SIXTH DIVISION
April 13, 2001

No. 1-99-0889

JUSTICE O'BRIEN delivered the opinion of the court:

The Illinois Department of Revenue (the Department) appeals an order of the circuit courtreversing the Department's finding that alcohol used by Armour Pharmaceutical Company (Armour)in making certain pharmaceutical products is subject to a use tax. Armour cross-appeals the portion ofthe order of the circuit court affirming the Department's finding that Armour utilized an unauthorizedmethod of computing and reporting its use tax liability.

On appeal, the Department argues that the circuit court erred in determining that the alcoholat issue was a "by-product of manufacturing" excepted from taxation under section 2 of the Use Tax Act(35 ILCS 105/2 (West 1998)). On cross-appeal, Armour argues that the Department and the circuitcourt erred in rejecting Armour's methodology for recovering overpayments of its use tax. We affirm onthe appeal and on the cross-appeal.

Armour manufactured pharmaceutical products derived from human plasma. As part of itsmanufacturing process, Armour employed alcohol to separate human plasma into various "fractions." During the fractionation process, the alcohol became contaminated with human proteins.

During the last stage of the process, Armour recycled the alcohol by removing it from the plasmaproducts and sending it to an "alcohol recovery system" where Armour removed all remaining humanproteins. Armour sold the recycled alcohol to unrelated manufacturers.

Through a series of accounting procedures, Armour effectively paid no use tax on the recycledalcohol. The Use Tax Act (35 ILCS 105/3 (West 1998)) imposes a tax upon the privilege of usingtangible personal property purchased at retail from a retailer. In order to avoid multiple taxation of thesame personal property as it moves through the chain of production, only those transactions involvinga consumer of the personal property are subject to taxation. Container Corp. of America v. Wagner, 293Ill. App. 3d 1089, 1093 (1997). Thus, the Use Tax Act makes a statutory exception for property that isresold or incorporated into the other property for resale. Container Corp., 293 Ill. App. 3d at 1093. Specifically, section 2 of the Use Tax Act excludes from taxation any personal property "resold as aningredient of an intentionally produced product or by-product of manufacturing." (Emphasis added.)35 ILCS 105/2 (West 1998).

Armour determined that the recycled alcohol was a "by-product of manufacturing," which isexcluded from taxation under section 2 of the Use Tax Act. See 35 ILCS 105/2 (West 1998). TheDepartment disagreed and issued a notice of tax liability. Armour filed a timely protest to theDepartment's notice.

An administrative hearing was held. The Department's administrative law judge (ALJ) foundthat the recycled alcohol was subject to use taxation and that Armour's method of use tax accounting andreporting was not authorized by law. The ALJ recommended that the notice of tax liability be upheldin its entirety. The Department accepted the ALJ's recommendation.

Armour filed a complaint for administrative review. The circuit court reversed the Department'sfinding that the recycled alcohol was subject to use taxation and affirmed the Department's finding thatArmour had used an unauthorized method of computing and reporting its use tax liability. TheDepartment appeals the portion of the circuit court's order reversing its finding that the recycled alcoholis subject to use taxation. Armour cross-appeals the portion of the circuit court's order affirming theDepartment's finding that Armour used an unauthorized method to compute and report its use taxliability.

First, we address the Department's appeal. In reviewing a final decision under theAdministrative Review Law (735 ILCS 5/3~101 et seq. (West 1996)), we review the agency's decisionand not the circuit court's determination. XL Disposal Corp. v. Zehnder, 304 Ill. App. 3d 202, 207(1999). The agency's decisions on questions of fact are entitled to deference and are reversed only if theyare against the manifest weight of the evidence. Abrahamson v. Illinois Department of ProfessionalRegulation, 153 Ill. 2d 76, 88 (1992). Where the agency decides a mixed question of fact and law, thedecision is reversed only if it is clearly erroneous. City of Belvidere v. The Illinois State Labor RelationsBoard, 181 Ill. 2d 191 (1998). Where there is no question of fact, and the issue is one of law only, theagency's decision is reviewed de novo. Envirite Corp. v. Illinois Environmental Protection Agency, 158Ill. 2d 210, 214 (1994).

The Department argues that the clearly erroneous standard of review, as set forth in City ofBelvidere, applies here. The issue in City of Belvidere was whether the city's refusal to engage incollective bargaining with the union over the city's decision to contract out paramedic services to a privateambulance company amounted to an unfair labor practice in violation of the Illinois Public LaborRelations Act (Act) (5 ILCS 315/1 et seq. (West 1994)). City of Belvidere, 181 Ill. 2d at 202. In resolvingthe issue, the court noted that the Illinois State Labor Relations Board ( Board) had made a factualdetermination that the city's decision affected wages, hours and other conditions of employmentpursuant to section 7 of the Act. City of Belvidere, 181 Ill. 2d at 201, 205. The court further noted thatthe Board's finding concerned a question of law because the phrase "wages, hours and other conditionsof employment" was a legal term that required interpretation. City of Belvidere, 181 Ill. 2d at 205. Therefore, the court held that the Board's determination was a mixed question of fact and law for whichthe clearly erroneous standard of review was appropriate. City of Belvidere, 181 Ill. 2d at 205.

By contrast, here we are not asked to review any factual findings made by the Department. Rather, the issue before us only involves a question of law, specifically, whether Armour's recycledalcohol is a "by-product of manufacturing" excepted from use taxation under section 2 of the Use TaxAct. Therefore, our standard of review is de novo.

Section 2 of the Use Tax Act does not define "by-product of manufacturing." Where a statutoryterm is undefined, that term must be given its ordinary and properly understood meaning. UnionElectric Co. v. Department of Revenue, 136 Ill. 2d 385, 397 (1990). The term "by-product" is ordinarilyunderstood to mean "a secondary or additional product: something produced (as in manufacturing) inaddition to the principal product." Webster's Third New International Dictionary 307 (1986).

The Department argues that the ordinary dictionary definition of "by-product" contemplatesthe creation of some new property resulting from the use of other property in manufacturing. TheDepartment contends that the recycled alcohol that came out of Armour's fractionation process wasessentially no different from the alcohol that went into the process and, thus, the recycled alcohol wasnot a new property. Since the recycled alcohol was not a new property, it could not be considered a by-product.

We disagree. The alcohol that went into the process was uncontaminated with human proteinsand was suitable for human plasma fractioning. The recycled alcohol that came out of the process hadbeen contaminated by human proteins which, according to federal regulations, rendered the recycledalcohol unsuitable for human plasma fractioning even after the proteins were removed. Thus, therecycled alcohol that came out of the process was different from the alcohol that went into the processbecause the recycled alcohol could no longer legally be used by Armour in its manufacturing ofpharmaceutical products derived from human plasma.

This case is similar to American Distilling Co. v. Department of Revenue, 53 Ill. App. 3d 42(1977). In American Distilling, the issue was whether new, charred white oak barrels used in theproduction and aging of bourbon whiskey were outside the scope of the Use Tax Act. AmericanDistilling, 53 Ill. App. 3d at 43. The court noted the uncontroverted testimony that bourbon whiskeycannot be made without the oak barrels, which provide the flavor bodies and extracts from their wood. American Distilling, 53 Ill. App. 3d at 44. The barrels can only be used once in the making of bourbonwhiskey. American Distilling, 53 Ill. App. 3d at 44.

The State argued that the barrels were not by-products of manufacturing. American Distilling,53 Ill. App. 3d at 45. The court adopted the Webster definition of "by-product": "A secondary oradditional product; something produced, as in the course of a manufacture, in addition to the principalproduct." American Distilling, 53 Ill. App. 3d at 45, quoting Webster's New International Dictionary (2ded. 1941). The court then stated:

"Here the barrels are a required part of the process of making bourbon whenthey are first used, and then by law, they are so changed it is illegal to attempt to usethem again to make bourbon. It is obvious the barrels are so changed by themanufacturing process, they are a secondary or additional by-product and are nottaxable." (Emphasis added.) American Distilling, 53 Ill. App. 3d at 45.

Similarly, here, the recycled alcohol is a required part of the fractionation process when it is firstused, but it is so changed that, by law, it may not be used again for fractionation of human plasma. Accordingly, the recycled alcohol is so changed by the manufacturing process that it constitutes asecondary or additional by-product and is not taxable.

The Department argues that the "lynchpin" of the court's holding in American Distilling wasthat the manufacturing process there robbed the barrels of the ingredients necessary to make bourbon. The Department argues that, by contrast, Armour's manufacturing process did not similarly rob therecycled alcohol of any essential ingredient or alter the alcohol's chemical composition. Therefore, theDepartment argues that American Distilling is inapposite.

We disagree. The court held in American Distilling that the barrels were by-products becausethey were so changed during the manufacturing process that they could no longer legally be used tomake the principal product (bourbon). Similarly, the recycled alcohol here is a by-product because itis so changed during the manufacturing process that it can no longer legally be used to make theprincipal product (pharmaceutical products derived from human plasma). American Distilling isdispositive here.

The Department argues that the court's discussion in American Distilling regarding by-productswas dictum, because the court had already determined earlier in the opinion that the barrels were notsubject to use taxation under a different exception in the Use Tax Act. However, even assuming that thecourt's discussion of by-products was dictum, that discussion constituted an expression of opinion on apoint argued by counsel and deliberately passed upon by the court. Thus, the court's discussion of by-products constituted judicial dictum (as opposed to mere obiter dictum) and should be followed unlessfound to be erroneous. See Cates v. Cates, 156 Ill. 2d 76, 80 (1993)(and its discussion of the differencesbetween judicial dictum and obiter dictum.) As discussed, we agree with the court's analysis in AmericanDistilling regarding what constitutes a by-product under the Use Tax Act, and we hold that the recycledalcohol here is a by-product excepted from taxation.

Next, we address Armour's cross-appeal. Armour contends that the Department erred inrejecting Armour's methodology for recovering the overpayment of its use tax. As succinctly noted bythe circuit court, Armour's method was to reduce its use tax basis by the amount of sales tax liability onthe sale of the recycled alcohol. The Department argues that Armour's method is not authorized bystatute and that Armour instead should have filed a refund claim under section 6 of the Retailers'Occupation Tax Act (35 ILCS 120/6 (West 1998)). Our review is de novo. Envirite Corp., 158 Ill. 2dat 214.

Armour admits that its methodology is not expressly authorized by statute. Instead, Armourrelies on private letter rulings from the Department that allegedly support Armour's position. However,private letter rulings have no precedential effect. Union Electric Co., 136 Ill. 2d at 400. Further, theprivate letter rulings cited by Armour are inapposite as they do not address the exact method used byArmour here to compute its use tax on the recycled alcohol.

Armour also cites two cases, Clark Oil & Refining Corp. v. Johnson, 154 Ill. App. 3d 773 (1987),and Sunnyland Cabinet & Millwork, Inc. v. Department of Revenue, 52 Ill. App. 3d 25 (1977). ClarkOil addressed the Department's use of the "relative volume approach" for computing the proper amountof use tax due on Clark Oil's use of certain oil refinery products. Sunnyland addressed whether theDepartment could collect a retailers' occupation tax on the taxes that plaintiff collected from itscustomers and remitted to the Department. Neither Clark Oil nor Sunnyland involved the issue here,i.e., whether Armour used an unauthorized methodology for recovering its use tax on the recycledalcohol.

The Department argues that Armour properly should have filed a claim for a refund of the usetax on the recycled alcohol. Section 19 of the Use Tax Act (35 ILCS 105/19 (West 1998)) provides thatwhen a taxpayer pays an erroneous amount of use tax, "whether such amount be paid through a mistakeof fact or an error of law, such [taxpayer] may file a claim for credit or refund with the Department inaccordance with Section[] 6 *** of the Retailers' Occupation Tax Act." (Emphasis added.)

As discussed, Armour paid use tax on an alcohol by-product that is exempt from taxation underthe Use Tax Act. The payment of the tax was an error of law to which section 6 of the Retailers'Occupation Tax Act applies. Accordingly, we affirm the Department's finding that Armour's properremedy is to file a refund claim in accordance with section 6 of the Retailers' Occupation Tax Act.

This case is being considered a second time. On August 18, 2000, an opinion issued with thesesame words, verbatim. On February 23, 2001, our supreme court vacated that opinion and orderedreconsideration in light of City of Belvidere v. Illinois State Labor Relations Board, 181 Ill. 2d 191 (1998).City of Belvidere was considered and analyzed in the first opinion and is considered and analyzed here.

Affirmed.

CAMPBELL, P.J., and REID, J., concur.*

*Justice Morton Zwick previously sat on this panel. Justice Zwick is no longer with the appellate court.Justice Ellis Reid is replacing Justice Zwick on the panel. He has reviewed the audio cassette of oralarguments and the briefs in this case.