                                                              NO. 5-05-0467
                        N O T IC E

 Decision filed 04/12/07. The text of
                                                                 IN THE
 this dec ision m ay b e changed or

 corrected prior to the              filing of a
                                                   APPELLATE COURT OF ILLINOIS
 P e t i ti o n   for     Re hea ring   or   the

 disposition of the same.
                              FIFTH DISTRICT
___________________________________________________________________________

ELECTRIC ENERGY, INC.,                  )     Appeal from the
                                        )     Circuit Court of
      Plaintiff-Appellant,              )     Massac County.
                                        )
v.                                      )     No. 03-MR-12
                                        )
BRIAN HAM ER, Director of Revenue,      )
and THE DEPARTMENT OF REVENUE,          )     Honorable
                                        )     Terry J. Foster,
      Defendants-Appellees.             )     Judge, presiding.
___________________________________________________________________________

                  JUSTICE DONOVAN delivered the opinion of the court:

                  Taxpayer, Electric Energy, Inc. (EEI), sought judicial review of an administrative

decision from the Illinois Department of Revenue (Department) denying a request for a

refund of a portion of the use taxes it paid. The circuit court of Massac County affirmed the

Department's decision denying the requested refund. EEI now appeals the circuit court's

decision. We affirm.

                  EEI is a corporation located in Joppa, Illinois, and is engaged primarily in the

wholesale production of electricity. Six percent of its after-tax income, however, is also

derived from the sale of type C specification fly ash. Fly ash, produced by the burning of

coal, is a pozzolan, which, in the presence of water, will combine an activator to produce

cementitious material.                             Fly ash is divided into two classes based upon its chemical

composition. Fly ash produced from subbituminous and lignite coals is type C and contains

more than 20% lime. Fly ash from bituminous or anthracite coal is type F and generally

contains less than 10% lime. Specification grade type C fly ash has several commercial

applications for use in construction projects as an addition to or replacement for portland

                                                                    1
cement. In order to produce marketable type C fly ash that meets the required specifications,

EEI must choose the proper type of coal and maintain multiple process control requirements.

EEI also had to purchase and install certain equipment, machinery, and other improvements

in order to produce, collect, transport, and store marketable type C fly ash. EEI filed

amended use tax returns seeking a refund of its self-assessed use taxes for the periods from

May 1992 through November 1999. The amended returns sought a refund for taxes paid for

the percentage of coal used to produce type C fly ash. The Department denied the refund.

The Department concluded that because EEI was not a manufacturer and its business

operations did not constitute manufacturing, its consumptive use of coal was taxable. The

circuit court agreed after determining that the coal purchased was intentionally burned to

produce electricity, not to produce fly ash, and that type C fly ash was not an intentionally

produced product or by-product of a manufacturing process. The court concluded that EEI

owed use tax on all of the coal burned to produce electricity at its Joppa plant.

       We are faced with one dispositive issue in this case: whether the coal purchased and

used in the creation of type C fly ash as a part of the process of generating electricity

qualifies for an exemption from the use tax imposed by the Use Tax Act (Act) (35 ILCS

105/1 et seq. (West 2004)). Given that we are reviewing an administrative decision, the

agency's determination of fact will be disturbed only if it is against the manifest weight of

the evidence. Central Illinois Light Co. v. Department of Revenue, 336 Ill. App. 3d 908, 911,

784 N.E.2d 442, 445 (2003). Questions of law, however, are not entitled to deference and

are reviewed de novo. Armour Pharmaceutical Co. v. Department of Revenue, 321 Ill. App.

3d 662, 665, 748 N.E.2d 265, 268 (2001). The examination of the legal effect of a set of

given facts presents a mixed question of fact and law calling for a clearly erroneous standard

of review. City of Belvidere v. Illinois State Labor Relations Board, 181 Ill. 2d 191, 205, 692

N.E.2d 295, 302 (1998); see also American Federation of State, County & Municipal


                                              2
Employees, Council 31 v. Illinois State Labor Relations Board, State Panel, 216 Ill. 2d 569,

577, 839 N.E.2d 479, 485 (2005). The Department argues here that we must review this case

under a clearly erroneous standard because a mixed question of fact and law exists. We

agree. As explained in City of Belvidere, the agency's finding is, in part, factual because it

involves considering whether the facts support a finding that the coal is exempted because

it is "resold as an ingredient of an intentionally produced product or by-product of

manufacturing." 35 ILCS 105/2 (West 2004). Nevertheless, the agency's finding also

concerns a question of law because the above-quoted phrase is a legal phrase that requires

interpretation.   Consequently, under City of Belvidere, because this case involves an

examination of the legal effect of a given set of facts, it involves a mixed question of fact and

law, and as a result, a clearly erroneous standard of review applies.

       In addition, as explained by the Illinois Supreme Court in Abrahamson v. Illinois

Department of Professional Regulation, 153 Ill. 2d 76, 97-98, 606 N.E.2d 1111, 1121-22

(1992), a reviewing court will give substantial weight and deference to an interpretation of

an ambiguous statute by the agency charged with the administration and enforcement of the

statute. Such an interpretation expresses an informed source for ascertaining the legislative

intent. A significant reason for this deference is that agencies can make informed judgments

upon the issues, based on their experience and expertise.           See Illinois Consolidated

Telephone Co. v. Illinois Commerce Comm'n, 95 Ill. 2d 142, 152-53, 447 N.E.2d 295, 300

(1983).

       Statutes imposing tax liability are generally construed against the state and in favor

of the taxpayer. Central Illinois Light Co., 336 Ill. App. 3d at 912, 784 N.E.2d at 445.

Statutory exemptions to taxation, however, are strictly construed in favor of taxation.

Chicago Bar Ass'n v. Department of Revenue, 163 Ill. 2d 290, 301, 644 N.E.2d 1166, 1172

(1994). The party seeking the exemption bears the burden of clearly and conclusively


                                               3
proving that it is entitled to the exemption. Van's Material Co. v. Department of Revenue,

131 Ill. 2d 196, 216, 545 N.E.2d 695, 705 (1989).

         Section 3 of the Act imposes a tax "upon the privilege of using in this State tangible

personal property." 35 ILCS 105/3 (West 2004). In order to avoid multiple taxation of the

same property as it moves through the chain of production, only those transactions involving

a consumer of the personal property are subject to taxation. Armour Pharmaceutical Co.,

321 Ill. App. 3d at 664, 748 N.E.2d at 267. The Act therefore makes a statutory exception

for property that is resold or incorporated into other property for resale.            Armour

Pharmaceutical Co., 321 Ill. App. 3d at 664, 748 N.E.2d at 267. Specifically, section 2 of

the Act exempts from taxation any personal property "resold as an ingredient of an

intentionally produced product or by-product of manufacturing." 35 ILCS 105/2 (West

2004).    EEI determined that the coal specifically purchased to create fly ash was an

ingredient of an intentionally produced product and therefore should be excluded from

taxation. While the Department disputes whether the fly ash was an intentionally produced

product, we need not address the matter.           As the Department correctly argues, the

determining language is "manufacturing." EEI is not a manufacturer. The production of

electricity is considered a service business. See People ex rel. Mercer v. Wyanet Electric

Light Co., 306 Ill. 377, 137 N.E. 834 (1922) (an electric light company is not a

manufacturing industry within the meaning of the taxing laws); see also Farrand Coal Co.

v. Halpin, 10 Ill. 2d 507, 140 N.E.2d 698 (1957) (the sale of electricity is the sale of a

service). Because producing electricity is not manufacturing, the fly ash cannot be a by-

product or an intentionally produced product of manufacturing as the Act requires. Cf.

Columbia Quarry Co. v. Department of Revenue, 40 Ill. 2d 47, 237 N.E.2d 525 (1968) (in

the manufacturing of pig iron, a portion of the limestone became an ingredient of the slag by-

product). As recognized in Farrand Coal Co.:


                                               4
       "The coal is used by the utility to generate electrical energy. Such use is by the

       burning or combustion of the coal. When burned, the coal is gone except for the ash

       residue. It is difficult to perceive how there could be a more complete use or

       consumption of the coal within the meaning of the act." Farrand Coal Co., 10 Ill. 2d

       at 513, 140 N.E.2d at 701.

Unfortunately for EEI, the use of coal to produce electricity is a fully taxable event, and

therefore, the Department properly denied EEI's requested use tax refund.

       For the aforementioned reasons, we affirm the judgment of the circuit court of Massac

County affirming the Department of Revenue's denial of a use tax refund.



       Affirmed.



       SPOM ER, J., concurs.



       JUSTICE WEXSTTEN 1 , dissenting:

       The Department of Revenue's interpretation of the Act is too restrictive and is contrary

to precedent. See Granite City Steel Co. v. Department of Revenue, 30 Ill. 2d 552 (1964) (the

Department properly excluded from its use tax assessment the amount of coke, converted

from coal and used to supply heat necessary to produce pig iron, that became an ingredient

of the finished pig iron that was subsequently sold); Columbia Quarry Co. v. Department of

Revenue, 40 Ill. 2d 47 (1968) (the portion of limestone, used by the steel company to "flux

off" impurities, that was not completely consumed but became a constituent of slag that was

resold was exempt from the retailers' occupation tax). Although the production of electricity

       1
           Justice Hopkins participated in oral argument. Justice Wexstten was later substituted

on the panel and has read the briefs and listened to the audiotape of oral argument.

                                                5
does not constitute manufacturing (Farrand Coal Co. v. Halpin, 10 Ill. 2d 507, 513 (1957)),

no precedent precludes EEI from acting as an electric company and a manufacturer for

purposes of the Act. There is a process occurring while the coal is burned for electricity, a

manufacturing process that results in type C specification fly ash that is subsequently resold.

As a result, that portion of coal not completely consumed but which became an ingredient

of the type C specification fly ash subsequently resold is exempt from taxation as personal

property "resold as an ingredient of an intentionally produced product or by-product of

manufacturing."    35 ILCS 105/2 (West 2004); see also American Distilling Co. v.

Department of Revenue, 53 Ill. App. 3d 42 (1977); Armour Pharmaceutical Co. v.

Department of Revenue, 321 Ill. App. 3d 662 (2001).            For the foregoing reasons, I

respectfully dissent.




                                              6
