United States: Illinois Local Sales Tax Sourcing Uncertainty Is Over…Replaced By Chaos: Hartney Wins Tax Situs Suit, But Governing Regulations Are Invalidated

On November 21, 2013, in Hartney Fuel Oil Company v. Hamer, the Illinois Supreme Court determined that the longstanding regulations for sourcing sales for local sales and use tax purposes promulgated by the Illinois Department of Revenue (the "Department") were invalid.1 The Supreme Court's decision was also notable because the court applied the Illinois Taxpayers Bill of Rights2 to protect the taxpayer against liability and penalties for periods in which the taxpayer relied on flawed regulations. The Hartney decision, however, has resulted in a situation where chaos and uncertainty will govern the sourcing of transactions for Illinois local sales tax purposes until a new sourcing can be established through the promulgation of new regulations or the passage of new legislation.

Background

Local sales tax rates vary in Illinois. This has resulted in local jurisdictions competing for sales tax revenue by offering businesses tax-sharing arrangements. Under these arrangements, local taxing jurisdictions would offer businesses tax benefits as an incentive to source their sales to the jurisdiction. These tax-sharing arrangements relied on the Illinois sales tax sourcing regulations, in particular 86 Ill. Admin. Code § 220.115, which sourced sales to the local jurisdiction where the order resulting in the sale was accepted by the vendor.

In Hartney, the Illinois Supreme Court affirmed the decisions of the lower courts, which had held that the bright line sourcing rule in the Department's regulation, based on the place of order acceptance, was not a valid interpretation of either the Home Rule County, the Home Rule Municipal, or the Regional Transportation Authority Retailers Occupation Tax Acts.3 However, the Illinois Supreme Court nonetheless held that Hartney Fuel Oil Company ("Hartney") and any other similarly situated taxpayers that relied on the Department's invalid regulations to source sales for local sales tax purposes for prior periods were entitled to a full abatement of tax, interest and penalty because of their detrimental reliance on the Department's invalid regulations.

Hartney, a retailer of fuel oil, maintained a home office in Forest View, Illinois, located in Cook County. Hartney simultaneously maintained a sales office in a separate location in the Village of Mark, situated in Putnam County, Illinois. The Mark office was the location where Hartney accepted all of its orders. Under this arrangement, Hartney did not source any of its sales to Forest View, and thus, was able to avoid collecting the retail occupation taxes of Cook County, the Village of Forest View, and the Regional Transportation Authority on its sales. Instead, Hartney sourced its sales to Mark and, as a result, was able to apply a much lower local tax rate to its sales.

The Department audited Hartney for the period January 1, 2005 through June 30, 2007, and determined the proper situs of Hartney's sales to be Forest View, not Mark. As a consequence, the Department assessed Hartney with more than $20 million of tax, interest, and penalty. Hartney paid the assessment and sued for a refund in Putnam County Circuit Court. Putnam County and the Village of Mark joined in the case seeking declaratory and injunctive relief to find Mark to be the proper situs of Hartney's selling activity. Forest View, Cook County and the Regional Transportation Authority intervened as defendants.

At issue were the legislative intent of the local retail occupation tax ("ROT") statutes and the interpretation of these statutes by the Department's administrative regulations. Hartney argued that the plain language of the regulations established a bright-line test for determining the situs of retail occupation tax liability based on the location of order acceptance. The Department argued that the regulations required a fact-intensive inquiry, based on the totality of the circumstances to determine where the "business of selling" took place. The location of order acceptance was an important, but not a determinative, factor in this determination.

Legislative Intent of the Retail Occupation Tax

The Illinois Supreme Court noted that the various local ROT statutes did not define the "business of selling." The court then looked to the prior judicial interpretation of what constituted the "business of selling" in Standard Oil Co v. Department of Finance.4 In that case, the Illinois Supreme Court held that the ROT was a tax on the occupation of retail selling, not on the sales themselves. The court deduced that because the local ROT statutes used language that was almost identical to the state ROT to describe the target of the tax, both the state ROT and local ROT language signal the legislature's acceptance of the "composite of many activities" analysis found in Ex-Cell-O Corp. v. McKibbin.5

Was the Department's Regulation a Valid Implementation of the Local ROT Statutes?

In invalidating the Department's sourcing regulation, the Illinois Supreme Court determined that it was not a valid interpretation of the various local ROT statutes.

The court determined that the legislative intent of the local ROT statutes was to permit home rule municipalities and counties to enact retail occupation taxes to place some of the burden of paying for local government services on the retailers who enjoyed the benefits of those services. Thus, the court concluded that that the Department's regulation impermissibly narrowed the application of the local ROT Acts, because it ignored the fact-intensive inquiry contemplated in Ex-Cell-O. Instead, by focusing exclusively on one factor to determine the tax situs of sales, the Department's regulation impermissibly limited the scope of the local ROTs in a way that the legislature had never intended.

In Hartney's case, the bulk of the selling activities of the business, including marketing, inventory, pricing, and cultivating sales relationships, occurred in Forest View. In contrast, only limited sales activity took place in Mark. Under the Department's regulation, Hartney's sales were sourced to Mark based purely on the fact that orders were accepted in Mark, notwithstanding the fact that the bulk of Hartney's sales activities took place in Forest View. Thus, under the Department's regulation, Hartney would have been able to enjoy the benefits of services offered by Forest View, Cook County and the local transportation district, without contributing to the tax base of any of those jurisdictions. Therefore, the court held the Department's regulation to be invalid.

Abatement

Notwithstanding its determination that the Department's sourcing regulation was invalid, the Illinois Supreme Court barred the Department from collecting the assessed tax, interest and penalties from Hartney, because Hartney had relied on the Department's regulation in determining not to source its sales to Forest View. The court determined that under the Taxpayers' Bill of Rights, the Department had a duty to abate taxes and penalties assessed based upon erroneous written information or advice given by the Department.6 In this case, Hartney had acted consistently with the Department's sourcing regulation, and therefore the court upheld the abatement of Hartney's penalties and retail occupation tax liability for the audit period.

What's Next? Chaos!

In the world of Illinois sales taxation, sourcing by place of order acceptance was one of the basic principles. The sudden elimination of that principle by the court's decision will have several likely consequences.

Of course, all sales tax sourcing software is, for now, uncertain in its accuracy. While the Hartney case was pending, the Department proposed draft regulations that identified multiple indicia as determinative of where the selling activity took place. However, the Department's proposed draft failed to identify which indicia were to be treated as decisive if found in one location. As a consequence, the proposal would merely have emboldened every local jurisdiction in which one indicia of a vendor's selling activities occurred to either sue other local jurisdictions for the ROT revenue collected by that vendor, or to file claims with the Department for erroneous distribution of local ROT revenues. The same flaw that doomed the Department's proposed draft – failure to prioritize among the indicia of where selling activity occurs – also doomed fledgling legislative efforts that were undertaken during the pendency of the Hartney case.

In fact, it is now conceivable that a vendor that is currently collecting and remitting the Illinois Use Tax on its business transactions may, as a result of the fact-intensive inquiry required by Hartney, determine that the contacts with Illinois that give it nexus for use-tax collection purposes now define the location where its sale is made, and those contacts should now determine the local jurisdiction that has the authority to require the vendor to collect its ROT. After all, if order acceptance is not the controlling factor in sourcing sales, and neither is the location of inventory, then even if those two factors are outside Illinois, there may be other factors, beyond mere solicitation of sales, that are within Illinois and sufficiently strong to cause the vendor's selling activity to be sourced to a local jurisdiction within Illinois for local ROT purposes. All vendors will now need to review their sales tax sourcing determinations based on a fact-intensive inquiry, which includes a review of all business actions from the preparation for, and the obtaining of, orders for goods to the final consummation of the sale.

Economic development projects that were financed in part by local sales tax revenues, like tax increment financing or sales tax-backed bonds, may be affected as well. It is unclear how large the impact will be, but one cannot eliminate the possibility that a shift in sales tax revenues away from a local ROT jurisdiction to other local ROT jurisdictions would be a source of concern for investors in instruments issued or guaranteed by the local ROT jurisdiction that is losing tax revenue.

The Taxpayer Bill of Rights protects taxpayers against liability and penalties that occur as a result of the taxpayer's reliance on erroneous written information issued by the Department, but it does not apply to claims by local governments against the Department. As a consequence, claims for the Department to reallocate previously distributed local ROT revenues may increase in frequency as a result of the Supreme Court's holding in Hartney. However, if such claims become too frequent or too intense, this may lead to a legislative solution sooner rather than later.

The Department has not yet given any indication of whether it will treat vendor reliance on the Department's sourcing regulation after November 21, 2013 as protected by the Taxpayer Bill of Rights, or whether it will allow vendors to continue to rely on the Department's sourcing regulation at least until the date when the Supreme Court issues a mandate to the lower court, rendering its decision final. It is also unclear whether the Department intends to fill the gap in guidance by issuing an emergency regulation, or whether the Department will defer issuing guidance to allow the legislature an opportunity to provide guidance on an expedited basis.

Until a new law or regulation is in place, everyone claiming to represent a jurisdiction where any aspect of a vendor's selling activity (other than the order acceptance) occurs can file suit seeking to lay claim to the vendor's local ROT collections. Thus, vendors may face suits based on local ROT rate differences from class action, consumer protection, and false claim lawyers, or they may suffer unprecedented consequences from adjustments to local tax distributions that counties and municipalities may obtain from the Department. In other words, until new legislation or regulations governing the sourcing of sales are in effect, vendors will have exposure for local ROT anywhere their business activities extend.

Reed Smith's State Tax Team will monitor developments closely and provide updates as needed.

Footnotes

1 Hartney Fuel Oil Co. v. Hamer, Ill., No. 2013 IL 115130 (Nov. 21, 2013).

2 20 ILCS 2520/4(c) (West 2008).

3 Home Rule County Retailer's Occupation Tax Law 55 ILCS 5/5-1006 (West 2012), the Home Rule Municipal Retailers' Occupation Tax Act 65 ILCS 5/8-11-1 (West 2012), and the Regional Transportation Authority Act 70 ILCS 3615/4.03 (West 2012).

4 383 Ill. 136 (1943).

5 383 Ill. 316 (1943).

6 20 ILCS 2520/4(c) (West 2008).

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions