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
 
In association with
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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

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