2018 IL App (4th) 170434 FILED
October 3, 2018
NO. 4-17-0434 Carla Bender
4th District Appellate
IN THE APPELLATE COURT Court, IL
OF ILLINOIS
FOURTH DISTRICT
ERDMAN DAIRY, INC., ) Appeal from
Plaintiff-Appellant, ) Circuit Court of
v. ) Sangamon County
ILLINOIS DEPARTMENT OF REVENUE and ) No. 16MR754
CONSTANCE BEARD, as Director, )
Defendants-Appellees. ) Honorable
) Esteban F. Sanchez,
) Judge Presiding.
JUSTICE HOLDER WHITE delivered the judgment of the court, with opinion.
Justices Knecht and Turner concurred in the judgment and opinion.
OPINION
¶1 Plaintiff, Erdman Dairy, Inc. (Erdman), appeals the judgment of the circuit court,
affirming the administrative decision of the Director of the Illinois Department of Revenue
(Department), which denied a use tax exemption to Erdman under section 3-5(11) of the Use Tax
Act (35 ILCS 105/3-5(11) (West 2012)). For the following reasons, we reverse and remand with
directions.
¶2 I. BACKGROUND
¶3 Erdman is a dairy farm located in Chenoa, Illinois. To feed its dairy cows,
Erdman grows corn and converts the corn into corn silage. There are five phases in the
production of corn silage and the process takes up to two weeks to complete. Phase one involves
chopping and collecting the corn. Then, using a bagger, the corn is tightly packed into a silage
bag. A silage bag is made of plastic, and it can vary in size with the smallest bag being 7 by 150
feet, to the largest bag being 14 by 500 feet. Once the corn is in a silage bag, the bag is closed
and the process of fermentation caused by oxygen deprivation begins.
¶4 When fermentation is complete, Erdman’s dairy cows eat the resulting product,
and the silage bag operates as storage for the remaining corn silage. After consumption of corn-
silage-filled sections of a bag, cutting and discarding of empty sections of the bag takes place.
Although silage bags are for onetime use, tears are repairable.
¶5 From November 2010 to September 2012, Erdman purchased silage bags from
AT Films, Inc., a company located in Alberta, Canada. In February 2014, the Department
conducted an audit of Erdman’s silage bag purchases to determine if Erdman paid the required
use tax. See Id. §3. Following the audit, the Department issued six notices of tax liability to
Erdman, showing use tax due on the purchases. Erdman filed a protest, arguing that silage bags
were exempt from use tax because the bags were farm equipment used for production
agriculture. See id. §3-5(11).
¶6 In July 2015, an administrative hearing took place, and the administrative law
judge (ALJ) ultimately concluded that silage bags are subject to use tax and ordered the
finalization of the notices of tax liability. The ALJ determined silage bags failed to meet the
definition of “equipment” under Department regulations. See 86 Ill. Adm. Code 130.305(k), (l)
(2000). According to the ALJ, silage bags fall under the category of supplies. In support of her
conclusion, the ALJ explained that silage bags are consumable and used only once. The ALJ
found silage bags “are not the type of durable product the term ‘equipment’ commonly
describes.”
¶7 On July 26, 2016, the Director of the Department (Director) adopted the ALJ’s
recommendation and issued the final agency decision. In August 2016, Erdman appealed the
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decision of the Director in the Sangamon County circuit court. On May 12, 2017, the circuit
court upheld the Director’s decision, thus affirming the decision of the Department to deny a use-
tax exemption for purchase of the silage bags.
¶8 This appeal followed.
¶9 II. ANALYSIS
¶ 10 On appeal, plaintiff argues that the Director erroneously denied it a use-tax
exemption for its purchases of silage bags because the bags are equipment used in production
agriculture. The Director argues it acted properly in denying plaintiff a use-tax exemption
because silage bags do not qualify as “equipment” under the use-tax exemption. We reverse and
remand with directions.
¶ 11 A. Standard of Review
¶ 12 In administrative review cases, we review the Director’s decision rather than the
decision of the circuit court. Provena Covenant Medical Center v. Department of Revenue, 236
Ill. 2d 368, 386, 925 N.E.2d 1131, 1142 (2010). This court reviews questions of law de novo,
factual questions under the manifest weight standard, and mixed questions of law and fact for
clear error. Id. at 386-87. A mixed question of law and fact occurs where the historical facts are
admitted or established, the rule of law is undisputed, and the issue is whether the facts satisfy
the statutory standard. Id. at 387. Here, because the Director considered whether the facts
satisfied the statutory standard for tax exemption, the clear-error standard applies. Under the
clear-error standard, we give deference to the agency’s experience in interpreting and applying
the statutes it administers. Cinkus v. Village of Stickney Municipal Officers Electoral Board, 228
Ill. 2d 200, 210, 886 N.E.2d 1011, 1018 (2008). Given the high deference afforded under this
standard, we reverse the Director’s decision only if the decision is clearly erroneous. In other
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words, we must have a “ ‘definite and firm conviction that a mistake has been committed.’ ”
(Internal quotation marks omitted.) Id. at 211 (quoting AFM Messenger Service, Inc. v.
Department of Employment Security, 198 Ill. 2d 380, 395, 763 N.E.2d 272, 282 (2001)).
¶ 13 B. Illinois Use Tax
¶ 14 In Illinois, a tax is imposed on the sale and use of tangible personal property sold
at retail. 35 ILCS 120/2 (West 2012); 35 ILCS 105/3 (West 2012). Under the Retailer’s
Occupational Tax Act (ROTA), a sales tax is imposed on Illinois retailers that sell tangible
personal property. 35 ILCS 120/2 (West 2012). A use tax is imposed on Illinois purchasers of
tangible personal property from a retailer who does not impose the sales tax. 35 ILCS 105/3
(West 2012). The purpose of the use tax is to prevent avoidance of the sales tax by people who
make purchases outside the state of Illinois and to protect Illinois merchants doing business
within the state. Brown’s Furniture, Inc. v. Wagner, 171 Ill. 2d 410, 418, 665 N.E.2d 795, 800
(1996). If the Illinois purchaser of the tangible personal property is not required to pay the use
tax to the retailer, the purchaser must pay the tax directly to the Department. 35 ILCS 105/3-45
(West 2012). The Department imposed use-tax liability on Erdman due to its failure to pay use
tax on its purchases of silage bags from AT Films, Inc., a Canadian company.
¶ 15 C. Farm Equipment Exemption
¶ 16 Erdman asserts the silage bags it purchased from AT Films, Inc., are not subject
to use tax because the bags are exempt under legislative exemptions to the use tax. Under Illinois
law, taxation is the rule, and exemption is the exception. Provena, 236 Ill. 2d at 388. Therefore,
as the taxpayer, Erdman is required to show it is entitled to the exemption. In this vein, Erdman
asserts silage bags are exempt under the farm machinery and equipment exemption of the Use
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Tax Act. See 35 ILCS 105/3-5(11) (West 2012). Section 3-5 of the Use Tax Act states in
relevant part, as follows:
Ҥ 3-5. Exemptions. Use of the following tangible personal
property is exempt from the tax imposed by this Act:
***
(11) Farm machinery and equipment, both new and used, including
that manufactured on special order, certified by the purchaser to be used
primarily for production agriculture ***.” (Emphasis added.) Id.
¶ 17 Erdman argues that the silage bags are not subject to use tax because the bags are
equipment used in production agriculture. Erdman asserts that a silage bag’s primary purpose is
to improve agricultural production because the bags are an integral part of the fermentation
process and not just necessary for storage of corn silage. Specifically, silage bags (1) improve
production agriculture by improving the quality of livestock feed and (2) reduce both costs and
safety hazards. Erdman makes no argument that silage bags qualify as “machinery.”
¶ 18 According to the language of the statute, whether silage bags qualify for
exemption involves two issues: (1) do the bags qualify as farm “machinery” or “equipment,” and
(2) are the bags “used primarily for production agriculture?” See id. The Director’s analysis of
whether silage bags are exempt from use tax began and ended with the threshold question: Do
the silage bags qualify as “equipment?” The Director determined that silage bags are not
“equipment.” While Erdman focuses primarily on the “production agriculture” issue, we note,
even if silage bags are for the purpose of production agriculture, an exemption is not available if
the bags do not qualify as “equipment” under the Use Tax Act. Therefore, we first consider
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whether the Director erred in concluding silage bags do not qualify as “equipment” for use tax
purposes.
¶ 19 The Director looked to the Department’s regulation (incorporating by reference
the ROTA regulations) defining equipment exempt from use tax, as follows:
“k) Equipment means any independent device or apparatus
separate from any machinery, but essential to production agriculture. ***
Supplies, such as baling wire, baling twine, work gloves, boots, overshoes
and chemicals for effluent systems are not exempt.
l) New or used repair or replacement parts, necessary for the
operation of the machine used in production agriculture *** qualify for the
exemption. *** Consumable supplies such as fuel, grease, oil and anti
freeze are not repair or replacement parts.” 86 Ill. Adm. Code 130.305(k),
(l) (2000).
¶ 20 In Illinois, courts adhere to the well-settled principle of law that “[t]he primary
goal of statutory construction is to ‘ascertain and give effect to the drafters’ intention, and the
most reliable indicator of intent is the language used, which must be given its plain and ordinary
meaning.’ ” Interstate Trucks, LLC v. State, 2011 IL App (4th) 100603, ¶ 30, 959 N.E.2d 64
(quoting People v. Smith, 236 Ill. 2d 162, 166-67, 923 N.E.2d 259, 262 (2010)). The Director
determined that silage bags are “consumable supplies” rather than “equipment” because “[t]he
bags are not the type of durable product the term ‘equipment’ commonly describes.” Rather, the
life of the silage bag expires after one use and removal of the corn silage.
¶ 21 We find that by considering whether silage bags are consumable supplies, the
Director undertook an irrelevant analysis. Subsection (l), which speaks to consumable supplies,
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is about new or used replacement parts, not equipment. We also reject the Director’s conclusion
that silage bags cannot be equipment because they are not a durable product. Again, we must
look to the plain language of the regulation. Absent from subsection (k) is any mention of the
word “durable” or “durability.”
¶ 22 The question under subsection (k) is whether a silage bag is an “independent
device or apparatus separate from any machinery” that is essential to production agriculture. 86
Ill. Adm. Code 130.305(k) (2000). This is the appropriate inquiry because this is how subsection
(k) defines equipment. As we find it dispositive, we look first to the plain meaning of
“apparatus.”
¶ 23 An “apparatus” is “a set of materials or equipment designed for a particular use.”
Merriam-Webster’s Collegiate Dictionary 59 (11th ed. 2006). In this case, the materials
previously mentioned work together for a particular use. Put another way, Erdman uses a
chopper, bagger, pipes, hoses, and silage bags to create the desired environment for the creation,
fermentation, and preservation of silage. The silage bags are separate from any machinery and
intended for a specific use. As an apparatus, the silage bags constitute equipment as defined by
the Administrative Code. See 86 Ill. Adm. Code 130.305(k) (2000).
¶ 24 The Director improperly concluded that Erdman failed to establish that silage
bags qualify as equipment under the use tax exemption. Thus, we find the decision clearly
erroneous. Our resolution of the equipment issue still leaves open the question of whether silage
bags are essential to production agriculture. Entitlement to the exemption requires two findings:
(1) that the item is equipment and (2) that the item is essential to production agriculture. The
Director has yet to address the question of “essentialness” to production agriculture. We note,
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initially, that the Director is entitled to make that determination. Thus, we find it appropriate to
remand and give the Director the opportunity to answer this remaining question
¶ 25 III. CONCLUSION
¶ 26 For the reasons stated, we reverse the circuit court’s judgment, affirming the
Director’s decision, and remand the case to the Director to determine whether silage bags are
essential to production agriculture.
¶ 27 Reversed and remanded to the Department with directions.
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