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

2023 IL App (1st) 221518-U

• Court: Appellate Court of Illinois
• Decided: December 26, 2023
• Docket: 1-22-1518
• Status: Unpublished

Opinion

2023 IL App (1st) 221518-U

No. 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). 2 No. 1-22-1518

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. 3 No. 1-22-1518

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

4 No. 1-22-1518

¶ 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

5 No. 1-22-1518

§ 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

6 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. 7 No. 1-22-1518

“[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).

8 No. 1-22-1518

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.

9 No. 1-22-1518

¶ 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

10 No. 1-22-1518

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).

11 No. 1-22-1518

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.

12 No. 1-22-1518

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

13 No. 1-22-1518

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.