Midwest Medical Equipment Solutions, Inc. v. Illinois Department of Revenue ( 2023 )

2023 IL App (1st) 221518-UNo. 1-22-1518
Order filed December 26, 2023.
First Division
NOTICE: This order was filed under Supreme Court Rule 23 and is not precedent except in the
limited circumstances allowed under Rule 23(e)(1).
______________________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
FIRST DISTRICT
______________________________________________________________________________
MIDWEST MEDICAL EQUIPMENT ) Appeal from the
SOLUTIONS, INC., ) Illinois Independent
) Tax Tribunal
Petitioner-Appellant, )
)
v. ) Nos. 17 TT 120, 19 TT 93 & 21
) TT77
)
ILLINOIS DEPARTMENT OF REVENUE and ) James M. Conway
ILLINOIS INDEPENDENT TAX TRIBUNAL, ) Chief Administrative Law,
) Judge Presiding.
Respondents-Appellees. )
______________________________________________________________________________
JUSTICE LAVIN delivered the judgment of the court.
Presiding Justice Fitzgerald Smith and Justice Coghlan concurred in the judgment.
ORDER
¶1 Held: The Illinois Independent Tax Tribunal properly entered judgment in favor of the
Illinois Department of Revenue where the tax exemption for sales to governmental bodies did
not apply to petitioner’s sales to managed care organizations. Additionally, the tribunal properly
declined to abate tax penalties imposed against petitioner.
¶2 This appeal arises from a final decision of the Illinois Independent Tax Tribunal (Tax
Tribunal) entering summary judgment against Midwest Medical Equipment Solutions, Inc.
No. 1-22-1518
(Midwest) and in favor of the Illinois Department of Revenue (Department). On appeal, Midwest
asserts that the Tax Tribunal erroneously determined that Midwest’s transactions did not qualify
for the Sale to Governmental Body Exemption (Governmental Body Exemption) to the Illinois
Retailer’s Occupation Tax (ROT) (35 ILCS 120/2-5(11) (West 2012)). Midwest alternatively
asserts that the tax penalties imposed were unwarranted. For the following reasons, we affirm the
Tax Tribunal’s decision.
¶3 I. Background.
¶4 Midwest is a licensed provider of durable medical equipment (DME) and provides breast
pumps and nebulizers to individuals enrolled in Medicaid. 1 Historically, the Illinois Department
of Healthcare and Family Services (DHFS) directly paid providers for DME. In addition,
payments for specific medical services are referred to as fee-for-service payments and are
determined by a schedule posted on DHFS’s website. Because Midwest’s sales of DME were
made directly to DHFS, they were covered by the Governmental Body Exemption to the ROT.
¶5 In 2011, however, the State expanded its use of Managed Care Organizations (MCOs).
See Pub. Act. 96-1501, § 40 (eff. Jan. 25, 2011) (adding 305 ILCS 5/5-30). MCOs are a form of
HMO that establish a network of covered providers that serve those individuals enrolled in the
MCOs’ plans. The majority of Medicaid recipients are now enrolled in MCOs. As a result, in
most instances, Midwest is reimbursed by MCOs rather than DHFS. DHFS continues to make
direct payments to providers for the approximate 20% of Medicaid participants who are not
required to enroll in an MCO.
¶6 Pertinent to this dispute, the Department audited Midwest for the failure to pay the ROT
for three periods between June 2012 through April 2020, and issued Midwest three notices for a
1
We note that Midwest’s fact section contains improper argument. See Rule 341(h)(6) (eff. Oct.
1, 2020).
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total of approximately $411,000 in tax liability. That sum reflected taxes Midwest had withheld
under the Governmental Body Exemption as well as interest and penalties.
¶7 Midwest subsequently filed three petitions challenging each notice of tax liability in the
Tax Tribunal.2 Midwest maintained that the sales in question were tax exempt under the
Governmental Body Exemption because Midwest made those sales to MCOs, which were in turn
paid by DHFS, a governmental body. In other words, Midwest took the position that DHFS was,
in substance, the purchaser of the DME. The Department disagreed.
¶8 The evidence before the Tax Tribunal showed that DHFS pays MCOs a fixed amount per
Medicaid member per month, on a “capitated” basis. In addition, the contracts between DHFS
and MCOs specify that the latter are independent contractors. In turn, MCOs enter into contracts
with Medicaid providers who agree to become part of the MCOs’ networks. Medicaid providers
and MCOs have the liberty to enter into contracts with the respective MCOs or providers of their
choice. Medicaid providers must also enroll with DHFS.
¶9 Midwest’s standard protocol involved confirming the patient’s Medicaid status and
coverage through the State of Illinois website database. For Medicaid recipients enrolled in
MCOs, Midwest would then submit invoices to the MCOs, which would in turn reimburse
Midwest. In Midwest’s contracts with MCOs, Midwest agreed to charge the same prices that
DHFS would pay Midwest under the fee-for-service schedule. No rule or regulation prohibits
providers from raising the fees they charge MCOs, however. In other words, the providers and
MCOs are not required to adopt the DHFS fee schedule in their contracts. They may negotiate.
2
The tax tribunal is an independent administrative body tasked with resolving disputes between
the Department and taxpayers for liability exceeding $15,000. Horsehead Corp. v. Department of
Revenue, 2019 IL 124155, ¶¶ 24-26. In the proceedings before the Tax Tribunal, Midwest and the
Department entered into a stipulation of the underlying facts.
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Moreover, Midwest’s contracts with MCOs prohibited Midwest from seeking payment from
DHFS.
¶ 10 During the periods at issue, Midwest claimed the Governmental Body Exemption for
proceeds that DHFS directly paid Midwest as well as proceeds that MCOs paid Midwest. In
other words, Midwest did not pay taxes for transactions in which it was directly reimbursed by
MCOs. Midwest treated its MCO reimbursement proceeds as exempt from the ROT because
patients must be approved for Medicaid. Midwest did not, however, collect exemption
identification numbers from MCOs.
¶ 11 Midwest moved for summary judgment, arguing that the Governmental Body Exemption
excused it from paying the taxes in dispute, that the MCOs were agents of DHFS, and that the
substance-over-form doctrine dictated that DHFS, a governmental body, was the true purchaser
of Midwest’s DME. The Department then filed a cross-motion for summary judgment, arguing
that the exemption did not apply and that penalties were appropriate. With respect to tax
penalties, Midwest’s reply added that penalties were not warranted because Midwest acted in
good faith.
¶ 12 The Tax Tribunal granted the Department’s motion for summary judgment and denied
Midwest’s motion, finding that MCOs were not governmental bodies but merely private
companies that contracted with the government. They were not DHFS’s agents or conduits for
funneling money from DHFS to Midwest. Instead, MCOs had separate contractual relationships
with both DHFS and the providers. Additionally, the tribunal denied Midwest’s request to abate
the tax penalties. Midwest then filed a petition for direct administrative review in this court.
¶ 13 II. Analysis
¶ 14 A. Governmental Body Exemption
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¶ 15 On appeal, Midwest first asserts that the Tax Tribunal erred in granting summary
judgment in the Department’s favor, as Midwest was entitled to the Governmental Body
Exemption to the ROT. See Rogers v. Illinois Department of Revenue, 2017 Ill App (1st)
151449, ¶ 30 (stating that summary judgment is warranted where the parties’ pleadings,
depositions, admissions and affidavits show that no genuine issue of material fact exist so that
the movant is entitled to judgment as a matter of law). The parties agree that we must review this
issue de novo. Id. Accordingly, we may affirm the tribunal’s judgment on any basis in the record,
regardless of the tribunal’s reasoning. See Amos Financial, LLC v. Szydlowski, 2022 IL App (1st)
210046, ¶ 31.
¶ 16 Taxation is the rule, whereas exemption is the exception. Safety-Kleen Systems, Inc. v.
Department of Revenue, 2020 IL App (1st) 191078, ¶ 18. Courts must strictly construe tax
exemptions and resolve any doubts as to whether an exemption applies in favor of taxation. Id.Additionally, the party seeking an exemption bears the burden of proving its right to the
exemption. Id. In determining whether an exemption applies, “we must construe all facts and
debatable questions in favor of taxation.” Id. Furthermore, because administrative regulations
have the force and effect of law, rules of statutory construction apply to the construction of such
regulations. Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, 368 (2009). The most reliable
indicator of the legislature’s intent is the statute’s language, which must be given its plain
meaning. Haage v. Zavala, 2021 IL 125918, ¶ 44. Where a statute’s language is unambiguous,
we must effectuate it without adding limitations or conditions. Kishwaukee Auto Coral, Inc., v.
Department of Revenue, 2021 IL App (1st) 200236, ¶ 16.
¶ 17 Under the ROT Act, “[a] tax is imposed upon persons engaged in the business of selling
at retail tangible personal property[.]” 35 ILCS 120/2(a) (West 2012); see also 86 Ill. Adm. Code
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§ 130.101 (2023). Medical appliances, such as those sold by Midwest, are taxed at the reduced
rate of one percent. See 86 Ill. Adm. Code 130.311 (2022). That being said, the Governmental
Body Exemption applies to “Gross receipts from proceeds from the sale of *** Personal property
sold to a governmental body.” 35 ILCS 120/2-5(11) (West 2012); see also 86 Ill. Admin. Code §
130.120(i) (2023). We find that the plain language of the statute unambiguously states that sale
proceeds are not exempt from the ROT unless the sale was made to a governmental body.
¶ 18 This court has previously held that “governmental body,” as used in the statute, does not
include “agents or instrumentalities thereof.” Lombard Public Facilities Corp. v. Department of
Revenue, 378 Ill. App. 3d 921, 929-30 (2008). Stated differently, the exemption “applies to the
actual purchaser and not to a future beneficiary of the purchases.” Id. at 934. If the legislature
had intended for the exclusion to involve more remote economic effects “farther down the line of
economic intercourse,” the legislature could have said so. See Berwyn Lumber Co. v. Korshak,
34 Ill. 2d 320, 323 (1966). We find this precedent to be well-reasoned. As the Department
argues, there would be no end to this exemption if any sale of a component part to a company
that ultimately sold a finished product to a governmental body qualified for the exemption. Such
an exemption would be the exception that swallowed the rule.
¶ 19 Section 130.2080(a) of the Illinois Administrative Code reinforces the limited reach of
this exemption:
“On and after January 1, 2015, *** sales of tangible personal property made to a
governmental body (federal, State, local or foreign) are exempt from the [ROT] if the
governmental body has an active exemption identification number (“E-number”) issued
by the Department and it provides this active E-number to the retailer, who records that
number instead of collecting the tax. In addition, only sales of tangible personal property
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No. 1-22-1518
invoiced directly to and paid by governmental bodies that possess active E-numbers are
exempt.” 3 86 Ill. Adm. Code § 130.2080 (2015).
Accordingly, even if sales to MCOs could conceivably constitute sales to a governmental body,
the exemption would not apply unless the MCOs provided an exemption identification number,
something that MCOs do not possess.
¶ 20 Notwithstanding the statute’s plain language, Midwest argues that limiting the exemption
to actual governmental bodies will lead to an absurd result: financial hardship to Midwest.
Specifically, Midwest insists that it is bound to set charges according to DHFS’s fee schedule,
which does not consider Midwest’s obligation to pay the ROT. Yet, the unrebutted testimony of
Robert Mendosa, deputy administrator for DHFS, was that providers such as Midwest were free
to negotiate fees in their contracts with MCOs and were not obligated to follow DHFS’s fee
schedule. While Midwest concludes that it cannot as a practical matter negotiate to receive fees
greater than those set forth in the schedule, Midwest has failed to develop a cohesive argument
supporting that conclusion. See Marzouki v. Najar-Marzouki, 2014 IL App (1st) 132841, ¶ 12
(recognizing that the failure to develop an argument results in forfeiture). Even assuming
Midwest correctly predicts that DME providers may stop serving Medicaid beneficiaries without
the benefit of the exemption, this would not permit us to deviate from the plain language of the
statute. Midwest’s recourse lies with the legislature.
¶ 21 Indeed, Midwest argues that Public Act 102-700 (eff. Apr. 19, 2022) recently modified
section 2-5 to specify that breast pumps are exempt from the ROT. Midwest argues that
3
Prior to 2015, section 130.2080(a) stated: “Sales made to a governmental body *** are exempt
from the [ROT]. Such sales are not exempt from the [ROT] unless a governmental body has an active
exemption identification number issued by the Department.” 86 Ill. Adm. Code § 130.2080 (2012). Thus,
the regulation has at all relevant times required that the purchaser provide an exemption identification
number.
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“[c]learly recognizing the unjust and perverse effect that the failure to exempt breast pumps from
ROT was having on providers like Midwest, the legislature took action to ensure that providers
were not financially hampered in their efforts to serve Medicaid beneficiaries in Illinois.” Yet,
this argument arguably supports the notion that during the period in question, the legislature did
not view breast pumps paid for by MCOs as being exempt from the ROT. We further observe
that the legislature did not amend section 2-5(11) to specify that the Governmental Body
Exemption applies to a governmental body’s agents, despite the existence of caselaw excluding
sales to such agents from exemption. Public Act 102-700 does not show that the legislature
previously intended for sales to MCOs to be exempt. Cf. In re Detention of Lieberman, 201 Ill.
2d 300, 321-22 (2000) (recognizing that the amendment of an unambiguous statute usually
indicates a purpose to change the law); People ex rel. Ryan v. Agpro, Inc., 214 Ill. 2d 222 (2005)
(stating that the supreme court has “never held that a subsequent amendment may replace the
plain meaning as the best evidence of the legislature's original intent”). We must allow the
legislature to legislate.
¶ 22 Here, it is undisputed that Midwest’s sales were made to MCOs, not governmental
bodies. Accordingly, those sales are not encompassed within the Governmental Body Exemption
to the ROT.
¶ 23 Midwest nonetheless argues that the substance-over-form doctrine dictates that DHFS
was the true purchaser of Midwest’s DME.
¶ 24 The substance-over-form doctrine has been universally accepted. See JI Aviation, Inc. v.
Department of Revenue, 335 Ill. App. 3d 905, 918 (2002). Under that doctrine, a transaction’s
tax consequences are governed by the underlying substance of the transaction, not its legal form.
Exelon Corporation v. Commissioner of Internal Revenue, 906 F. 3d 513, 523 (7th Cir. 2018).
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Courts look to the objective economic realities of a transaction, not the particular form used by
the parties. Id. (citing Frank Lyon Co. v. United States, 435 U.S. 561, 573 (1978)). The
substance-over-form doctrine does not apply to all tax situations, however, and we must interpret
and apply the unambiguous, plain language of a statute as it is written. See Shakman v.
Department of Revenue, 2019 IL App (1st) 182197, ¶¶ 54-55.
¶ 25 Here, DHFS contracted with MCOs to provide Medicaid recipients with managed care
plans. DME is but one inseverable component of those plans, and is a benefit that not every
Medicaid recipient will even use. Additionally, DHFS pays MCOs on a capacitated basis, not a
fixed fee for a particular product. In contrast, Midwest sells DME, not managed care plans.
Because the product that Midwest sells the MCOs is different from the product that MCOs sell to
DHFS, we categorically reject Midwest’s assertion that DHFS is in substance the purchaser of
the DME. Cf. JI Aviation, Inc. v. Department of Revenue, 335 Ill. App. 3d 905, 920-21 (2002)
(finding for tax purposes that the “purchaser” was a mere conduit and intermediary where it was
at all times required to convey title to another party).
¶ 26 Midwest also argues that the substance of DHFS’s relationships with the MCOs showed
they had apparent agency to act on DHFS’s behalf. We adhere, however, to this court’s well-
reasoned, prior determination that “governmental body” does not include “agents or
instrumentalities thereof.” Lombard Public Facilities Corp., 378 Ill. App. 3d at 929-30; see also
Berwyn Lumber Co., 34 Ill. 2d at 322-23 (finding where dealers sold lumber to contractors who
used the lumber in construction contracts with exempt organizations that the contractors were not
agents of the exempt organizations). In any event, Midwest cannot establish that the MCOs acted
as DHFS’s agents.
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¶ 27 “The tests of agency are whether the principal has authority to control the method or
manner of accomplishing a task by the agent and whether the agent has authority to subject the
principal to liability.” Jackson v. Callan Publishing, Inc., 2021 IL App (1st) 191458, ¶ 190. In
addition, an agent’s authority may be actual or apparent. Cove Management v. AFLAC, Inc.,
2013 IL App (1st) 120884, ¶ 23. Apparent authority exists where a principal through conduct or
words, gives a third party the reasonable impression that the principal’s agent has the authority to
act on the principal’s behalf. Gambino v. Boulevard Mortgage Corp., 398 Ill. App. 3d 21, 56
(2009). Thus, apparent authority requires that (1) the principal gave its consent or knowingly
acquiesced in its agent’s exercise of authority; (2) a third party, due to his knowledge of the
facts, held a good-faith belief that the agent possessed authority; and (3) the third party relied on
the agent’s apparent authority to his detriment. Id. One party’s right to control the other’s work,
however, is the predominant factor in determining whether an agency relationship exists. Union
Planters Bank, N.A. v. FT Mortgage Companies, 341 Ill App. 3d 921, 928 (2003).
¶ 28 Midwest argues that the MCOs had apparent authority to act as DHFS’s agents because
those parties’ contracts included approximately 73 pages of rules governing MCOs’ operations.
Yet, Midwest’s brief cites only one page. This argument fails to comport with Illinois Supreme
Court Rule 341(h)(7) (eff. Oct. 1, 2020), which requires that the appellant’s brief contains
citations to “the pages of the record relied on.” We decline to scour through 73 pages. See
Cabrera v. First National Bank of Wheaton, 324 Ill. App. 3d 85, 93 (2001) (finding that the
plaintiff’s failure to support its conclusory statement with citation to the record resulted in
forfeiture); see also Ellis v. Flannery, 2021 IL App (1st) 201096, ¶ 8.
¶ 29 In any event, the single page cited essentially requires the MCOs to comply with the law,
notify DHFS of deviations from contract terms, enable enrollees to obtain second opinions and
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refrain from advising enrollees to seek public resources for things that the MCOs are already
being paid to provide. This falls short of showing that DHFS has an ongoing right to control how
Midwest performs its work. Thus, Midwest’s conclusory assertion that DHFS controlled the
MCO is insufficient. Additionally, the record shows that DHFS is an outsider to the MCOs’
contracts with providers. Furthermore, contractual language specifies that MCOs are not DHFS’s
agents and will indemnify and hold DHFS harmless from liability. Cf. Hiatt v. Western Plastics,
Inc., 2014 IL App (2d) 140178, ¶ 80 (stating that the parties’ declaration is not controlling where
their conduct otherwise shows that an agency relationship exists). As a result, Midwest could not
have possessed a good faith belief that MCOs were agents of DHFS.
¶ 30 Construing the record in the light most favorable to Midwest, we find that there is no
genuine issue of material fact, that Midwest was not entitled to the Governmental Body
Exemption, and that the Department was entitled to summary judgment.
¶ 31 B. Abatement
¶ 32 Next, Midwest asserts that the Tax Tribunal erroneously upheld the tax penalties assessed
against Midwest. The parties dispute whether Midwest forfeited this issue by failing to raise it in
its motion for summary judgment. In any event, we find no error. See Horsehead Corp. v.
Department of Revenue, 2019 IL 124155, ¶ 46 (reviewing abatement under the manifest weight
of the evidence standard).
¶ 33 “If any return or amended return is prepared negligently, but without intent to defraud,
and filed, *** a penalty shall be imposed in an amount equal to 20% of any resulting
deficiency.” 35 ILCS 735/3-5(a) (West 2022). In addition, “[n]egligence includes any failure to
make a reasonable attempt to comply with the provisions of any tax Act and includes careless,
reckless, or intentional disregard of the law or regulations.” 35 ILCS 735/3-5(a) (West 2022).
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Conversely, “[n]o penalty shall be imposed under this Section if it is shown that failure to
comply with the tax Act is due to reasonable cause.” 35 ILCS 735/3-5(c) (West 2022).
¶ 34 Section 3-8 similarly states that penalties will not be imposed “if the taxpayer shows that
his failure to file a return or pay tax at the required time was due to reasonable cause.” 35 ILCS
735/3-8 (West 2022). Reasonable cause is determined according to the Department’s rules and
regulations on a case-by-case basis. 35 ILCS 735/3-8 (West 2022). That being said, the most
important factor in deciding whether a penalty should be abated is “the extent to which the
taxpayer made a good faith effort to determine the proper tax liability and to file returns and pay
the proper liability in a timely fashion.” 86 Ill. Adm. Code § 700.400(b) (2019). A taxpayer is
considered to have made a good faith effort if he “exercised ordinary business care and
prudence.” 86 Ill. Adm. Code § 700.400(c) (2019). In turn, determining whether the taxpayer
exercised such care and prudence depends on “the clarity of the law or its interpretation and the
taxpayer's experience, knowledge, and education.” 86 Ill. Adm. Code § 700.400(c) (2019).
¶ 35 We have already found that the plain, unambiguous language of the Governmental Body
Exemption shows it does not apply to Midwest’s sales of DME to MCOs, which are not
governmental bodies. Prior case law confirms the plain language of the statute. See Lombard
Public Facilities Corp., 378 Ill. App. 3d at 929-30, 934; Berwyn Lumber Co., 34 Ill. 2d at 323.
Furthermore, Midwest has identified no case law suggesting a contrary construction of the
statute.
¶ 36 Midwest maintains that penalties should be abated because no case has specifically
addressed whether DME sales to MCOs are exempt from ROT. The Tax Tribunal, however,
properly rejected Midwest’s attempt to define issues so narrowly, which would permit many
taxpayers to claim that a specific set of transactions was unique and not addressed by case law.
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The tribunal stated, “MCOs are just like any other company that contracts with the State and then
separately contracts with unrelated third-party vendors to provide certain tangible personal
property for which the government body, upstream from the vendors, can be said to be the
indirectly source of payment that the vendors receive.” We agree. Midwest’s failure to consider
the tax implications from the State’s transition from DHFS reimbursement to MCO
reimbursement does not render Midwest’s circumstances unique. While Midwest suggests that it
did not voluntarily enter into contracts with MCOs, we are unpersuaded by Midwest’s attempt to
minimize its responsibility in this matter.
¶ 37 As previously stated, the Illinois Administrative Code has at all times required that a
purchaser provide an exemption identification number in order for the Government Body
Exemption to apply. 86 Ill. Adm. Code §130.2080 (2012); 86 Ill. Adm. Code § 130.2080 (2015).
This put Midwest on notice that it was insufficient to merely confirm that the patient was
enrolled in Medicaid and that the exemption would not apply to payments from MCOs unless
they provided an exemption identification number. Had Midwest requested exemption
identification numbers from MCOs, Midwest could have had no reasonable doubt that the
exemption did not apply.
¶ 38 Under these circumstances, we find that the Tax Tribunal’s decision to uphold the tax
penalties imposed by the Department was not against the manifest weight of the evidence. The
tribunal was not required to find that Midwest withheld tax payments in good faith and with
reasonable cause.
¶ 39 III. Conclusion
¶ 40 The Tax Tribunal properly entered summary judgment in favor of the Department and
against Midwest where the Governmental Body Exemption to the ROT clearly did not apply to
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proceedings from sales to MCOs. In addition, the tribunal appropriately upheld the Department’s
imposition of tax penalties.
¶ 41 For the foregoing reasons, we affirm the Tax Tribunal’s judgment.
¶ 42 Affirmed.
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