violated the requirement
that the tax fairly reflect the plaintiff's activities in
Chicago.
The tax involved here, though, is not an income based tax
but a tax on the privilege of using property inside the city of
Chicago which is calculated as a percentage of the value of the
property used. In United States v. City of Detroit, 355 U.S. 466, 470, 2 L. Ed. 2d 424, 427, 78 S. Ct. 474, 476 (1958), the
United States Supreme Court held that "[i]n measuring such a use
tax it seems neither irregular nor extravagant to resort to the
value of the property used." In Philco Corp. v. Department of
Revenue, 40 Ill. 2d 312, 239 N.E.2d 805 (1968), two out-of-state
corporations were assessed an Illinois state use tax on property
they leased within the state. The corporations argued that the
tax was " 'inequitable on its face' " because it was based on the
entire value of the leased equipment without regard to how long
it was used in the state. Philco, 40 Ill. 2d at 319. The court
stated that the use tax was a nonrecurrent tax on the privilege
of using the property in the state. Once the tax is paid, the
owner may use the property in the state as often as he wishes.
The court further noted that the record only revealed the period
of time the equipment was used in the state during the audit
period and that it was impossible to determine from the record
how long and how frequently the equipment would be used in the
state in the future. Philco, 40 Ill. 2d at 320.
The use tax assessed against the plaintiff is a tax on the
privilege of using its property within the city of Chicago. Once
the tax is paid, the plaintiff may use the property as frequently
as it wishes within the City, and we cannot determine from the
record how often it will do so. We do not find the City's
refusal to apportion the taxes to reflect the property's out-of-
city use to be a violation of the plaintiff's due process rights.
The plaintiff also argues that the imposition of the use tax
on the full value of the forklifts was contrary to section 3-27-
030(C) of the Use Tax Ordinance, which provides that, if the
nontitled personal property is used outside the city before its
use inside the city:
"the 'selling price' of the property for purposes of
computing the tax imposed by subsection (A) of this
section shall be reduced by an amount which represents
a reasonable allowance for depreciation attributable to
the prior period of out-of-city use."
Chicago Municipal Code, 3-27-030(C) (1992). The plaintiff
contends that its rental records for all of the forklifts
subjected to the use tax establish that it is entitled to the
depreciation allowance for out-of-city use. The hearing officer
viewed these records and made a factual finding that the rental
records were unclear as to the purchase dates, rental dates,
value and depreciation of the equipment. She concluded that the
plaintiff had not met its burden of proof in establishing it was
entitled to the depreciation allowance.
Wilkans testified that the rental records the plaintiff
submitted recorded all rentals which took place from the date
each piece of equipment came into the plaintiff's fleet. This
testimony was unrebutted. The plaintiff submitted rental records
for 43 pieces of equipment. The records establish that some of
these pieces of equipment were first leased to customers in the
city of Chicago. For some other pieces of equipment, it is
unclear whether the equipment was leased outside the city prior
to being leased inside the city because the customers to whom the
equipment was leased are not identified by town. The records do
establish, however, that 12 of the 43 pieces of equipment on
which the use tax was assessed were leased to customers outside
the city of Chicago before being leased to customers in the city,
even if only for a short time. Those pieces of equipment, as
identified by serial number, are as follows: 10133, 10486, 71220,
71248, 72748, 72773, 72779, 74681, 74682, 75000, 76815, and
76846.[fn1] Therefore, we find that the unrebutted evidence
established that the plaintiff was entitled to a reasonable
allowance for depreciation of those pieces of equipment. We,
therefore, reverse the Department's assessment of use taxes, as
well as the corresponding interest and late payment and
negligence penalties, and remand this action to the Department
for a determination of the plaintiff's use tax liability after
granting the plaintiff the reasonable depreciation allowance to
which it is entitled.
We next address the defendant's contention that, even if it
is liable for the taxes assessed, there was no basis for imposing
the late payment and negligence penalties. The Department
assessed the plaintiff a 10% late penalty pursuant to section 3-
4-200 of the Uniform Revenue Procedures Ordinance (Revenue
Ordinance). Chicago Municipal Code, 3-4-200(B) (1997). It also
assessed a 25% penalty, pursuant to section 3-4-220 of the
Revenue Ordinance, for the plaintiff's negligent failure to pay
the taxes. Chicago Municipal Code, 3-4-220 (1997).
The Revenue Ordinance provides that the 10% late penalty
shall be waived if the taxpayer had reasonable cause for its
failure to pay. Chicago Municipal Code, 3-4-200(C) (1997). It
further provides that, if the Director does not promulgate
standards for determining what constitutes reasonable cause, the
criteria of the United States Internal Revenue Service (IRS)
shall apply. Chicago Municipal Code, 3-4-240 (1997).
The IRS "defines reasonable cause as those reasons deemed
administratively acceptable to the Service for justifying the
non-assertion or abatement of applicable penalties against
taxpayers." I.R.M. (20)310(3) (7-27-92). The taxpayer generally
bears the burden of proof in establishing that he had reasonable
cause for his failure to pay certain taxes. I.R.M. (20)331(1)
(7-27-92). Reasonable cause will generally be found to exist
where the taxpayer exercised ordinary business care and prudence
but, due to circumstances beyond his control, was unable to pay
the taxes in a timely manner. I.R.M. (20)331(6) (7-27-92).
The plaintiff claims that it had reasonable cause for its
failure to pay the transaction taxes because it had previously
been audited and had not been assessed this tax on the hourly
overtime charges. Except for Wilkans' statement to that effect,
the plaintiff offered no evidence of the previous audit.
Therefore, we find that the assessment of late payment and
negligence penalties upon the transaction taxes was not against
the manifest weight of the evidence, and we affirm the assessment
of those penalties.
Although we have reversed the late payment and negligence
penalties imposed upon the unpaid use taxes, we will address the
plaintiff's arguments regarding these penalties because the
penalties may be imposed again on remand. The plaintiff claims
it had reasonable cause for its failure to pay the use tax
because it was unaware the tax existed prior to the audit. The
Internal Revenue Manual provides that ordinary business care and
prudence require a taxpayer to be aware of his tax obligations
and that reasonable cause will not be presumed where a taxpayer
claims ignorance of the law. I.R.M. (20)333.5(1)(3) (7-27-92).
It further provides that ignorance of the law, when combined with
other circumstances such as limited education or a lack of
previous tax and penalty experience, can support a finding of
reasonable cause. I.R.M. (20)333.5(1) (7-27-92). Reasonable
cause may also be established where the taxpayer's failure to pay
results from a recent change in the tax laws of which it could
not be reasonably expected to know. I.R.M. (20)333.5(2) (7-27-
92).
The plaintiff did not offer any evidence which established
that it should not have reasonably been expected to know that the
use tax became effective in January 1992. Nor is there any
evidence of a lack of previous tax experience or other
circumstance which would support a finding of reasonable cause in
this case.
Accordingly, we affirm the trial court's ruling with respect
to the plaintiff's transaction tax liability and the late payment
and negligence penalties imposed thereon; reverse the assessment
of use taxes against the plaintiff, along with the late payment
and negligence penalties imposed thereon; and remand this action
to the Department for a determination of the plaintiff's use tax
liability and penalties, if any, after a reasonable depreciation
allowance for the stated pieces of equipment.
Affirmed in part, reversed in part, and remanded.
HARTMAN and THEIS, JJ., concurring.
[fn1]While the rental records establish that the pieces of
equipment with the serial numbers 21604, 71093 and 76762 were
also leased outside the city before being leased in the city,
those pieces are not listed on the summary of assets on which the
use tax was apparently assessed.
FILED: 6/5/98
No. 1-97-2774
FIRST ACCESS MATERIAL HANDLING, ) Appeal from the
) Circuit Court of
Plaintiff-Appellant, ) Cook County.
)
v. )
) No. 95 L 50864
ERNEST R. WISH, Director, City of )
Chicago Department of Revenue, )
and the CITY OF CHICAGO DEPARTMENT OF )
REVENUE, ) Honorable
) Joanne L. Lanigan
Defendants-Appellees. ) Judge Presiding.
PRESIDING JUSTICE HOFFMAN delivered the opinion of the court:
The plaintiff, First Access Material Handling, appeals the
circuit court's order which affirmed the City of Chicago
Department of Revenue's (Department) assessment of taxes and
penalties against the plaintiff.
The plaintiff is a corporation engaged in the business of
leasing material handling equipment, primarily forklifts. While
all of its offices are located outside the city of Chicago, the
plaintiff leases forklifts to lessees in Chicago. Following an
audit, the Department assessed the plaintiff personal property
lease transaction taxes, use taxes for nontitled personal
property, interest on the overdue taxes, and late payment and
negligence penalties. As of July 31, 1995, the taxes, penalties
and interest due totalled $80,702.02.
On April 29, 1994, the plaintiff filed a protest and a
petition for a hearing. The plaintiff claimed that the
Department had improperly assessed lease transaction taxes on
hourly overtime charges which, it alleged, were not rental
charges but charges for maintenance. The plaintiff also claimed
that the Department had improperly used the full value of each
piece of equipment in calculating the amount of use tax due
rather than apportioning the tax to take into account the period
of time in which the equipment was actually used in Chicago. The
plaintiff maintained that, even if the taxes were properly
assessed, there was no basis to impose any penalties because it
reasonably believed it did not owe the taxes.
An administrative hearing before one of the Department's
hearing officers was conducted on April 11, 1995. Section 3-4-
340(H) of the Uniform Revenue Procedures Ordinance (Revenue
Ordinance) provides that, at such an evidentiary hearing:
"the tax determination and assessment and the
assessment of any nontax debt shall be prima facie
correct and the protesting party shall have the burden
of proving with books, records and other documentary
evidence that it is incorrect."
Chicago Municipal Code, 3-4-340(H) (1997).
Mark Bunetta, the Department revenue auditor who audited the
plaintiff, testified that he reviewed the plaintiff's general
ledgers, rental and sales invoices, and lease agreements.
Bunetta assessed the plaintiff $7,060.56 in use tax for nontitled
personal property (use tax) for the period of January 1992
through June 1993. He determined the plaintiff's use tax
liability by computing 1% of the purchase price of all equipment
used in Chicago during the audit period and on which, according
to the invoices, no sales tax had previously been paid. Bunetta
did not take into consideration the fact that the equipment was
used both inside and outside Chicago. Bunetta also assessed the
plaintiff interest, late payment penalties, and negligence
penalties on the unpaid use tax.
In addition to the use tax, Bunetta assessed the plaintiff
$33,486.94 in personal property lease transaction tax
(transaction tax) for the period January 1989 through November
1993, plus interest, late payment penalties, and negligence
penalties. Bunetta assessed the transaction tax because the
plaintiff had failed to self-assess and remit the transaction tax
due on overtime hourly rental charges it collected from its
customers. These overtime rental charges were recorded under the
rental revenue account in the plaintiff's general ledger and were
listed as long-term rental overtime charges on the plaintiff's
invoices. In the plaintiff's lease agreements with its
customers, the overtime charges were characterized as hourly
rental overtime charges for equipment used in excess of a
specified number of hours.
Bunetta's audit file, which was admitted into evidence,
contained a copy of an executed lease agreement between the
plaintiff, under its former name of ClarkLift of Chicago South,
Inc., and one of its customers. That lease, executed February
25, 1988, contained the following provision regarding hourly
overtime charges:
"13. OVERTIME CHARGE.
The hourly overtime charge provided in Section 12 shall
apply to each hour of use of any unit of equipment in
excess of 500/250 hours in any calendar quarter as
determined by the Hobbs Hour Meter or other mechanical
device used to record hours of use supplied with each
unit (herein called "hour meter"). *** LESSEE agrees
to pay said overtime rental charges within ten (10)
days from the date of LESSOR'S invoices therefor."
The plaintiff's treasurer, Al Wilkans, testified on the
plaintiff's behalf. According to Wilkans, a customer entering
into a long-term lease with the plaintiff has the option of
purchasing maintenance from the plaintiff or providing its own
maintenance. If the customer purchases maintenance service from
the plaintiff, that service is included in the lease rate. When
a customer wishes to purchase maintenance service with the lease,
the plaintiff surveys the customer's operation and asks the
customer how many hours it intends to use the equipment. Each
piece of equipment contains an hour meter and if the customer
uses the equipment in excess of the estimated number of hours, it
is charged an hourly overtime charge to compensate for the
additional maintenance required. If a customer does not request
maintenance services from the plaintiff, there is no limit to the
number of hours the customer can use the equipment for the base
rental fee. The transaction tax is collected on the base rental
fee but not on the hourly overtime charges.
Wilkans further testified that, from February 1992 onward,
the plaintiff ordered its equipment from Toyota Motor Credit
Corporation (Toyota). The plaintiff sold the equipment to
Toyota, who was the actual lessor. Toyota billed the customer
the base rate, plus the maintenance fee if applicable, and
forwarded the maintenance fee to the plaintiff. The plaintiff
billed its maintenance customers separately for overtime based on
the hour meter readings done by its maintenance staff. The
plaintiff did not record the maintenance charges under a separate
account in its books and records.
Wilkans testified that the Department audited the plaintiff
around 1984, at which time the plaintiff's leasing arrangements
were the same with respect to the overtime charges, and the
Department found the plaintiff to be in full compliance at that
time. Wilkans was not aware of the Chicago use tax until the
current audit.
The plaintiff submitted into evidence letters from two of
its customers, each of which stated that it understood the hourly
overtime charges were intended to offset additional maintenance
required when the equipment was used in excess of the estimated
number of hours. The plaintiff also submitted rental control
cards for the equipment on which the use tax was assessed. Those
records listed the names and/or locations of the customers to
whom the equipment was rented and the dates of each rental.
Wilkans testified that the cards recorded all rentals of a piece
of equipment from the date that it "came into [plaintiff's]
short-term fleet." Some of the forms contain a date listed at
the top, which Wilkans testified was the date that the piece of
equipment came into the fleet. The plaintiff also submitted a
blank copy of the lease agreement it uses with Toyota. Wilkans
testified that the plaintiff is listed as the lessor on these
leases. The blank lease contained boxes to indicate whether the
lease was or was not a full service maintenance agreement. The
lease also contained a provision, almost identical to the above-
quoted provision, regarding "an hourly overtime rate" and stating
that the lessee "agrees to pay said overtime rental charges
within 10 days from the date of LESSOR'S invoice for such
charges."
The hearing officer issued written recommendations and
findings of fact, recommending that the assessment of the
transaction and use taxes with penalties and interest be affirmed
and that interest continue to accrue on the unpaid balance. On
August 31, 1995, the defendant Ernest R. Wish, Director of the
Department, issued a final determination, adopting the hearing
officer's recommendations. The plaintiff filed a petition
entitled "petition for writ of certiorari and administrative
review" in the circuit court, and the circuit court affirmed the
Department's decision.
The actions of an administrative agency are generally
presumed to be reviewable unless there is a statutory bar to
review or statutory language making the agency's decision a
matter of unreviewable discretion. Hanrahan v. Williams, 174 Ill. 2d 268, 273, 673 N.E.2d 251, 254 (1996). We find no such
bar to review in the instant case. While the Department's
actions are reviewable, the Administrative Review Law does not
apply because it is not expressly adopted by the Chicago
ordinance creating the Department and conferring power upon it.
735 ILCS 5/3-102 (West 1996)); Chicago Municipal Code, Chapter 2-
80 (1997). When the statute creating or conferring power upon an
administrative agency does not expressly adopt the Administrative
Review Law or provide other means of review, then a common law
writ of certiorari is the appropriate method of reviewing the
agency's decision. Smith v. Department of Public Aid, 67 Ill. 2d 529, 540, 367 N.E.2d 1286, 1292-93 (1977). The standards of
review are essentially the same under a writ of certiorari and
the Administrative Review Law. Hanrahan, 174 Ill. 2d at 272.
When reviewing an administrative agency's decision, we are
limited to determining whether the decision is against the
manifest weight of the evidence. Przislicki v. City of Chicago,
212 Ill. App. 3d 661, 668, 571 N.E.2d 762, 767 (1991). We cannot
substitute our judgment for that of the agency, and if the record
contains evidence to support the agency's decision, we must
affirm. Abrahamson v. Illinois Department of Professional
Regulation, 153 Ill. 2d 76, 88, 606 N.E.2d 1111, 1117 (1992). We
review any legal questions presented de novo, and, while an
administrative agency's interpretation of a statute is relevant,
it is not binding on this court. Thomas M. Madden & Co. v.
Department of Revenue, 272 Ill. App. 3d 212, 215, 651 N.E.2d 218,
220 (1995); Branson v. Department of Revenue, 168 Ill. 2d 247,
254, 659 N.E.2d 961, 965 (1995).
We first address the plaintiff's arguments regarding the
assessment of the transaction tax. Section 3-32-030 of the
Chicago Personal Property Lease Transaction Tax Ordinance
(Transaction Tax Ordinance) provides that a 6% tax is imposed on
"(1) the lease or rental in the city of personal property, or (2)
the privilege of using in the city personal property that is
leased or rented outside the city." Chicago Municipal Code, 3-
32-030(A)(B)(1995). Furthermore, the Transaction Tax Ordinance
provides that "[i]t shall be the duty of each lessor to collect
the tax imposed by this chapter from the lessee at the time of
each lease or rental payment, and to remit the tax to the
department." Chicago Municipal Code, 3-32-070(A) (1995).
The plaintiff initially argues that if any transaction tax
is due, Toyota is liable for the tax because it is the actual
lessor of the forklifts. The defendants contend that the
plaintiff waived this issue by failing to raise it at the
administrative hearing or before the trial court. LaSalle
Partners, Inc. v. Illinois Property Tax Appeal Board, 269 Ill.
App. 3d 621, 631, 646 N.E.2d 935, 942 (1995) (an argument not
made at the administrative proceeding is waived); Rispoli v.
Police Board, 188 Ill. App. 3d 622, 634, 544 N.E.2d 1063, 1071
(1989) (argument not raised at administrative review in the trial
court deemed waived). Even if we were to consider the argument,
we would reject it. Wilkans' testified that the plaintiff sells
all of its equipment to Toyota, who is the actual lessor. One of
the plaintiff's exhibits was a blank copy of the lease it uses
with Toyota, on which the plaintiff is listed as the lessor and
Toyota is listed as the assignee of the lease agreement. The
plaintiff did not present any completed leases showing
assignments to Toyota. In addition, the plaintiff testified that
it billed and collected the overtime charges directly. There is
sufficient evidence in the record to support the conclusion that
the plaintiff was liable for the transaction tax.
The plaintiff next contends that the hourly overtime charges
in question are fees charged for maintenance rather than for the
use of the equipment and, therefore, are not subject to the
transaction tax. Section 3-32-020(J) of the Transaction Tax
Ordinance provides that the lease price, which is used to
calculate transaction tax liability,
"shall exclude separately stated charges not for the
use of personal property. If any separately stated
charge is not optional, it shall be presumed unless
proved otherwise that it is part of the charge for the
use of the personal property."
Chicago Municipal Code, 3-32-020(J) (1995). The defendants
concede that the transaction tax does not apply to service
charges, such as those for maintenance, but contend that the
record shows the hourly overtime charges were actually rental
charges.
In support of its claim that the hourly overtime charges
were not rental charges, the plaintiff relies on Wilkans'
testimony that a lessee under a long-term lease has the option of
leasing a forklift with or without maintenance and on the letters
submitted from two of its customers expressing their beliefs that
the hourly overtime charges were for maintenance.
The record, however, also contains two lease agreements,
each of which contain nearly identical provisions regarding the
hourly overtime charges. No mention of maintenance is made in
those provisions, and the hourly overtime charges are referred to
as "overtime rental charges." Based on the evidence, we do not
find the assessment of transaction taxes on the hourly overtime
charges to be against the manifest weight of the evidence.
We next address the plaintiff's contentions regarding its
use tax liability. Section 3-27-030(A) of the Chicago Use Tax
Ordinance for Nontitled Personal Property (Use Tax Ordinance)
provides for the imposition of tax "upon the privilege of using
in the city nontitled tangible personal property which is
purchased at retail on or after January 1, 1992 from a retailer
located outside the city." Chicago Municipal Code, 3-27-030(A)
(1992). The tax imposed is 1% of the selling price of the
personal property in question. Chicago Municipal Code, 3-27-
030(A) (1992).
The plaintiff argues that the defendants' method of
calculating its use tax liability violated its due process rights
under the United States and Illinois constitutions because the
tax as calculated by the Department does not accurately reflect
its activities in the City. The plaintiff claims that, rather
than assessing it 1% of the full purchase price of the equipment,
the Department should have apportioned the taxes to reflect the
percentage of time that the equipment was used inside the city of
Chicago. The defendants argue that the plaintiff has waived this
due process argument because it did not raise it at the
administrative hearing or before the trial court. See Jackson v.
Retirement Board of the Policeman's Annuity and Benefit Fund of
the City of Chicago, 293 Ill. App. 3d 694, 698, 688 N.E.2d 782,
785 (1997); S.W. v. Department of Children and Family Services,
276 Ill. App. 3d 672, 679, 658 N.E.2d 1301, 1307 (1995).
Assuming arguendo that the plaintiff did not waive this
issue, the Department's method of computing the plaintiff's use
tax liability did not violate its due process rights. Due
process requires that there must be a minimum connection between
the taxpayer and the taxing body and that any income attributed
to the taxing body must fairly reflect the taxpayer's activities
in the taxing body's jurisdiction. Quill Corp. North Dakota, 504 U.S. 298, 306, 119 L. Ed. 2d 91, 102, 112 S. Ct. 1904, 1909-10
(1992); Container Corp. of America v. Franchise Tax Board, 463 U.S. 159, 165-66, 77 L. Ed. 2d 545, 553, 103 S. Ct. 2933, 2940
(1983). The plaintiff contends that, while it had sufficient
contacts with Chicago to subject it to the tax, the Department's
failure to apportion the tax to reflect the period of time for
which the equipment was used in Chicago violated the requirement
that the tax fairly reflect the plaintiff's activities in
Chicago.
The tax involved here, though, is not an income based tax
but a tax on the privilege of using property inside the city of
Chicago which is calculated as a percentage of the value of the
property used. In United States v. City of Detroit, 355 U.S. 466, 470, 2 L. Ed. 2d 424, 427, 78 S. Ct. 474, 476 (1958), the
United States Supreme Court held that "[i]n measuring such a use
tax it seems neither irregular nor extravagant to resort to the
value of the property used." In Philco Corp. v. Department of
Revenue, 40 Ill. 2d 312, 239 N.E.2d 805 (1968), two out-of-state
corporations were assessed an Illinois state use tax on property
they leased within the state. The corporations argued that the
tax was " 'inequitable on its face' " because it was based on the
entire value of the leased equipment without regard to how long
it was used in the state. Philco, 40 Ill. 2d at 319. The court
stated that the use tax was a nonrecurrent tax on the privilege
of using the property in the state. Once the tax is paid, the
owner may use the property in the state as often as he wishes.
The court further noted that the record only revealed the period
of time the equipment was used in the state during the audit
period and that it was impossible to determine from the record
how long and how frequently the equipment would be used in the
state in the future. Philco, 40 Ill. 2d at 320.
The use tax assessed against the plaintiff is a tax on the
privilege of using its property within the city of Chicago. Once
the tax is paid, the plaintiff may use the property as frequently
as it wishes within the City, and we cannot determine from the
record how often it will do so. We do not find the City's
refusal to apportion the taxes to reflect the property's out-of-
city use to be a violation of the plaintiff's due process rights.
The plaintiff also argues that the imposition of the use tax
on the full value of the forklifts was contrary to section 3-27-
030(C) of the Use Tax Ordinance, which provides that, if the
nontitled personal property is used outside the city before its
use inside the city:
"the 'selling price' of the property for purposes of
computing the tax imposed by subsection (A) of this
section shall be reduced by an amount which represents
a reasonable allowance for depreciation attributable to
the prior period of out-of-city use."
Chicago Municipal Code, 3-27-030(C) (1992). The plaintiff
contends that its rental records for all of the forklifts
subjected to the use tax establish that it is entitled to the
depreciation allowance for out-of-city use. The hearing officer
viewed these records and made a factual finding that the rental
records were unclear as to the purchase dates, rental dates,
value and depreciation of the equipment. She concluded that the
plaintiff had not met its burden of proof in establishing it was
entitled to the depreciation allowance.
Wilkans testified that the rental records the plaintiff
submitted recorded all rentals which took place from the date
each piece of equipment came into the plaintiff's fleet. This
testimony was unrebutted. The plaintiff submitted rental records
for 43 pieces of equipment. The records establish that some of
these pieces of equipment were first leased to customers in the
city of Chicago. For some other pieces of equipment, it is
unclear whether the equipment was leased outside the city prior
to being leased inside the city because the customers to whom the
equipment was leased are not identified by town. The records do
establish, however, that 12 of the 43 pieces of equipment on
which the use tax was assessed were leased to customers outside
the city of Chicago before being leased to customers in the city,
even if only for a short time. Those pieces of equipment, as
identified by serial number, are as follows: 10133, 10486, 71220,
71248, 72748, 72773, 72779, 74681, 74682, 75000, 76815, and
76846.[fn1] Therefore, we find that the unrebutted evidence
established that the plaintiff was entitled to a reasonable
allowance for depreciation of those pieces of equipment. We,
therefore, reverse the Department's assessment of use taxes, as
well as the corresponding interest and late payment and
negligence penalties, and remand this action to the Department
for a determination of the plaintiff's use tax liability after
granting the plaintiff the reasonable depreciation allowance to
which it is entitled.
We next address the defendant's contention that, even if it
is liable for the taxes assessed, there was no basis for imposing
the late payment and negligence penalties. The Department
assessed the plaintiff a 10% late penalty pursuant to section 3-
4-200 of the Uniform Revenue Procedures Ordinance (Revenue
Ordinance). Chicago Municipal Code, 3-4-200(B) (1997). It also
assessed a 25% penalty, pursuant to section 3-4-220 of the
Revenue Ordinance, for the plaintiff's negligent failure to pay
the taxes. Chicago Municipal Code, 3-4-220 (1997).
The Revenue Ordinance provides that the 10% late penalty
shall be waived if the taxpayer had reasonable cause for its
failure to pay. Chicago Municipal Code, 3-4-200(C) (1997). It
further provides that, if the Director does not promulgate
standards for determining what constitutes reasonable cause, the
criteria of the United States Internal Revenue Service (IRS)
shall apply. Chicago Municipal Code, 3-4-240 (1997).
The IRS "defines reasonable cause as those reasons deemed
administratively acceptable to the Service for justifying the
non-assertion or abatement of applicable penalties against
taxpayers." I.R.M. (20)310(3) (7-27-92). The taxpayer generally
bears the burden of proof in establishing that he had reasonable
cause for his failure to pay certain taxes. I.R.M. (20)331(1)
(7-27-92). Reasonable cause will generally be found to exist
where the taxpayer exercised ordinary business care and prudence
but, due to circumstances beyond his control, was unable to pay
the taxes in a timely manner. I.R.M. (20)331(6) (7-27-92).
The plaintiff claims that it had reasonable cause for its
failure to pay the transaction taxes because it had previously
been audited and had not been assessed this tax on the hourly
overtime charges. Except for Wilkans' statement to that effect,
the plaintiff offered no evidence of the previous audit.
Therefore, we find that the assessment of late payment and
negligence penalties upon the transaction taxes was not against
the manifest weight of the evidence, and we affirm the assessment
of those penalties.
Although we have reversed the late payment and negligence
penalties imposed upon the unpaid use taxes, we will address the
plaintiff's arguments regarding these penalties because the
penalties may be imposed again on remand. The plaintiff claims
it had reasonable cause for its failure to pay the use tax
because it was unaware the tax existed prior to the audit. The
Internal Revenue Manual provides that ordinary business care and
prudence require a taxpayer to be aware of his tax obligations
and that reasonable cause will not be presumed where a taxpayer
claims ignorance of the law. I.R.M. (20)333.5(1)(3) (7-27-92).
It further provides that ignorance of the law, when combined with
other circumstances such as limited education or a lack of
previous tax and penalty experience, can support a finding of
reasonable cause. I.R.M. (20)333.5(1) (7-27-92). Reasonable
cause may also be established where the taxpayer's failure to pay
results from a recent change in the tax laws of which it could
not be reasonably expected to know. I.R.M. (20)333.5(2) (7-27-
92).
The plaintiff did not offer any evidence which established
that it should not have reasonably been expected to know that the
use tax became effective in January 1992. Nor is there any
evidence of a lack of previous tax experience or other
circumstance which would support a finding of reasonable cause in
this case.
Accordingly, we affirm the trial court's ruling with respect
to the plaintiff's transaction tax liability and the late payment
and negligence penalties imposed thereon; reverse the assessment
of use taxes against the plaintiff, along with the late payment
and negligence penalties imposed thereon; and remand this action
to the Department for a determination of the plaintiff's use tax
liability and penalties, if any, after a reasonable depreciation
allowance for the stated pieces of equipment.
Affirmed in part, reversed in part, and remanded.
HARTMAN and THEIS, JJ., concurring.
[fn1]While the rental records establish that the pieces of
equipment with the serial numbers 21604, 71093 and 76762 were
also leased outside the city before being leased in the city,
those pieces are not listed on the summary of assets on which the
use tax was apparently assessed.
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