H.D., Ltd. v. Dept. of Revenue

No. 2--97--0478
_________________________________________________________________

IN THE

APPELLATE COURT OF ILLINOIS

SECOND DISTRICT
_________________________________________________________________

H.D., LTD., ) Appeal from the Circuit Court
) of Lake County.
Plaintiff-Appellant, )
)
v. ) No. 96--MR--28
)
THE DEPARTMENT OF REVENUE, ) Honorable
) Charles F. Scott,
Defendant-Appellee. ) Judge, Presiding.
_________________________________________________________________

JUSTICE DOYLE delivered the opinion of the court:
Plaintiff, H.D., Ltd., appeals from an order of the circuit
court of Lake County in an administrative review action. The order
affirmed a decision of the Illinois Department of Revenue
(Department) that plaintiff owed Retailer s Occupation Tax (ROT)
deficiencies and entered judgment assessing plaintiff $65,854.66
for ROT deficiencies, interest, and penalties.
Plaintiff raises the following issues on appeal: (1) whether
the circuit court erred when it denied plaintiff's motion for a
default judgment and allowed the Department to enter its appearance
and file its answer after the statutorily required time for doing
so had expired; and (2) whether the Department s decision that
plaintiff owed ROT deficiencies was against the manifest weight of
the evidence and contrary to law because the Department erred when
it determined that the ROT applied to plaintiff s activities.
The Department conducted an audit of plaintiff's ROT payments
for the period from July 1988 through June 1992. Based on the
audit, the Department issued a notice of tax liability assessing
$122,380 against plaintiff for tax deficiencies, interest, and
penalties.
Plaintiff protested the notice of tax liability, and the
Department conducted a hearing on the matter. At the hearing, the
parties made three stipulations. The parties first stipulated to
the amounts of plaintiff's purchases of goods for retail sales for
each of the periods in question. The parties next stipulated to a
total amount for unreported receipts by plaintiff during the audit
period and the calculation and categorization of these unreported
receipts on a monthly basis as either retail sales or some other
category. Finally, the parties stipulated that the amounts shown
on certain schedules were correct allocations of plaintiff's total
gross sales and that these amounts would be adjusted to account for
unreported income.
The Department then presented its prima facie case. The
Department's prima facie case consisted of a six-page document
entitled Correction and/or Determination of Tax Due showing the
amount of tax deficiencies and penalties that plaintiff allegedly
owed for the audit period.
At the hearing, Karen Tennill, a Department auditor who
conducted the audit of plaintiff's ROT payments, and Tennill's
supervisor, John Cooper, testified for the Department. Tennill was
also called by plaintiff to testify.
In summary, the pertinent testimony of Cooper and Tennill was
as follows: the audit was based on plaintiff s sales invoices that
were provided to Tennill by plaintiff's bookkeeper and accountant;
the invoices showed that plaintiff was engaged in various
activities including exterior landscaping, the rental of plants,
and the sale of plants and related materials for indoor use by
purchasers; the tax deficiencies calculated by the Department
involved only the portion of plaintiff's business relating to the
sale of plants and related material for indoor use by the
purchasers; plaintiff's invoices for these sales generally showed
a single rate for the sale, i.e., the invoices did not separate out
things such as maintenance or service agreements; if a sales
invoice did show a separate maintenance agreement, the Department
determined that the ROT did not apply to that part of the invoice;
an audit narrative completed by Tennill showed that plaintiff
claimed to be a serviceman ; however, the narrative also showed
that plaintiff reported sales shown on the invoices as subject to
the ROT; and the Department levied penalties for fraud against
plaintiff because one of plaintiff's attorneys submitted an altered
set of invoices that attempted to specify the cost of goods sold on
the invoices.
Fritz Peltonen testified for plaintiff. Peltonen's testimony
included the following: he is a space and occupancy planner
currently employed by Citibank; he has purchased goods and services
for indoor use from plaintiff for about 10 years; when making these
purchases from plaintiff, he relies on plaintiff to design,
install, and maintain plant arrangements in various spaces inside
buildings owned or occupied by Citibank; he uses plaintiff to do
this primarily for the service plaintiff provides; the services
provided by plaintiff include regularly watering and inspecting the
plants in the arrangements and replacing plants if necessary.
Jon Crim also testified for plaintiff. Crim's testimony
included the following: he is plaintiff's president and sole stock
owner; he considers himself to be an interior and exterior
landscape contractor; at one time, plaintiff paid taxes on the
entire invoice amount for its indoor landscaping activities, but,
on the advice of an accountant, plaintiff later began to pay taxes
only on the cost price of the goods it sold when engaged in these
activities; with respect to the sales of interior plant
arrangements, plaintiff designs, delivers, and installs the plants
and then services and maintains the plants; Crim believes that
customers who hire plaintiff for indoor landscaping activities do
so primarily for the services plaintiff provides because, if the
customers just wanted plants, they could purchase them cheaper
elsewhere; plaintiff did not intend to deceive the Department by
adding the cost of goods to its invoices; and the altered invoices
were intended only to clarify what plaintiff was doing.
Following the hearing, the administrative law judge who
conducted the hearing issued a recommended disposition. The
recommended disposition stated that the first issue to be decided
was whether plaintiff, when it was engaging in indoor landscaping
activities, was engaged in retail sales and therefore was subject
to the ROT or whether plaintiff was engaged in a service occupation
and therefore was subject to the Service Occupation Tax (SOT)
rather than the ROT. A second issue identified by the
administrative law judge was whether the Department erred when it
imposed fraud penalties on plaintiff. The recommended disposition
resolved these issues by determining that the Department correctly
decided that plaintiff was subject to the ROT but that the
Department erred when it imposed fraud penalties on plaintiff.
The Department subsequently accepted the administrative law
judge's recommended disposition, and it became the Department's
final administrative decision. On December 12, 1995, the
Department issued a final assessment against plaintiff indicating
that plaintiff owed a total of $107,665.99 in tax delinquencies,
penalties, and interest. The Department subsequently issued a
corrected final assessment with the same effective date. The
corrected final assessment showed that plaintiff owed a total of
$61,857 in tax delinquencies, penalties, and interest through
December 12, 1995.
Plaintiff filed its complaint for administrative review on
January 16, 1996. On March 26, 1997, the circuit court issued a
ruling on the matter. In its remarks, the court noted that the
Department based its decision on plaintiff's invoices. Where
services were indicated on the invoices the Department determined
that they would be subject to the SOT, but where services were not
specified on the invoices the Department determined that the
amounts shown were subject to the ROT.
The court noted that plaintiff claimed that it was a service-
oriented business and therefore not subject to the ROT. However,
the court concluded that plaintiff's invoices showing that there
was a retail component to plaintiff's business were undisputed and
the Department correctly had determined that the invoices showing
such retail sales that did not specify separate service charges
were subject to the ROT for the entire amount shown on the invoice.
In a written order entered on the same day as the hearing,
March 26, 1997, the court found that the Department's decision was
neither against the manifest weight of the evidence nor contrary to
law. The order entered judgment against plaintiff in the amount of
$61,857 and noted that interest had continued to accrue.
On April 23, 1997, the circuit court entered an amended
judgment order. The amended order entered judgment against
plaintiff in the amount of $65,854.66 for tax deficiencies,
penalties, and interest through March 26, 1997. The order stated
that it was nunc pro tunc to March 26, 1997. On April 24, 1997,
plaintiff filed its notice of appeal.
The first issue that plaintiff raises on appeal is whether the
trial court erred when it permitted defendant to enter its
appearance and file its answer more than five months after summons
was served on defendant. Plaintiff caused summons to be served on
defendant on January 16, 1996, the same day that plaintiff filed
its complaint. On April 15, 1996, after defendant had neither
appeared nor filed an answer, plaintiff moved for a default
judgment against defendant. On June 11, 1996, the trial court
entered an order that gave defendant 21 days to file an appearance
or otherwise plead. On June 20, 1996, the Illinois Attorney
General entered defendant's appearance. On June 21, 1996, the
administrative record was filed as defendant's answer.
Plaintiff contends that the Administrative Review Law (Review
Law) (735 ILCS 5/3--101 et seq. (West 1992)) in conjunction with
Supreme Court Rule 291 (134 Ill. 2d R. 291) required defendant to
answer or otherwise appear no later than 35 days after it was
served with summons. Plaintiff asserts that the trial court did
not have the authority to extend the time for plaintiff to answer
or appear beyond 35 days. Plaintiff argues that the trial court's
order allowing defendant to appear and answer more than 35 days
after the summons was served on defendant was therefore erroneous.
Plaintiff correctly notes that the Review Law mandates that
[e]very appearance shall be filed within the time fixed by rule of
the Supreme Court. 735 ILCS 5/3--106 (West 1996). Plaintiff also
correctly notes that Supreme Court Rule 291(c) requires appearances
in administrative review proceedings not later than 35 days after
the date the summons bears. 134 Ill. 2d R. 291(c). However,
plaintiff fails to note that Rule 291 also provides that other
supreme court rules, including Rule 183, shall apply to
administrative review proceedings. Supreme Court Rule 183 provides
that [t]his court, for good cause shown on motion after notice to
the opposite party, may extend the time for filing any pleading or
the doing of any act which is required by the rules to be done
within a limited period, either before or after the expiration of
the time. 134 Ill. 2d R. 183.
Thus, contrary to plaintiff's assertions, the Review Law,
through the supreme court rules it references, plainly gives a
circuit court the power to extend the time for filing an appearance
or answer. Moreover, a decision regarding such an extension rests
within the trial court's discretion, and a reviewing court will not
reverse the trial court's decision absent an abuse of that
discretion. Straub v. Zollar, 278 Ill. App. 3d 556, 563 (1996).
In this case, plaintiff does not contend that the trial court
abused its discretion when it decided to extend the time for
defendant to file an appearance. Rather, plaintiff contends that
the trial court did not have the power to grant such an extension.
A default judgment is a drastic measure that should not be
encouraged and should be employed with great caution only as a last
resort. Biscan v. Village of Melrose Park Board of Fire & Police
Commissioners, 277 Ill. App. 3d 844, 848 (1996). The overriding
consideration in deciding whether to enter or vacate a default
judgment is the achievement of substantial justice. Biscan, 277
Ill. App. 3d at 848. Reversing the ruling of an administrative
agency without any review by allowing a motion for a default
judgment generally does not achieve substantial justice. Biscan,
277 Ill. App. 3d at 848.
Here, plaintiff has not shown that the trial court abused its
discretion when it denied plaintiff's motion for a default
judgment. Absent such a showing, substantial justice would not be
achieved by reversing the trial court's decision to deny the
motion. Accordingly, plaintiff's contention that the trial court
committed reversible error when it denied plaintiff's motion for
default judgment fails.
Plaintiff next contends that the Department's decision that
plaintiff owed ROT deficiencies for its interior landscaping
activities was erroneous because when it was engaged in those
activities plaintiff was subject to an SOT under the Service
Occupation Tax Act (SOT Act) (35 ILCS 115/1 et seq. (West 1992))
rather than an ROT under the Retailers' Occupation Tax Act (ROT
Act) (35 ILCS 120/1 et seq. (West 1992)). In support of its
position, plaintiff asserts that when it engaged in interior
landscaping activities it was a serviceman engaged in a service
occupation. Plaintiff maintains that it has established that it
was engaged in a service occupation by showing that it primarily
provided services to its interior landscaping clients and that any
related sales of tangible personal property to these clients were
incidental to the services it provided.
We first note the standard of review for this administrative
review proceeding. Section 12 of the ROT Act provides that
judicial review of the Department's decisions regarding the ROT be
in accordance with the Review Law. 35 ILCS 120/12 (West 1992).
The Review Law provides that our review extends to all questions of
law and fact presented by the entire record. Under the Review Law,
our review is limited to the record before us; we may not hear new
or additional evidence. The Review Law mandates that the findings
and conclusions of the administrative agency on questions of fact
shall be held to be prima facie true and correct. 735 ILCS 5/3--
110 (West 1996).
A court's function in administrative review proceedings is to
ascertain whether the findings and decisions of the agency are
against the manifest weight of the evidence. An administrative
decision is against the manifest weight of the evidence only if the
opposite conclusion is clearly evident. The mere fact that an
opposite conclusion is reasonable or that the reviewing court might
have ruled differently does not justify reversal of the
administrative findings. If the record contains evidence to
support the agency's decision, the reviewing court should affirm
the decision. Abrahamson v. Illinois Department of Professional
Regulation, 153 Ill. 2d 76, 88 (1992).
The ROT Act imposes a tax (the ROT) on persons, including
public or private corporations, engaged in the occupation of
selling tangible personal property at retail. See 35 ILCS 120/2
(West 1992). The ROT Act defines a sale at retail as any transfer
of the ownership of or title to tangible personal property to a
purchaser, for the purpose of use or consumption, and not for the
purpose of resale. 35 ILCS 120/1 (West 1992). Although the ROT
is imposed on the occupation, it is calculated on the taxpayer's
gross retail receipts. Soho Club, Inc. v. Department of Revenue,
269 Ill. App. 3d 220, 228-29 (1995).
The SOT Act imposes a tax (the SOT) upon all persons engaged
in the business of making sales of service (referred to as
'servicemen') on all tangible personal property transferred as an
incident of a sale of service. 35 ILCS 115/3 (West 1992). The
SOT Act generally defines a sale of service as any transaction
except the sale of tangible personal property taxable under the
ROT Act or the Use Tax Act (35 ILCS 105/1 et seq. (West 1992)). 35
ILCS 115/2 (West 1992).
As a general rule, the ROT applies to all sales at retail
unless the taxpayer produces evidence in the form of books and
records to establish nontaxability. Mel-Park Drugs, Inc. v.
Department of Revenue, 218 Ill. App. 3d 203, 217 (1991). Under the
ROT Act, persons who sell at retail and who also engage in other
activities (including, but not limited to, engaging in a service
occupation) must keep such additional records and books of all
such activities as will accurately reflect the character and scope
of such activities and the amount of receipts realized therefrom.
35 ILCS 120/7 (West 1992). However, if a sale of service includes
a relatively insignificant or incidental transfer of tangible
personal property, then an SOT should be assessed rather than an
ROT. Soho Club, Inc., 269 Ill. App. 3d at 229. The tax system is
structured so that only one occupation tax is imposed on a
particular item of commerce. Soho Club, Inc., 269 Ill. Ap. 3d at
229.
As our supreme court has noted, the distinction between
occupations taxable under the ROT Act and the SOT Act is often
elusive and difficult to determine. J.H. Walters & Co. v.
Department of Revenue, 44 Ill. 2d 95, 101 (1969). The court set
out the standard for making that determination when it stated:
'If the article sold has no value to the purchaser except as
a result of services rendered by the vendor and the transfer
of the article to the purchaser is an actual and necessary
part of the service rendered, then the vendor is engaged in
the business of rendering service and not in the business of
selling at retail. If the article sold is the substance of
the transaction and the service rendered is merely incidental
to and an inseparable part of the transfer to the purchaser of
the article sold, then the vendor is engaged in the business
of selling at retail.' Velten & Pulver, Inc. v. Department of
Revenue, 29 Ill. 2d 524, 529[-30] [(1963)]; Dow Chemical Co.
v. Department of Revenue, 26 Ill. 2d 283, 285 [(1962)];
Kellogg Switchboard & Supply Corp. v. Department of Revenue,
14 Ill. 2d 434, 437[-38] [(1958)]. Spagat v. Mahin, 50 Ill. 2d 183, 189 (1971).
A reviewing court has the responsibility of making the
determination, as a matter of law, whether an occupation is within
the purview of a taxing statute. American Brake Shoe Co. v.
Department of Revenue, 25 Ill. 2d 354, 361 (1962). Courts have
used various factors in making this determination. See, e.g.,
Colorcraft Corp., Inc. v. Department of Revenue, 112 Ill. 2d 473,
483 (1986) (consolidating factors used in several cases). However,
each determination ultimately rests on its own facts. Automatic
Voting Machine Corp. v. Daley, 409 Ill. 438, 447 (1951).
In this case, we conclude that plaintiff has not carried its
burden of overcoming the Department's prima facie case that
plaintiff made retail sales subject to the ROT when it engaged in
indoor landscaping activities. We recognize that plaintiff
presented evidence tending to show that plaintiff s clients
employed plaintiff to provide interior landscaping at least in part
because of the services plaintiff provided in conjunction with the
sale of the plants and related materials involved in the interior
landscaping. However, plaintiff failed to show that the tangible
property it sold to its customers, the plants and related material,
had no value to the customers except as a result of the services
plaintiff rendered. Rather, we believe that the sale of the plants
and related material was a major part of the substance of the
transactions that constituted plaintiff s indoor landscaping
activities. Plaintiff failed to show that the sale of the plants
was merely an insignificant or incidental part of the transactions.
In addition, plaintiff failed to provide records and books for
its interior landscaping activities that would allow the Department
to determine the character and scope of the activities as required
by section 7 of the ROT Act (35 ILCS 120/7 (West 1992)). Section
7 plainly requires a taxpayer, such as plaintiff, who sells at
retail and also engages in other activities, including a service
occupation, to provide sufficient records to reflect the character
and scope of the activities. 35 ILCS 120/7 (West 1992). Here,
many of plaintiff s invoices showed only a single amount for
interior landscaping activities and did not separate out the
purported service or maintenance activities. These invoices
therefore did not satisfy the statutory requirements for record
keeping. In view of these inadequate records, the Department could
not determine how much, if any, of the invoice amount reflected
retail sales and how much reflected other activities. The
Department therefore correctly determined that the entire amount
shown on these invoices was subject to the ROT.
For all these reasons, we cannot say that the trial court s
affirmation of the Department's decision was against the manifest
weight of the evidence or contrary to law. Based on the foregoing,
the decision of the circuit court of Lake County affirming the
Department's decision is affirmed.
Affirmed.
COLWELL and RATHJE, JJ., concur.