Court Opinion

ID: 9535861
Source: CourtListenerOpinion
Date Created: 2023-08-07 06:45:40.615773+00
Date Added: 2024-06-11T13:33:22.122641
License: Public Domain

JUSTICE SIMON, concurring in part and dissenting in part: While I agree with the majority’s conclusion that Mobil’s use of its refinery fuels is subject to the use tax, I disagree with the method adopted to calculate that tax. As the majority explains, Mobil purchases crude oil from a source not subject to the Illinois retailers’ occupation tax. From that oil, Mobil makes two kinds of products: “Premium products” and “refinery fuels.” The premium products are sold on the open market and thus are not subject to the use tax. The refinery fuels, catalytic coke, process gas and heavy oil, are essentially by-products of the process by which the premium products are made. They have little or no value on the open market. Mobil itself uses them, however, for heating. Thus, they become subject to the use tax. The issue on which I disagree with the majority is how much tax. The use tax is calculated on the selling price of the item taxed. (Ill. Rev. Stat. 1977, ch. 120, par. 439.3.) There is no selling price here for refinery fuels, however, because Mobil never purchased refinery fuels. It purchased crude oil. The two products contained in it were a package deal. Thus, the difficult issue the court is faced with is how to allocate the price paid for the crude oil between the premium and the lower-grade products. There is no obvious way to make such an allocation. Any method will involve some element of fiction, because it is impossible to attach separate price tags to two items that were in fact purchased together. Nonetheless, there are fair and realistic ways to go about making the allocation which approximate what the selling prices of the two items would have been had they been sold separately. The majority unfortunately has not chosen such a method. The majority allocates the selling price solely on the basis of volume. Thus, if we can assume for the purpose of easy calculation that a barrel of crude oil sells for $100 and yields one-half barrel of the low-grade refinery fuels and one-half barrel of the premium products, the tax would be calculated as if Mobil had paid $50 for the low-grade fuels. That adds up to quite a high tax on the privilege of using something that is practically worthless. An example will illustrate the absurd results such a method of calculation can lead to. A maker of chinchilla coats might purchase live chinchillas for $500. When they arrive at his workshop, he slaughters them, takes their pelts to make coats, and grinds the rest of their bodies into cat food to feed the cats he keeps around to control mice. If the animal’s body without its pelt constitutes three-fifths of its total volume, the tax will be figured as if the coat maker paid $300 for his cat food. At a tax rate of 4% (Ill. Rev. Stat. 1977, ch. 120, par. 439.3), he will pay $12 in tax for an amount of cat food that he could have purchased at retail for 37 cents. I believe a better way to allocate the price of crude oil between premium and low-grade products is the relative-sales-value method. Under such a method, the ratio of the market prices of the two products plays a big part in allocating the purchase price of the raw combined commodity. The price paid for each part of the whole is thereby made to bear some resemblance to its actual value. Thus if a barrel of the premium-grade product is worth nine times what a barrel of the low-grade product is worth, and one barrel of crude oil produces one-half barrel of each product and sells for $100, $90 would be allocated to the premium products and $10 to low-grade refinery fuels. The majority’s formula encourages waste. The fuels in issue here are essentially by-products of the refining process. They command a low price on the open market, presumably because they are not very useful. There must be drawbacks to using these fuels rather than the premium products. Taxing their use at excessive rates may well discourage their use entirely. Yet because the premium products cannot be made without also making the low-grade products, the only thing to do with the by-product may be to throw it away and use premium products instead — a foolish waste of not inexhaustible resources. Moreover, I cannot believe that such a result is required by the statute. The statute requires that the selling price be used to determine the amount of tax. Both the method approved by the majority and the one I advance are based on the selling price. The statute says nothing about how to allocate that price between two products made from the purchased commodity. The use tax was enacted to fill in the gaps left by the retailers’ occupation tax (commonly known as the sales tax). The use tax prevents the avoidance of tax by purchasing goods out of State and shipping them into Illinois for use. Because of the use tax, no one will be tempted to buy goods at retail outside Illinois and bring them here. The State tax will be the same in any event: 4%. The trouble with the majority’s calculation of the use tax is that it will ultimately generate a tax greater than 4% on Mobil’s total purchase. It will more than fill the gap left by the sales tax. If Mobil had purchased the entire barrel of crude for $100 out of State wholly for its own use in Illinois, it would have been subject to a use tax of $4. Similarly, if it had purchased the barrel in Illinois from a retailer, a $4 sales tax would have to be paid. The tax is the same because the use tax is designed to neither encourage nor discourage commercial transactions not subject to the sales tax. Now assume for the sake of isolating the relevant issue that crude oil can be separated into the two products at no cost. Thus a $100 barrel of crude can be separated into a half barrel of premium product that will sell for $90 and a half barrel of low-grade refinery fuel that will sell for $10. If both products were sold by the refiner, the tax would be the same — $4 (4% of $90 and 4% of $10). Only when the refiner uses one product and sells the other and the majority’s formula is employed does that figure vary. Under the majority’s formula Mobil must pay $2 in use tax (4% on $50 which is one-half of the original cost). When it comes time to sell the premium product, however, its market value will still be $90. The sales tax on it will therefore be $3.60, bringing the total tax receipts by the State of Illinois to $5.60. Under my formula, the tax would remain $4. This peculiarity in the majority’s formula can work to the Department of Revenue’s disadvantage too. Using the same example, suppose Mobil had used its premium product and sold its low-grade product. Allocating the $100 purchase price by volume, only a $2 tax could be collected for the use of the premium product. The low-grade product will not, however, command any higher price on the open market than it would in the absence of the tax. It will still be sold for $10. The tax on it will be 40 cents, making the total tax only $2.40. Such a result is neither logical nor fair; clearly it is not consistent with the purpose of the statute. I therefore dissent from that portion of the majority’s conclusion. CHIEF JUSTICE RYAN joins in this partial concurrence and partial dissent.