Electric Energy, Inc. v. Hamer

Citations: 869 N.E.2d 153; 373 Ill. App. 3d 733; 311 Ill. Dec. 479; 2007 Ill. App. LEXIS 342Docket: 5-05-0467

Court: Appellate Court of Illinois; April 12, 2007; Illinois; State Appellate Court

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Electric Energy, Inc. (EEI) appealed an administrative decision by the Illinois Department of Revenue that denied its request for a refund of use taxes related to coal used to produce type C fly ash. EEI, based in Joppa, Illinois, primarily generates electricity and also sells type C fly ash, which is produced from burning coal. The Department denied the refund on the grounds that EEI's operations did not constitute manufacturing, as the coal was burned primarily to generate electricity, not to produce fly ash. The circuit court affirmed the Department's decision, concluding that EEI owed use tax on all coal burned for electricity production. The appellate court addressed the key legal issue of whether the coal used in producing fly ash qualifies for a tax exemption under the Use Tax Act. The court stated that it would review the factual determinations based on the manifest weight of the evidence, while legal questions would be reviewed de novo. The court agreed with the Department’s reasoning for applying a clearly erroneous standard due to the mixed question of fact and law involved.

The agency's determination regarding the coal's tax exemption involves both factual and legal analyses, specifically whether the coal qualifies as "resold as an ingredient of an intentionally produced product or by-product of manufacturing" under 35 ILCS 105/2. This constitutes a mixed question of fact and law, warranting a clearly erroneous standard of review. The Illinois Supreme Court emphasizes that courts should defer to agency interpretations of ambiguous statutes, as agencies possess the expertise to make informed judgments. Generally, tax statutes are construed in favor of the taxpayer, while exemptions are strictly interpreted in favor of taxation. The burden lies with the party claiming the exemption to prove it convincingly.

Section 3 of the Act levies a tax on the use of tangible personal property, allowing for exemptions to prevent double taxation throughout production stages. Specifically, the Act exempts property resold or incorporated into other property for resale. EEI asserted that the coal used to create fly ash qualifies as an ingredient of an intentionally produced product, thus exempt from taxation. However, the Department contests the characterization of fly ash and argues that the critical issue is whether EEI qualifies as a manufacturer. The production of electricity is categorized as a service, not manufacturing, as established in case law. Consequently, since EEI is not a manufacturer, the fly ash does not meet the Act's criteria for a by-product of manufacturing, leading to the conclusion that the coal's use does not satisfy the statutory exemption.

The burning of coal results in ash residue, indicating a complete consumption of the coal under the act's definition. As a consequence, the use of coal for electricity generation is deemed fully taxable, leading to the Department of Revenue's proper denial of EEI's use tax refund request. The circuit court of Massac County's judgment affirming this denial is upheld.

Justice Wexstten dissents, arguing that the Department's interpretation of the Act is overly restrictive and inconsistent with legal precedents. He references cases where by-products of coal and limestone used in manufacturing were exempt from taxation when they became integral to the final product. Wexstten asserts that electricity production involves a manufacturing process, producing type C specification fly ash, which should qualify for tax exemption as it is a component of a product that is intentionally manufactured and then resold. He cites additional cases supporting this standpoint, emphasizing that the portion of coal that is not fully consumed and transforms into fly ash should not be subject to taxation as personal property.