Sprague v. Johnson

JUSTICE STEIGMANN

delivered the opinion of the court:

The Illinois Department of Revenue (Department) appeals the circuit court’s decision to refund money assessed as retailers’ occupation tax and use tax against plaintiff, Ralph Sprague. The Department claims (1) Sprague engaged in retail sales when he acted as a hauler and a middleman between a quarry and purchaser of rock, and (2) Sprague owed use tax on two pickup trucks purchased during the audit.

We reverse.

The Department audited Sprague to determine his liability for retailers’ occupation tax (retailers’ tax) for the period of January 1, 1983, to December 31, 1985. Sprague’s trucking service specialized in hauling rock, coal, sand, and fertilizer. Sprague never advertised he had rock for sale and never offered to sell rock to anyone. Instead, customers called him to request that he acquire and haul rock to locations they specified. Sprague then quoted the sales price, the retailers’ tax on the purchase, and the hauling charge. These charges were determined by the Illinois Commerce Commission. Sprague did not charge retailers’ tax on hauling.

After a customer placed an order, a Sprague employee would drive to a quarry, load the rock onto a truck, and deliver the rock to the location requested by the customer. On one occasion, Sprague hauled some rock to his own place of business because his truck could not gain access to a customer’s driveway. Sprague did not offer this rock for sale and never purchased other quantities of stone on his own behalf.

After hauling was completed, Sprague billed the customer. The bills did not itemize the price of the rock, the retailers’ tax on the rock, or the hauling charge, but simply listed a total charge.

The quarries with which Sprague did business did not require that Sprague’s service haul their rock and did sell rock directly to their customers. The price of the rock was the same in both cases because Sprague added no markup and did not receive any kickbacks. Sprague did not testify about the weight of the rock he hauled. His secretary testified about one order for 44.9 tons of rock.

Frank Cook, an auditor for the Department, concluded that Sprague was conducting retail sales because (1) Sprague’s customers called him, placed their orders with him, were billed by him, and paid him; (2) Sprague paid the quarry for the purchase amount of the rock; and (3) Sprague did not itemize the hauling charge, the charge for the rock, and the amount of tax on the rock on his bills. Cook concluded that Sprague was a retailer despite the absence of an inventory at Sprague’s place of business.

The circuit court cited the definition of “sale at retail” set forth in section 1 of the Retailers’ Occupation Tax Act (Act) (Ill. Rev. Stat. 1987, ch. 120, par. 440) and determined that the Act, not the Department regulations described by Cook (86 Ill. Adm. Code §§130.415(b), (d) (1985)), should govern the outcome of the case. The court found that Sprague and his customers made an oral contract at the time of ordering. Based upon the contract and the circumstances of this case, the court concluded that the parties to the transaction intended for Sprague to merely be the customer’s agent for the purpose of purchasing the rock and that title to the rock pass to the customer when Sprague picked up the rock at the quarry. The court noted that Sprague had even purchased rock from one of his customers during the incident in which Sprague hauled the rock to Sprague’s place of business because the customer’s driveway would not allow delivery. The court found for Sprague and ordered a refund.

In addition to contesting the retailers’ tax on the hauling charge, Sprague also contested the Department’s determination that use tax was owing on two pickup tracks purchased during the period of the audit. Sprague’s bookkeeper testified that the trucks were used to haul commodities to Indiana and to transport repairmen and tires for the repair of tractor trailers. The court held that these trucks were used in interstate commerce and were exempt from taxation. The Department appeals both of these rulings.

Section 2 of the Act (Ill. Rev. Stat., 1988 Supp., ch. 120, par. 441) imposes a tax “upon persons engaged in the business of selling tangible personal property *** at retail.” Section 1 of the Act (Ill. Rev. Stat. 1987, ch. 120, par. 440) provides the following definitions:

“ ‘Sale at retail’ means any transfer of the ownership of or title to tangible personal property to a purchaser, for the purpose of use or consumption, *** for a valuable consideration * * *
* * *
‘Selling price’ or the ‘amount of sale’ means the consideration for a sale *** determined without any deduction on account of the cost of the property sold, the cost of materials used, labor or service cost or any other expense whatsoever ***.
* * *
‘Gross receipts’ from the sales of tangible personal property at retail means the total selling price or the amount of such sales, as hereinbefore defined.”

The Department argues Sprague engaged in sales of rock at retail and is subject to the retailers’ tax for all charges in connection therewith. The evidence presented at trial concerning the transactions between Sprague and his customers was as follows: (1) the customer would telephone Sprague to order rock; (2) Sprague would quote a price for the rock; (3) Sprague would go to the quarry and load the rock onto a truck; (4) Sprague would deliver the rock to the customer; (5) Sprague would bill the customer; and (6) Sprague would pay the quarry when billed. Because the quarry charged the retailers’ tax on the rock he hauled, Sprague collected that retailers’ tax from the customer for the sale of the rock.

The Act essentially defines a “sale at retail” as the transfer of title for the purpose of use or consumption in exchange for consideration. The circuit court determined that title to the rock passed to the customer, not to Sprague, when he picked up the rock at the quarry. However, this analysis is contrary to the rule set forth in section 2— 401(2) of the Uniform Commercial Code (Code) (Ill. Rev. Stat. 1987, ch. 26, par. 2—401(2)), which states the following:

“(2) Unless otherwise explicitly agreed[,] title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place; and in particular and despite any reservation of a security interest by the bill of lading * * *
(b) if the contract requires delivery at destination, title passes on tender there.”

If we assume, as the circuit court did, that the customer was the buyer and the quarry was the seller, then according to section 2— 401(2) of the Code, title to the rock passed when Sprague delivered the rock to the customer and not when Sprague loaded the rock at the quarry. It also follows that Sprague received title to the rock when he took possession of it at the quarry and held the title until he delivered it to the customer.

The circuit court further reasoned that the time at which the title passed was to be determined by the intentions of the parties. However, these intentions control only when the parties “otherwise explicitly agree” as to when title will pass. (Country Mutual Insurance Co. v. Aetna Life & Casualty Insurance Co. (1979), 69 Ill. App. 3d 764, 767, 387 N.E.2d 1037, 1039.) In this case, no evidence was presented indicating that Sprague, the quarry, or the customers explicitly agreed that title would pass from the quarry to the customer after Sprague loaded the rock onto his truck.

In Federal-Bryant Machinery Co. v. Department of Revenue (1968), 41 Ill. 2d 64, 241 N.E.2d 857, the Illinois Supreme Court considered whether a middleman is a retailer subject to the retailers’ tax. In Federal-Bryant, the Department assessed the retailers’ tax on a corporation which solicited and forwarded orders from customers to manufacturers. The manufacturers shipped directly to the customer, but billed the corporation which, in turn, billed the customer. The corporation guaranteed payment to the manufacturer and received commission from the orders solicited.

The court in that case determined that the corporation was not the manufacturer’s agent because the purchase order was routed through the corporation and the customer paid the corporation and not the manufacturer. Furthermore, the corporation’s responsibility for payment to the manufacturer and the corporation’s complicated ordering and billing procedures led the court to conclude that the corporation purchased from the manufacturers and resold to its customers. Federal-Bryant, 41 Ill. 2d at 68-69, 241 N.E.2d at 859.

Federal-Bryant differs factually in some ways from the present case. In Federal-Bryant, the corporation (1) exclusively represented the manufacturer, (2) solicited orders, (3) received commissions, (4) did not haul its product, and (5) used a complicated ordering and billing procedure. We note, however, that both the present case and Federal-Bryant have in common the middleman’s purchase from and remittance to one party, coupled with a sale to and payment from another party.

We find that Sprague took title to the rock at the quarry and transferred title to the customer upon unloading the rock at the customer’s place of business. Admittedly, Sprague realized no profit above and beyond the tariffs required to be charged by law. However, the fact that a taxpayer does not incur a profit does not preclude the assessment of the retailers’ tax. (Valier Coal Co. v. Department of Revenue (1957), 11 Ill. 2d 402, 409-10, 143 N.E.2d 35, 39.) Thus, Sprague conducted a “sale at retail.” Federal-Bryant lends support to this position despite its factual dissimilarities.

Having determined that Sprague conducted sales at retail, we now must determine whether Sprague’s hauling fees should be taxed under the Act. The Department contends Sprague failed to prove his hauling services are exempt from the retailers’ tax.

Section 4 of the Act states that a taxpayer’s return corrected by the Department, “shall be prima facie correct and shall be prima facie evidence of the correctness of the amount of tax due.” (Ill. Rev. Stat. 1987, ch. 120, par. 443.) The taxpayer must establish by competent evidence that the return corrected by the Department is not correct, and until he provides such proof, the corrected returns are presumptively correct. (Copilevitz v. Department of Revenue (1968), 41 Ill. 2d 154, 156, 242 N.E.2d 205, 206-07; Quincy Trading Post, Inc. v. Department of Revenue (1973), 12 Ill. App. 3d 725, 729, 298 N.E.2d 789, 792.) This prima facie case is overcome, and the burden shifts to the Department to prove its case, when the taxpayer presents his books and testimony, “which is not so inconsistent or improbable itself as to be unworthy of belief.” Quincy Trading Post, Inc., 12 Ill. App. 3d at 729-30, 298 N.E.2d at 793.

In Du Page Liquor Store, Inc. v. McKibbin (1943), 383 Ill. 276, 48 N.E.2d 926, the court determined that the taxpayer overcame the Department’s prima facie case by offering both financial documents and testimony at trial. The court explained,

“there should be some evidence introduced which is identified with books or records as kept by the taxpayer and supported by proof of facts entitling it to be admitted as evidence or facts gathered from some other source which imports equal verity.” Du Page Liquor Store, Inc., 383 Ill. at 279, 48 N.E.2d at 927.

In Quincy Trading Post, Inc., this court stated the following:

“In Copilevitz [citation], the supreme court said that the Act and its regulations are ‘explicit in its demand for documentary evidence ***.’ The language of that case indicates that evidence corroborating statements of the taxpayer and other supporting data is necessary. A taxpayer has all of his books and records, so, if wrongfully assessed, he could easily overcome the prima facie case of the department at the hearing procedures provided. In short, the plaintiff may not prevail by merely saying its own return was correct, and that the revenue department must prove its return correct. Simply questioning the Department of Revenue’s return or denying its accuracy does not shift the burden to the Department of Revenue.” Quincy Trading Post, Inc., 12 Ill. App. 3d at 730-31, 298 N.E.2d at 793.

In the instant case, Sprague offered no documentary evidence showing that the sale of rock and the hauling of rock were separate transactions. In fact, Sprague’s sales invoices reveal one total charge for both the rock and the hauling. We therefore conclude that Sprague failed to overcome the Department’s prima facie case. Accordingly, we find that he owes the retailers’ tax for his hauling services.

Also at issue is whether Sprague is exempt from use tax for his two pickup trucks. Section 3(c) of the Use Tax Act (Ill. Rev. Stat. 1987, ch. 120, par. 439.3(c)) imposes a use tax on tangible personal property purchased at retail, but exempts several activities, including the following:

“the use, in this State, by owners, lessors, or shippers of tangible personal property which is utilized by interstate carriers for hire for use as rolling stock moving in interstate commerce as long as so used by interstate carriers for hire.” Ill. Rev. Stat. 1987, ch. 120, par. 439.3(c).

Again, Sprague failed to overcome the Department’s prima facie case. At trial, Sprague merely offered the testimony of his bookkeeper, who indicated that the trucks in question were used to haul for a mine service located in Indiana and to aid in the repair of tractor trailers. This evidence is insufficient as a matter of law. As previously noted, documentary proof of tax-exempt status is required to prevail against an assessment of tax deficiency by the Department.

Reversed.

SPITZ, J., concurs.