United States: Illinois Appeals Court Affirms Injunction Preventing State From Recouping Sales Tax Revenue From City

The Illinois Appellate Court has affirmed a trial court's decision to grant a preliminary injunction that prevented the Illinois Department of Revenue from recouping sales tax revenue from the City of Kankakee.1 On remand, the trial court will need to determine whether the Department should be permanently enjoined from adjusting Kankakee's sales tax revenue. This case is related to a sales tax sourcing dispute that is currently being considered by the Illinois Supreme Court.2


Last year, in Hartney Fuel Oil v. Hamer, the Illinois Appellate Court affirmed a trial court's decision that a taxpayer's sales were sitused to and taxable at its dedicated sales office for local Retailers' Occupation Tax (ROT) purposes.3 Although the taxpayer was headquartered in a locality that imposed local sales taxes, the taxpayer's sales were properly sitused to the sales office in a locality that did not impose local sales tax. According to the Court, proper sourcing for determining state and local ROT liability is based on a determination of where the acceptance of orders occurs. The Illinois Supreme Court has granted the Department's petition to appeal the Hartney decision.

In the instant case, the Illinois Department of Revenue sent a letter to the City of Kankakee asserting that it had erroneously disbursed $540,811 in sales tax revenue that should have been reported to the Village of Glendale Heights.4 The letter stated that the Department would recoup the erroneous distribution from Kankakee by deductions from future sales tax distributions. Also, the letter stated that it could not disclose any additional information due to the ROT's confidentiality provisions.

Kankakee filed a six-count complaint seeking administrative review of the Department's adjustment of tax revenue, a writ of prohibition, and the issuance of preliminary and permanent injunctions to stop the adjustment. The complaint challenged the Department's determination that the sales were located in Glendale Heights and not in Kankakee. Also, the complaint alleged that the tax adjustment would severely impact the safety and welfare of Kankakee's citizens. Following a hearing, the trial court preliminarily enjoined the Department from enforcing the revenue adjustment. After the trial court denied the Department's motion to dissolve or modify the preliminary injunction, the Department filed an appeal.

Department Enjoined from Adjusting City's Tax Revenue

The Illinois Appellate Court affirmed the trial court's order granting the preliminary injunction that prevented the Department from adjusting Kankakee's sales tax revenue. Although Kankakee was not entitled to administrative review and the trial court lacked special statutory jurisdiction, the trial court retained original jurisdiction to review Kankakee's complaint under common law certiorari. After determining that the trial court had subject matter jurisdiction and that Kankakee was entitled to a writ of prohibition regarding disclosure of the taxpayer's information, the Appellate Court considered the substantive arguments on appeal. In affirming the trial court, the Appellate Court rejected the Department's arguments that: (i) Kankakee was not entitled to the issuance of a preliminary injunction because it had no right to administrative review of the Department's adjustment determination; (ii) Kankakee's claim was barred by sovereign immunity; and (iii) the six-month limitations period found applicable by the trial court did not apply to this type of adjustment.

The Appellate Court found that Kankakee was entitled to the preliminary injunction because Kankakee established the following: (i) a clear, ascertainable right in need of protection; (ii) Kankakee would suffer irreparable harm if the injunction were not issued; (iii) Kankakee had no adequate remedy at law; and (iv) Kankakee likely would succeed on the merits.

To satisfy the likelihood of success element, Kankakee was required to raise a "fair question" concerning the existence of a claimed right and that it would be entitled to the requested relief. The Appellate Court determined that Kankakee raised a "fair question" of whether the Department was barred under the six-month statute of limitations for a reallocation based on errors in determining the taxpayer's location.5 Under Illinois law, errors in the distribution of taxes paid into the Local Government Fund may be corrected based on the taxpayer's location when certifying the municipality's disbursement amount and are limited to a six-month offset period.6 However, according to City of Champaign v. Department of Revenue,7 there is no limitation for corrections made as a result of tax record errors.8 The trial court determined that Champaign has been overruled by the Illinois General Assembly and the six month limitations period applies. The Appellate Court concluded that this finding was beyond the question raised on a motion for a preliminary injunction.

The Department also argued that the trial court should have granted its motion to modify the injunction to cover only the amount of offset based on the change in location of the retailer to Glendale Heights. According to the Department, Kankakee had standing to challenge only the reallocation of the tax revenue to Glendale Heights and not the refunds made to the taxpayer. In rejecting this argument, the Court explained that Kankakee had provided facts establishing that it would be injured were its sales tax revenue incorrectly adjusted and recouped by the Department. Furthermore, until the Department's calculations are verified, there was no adequate basis to modify the injunction to include only the amount the Department claimed was credited to Glendale Heights.

In a dissent, a justice disagreed with the majority that the trial court had original jurisdiction to consider Kankakee's complaint for an injunction.


This is the latest case concerning the ongoing dispute regarding the proper situsing of sales among localities in Illinois. Although this case does not address the substantive issue of how sales should be sourced, the case should be of interest to Illinois companies that have established sales centers in jurisdictions that do not impose local tax. To the extent that the Department were to appeal this decision and achieve a victory, it could have a chilling effect on the municipalities that have been aggressive in serving as a home to companies that seek to source sales to low-tax local jurisdictions.

The trial court will need to decide on remand whether the Department should be permanently enjoined from adjusting Kankakee's sales tax revenue. Based on the proceedings held for the preliminary injunction, Kankakee presumably will argue that the six-month limitation period bars the Department from redistributing the tax revenue. If the trial court accepts the Department's argument that it has more than six months to reallocate revenue, Kankakee and other low tax municipalities may be dissuaded from encouraging companies to open sales offices in their jurisdictions, for fear that such reallocations could make it difficult to create accurate local budgets, or satisfy existing budgets.


1 City of Kankakee v. Department of Revenue, Illinois Appellate Court, Third District, No. 3-12-0599, April 15, 2013.

2 See Hartney Fuel Oil Co. v. Hamer, 976 N.E.2d 682 (Ill. App. Ct. 2012), leave to appeal granted, 982 N.E.2d 768 (Ill. 2013).

3 Id. For further discussion of this case, see GT SALT Alert: Illinois Appellate Court Holds Acceptance of Sales Orders in Jurisdiction Is Necessary to Impose Local Sales Tax.

4 Note that Glendale Heights imposes local sales tax, but Kankakee does not.

5 The Appellate Court also determined that Kankakee raised a "fair question" concerning the amount of tax revenue that should possibly be reallocated to Glendale Heights and/or the taxpayer and the amount of the disbursements that it must contribute.

6 30 ILL. COMP. STAT. 105/6z-18.

7 412 N.E.2d 211 (Ill. App. Ct. 1980).

8 Under Champaign, there is no limitation for corrections made pursuant to 20 ILL. COMP. STAT. 2505/2505-475.

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