Best Buy Stores, L.P. v. Department of Revenue

2020 IL App (1st) 191680

FIFTH DIVISION
August 14, 2020

No. 1-19-1680

IN THE
APPELLATE COURT OF ILLINOIS
FIRST JUDICIAL DISTRICT

BEST BUY STORES, L.P., ) Appeal from the Circuit Court of
) Cook County.
Plaintiff-Appellant, )
)
v. )
)
) No. 2017 L 050591
THE DEPARTMENT OF REVENUE; DAVID )
HARRIS, as Director of Revenue; and MICHAEL )
FRERICHS, as the Treasurer of the State of Illinois, )
)
Defendants-Appellees. ) Honorable Michael F. Otto,
) Judge, presiding.

JUSTICE DELORT delivered the judgment of the court, with opinion.
Presiding Justice Hoffman and Justice Rochford concurred in the judgment and opinion.

OPINION

¶1 Plaintiff, Best Buy Stores, L.P. (Best Buy), appeals from an order of the circuit court of

Cook County denying its motion for summary judgment and granting summary judgment in favor

of defendants the Illinois Department of Revenue (Department); Constance Beard, 1 Director of the

1
David Harris replaced Beard and became Director of the Department during the pendency
of this case. By operation of law, Harris is substituted as a defendant. See 735 ILCS 5/2-1008(d)
(West 2020).
No. 1-19-1680

Department (Director); and Michael Frerichs, the Treasurer of the State of Illinois. Best Buy

contends that the circuit court erred in rejecting its argument that that certain appliances, which

Best Buy later installs in a purchaser’s residence, are exempt from the retail occupancy tax. Best

Buy also contends that imposition of the tax violates the uniformity clause of the Illinois

constitution. We affirm.

¶2 BACKGROUND

¶3 Best Buy is a retailer of, among other things, consumer electronics and appliances. In its

regular course of business, Best Buy also sometimes installs appliances in the purchasers’ homes.

When a customer purchases an appliance from Best Buy, the customer has three options: (1) pick

up the appliance at the store and make their own arrangements for transportation and installation,

(2) have Best Buy deliver but not install the appliance, or (3) have Best Buy deliver and install the

appliance. If the customer chooses either of the first two options, Best Buy collects sales tax and

remits it to the Department.

¶4 If, however, the customer chooses the third option—having Best Buy deliver and install

the appliance—whether Best Buy collects sales tax depends upon, in Best Buy’s opinion, “whether

the installed appliance becomes part of the real property or retains its character as personal

property.” If, in Best Buy’s opinion, the installed appliance is “incorporated into, and permanently

affixed to, real estate,” then Best Buy does not collect sales tax. Some of the appliances Best Buy

considers to be incorporated into and permanently affixed to real estate include the following:

“built-in dishwashers, over-the-range microwaves, wall ovens, cooktops installed on counters,

range hoods, built-in refrigerators, and gas range/gas dryers.”

¶5 When a customer opts to have Best Buy deliver and install the appliance, Best Buy and the

customer enter into an “Appliance Installation Terms and Conditions Contract” (Installation

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Contract). The Installation Contract provides, in relevant part that, for all installations the

customer must have an existing appliance that Best Buy is replacing (except with respect to

refrigerator water lines and air conditioners); all new parts and necessary accessories must be

purchased at Best Buy; and if the customer is purchasing a range, “Anti-Tip brackets” might be

installed that would require drilling into the floor under the range. The Installation Contract further

states that “every” installation includes, in pertinent part, (1) the “direct replacement of an existing

similar appliance only” (excluding refrigerator water lines, window air conditioning units, electric

hardware, and the “Frigidaire Refrigerator/Freezer w/Trim Kit”) and (2) the disconnection and

removal of an “existing similar appliance from surrounding cabinets and fixtures.”

¶6 On January 25, 2016, the Department sent Best Buy a “Notice of Proposed Liability”

stating that, following an audit for the period July 2012 through December 2013, Best Buy had

additional tax liability of $210,676. This amount comprised sales taxes on appliances Best Buy

had unilaterally exempted from sales tax, as well as interest and penalties on the deficiency. After

agreeing to Best Buy’s request to abate the penalties but denying the request to set aside the

proposed additional tax liability and interest, the Department sent a new notice of liability on April

4, 2017, totaling $192,147.58, including interest. Best Buy paid this amount on May 31, 2017,

and then filed a complaint under the State Officers and Employees Money Disposition Act

(commonly known as the Protest Monies Act) (30 ILCS 230/1 et seq. (West 2016)). In November

2018, the parties filed a joint stipulation of facts, which included various exhibits.

¶7 Best Buy and the Department subsequently filed cross-motions for summary judgment.

Best Buy argued that, when it installs certain appliances, it is a construction contractor and not a

retailer, and therefore, it was not obligated to collect and remit sales taxes on the appliances it sells

and installs. Best Buy further argued sales tax liability on the appliances was unwarranted because

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the appliances it installs are incidental to the installation contract and the appliances are

incorporated into the real estate. Finally, Best Buy claimed that imposing sales tax on these types

of transactions would violate the uniformity clause of the state constitution.

¶8 On July 29, 2019, following a hearing, the circuit court issued a written order granting the

Department’s motion for summary judgment and denying Best Buy’s motion. The court

determined that, under “[l]ong-standing Illinois law,” Best Buy was a retailer, even when it

contracts with a purchaser to install the appliances that Best Buy sells. The court also rejected

Best Buy’s claims that the appliances are furnished and installed as an incident of a construction

contract and that the installed appliances were incorporated “into the [real property] structure as

an integral part thereof.” Finally, the court rejected Best Buy’s constitutional challenge.

¶9 This appeal follows.

¶ 10 ANALYSIS

¶ 11 On appeal, Best Buy contends that the circuit court erred in denying its motion for summary

judgment and granting the Department’s motion. Best Buy argues that the court (1) improperly

applied the “substance of the transaction test” to its installed-appliances transactions,

(2) disregarded Illinois tax laws, regulations, and “Department guidance,” (3) erred in finding that

the built-in appliances at issue “can never be incorporated into real estate as an integral part

thereof,” and (4) erroneously rejected Best Buy’s claim that the Department’s assessment of sales

tax in this case violates the uniformity clause of the state constitution. This court granted leave for

the Coalition of Independent Appliance Sellers to file an amicus curiae brief in support of the

appellees.

¶ 12 Since the parties filed cross-motions for summary judgment, they conceded that no material

questions of fact existed and that only a question of law was involved that the court could decide

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based on the record. Pielet v. Pielet, 2012 IL 112064, ¶ 28. Nonetheless, the mere filing of cross-

motions for summary judgment does not conclusively establish that there is no issue of material

fact, nor is the circuit court obligated to enter summary judgment for either party. Id. We review

the circuit court’s decision as to cross-motions for summary judgment de novo. Id. ¶ 30; see also

Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 102 (1992) (circuit court’s

entry of summary judgment reviewed de novo). Finally, we review the judgment, not the

reasoning, of the circuit court, and we may affirm on any grounds in the record, regardless of

whether the court relied on those grounds or whether its reasoning was correct. Leonardi v. Loyola

University of Chicago, 168 Ill. 2d 83, 97 (1995).

¶ 13 The Statutory Claim

¶ 14 Best Buy raises three interrelated issues surrounding the circuit court’s interpretation of the

Retailers’ Occupation Tax Act (Act) (35 ILCS 120/1 et seq. (West 2018)) and various

administrative regulations promulgated thereunder. Best Buy argues that “the substance of the

transaction” test is inapplicable because, when Best Buy sells certain built-in appliances to

customers and performs the installation, it acts as a “construction contractor” and need not collect

and remit sales tax to the Department. Best Buy explains that, pursuant to various sections of the

Illinois Administrative Code, (1) it meets the definition of a construction contractor, (2) the sale

of the built-in appliances are incidental to a construction contract, and (3) the built-in appliances

are permanently affixed to and an integral part of the real estate.

¶ 15 Resolution of this issue turns on the interpretation of the Act and the administrative

regulations promulgated under it. Administrative regulations, which have the force and effect of

law, are interpreted as if they were statutes. Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130, ¶ 38

(citing People ex rel. Madigan v. Illinois Commerce Comm’n, 231 Ill. 2d 370, 380 (2008)). When

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construing a statute, our goal is to “ascertain and give effect to the intent of the legislature.” Kean

v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, 361 (2009). This inquiry begins with the language of the

statute, “the best indicator of legislative intent.” Id. Where the language in the statute is clear and

unambiguous, we apply the statute as written without resort to extrinsic aids of statutory

construction. Landis v. Marc Realty, L.L.C., 235 Ill. 2d 1, 6-7 (2009).

¶ 16 Since all provisions of a statutory enactment are viewed as a whole, we do not construe

words and phrases in isolation; instead, they are interpreted in light of other relevant portions of

the statute. Carver v. Sheriff of La Salle County, 203 Ill. 2d 497, 507-08 (2003). We presume that

the General Assembly did not intend absurdity, inconvenience, or injustice. Id. at 508. Finally,

the Act must be given a “ ‘practical and common-sense construction.’ ” Hartney, 2013 IL

115130, ¶ 25 (quoting Automatic Voting Machine Corp. v. Daley, 409 Ill. 438, 447 (1951)).

¶ 17 The interpretation of statutes and regulations are questions of law that we review de novo.

Id. ¶ 16. Nonetheless, although our standard of review is de novo, an agency’s interpretation of its

regulations and enabling statute are entitled to substantial weight and deference because

“ ‘agencies make informed judgments on the issues based upon their experience and expertise and

serve as an informed source for ascertaining the legislature’s intent.’ ” Id. (quoting Provena

Covenant Medical Center v. Department of Revenue, 236 Ill. 2d 368, 387 n.9 (2010)). Our review

is not whether the regulation is the best possible implementation of the statute, only whether it is

permissible. Id. ¶ 59.

¶ 18 In Illinois, taxation is the rule; tax exemption is the exception. Oswald v. Hamer, 2018 IL

122203, ¶ 12. Therefore, although a tax statute must be strictly construed against the government

and in favor of the taxpayer (Kankakee County Board of Review v. Property Tax Appeal Board,

226 Ill. 2d 36, 52 (2007)), a statute providing an exemption is strictly construed in favor of taxation

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and against exemption (Quad Cities Open, Inc. v. City of Silvis, 208 Ill. 2d 498, 507 (2004)). The

party seeking the exemption must prove that it is entitled to it. Id. This is a “very heavy” burden.

Provena Covenant, 236 Ill. 2d at 388. The Department’s audit determination is considered

prima facie evidence of the correct amount of tax due. 35 ILCS 120/4 (West 2018).

¶ 19 The Act imposes a tax on the occupation of retailing. See id. § 2 (“A tax is imposed upon

persons engaged in the business of selling at retail tangible personal property ***.”); accord

Hartney, 2013 IL 115130, ¶ 30 (citing Standard Oil Co. v. Department of Finance, 383 Ill. 136,

142 (1943)). A retailer’s tax liability under the Act is based upon a percentage of “gross receipts”

from the sale of tangible personal property, which is defined as the “total selling price” of the

tangible personal property that was sold. 35 ILCS 120/1, 2(a) (West 2018); People ex rel.

Lindblom v. Sears Brands, LLC, 2018 IL App (1st) 171468, ¶ 5 (citing Kean, 235 Ill. 2d at 362).

A retailer remits sales taxes collected from purchasers to the Department. Lindblom, 2018 IL App

(1st) 171468, ¶ 5.

¶ 20 By contrast, a construction contract involves the incorporation of tangible personal

property into real estate, and those contracts are not subject to sales tax on the labor furnished and

tangible personal property (e.g., materials and fixtures) incorporated into a structure. Id.; 86 Ill.

Adm. Code 130.1940(c) (2000). “Contractor” is defined as any person who is engaged in “the

occupation of entering into and performing construction contracts for owners.” 86 Ill. Adm. Code

130.1940(a)(1) (2000).

¶ 21 Consequently, the “primary” or “real” occupation of the taxpayer determines the

applicability of the Act. Ingersoll Milling Machine Co. v. Department of Revenue, 405 Ill. 367,

370 (1950). The primary occupation of the taxpayer is based upon the “substance of the

transaction” test:

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“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.” (Internal quotation marks omitted.) H.D., Ltd. v.

Department of Revenue, 297 Ill. App. 3d 26, 34 (1998) (quoting

Spagat v. Mahin, 50 Ill. 2d 183, 189 (1971)).

In essence, to establish an exemption from the Act, a taxpayer must show that the tangible property

it sold to its customers had “no value to the customers except as a result of the services” the

taxpayer rendered. Id. at 35.

¶ 22 In this case, the circuit court correctly granted the Department’s motion for summary

judgment and denied Best Buy’s motion. The “articles” at issue here that Best Buy sells (various

built-in appliances) have substantial value to a purchaser even without installation services. Best

Buy concedes that it still sells appliances to purchasers who do not opt to have Best Buy perform

the installation. As such, the substance of the transaction test establishes that Best Buy is a retailer,

and we reject Best Buy’s argument that it meets the definition of a construction contractor.

¶ 23 For the same reason, the sale of the built-in appliances is not merely incidental to a

construction contract. Best Buy admitted in its stipulated facts that a purchaser can buy an

appliance without engaging Best Buy for the installation. Clearly, the product (i.e., the built-in

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appliance) has value even in the absence of the service (the installation). Therefore, the circuit

court correctly found that the installation service was incidental to the sale, and Best Buy is

engaged in the occupation of selling at retail. See id. at 34.

¶ 24 Finally, the circuit court correctly found that the built-in appliances are not permanently

affixed to and an integral part of the real estate. Best Buy’s Installation Contract specifies that for

all installations, the customer must have an existing appliance that Best Buy is replacing. The fact

that the to-be-installed appliance is replacing a similar one would fatally undermine any

characterization of either permanency or integrality. Best Buy’s assertion that its built-in

appliances may be “bolted or bracketed” into the real estate does not alter this conclusion.

¶ 25 In any event, we must construe tax exemptions strictly in favor of taxation (Quad Cities

Open, 208 Ill. 2d at 507), and Best Buy has a “very heavy” burden to establish that it is entitled to

an exemption (Provena Covenant, 236 Ill. 2d at 388). Since we must (1) give the Act a “practical

and common-sense construction” (internal quotation marks omitted) (Hartney, 2013 IL

115130, ¶ 25), (2) give “substantial weight and deference” to the Department’s interpretation of

its regulations and enabling statute (internal quotation marks omitted) (id. ¶ 16), and (3) consider

the Department’s audit determination prima facie evidence of the correct amount of tax due (35

ILCS 120/4 (West 2018)), we are compelled to hold that Best Buy has failed to meet its burden to

show the transactions at issue are exempt from taxation. The circuit court, therefore, did not err

in granting the Department’s motion for summary judgment and denying Best Buy’s motion.

¶ 26 Nonetheless, Best Buy attempts to avoid this result by citing various unrelated “private

letter rulings,” “general information letters,” and a “compliance alert” that the Department has

issued. Those statements, however, do not bind the Department and have no persuasive weight.

See 2 Ill. Adm. Code 1200.110 (2017) (private letter rulings); 2 Ill. Adm. Code 1200.120 (1993)

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(general information letters); 2 Ill. Adm. Code 1200.130 (2017) (Department publications); see

also Kean, 235 Ill. 2d at 370. In addition, Best Buy’s reliance upon section 130.1951 of Title 86

of the Illinois Administrative Code is meritless: that section only applies in enterprise zones and

fails to define when a built-in appliance is “physically incorporated into the real estate.” See 86

Ill. Adm. Code 130.1951 (2015).

¶ 27 The Uniformity Clause of the Illinois Constitution

¶ 28 Finally, Best Buy contends that the assessment of sales tax in this case violates the

uniformity clause of the Illinois Constitution, which provides in relevant part as follows: “In any

law classifying the subjects or objects of non-property taxes ***, the classes shall be reasonable

and the subjects and objects within each class shall be taxed uniformly. Exemptions *** and other

allowances shall be reasonable.” Ill. Const. 1970, art. IX, § 2. Best Buy argues that there is no

real and substantial distinction between (1) a business acting exclusively as a construction

contractor and (2) one acting as both a retailer and construction contractor. Best Buy also claims

that there is no authority for the Department to “discriminate against larger businesses in this way.”

¶ 29 Statutes carry a strong presumption of constitutionality, and we have a duty to uphold the

constitutionality of a statute if reasonably possible. Arangold Corp. v. Zehnder, 204 Ill. 2d 142,

146 (2003). A party challenging a nonproperty tax classification carries the burden of rebutting

that presumption and clearly establishing the statute’s unconstitutionality. Id. Furthermore, we

must afford broad latitude to the legislature with respect to its classifications for tax purposes.

Allegro Services, Ltd. v. Metropolitan Pier & Exposition Authority, 172 Ill. 2d 243, 250 (1996). If

a set of facts can be reasonably conceived that would sustain the classification, we must uphold it.

Geja’s Cafe v. Metropolitan Pier & Exposition Authority, 153 Ill. 2d 239, 248 (1992) (citing

Illinois Gasoline Dealers Ass’n v. City of Chicago, 119 Ill. 2d 391, 403 (1988)).

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¶ 30 To survive scrutiny under the uniformity clause, a nonproperty tax classification must pass

the “Searle test,” i.e., it must (1) be based on a real and substantial difference between the people

taxed and those not taxed and (2) bear some reasonable relationship to the object of the legislation

or to public policy. See Searle Pharmaceuticals, Inc. v. Department of Revenue, 117 Ill. 2d 454,

469 (1987). A court, however, does not require perfect rationality as to each and every taxpayer.

See Geja’s Cafe, 153 Ill. 2d at 252. “The uniformity clause was not designed as a straitjacket for

the General Assembly”; to the contrary, the clause merely ensures minimum standards of

reasonableness and fairness between groups of taxpayers. Id. We review the constitutionality of

a statute de novo. Arangold, 204 Ill. 2d at 146.

¶ 31 In this case, the Act meets both prongs of the Searle test. First, there is a real and substantial

difference between a retailer such as Best Buy, which primarily sells appliances to the end user

and whose installation services are merely incidental to the sale of the appliance, and a construction

contractor (or other entity who meets the exemption requirements of section 1940(c)), which

provides a service for which the appliance is merely incidental. Best Buy cites a June 2015

“Compliance Alert” issued by the Department to support its claim that a business can act as a

retailer and construction contractor simultaneously. See Ill. Dep’t of Revenue, Compliance Alert

(June 2015), https://www2.illinois.gov/rev/research/publications/compliancealerts/Documents/

ca-2015-14.pdf [https://perma.cc/5KQ3-E42Y]. This, however, does not change the outcome.

Setting aside the propriety of citing a general agency publication as authority (see Ill. S. Ct. R.

341(h)(7) (eff. May 25, 2018)), whether an entity can act as a retailer and contractor at the same

time is irrelevant. The Act applies based upon the substance of the transaction and not the

taxpayer’s subjective characterization. We further note that the 2015 alert specifically rejected the

precise argument Best Buy makes in its statutory challenge. The first prong is thus met.

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¶ 32 As to the second prong, it is well established that the intent of the Act is to tax “the last

transfer for a consideration.” Modern Dairy Co. v. Department of Revenue, 413 Ill. 55, 67 (1952).

This intent is not discriminatory, nor is it discriminatory to exempt sales that are merely “incidental

to the performance of services.” Id. The Department does not have to provide perfect rationality;

instead, it must merely ensure “minimum standards” of reasonableness. Geja’s Cafe, 153 Ill. 2d

at 252. Furthermore, we must accord broad latitude to the legislation as to its tax classifications

(Allegro Services, 172 Ill. 2d at 250) and reject constitutional challenges to statutes if reasonably

possible (Arangold, 204 Ill. 2d at 146). Under these circumstances, we are compelled to hold that

the Act is constitutional. Best Buy’s final claim of error is thus without merit.

¶ 33 CONCLUSION

¶ 34 The circuit court did not err in finding that Best Buy’s sale of certain appliances is not

exempted from the retail occupancy tax despite Best Buy’s subsequent installation of those

appliances. The Department’s imposition of the retail occupancy tax on these sales does not violate

the uniformity clause of the state constitution.

¶ 35 Affirmed.

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No. 1-19-1680

Cite as: Best Buy Stores, L.P. v. Department of Revenue, 2020 IL App
(1st) 191680

Decision Under Review: Appeal from the Circuit Court of Cook County, No. 2017-L-
050591; the Hon. Michael F. Otto, Judge, presiding.

Attorneys David A. Hemmings and Robert M. Galloway, of Baker &
for McKenzie LLP, of Chicago, and Scott L. Brandman and David A.
Appellant: Pope, of Baker & McKenzie LLP, of New York, New York, for
appellant.

Attorneys Kwame Raoul, Attorney General, of Chicago (Jane Elinor Notz,
for Solicitor General, and Caleb Rush, Assistant Attorney General, of
Appellee: counsel), for appellees.

Amicus Curiae: Leonard A. Gail, Paul J. Berks, and Suyash Agrawal, of Massey &
Gail LLP, of Chicago, for amicus curiae Coalition of Independent
Appliance Sellers.

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