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SECOND DIVISION

December 15, 1998

No. 1-97-3560

JUSTICE McNULTY delivered the opinion of the court:

In this case we must decide whether rolling stock used occasionally in interstate commercequalifies for exemption from the use tax. See 35 ILCS 105/1 et seq.(West 1992). TheDepartment of Revenue (the Department) denied the exemption National School Bus Servicesought, and the circuit court affirmed the Department's ruling. National appeals. The Mid-WestTruckers' Association, Inc., and Illinois Movers' and Warehousemen's Association submitted abrief as amici curiae, supporting National.

The Interstate Commerce Commission issued a certificate granting National authority tooperateas a common carrier. National primarily provides children transportation to and from school, andon school field trips or for extracurricular activities. To supplement the income from schooltransportation, National also provides charter trips for hire to private groups. Some of the fieldtrips and extracurricular activities require trips to other states, and the private groups occasionallycharter trips to other states or to the airport to start trips to other states.

National purchased 25 buses from out-of-state suppliers during July and August 1990. Nationalpaid no use tax, claiming that section 3-55 of the Use Tax Act (the Act) (35 ILCS 105/3-55(West1992)) exempted it from taxation. That section provides:

"To prevent actual or likely multistate taxation, the tax imposed by this Actdoes not applyto the use of tangible personal property in this State under the following circumstances:

***

(b) The use, in this State, of tangible personal property by an interstatecarrier for hire asrolling stock moving in interstate commerce *** as long as so used by the interstate carriersfor-hire."

In 1994 the Department completed an audit of the use of the 25 buses. National gave theDepartment invoices for every trip in interstate commerce taken by any of the 25 buses fromAugust 1990 through June 1993. The invoices showed a total of 389 such trips. Nationalpresented no data concerning the total number of trips the buses made, and it refused theDepartment's request for data on the revenue earned from intrastate and interstate trips. However, National supplied total mileage data, from which the Department concluded that thebuses traveled 5.01% of their miles in interstate trips, including trips to the airport for which thebus never left the state. National made no claim that its other trips involved interstate commercein any way.

The Department's auditor found that 12 of the buses, for at least one complete tax year, madenointerstate trips. All the buses averaged five trips in interstate commerce per bus per year. Theauditor reasoned that the trips in interstate commerce probably averaged more miles per trip thanthe intrastate trips on which the buses mostly took children to and from school. Therefore, heconcluded that far fewer than 5% of all trips involved interstate commerce. The auditor alsoassumed, from National's refusal to provide the requested data, that far less than 5% of itsrevenue came from trips involving interstate commerce.

The Department had a long-standing policy of denying the rolling stock exemption unlessthetaxpayer was "able to show that it transport[ed] persons or property for hire in interstatecommerce on a 'regular and frequent' basis." In light of this policy, the auditor wrote, "Thetaxpayer has not provided the necessary information in the way of records to substantiate theexemption should be allowed. Therefore, the exemption is disallowed." He calculated a tax dueof $56,005, plus penalties and interest due of $35,996, for a total of $92,001.

For its protest, National paid the tax due to stop the accumulation of penalties and interest. TheDepartment reaffirmed its interpretation of the rolling stock exemption, and therefore it upheldthe auditor's decision. The court affirmed the Department.

National claims that the Department's ruling conflicts with the holding of BurlingtonNorthern,Inc. v. Department of Revenue, 32 Ill. App. 3d 166, 336 N.E.2d 170 (1975). TheDepartmentcontends that the ruling is mandated by the holding of First National Leasing &Financial Corp.v. Zagel, 80 Ill. App. 3d 358, 399 N.E.2d 994 (1980). The parties agree that the two casescan beharmonized, but they argue for different interpretations of the cases.

In Burlington Northern, the railroad used passenger cars and engines in bothintrastate andinterstate trips. The Department denied the rolling stock exemption, in part because the taxpayerfaced no possibility of multiple taxation. The appellate court rejected this reasoning, holding thatthe legislature

"intended to exempt rolling stock moving in interstate commerce frombeing subject to theuse tax regardless of the potentiality of multiple taxation. *** While it is true thatgrantsof tax exemption are to be given a strict interpretation against the taxpayer and in favor ofthe taxing power [citations], even a strict interpretation of this statute does not justifymaking the rolling stock exemption contingent on eligibility for the credit exemption." (Emphasis in original.) Burlington Northern, 32 Ill. App. 3d at 173-74.

The court also held that the taxpayer need not show that the primary purpose of the rollingstockinvolved interstate commerce. Such a standard "would exclude from the coverage of theexemption *** instrumentalities substantially but not primarily used in interstatecommerce ***. No doubt exists that such results would unduly burden interstate commerce." (Emphasis inoriginal.) Burlington Northern, 32 Ill. App. 3d at 175.

The court noted that 13% of the movement of the cars took them across state lines, andintrastatetrips involved interstate commerce.

"[W]here passengers or goods traveling from one State to another aretransported as part ofthat interstate journey by an agency which carries them solely within one State, theintrastate portion of the journey becomes interstate. *** The interstate nature of the mailand express packages carried by the plaintiff similarly imparts interstate status to theplaintiff's activities within Illinois. *** Combining plaintiff's '13%' of actual physicalmovement across State lines with the interstate movement conferred on plaintiff as carrierof interstate traffic, we hold *** that plaintiff should not be denied an exemption ***." Burlington Northern, 32 Ill. App. 3d at 176.

National and amici claim that in Burlington Northern the courtestablished that absolutely anyuse of rolling stock in interstate commerce, no matter how insignificant, qualifies for the rollingstock exemption from the use tax. We disagree. The court in Burlington Northernheld only thatthe specific usage in interstate commerce proved in that case was "significant enough to meritexemption." Burlington Northern, 32 Ill. App. 3d at 169.

In Zagel the taxpayer sought the rolling stock exemption from equipment usedto remove or rerailrailroad cars. The taxpayer's employees testified to occasional use in interstate commerce. TheDepartment found the oral testimony incompetent and denied the exemption due to inadequatedocumentation. The trial court reversed this decision, finding the oral testimony competentevidence because the statute did not require written evidence of interstate use.

The appellate court agreed with the trial court that the statute did not require written records. Zagel, 80 Ill. App. 3d at 360. But the court held:

"We do not find the general accounts of these witnesses, who said thatgoods wereinfrequently carried across the State lines by the taxpayer's vehicles, to be a sufficientindication of interstate commerce." Zagel, 80 Ill. App. 3d at 359.

Because the taxpayer did not present sufficient evidence to establish entitlement to theexemption, the court reinstated the Department's tax assessment.

National and amici argue that the oral testimony in Zagel wasinsufficient to show any use of therolling stock in interstate commerce. Again we disagree. The court held the oral evidencecompetent, and that evidence showed some use in interstate commerce, but that evidence did notestablish a level of usage significant enough to merit exemption. Thus, both BurlingtonNorthernand Zagel require the taxpayer to prove some significant level of usage in interstatecommerce towarrant a rolling stock exemption.

The Department interpreted the opinion and the concurrence in Zagel to requireevidence ofregular and frequent use in interstate commerce, and its letter rulings have consistently reflectedthat understanding. National argues that the Department has misconstrued the statute, andamicicontend that the Department has effectively enforced an unpublished rule, in violation of theAdministrative Procedure Act. 5 ILCS 100/5-35 (West 1992). This court affords substantialdeference to an administrative agency's interpretation of a statute which the agency administersand enforces. Van's Material Co. v. Department of Revenue, 131 Ill. 2d 196,202-03, 545 N.E.2d695 (1989). "A significant reason for deferring *** is that the agency makes informed decisionsbased on its experience and expertise." County of Will v. Illinois State Labor RelationsBoard,219 Ill. App. 3d 183, 185, 580 N.E.2d 884 (1991).

The Use Tax Act says only that the tax does not apply to "the use *** of tangible personalproperty *** for hire as rolling stock moving in interstate commerce." 35 ILCS 105/3-55 (West1992). As the Department noted, the Act does not establish any particular level of usage requiredto qualify for the exemption. The Department has required regular and frequent use in interstatecommerce for the exemption. "[N]ot all statements of agency policy must be announced bymeans of published rules. When an administrative agency interprets statutory language as itapplies to a particular set of facts, adjudicated cases are a proper alternative method ofannouncing agency policies." Sparks & Wiewel Construction Co. v. Martin,250 Ill. App. 3d955, 968, 620 N.E.2d 533 (1993). In this case, as in Sparks & Wiewel, theDepartment merelyinterpreted the statute and applied it to the facts. It did not violate the Administrative ProcedureAct.

Our supreme court interpreted a more explicit tax exemption in McKenzie v.Johnson, 98 Ill. 2d87, 456 N.E.2d 73 (1983). There the legislature allowed an exemption for "property usedexclusively for religious purposes." Ill. Rev. Stat. 1981, ch. 120, par. 500.2. Although taxexemptions are strictly construed against the taxpayer (City of Lawrenceville v.Maxwell, 6 Ill. 2d42, 47, 126 N.E.2d 671 (1955)), the court said:

"[P]roperty satisfies the exclusive-use requirement of the property taxexemption statutes ifit is primarily used for the exempted purpose; '[i]f property is devoted, in a primarysense,to a religious purpose, the fact that it is incidentally used for secular purposes will notdestroy the exemption.'" (Emphasis in original.) McKenzie, 98 Ill. 2d at 98,quoting FirstCongretational Church v. Board of Review, 254 Ill. 220, 224 (1912).

Thus, a statute that requires exclusive use for religious purposes allows some incidentalsecularuses, even when the statute is narrowly construed in favor of taxation. The appellate courtapplied the reasoning of McKenzie to interpret a statute exempting propertyexclusively used forcharitable purposes; the court held that the statute exempted property whose noncharitable usewas merely incidental to charitable use. Resurrection Lutheran Church v. Department ofRevenue, 212 Ill. App. 3d 964, 972, 571 N.E.2d 989 (1991).

Illinois courts have similarly interpreted the charitable use exemption in the Retailers'OccupationTax Act (35 ILCS 120/2-5(11) (West 1994)), which exempts from tax personal property sold toan "institution organized and operated exclusively for charitable *** purposes." The appellatecourt held:

"An exclusively charitable purpose need not be interpreted literally as theentity's solepurpose; it should be construed to mean the primary purpose, but not a merely incidentalor secondary purpose or effect. [Citation.] If a substantial purpose or activity of theclaimant is not charitable, religious, or educational, it cannot be said to be organized andoperated exclusively for charitable, religious, or educational purposes within the meaning[of the statute]." Gas Research Institute v. Department of Revenue, 154 Ill. App.3d 430,436, 507 N.E.2d 141 (1987).

National claims that the Use Tax Act should be interpreted to permit taxation only if rollingstockis used exclusively in intrastate commerce, and any use in interstate commerce qualifies for theexemption. The Act does not say this, as it sets no explicit level of use required for theexemption. But even if the Act expressly required use exclusively in intrastate commerce, thestatute, under the reasoning of McKenzie and Gas Research, wouldmean that the Departmentcould tax the use as long as any use in interstate commerce was merely incidental or secondary tothe use in intrastate commerce. Just as incidental use of property for noncharitable purposes doesnot destroy the exemption under the Retailers' Occupation Tax Act, an incidental use of rollingstock in interstate commerce will not destroy its taxability under the Use Tax Act.

The Department has construed the Act to require regular and frequent use of the rolling stockininterstate commerce. Amici contend that this standard is unconstitutionally vague. Thisargument did not arise in the trial court, so it is waived for appeal. Leone v. City ofChicago, 156Ill. 2d 33, 38, 619 N.E.2d 119 (1993); In re Petition to Adopt T.I.S., 224 Ill. App.3d 475, 480,586 N.E.2d 690 (1991).

Amici also contend, as did National at trial, that the Act, as the Departmentinterprets it, createsan unconstitutional classification by distinguishing rolling stock used regularly and frequently ininterstate commerce from that so used only irregularly and infrequently.

"In considering classification of nonproperty tax in light of the uniformity requirement ***,thiscourt has stated the appropriate test to be that the classification must be based on a real andsubstantial difference between the people taxed and those not taxed, and that the classificationmust bear some reasonable relationship to the object of the legislation or to publicpolicy." (Emphasis in original.) Searle Pharmaceuticals, Inc. v. Department of Revenue,117 Ill. 2d 454,468, 512 N.E.2d 1240 (1987).

The statute, under the Department's interpretation, distinguishes rolling stock that is usedonly inintrastate commerce, or that has irregular and infrequent use in interstate commerce, from rollingstock regularly and frequently used in interstate commerce.

A substantial difference in the frequency and regularity of use in interstate commercedirectlyimplicates the object of the legislation. As the legislature stated in the exemptions section of theAct, the exemptions are designed to "prevent actual or likely multistate taxation." 35 ILCS105/3-55 (West 1992); see Nutrition Headquarters, Inc. v. Department of Revenue,106 Ill. 2d58, 62-63, 477 N.E.2d 235 (1985) (statement of purpose helps guide interpretation of use taxexemptions). Rolling stock regularly and frequently used in interstate commerce is far morelikely to incur tax in other states. See Quill Corp. v. North Dakota, 504 U.S. 298,313-15, 119 L.Ed.2d 91, 107-08, 112 S. Ct. 1904, 1913-14 (1992). Our supreme court upheld, againstconstitutional challenges, the similar exemption for property used exclusively for religiouspurposes, as interpreted to exempt property whose secular use is merely incidental.McKenzie, 98Ill. 2d at 94-99.

National and amici have not met their burden of proving that the statute, as theDepartmentconstrues it, violates the constitution. See Allegro Services, Ltd. v. Metropolitan Pier&Exposition Authority, 172 Ill. 2d 243, 250-51, 665 N.E.2d 1246 (1996). The statute, sointerpreted, is no more impractical or unworkable than the exemption for property used forcharitable purposes, which remains exempt despite noncharitable use as long as the noncharitableuse is secondary, or merely incidental, to the charitable use. See Illinois Institute ofTechnologyv. Skinner, 49 Ill. 2d 59, 66, 273 N.E.2d 371 (1971).

In 1984 our legislature adopted an amendment to the Act which specified that the rollingstockexemption applied to vehicles used exclusively within Illinois, if the vehicles carry persons orproperty on journeys either to or from other states. 35 ILCS 105/3-60 (West 1994). Thus, thetaxpayer need not prove the vehicle ever left Illinois. Under National's interpretation of the Act,any individual use marginally connected with interstate commerce, at any time in the life of thevehicle, suffices for the exemption of rolling stock of an interstate carrier for hire. Thisinterpretation would virtually eliminate the statutory restriction of the exemption to stock"moving in interstate commerce." 35 ILCS 105/3-55(b)(West 1992). We will not direct theDepartment to so construe the statute.

National further maintains that the exemption here must be construed as is the rolling stockexemption in the Retailers' Occupation Tax Act (35 ILCS 120/2-5(12) (West 1994)). We agree. National presented no case law, and we are aware of none, indicating that the Department hasapplied any interpretation for the retailers' occupation tax exemption other than the interpretationapplied for the use tax exemption. In light of the judicial interpretation of the charitableexemption in section 2-5(11), we believe the Department will adopt an interpretation of section2-5(12) which is consistent with its interpretation of the exemption at issue here.

Finally, National argues that the denial of the exemption contravened the manifest weight oftheevidence. National presented evidence that 5% of the miles over which the buses drove occurredin 389 trips connected to interstate commerce. However, National presented no evidence of thetotal number of trips the buses took, and it refused the Department's request for informationconcerning revenues from the trips connected with interstate commerce and the total revenuesfrom all trips. The Department concluded that National failed to prove its entitlement to theexemption. The conclusion is not contrary to the manifest weight of the evidence. SeeZagel, 80Ill. App. 3d at 359.

The case law interpreting the rolling stock exemption has required some substantial use oftherolling stock in interstate commerce. The Department has therefore required proof of regular andfrequent such use of the rolling stock. The statutory interpretation does not violateBurlingtonNorthern, as the Department does not require proof of taxation by other states, nor does itrequireproof that the primary use is for interstate commerce. National and amici have notshownadequate grounds for overturning the Department's interpretation of the Act. National did notpresent sufficient evidence to show that its use of rolling stock was regular and frequent, or anymore than incidental. Accordingly, the judgment of the trial court upholding the decision of theDepartment is affirmed.

Affirmed.

GORDON, P.J. and RAKOWSKI, J., concur.