Nokomis Quarry Co. v. Department of Revenue

                               NO. 5-97-0216

                                  IN THE 

                        APPELLATE COURT OF ILLINOIS

                              FIFTH DISTRICT
_________________________________________________________________

NOKOMIS QUARRY COMPANY,             )  Appeal from the 
                                    )  Circuit Court of 
     Plaintiff-Appellee,            )  Montgomery County.
                                    )  
v.                                  )  No. 96-MR-59
                                    )
THE DEPARTMENT OF REVENUE and       )
KENNETH E. ZEHNDER, Director of     )
Revenue,                            )  Honorable
                                    )  Mark M. Joy, 
     Defendants-Appellants.         )  Judge, presiding.  
_________________________________________________________________

     JUSTICE KUEHN delivered the opinion of the court:  
     We are faced with one dispositive issue in this case:  Whether
two machines that plaintiff, Nokomis Quarry Company, uses in its
quarry operation qualify for a manufacturing exemption from the use
tax imposed by the Illinois Use Tax Act (the Act)(35 ILCS 105/1 et
seq. (West 1994)).  Specifically, defendant, the Department of
Revenue of the State of Illinois (Department), appeals from the
Montgomery County Circuit Court's order, upon administrative
review, reversing the Department's decision that plaintiff's
crawler dozer and wheel loader are not exempt from the use tax.  We
affirm.
     The Department's decision is based upon undisputed facts. 
Plaintiff owns and operates a limestone quarry in Montgomery
County.  The quarry's limestone deposit sits in two layers
separated by a layer of shale.  The upper layer of limestone is
buried underneath approximately 12 to 15 feet of soil.  Once the
soil is extracted, plaintiff removes the limestone by blasting with
explosives.  Its blasting method involves the systematic drilling
of holes, the filling of these holes with an explosive charge, and
the detonation of that charge.  This explosion creates limestone
fragments called "shot rock".  After the explosion, plaintiff uses
a D135A crawler dozer to push the shot rock off whatever ledge
remains after the blast.  Plaintiff then utilizes a WA-500 wheel
loader to pick up the shot rock and transport it to a "crusher-
sorter" machine, which crushes and/or sorts the rock into various
sizes, as necessary.  The crawler dozer and wheel loader are
exclusively used for these purposes.
     After an audit, the Department issued two tax-liability
notices to plaintiff, assessing use tax on the crawler dozer and
wheel loader for the period of January 1, 1991, to April 30, 1994. 
Plaintiff filed a timely protest to these notices, claiming that
the two machines were used in manufacturing and, thus, were exempt
from use tax.  
     On February 7, 1996, an administrative hearing was held on the
issue of whether the two machines qualified for the manufacturing
exemption from the use tax.  Plaintiff presented the uncontroverted
testimony of both its general manager, Ron Koehler, and a civil
engineering expert, Richard Barksdale.  Both Koehler and Barksdale
testified that the blasting technique plaintiff utilizes is a form
of crushing and that the resulting shot rock's size is determined
by the placement of the explosive charges.  Koehler further stated
that the charges are placed 10 feet apart in order to produce shot
rock of less than 150 pounds, in compliance with State "stone fill"
specifications.  The stone fill is used for erosion prevention
along ditches and/or lakes.  He noted that nearly all of this shot
rock created by the initial blast could be sold without further
processing, if warranted by consumer demand.  In plaintiff's
business, approximately 40 to 50% of this shot rock is sorted and
sold without additional processing.  The remainder of the shot rock
is crushed further to create smaller-sized products for sale.  
     On June 13, 1996, the Department issued its final
administrative decision, finding that the crawler dozer and wheel
loader did not qualify for the manufacturing exemption.  The
Department determined that, because the manufacturing process
originated at the crusher-sorter machine, plaintiff primarily used
the crawler dozer and wheel loader to extract limestone prior to
the manufacturing process.  On July 5, 1996, the Department issued
two final assessments of use tax due, totalling $40,822.93,
including interest and penalties.
     On August 9, 1996, plaintiff filed its complaint for
administrative review in the Montgomery County Circuit Court.  On
March 19, 1997, the circuit court reversed the Department's final
decision.  Its order concluded that the machines qualified for a
manufacturing exemption from the use tax because the manufacturing
process actually began with the blasting.  The Department now
appeals this order, contending that the circuit court's reversal
constitutes error.
     An administrative agency's decision may be reversed only if it
is factually against the manifest weight of the evidence or legally
erroneous.  Thomas M. Madden & Co. v. Department of Revenue, 272
Ill. App. 3d 212, 215, 651 N.E.2d 218, 219 (1995).  Where, as here,
facts are undisputed, a tax-exemption determination is a question
of law and, as such, hinges solely on an application of the proper
legal standard to those facts.  City of Chicago v. Illinois
Department of Revenue, 147 Ill. 2d 484, 491, 590 N.E.2d 478, 481
(1992); Our Savior Lutheran Church v. Department of Revenue, 204
Ill. App. 3d 1055, 1059, 562 N.E.2d 1198, 1199 (1990).  Our review
of an agency's statutory construction interpretation, a purely
legal question, is de novo.  Thomas M. Madden & Co., 272 Ill. App.
3d at 215, 651 N.E.2d  at 219.
     Plaintiff initially contends that prior Department decisions,
as well as one of our unpublished orders, collaterally estop the
Department from arguing that this case's facts do not warrant the
manufacturing exemption from the use tax.  We recognize that, just
as prior decisions of this court, "administrative decisions have
res judicata and collateral estoppel effect where the department's
determination is made in proceedings which are adjudicatory,
judicial, or quasi-judicial in nature."  Marco v. Doherty, 276 Ill.
App. 3d 121, 124-25, 657 N.E.2d 1165, 1168 (1995).  However, the
collateral estoppel doctrine applies to the relitigation of facts,
not to questions of law.  City of Chicago v. Chicago Fiber Optic
Corp., 287 Ill. App. 3d 566, 576, 678 N.E.2d 693, 700 (1997);
Deford-Goff v. Department of Public Aid, 281 Ill. App. 3d 888, 891,
667 N.E.2d 701, 703 (1996).  This case does not require the
relitigation of facts.  Rather, it demands our statutory
construction analysis of the Act (35 ILCS 105/1 et seq. (West
1994)), a question of law.  Accordingly, because collateral
estoppel is inapplicable, we must confront the merits of the
Department's appeal.  
     Section 3 of the Act imposes a tax "upon the privilege of
using in this State tangible personal property ***."  35 ILCS 105/3
(West 1994).  However, Section 3-5(18) of the Act affords certain
exemptions from this use tax:
     "Use of the following tangible personal property is exempt
     from the tax imposed by this Act:
                                   * * *
          (18) Manufacturing and assembling machinery and equipment
     used primarily in the process of manufacturing or assembling
     tangible personal property for wholesale or retail sale ***." 
     35 ILCS 105/3-5(18) (West 1994).  
For purposes of this exemption, section 3-50(1) of the Act further
defines manufacturing process as follows:
          (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, 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(1) (West 1994).
     A resolution of the issue before us requires our statutory
construction analysis of these provisions.
     This statutory construction analysis is two-tiered: the first
tier requires construction of the statute; the second demands a
determination of the applicability of the statutory exemption. 
Van's Material Co. v. Department of Revenue, 131 Ill. 2d 196, 201,
545 N.E.2d 695, 698 (1989).  We must first address the issue of the
statute's construction.
     The objective in construing the manufacturing exemption
statute is to determine and give effect to the legislature's
intent.  Thomas M. Madden & Co., 272 Ill. App. 3d at 215, 651 N.E.2d  at 220.  The court should consider not only the statute's
language but also its purposes.  Canteen Corp. v. Department of
Revenue, 123 Ill. 2d 95, 104, 525 N.E.2d 73, 77 (1988).  "Statutes
granting tax exemptions are to be construed strictly in favor of
the taxing body and against exemption, and the party claiming an
exemption bears the burden of clearly proving he comes within the
statutory exemption."  Thomas M. Madden & Co., 272 Ill. App. 3d at
215-16, 651 N.E.2d  at 220.  
     Mindful of this precedent for statutory review, our supreme
court has already addressed the statutory construction of the
identical provisions pertinent to the present case, in Van's
Material Co. v. Department of Revenue, 131 Ill. 2d 196, 545 N.E.2d 695 (1989).  Such an analysis requires an examination of three
distinct words or phrases which form the gist of section 3-5(18):
(1) "tangible personal property", (2) "process of manufacturing or
assembling", and (3) "primarily."  Van's Material Co., 131 Ill. 2d 
at 203, 545 N.E.2d  at 699.  The supreme court further expanded the
analysis of this second phrase by stating that, in order to be a
"process of manufacturing" as contemplated by section 3-50 of the
Act, the procedure must: (1) change an existing material or
materials into one with a new form, use, or name and (2) be
commonly regarded as manufacturing.
     There is no dispute in this case that plaintiff's limestone
products are tangible personal property.  Furthermore, the
Department does not contest the proposition that if the
manufacturing process begins with the initial blast, then the
crawler dozer and wheel loader are used "primarily" in the
manufacturing process.  Therefore, the taxability of plaintiff's
use of its crawler dozer and wheel loader turns on whether blasting
begins the manufacturing process within the purview of section 3-
50.  We hold that it does.
     Plaintiff produced uncontroverted evidence that the blasting
procedure changed existing material into material with a new form,
a new use, and a new name.  The record demonstrates that the
blasting either completely changes or begins the transformation of
a limestone deposit with no apparent use into various sizes of
limestone products with different uses.  
     The Department argues, however, that plaintiff failed to meet
its burden of showing that the blasting process is "commonly
regarded as manufacturing."  The Department points to the
differences between the dictionary definitions of "quarrying" and
"manufacturing," as well as its own regulations and prior rulings. 
Based on the record before us, we cannot agree with this argument. 
     In Van's Material Co., the supreme court noted:
          "In interpreting the term `commonly regarded' it seems
     evident that application of the terms of the statute is not to
     be guided by some hyperbolic definition of manufacture but
     rather is subject to commonsense interpretations based on past
     and current understanding.  [Citations.]  ***
          ***
          *** [T]his court [has] determined that `[w]henever labor
     is bestowed upon an article which results in its assuming a
     new form, possessing new qualities or new combinations, the
     process of manufacturing has taken place.'"  Van's Material
     Co., 131 Ill. 2d  at 207-08, 545 N.E.2d  at 701, quoting Dolese
     & Shepard Co. v. O'Connell, 257 Ill. 43, 45, 100 N.E. 235, 236
     (1912).
We do not believe that the evidence in this case supports the
glaring distinction the Department draws between "quarrying" and
"manufacturing."  Rather, under the particular circumstances before
us, we view plaintiff's calculated blasting method as synonymous
with manufacturing.  
     The blasting technique plaintiff utilizes is much more
complicated than mere digging or haphazard rock removal.  Plaintiff
deliberately puts a sufficient amount of explosives in
systematically placed holes in order to achieve an intended result,
particularly, the production of shot rock which may be immediately
marketed or further processed.  This blasting method does more than
simply separate the rock from the ground; it does so with specific
desired results.  Clearly, plaintiff bestows labor upon a limestone
deposit, resulting in the limestone's assumption of new forms
possessing new qualities or new combinations.
     We are equally unpersuaded by the prior Department letter
rulings on similar issues, which are noted in its brief.  Although
courts should generally give some deference to statutory
interpretations promulgated by the administrative agency charged
with the statute's administration and enforcement, such
interpretations are clearly not binding on the court.  Van's
Material Co., 131 Ill. 2d  at 202-03, 545 N.E.2d  at 699.  Moreover,
these letter rulings are inconsistent with other Department
decisions cited by plaintiff, one of which even found that "the
manufacturing process begins when explosives are used to blast the
solid rock from the quarry."  Department of Revenue v. Moline
Consumer Co., Dept. of Rev. Adm. Hearing Div., No. 0099-5088
(November 23, 1992).  
     We reject that part of the Department's regulation that
states, "The extractive process of quarrying does not constitute
manufacturing."  86 Ill. Adm. Code 130.330(b)(4) (1994).[fn1]  It
is clear that "[a]dministrative rules can neither limit nor extend
the scope of a statute."  Du-Mont Ventilating Co. v. Department of
Revenue, 73 Ill. 2d 243, 247-48, 383 N.E.2d 197, 200 (1978).  This
portion of the regulation unduly restricts the scope of the
statute.  The statute's language draws no such distinction between
quarrying and manufacturing.  We cannot accept that which is not
contemplated by the legislature.
     Indeed, both the evidence presented at the hearing and the
latter portion of the very regulation upon which the Department
relies indicate that plaintiff's blasting method is commonly
regarded as manufacturing.  That regulation specifically states
that "the activities subsequent to quarrying such as crushing,
washing, sizing and blending will constitute manufacturing ***." 
(Emphasis added.)  86 Ill. Adm. Code 130.330(b)(4) (1994). 
Plaintiff produced evidence, via expert testimony and exhibit,
that, by industry standards, its blasting method constitutes
crushing to achieve a particular size.  Given this uncontroverted
evidence, plaintiff's calculated blasting method constitutes a
"process of manufacturing" within the import of section 3-50.  
     We now turn to the second tier of our analysis:  Whether
plaintiff has met its burden of proving that the manufacturing
exemption applies to its crawler dozer and wheel loader.  The
record demonstrates that plaintiff has met its burden.  After the
blasting, plaintiff exclusively uses the crawler dozer to push the
shot rock off whatever ledge remains after the blast.  Plaintiff
then exclusively utilizes the wheel loader to pick up the shot rock
and transport it to a crusher-sorter machine.  Clearly, these
machines are used primarily in the process of manufacturing within
the meaning of section 3-5(18) of the Act.  Therefore, we hold that
plaintiff's D135A crawler dozer and WA-500 wheel loader are exempt
from use tax.[fn2]
     Accordingly, for the foregoing reasons, the judgment of the
Montgomery County Circuit Court is affirmed.

     Affirmed.

     MAAG, J., and GOLDENHERSH, J., concur.
     [fn1]This retailer's occupation tax regulation is incorporated
by reference and made part of the use tax regulations pursuant to
86 Ill. Adm. Code 150.1201 (1994).
     [fn2]Although this case involves only a use-tax assessment,
the supreme court has explained how the existence of substantially
identical provisions in the Illinois Retailer's Occupation Tax Act
(35 ILCS 120/1 et seq. (West 1994)) renders our decision today
applicable to both acts.  Van's Material Co. v. Department of
Revenue, 131 Ill. 2d 196, 200-01, 545 N.E.2d 695, 699 (1989).