United States: Illinois Supreme Court Holds Regulation Sourcing Sales Tax To Order Acceptance Location Invalid Under State Law

In Hartney Fuel Oil Co. v. Hamer,1 the Illinois Supreme Court affirmed in part, and reversed in part, an Illinois Appellate Court decision2 involving the proper sourcing of the sales of an Illinois motor fuel retailer. The Court held that Hartney Fuel Oil Company complied with the applicable Illinois regulations when it sourced its sales to the location of purchase order acceptance. However, the Court prospectively struck down the Illinois regulation relied upon by Hartney, ruling that the regulation exceeded the statutory authority of the Illinois Department of Revenue.

Retailers' Occupation Tax

Illinois retailers of tangible personal property are subject to a state-level Retailers' Occupation Tax (ROT), as well as locally-imposed ROTs. The imposition of local ROTs is not uniform within the state. In some jurisdictions, the combination of state and locally-imposed taxes can approach 9.5 percent, while in other jurisdictions no local taxes are imposed and the rate consists only of the state rate, 6.25 percent. Unlike most other states, Illinois law provides that sales are sourced to the location of the seller. The Illinois sourcing regime, the disparity in rates between locations, and the manner in which the Illinois sourcing regulations have traditionally sourced sales resulted in planning opportunities for Illinois retailers who wished to attempt to minimize their tax rate.


Hartney operated a retail fuel oil sales business with a home office in Forest View, Illinois. From this office, Hartney solicited customers, set and communicated prices, and performed various administrative tasks necessary to operate the business. This location also housed a wholly-owned transportation company, Energy Transport, which delivered the fuel sold by Hartney. In addition to the office in Forest View, Hartney also maintained a satellite sales office located in Mark, Illinois. The sales tax rate in Mark, Illinois at 6.25 percent was 2.5 percent lower than the rate in Forest View. To staff its sales office, Hartney contracted with an existing business to provide a part-time clerk and limited office space to accept fuel orders. Hartney utilized this approach in an attempt to ensure that order acceptance occurred in a location with a low sales tax rate.

The sales office in Mark, Illinois processed two types of transactions. The first were daily orders, which usually came from customers who would order a fixed amount of fuel oil delivered to a specific location. Once the clerk received a daily order, the clerk checked the customer name against a list of credit-approved customers supplied by Hartney. If the customer was on the approved list, the clerk forwarded the order to Energy Transport for delivery of the fuel. Other than providing the list of credit approved customers, Hartney had no other role in accepting or processing these daily orders.

The second type of order processed by the sales office related to long-term requirements contracts. These contracts consisted of "keep full" agreements under which Hartney was responsible for monitoring and filling customer fuel tanks. Hartney's president negotiated these agreements and instructed the customer to sign and mail the contract to the sales office located in Mark. Hartney's president would then travel to the Mark sales office and sign the contract. The contract was stored at the sales office with a copy sent to the customer and the home office. Energy Transport or another common carrier would then regularly monitor and fill the customer's tanks and transmit this information to the home office in Forest View for invoicing.

By conducting its business in this manner, Hartney was able to compete with other fuel suppliers that only charged 6.25 percent on their fuel deliveries. These competitors operated outside Illinois or within other low-tax rate local jurisdictions within Illinois.

Procedural History

Hartney's business was continually scrutinized by the Department, auditing Hartney for all ROT periods since 1990. During five of the previous eight audit periods, Hartney operated a sales office at a different location from the home office in Forest View. However, in two prior audits, the Department raised the issue of proper situs for orders accepted at the satellite sales office, and in both audits, the Department concluded that sales were accepted at the satellite sales office, not the home office. Consistent with the results of the prior audits, Hartney continued to operate satellite sales offices to accept purchase orders and charged the tax rate in effect at the satellite location. Despite this prior audit history, in the most recent audit, the Department changed course and issued a notice of over $23 million in tax liability for the ROTs imposed by Forest View, Cook County and the Regional Transportation Authority (RTA), claiming that the proper situs for purposes of establishing the proper tax rate should have been the home office.3 Hartney paid the audit assessment under protest and challenged the Department's conclusion through a Protest Monies Act complaint, which it filed in the Circuit Court of Putnam County. The Circuit Court found in favor of Hartney, holding that for both longterm and daily contracts, "the place of receipt of a purchase order from the customer will be deemed the place of acceptance" for tax situs.4 The Illinois Appellate Court affirmed this decision, finding that while Hartney deliberately structured its sales office to enjoy favorable sales tax rates, such an action did not conflict with any regulation or statute.5

Appeal to Illinois Supreme Court

The Department appealed the Appellate Court's decision to the Illinois Supreme Court. The Supreme Court affirmed the lower courts' rulings, holding that Hartney properly sourced its sales to Mark, Illinois under the Department's regulations. The Court then concluded that the Department's regulations were inconsistent with Illinois statutes and, thus, invalid.

Hartney contended that a plain language reading of the regulation established a bright-line test basing tax situs on the location of purchase order acceptance. The Department, on the other hand, contended that the regulation contained a requirement that a certain amount of selling activity occur in a jurisdiction, which necessitates a detailed factual inquiry into the totality of the circumstances to determine sourcing. The Supreme Court resolved these conflicting interpretations by agreeing with the Appellate Court's holding that, contrary to the Department's contention, the factual inquiry was a minimum threshold to narrow the potential jurisdictions to which sales could be sourced.6 After this threshold inquiry, the Department's regulation enumerated a bright-line test – purchase order acceptance – to determine which jurisdiction would be the situs of taxation. The Court further explained how a plain reading of the regulation did not support the Department's position. In short, in the Court's view, the ordinal arrangement and structure of the Department's regulation made the bright-line purchase order acceptance test the controlling factor to determine tax situs.

Regulation Inconsistent with Illinois Statutes

After concluding that the regulation established purchase order acceptance as the bright line test, the Court examined whether the regulation was consistent with the Illinois statutes. The Court found guidance in Ex-Cell-O Corp.,7 a 1943 decision where it previously determined that the definition of selling under the ROT Act comprised many activities requiring a fact-intensive inquiry. The Court applied the analysis it used in Ex- Cell-O to the sourcing issue of locally-imposed ROTs presented in Hartney.

The Court noted that although regulations promulgated by the Department are given great deference, a regulation cannot narrow or broaden the scope of taxation provided under a taxing statute.8 The Court held, by allowing only purchase order acceptance to determine tax situs, the regulation impermissibly narrowed the review required to determine the proper jurisdiction for the locally-imposed ROT. They considered, but rejected sustaining purchase order acceptance as a bright-line test because of what are likely to be the inherent difficulties that will be faced by taxpayers and the Department in implementing a "totality of the circumstances" test. The Court concluded that the legislature is well suited to establish a bright-line test should it believe one is warranted.

The Court ultimately invalidated the Department's regulation but found that Hartney properly relied on those regulations to its detriment. As a result, the Court found that the Taxpayer Bill of Rights protected Hartney from the Department's assessment and returned the amount that Hartney paid under protest.9


The Illinois Supreme Court ruling in Hartney likely will usher in a period of confusion for both the Department and taxpayers other than Hartney, until and unless additional statutory and/or regulatory guidance is provided. Under the Taxpayer Bill of Rights analysis engaged in by the Court, the Department may be precluded from assessing taxpayers who sourced sales based on the location of purchase order acceptance up through the date of the Hartney decision, serving to protect certain taxpayers. However, for matters currently in the administrative or judicial pipeline in which taxpayers' facts are not completely in line with the facts in Hartney, the Department may distinguish the facts of each matter, and argue for ROT assessments based on where actual order acceptance occurs.

Further, for periods after the Hartney decision, the Department must determine the proper sourcing of sales based on the Court's ruling that the business of selling is the composite of many activities. There is a strong possibility that the Department will prospectively challenge those existing sourcing arrangements where retailers have relied upon establishing purchase order acceptance in a low-tax jurisdiction without also moving other selling activities to the purchase order acceptance location.

It should be noted that it is unclear from the Hartney decision exactly what level of selling activities will be required to take place in a particular location in order to source sales to that location. The lack of clarity around what selling activities are actually required to establish order acceptance will be particularly troublesome for taxpayers with multiple locations who have centralized certain selling activities and purchase order acceptance in one location. Until the Department engages in rulemaking to set forth clear standards that establish the level of selling activities that will be required, or the Illinois legislature enacts a clarifying statute, taxpayers will remain vulnerable.

The Department and the Illinois legislature should consider the possible consequences their actions can have on Illinois businesses and communities as they attempt to address the invalidated regulations. Both bodies should be mindful of the fact that local taxes often place Illinois businesses at a significant competitive disadvantage to those businesses that sell property from outside the state or from low-tax jurisdictions within the state. While the Hartney decision could generate significant revenue for local governments, that revenue stream could dry up quickly along with the jobs that those businesses provide, if consumers flock to suppliers located in low-tax jurisdictions.


1 Illinois Supreme Court, Docket Nos. 115130, 115131, Nov. 21, 2013.

2 Hartney Fuel Oil Co. v. Hamer, 976 N.E.2d 682 (Ill. App. Ct. 2012).

3 In the Circuit Court case, Hartney was allowed to argue a negative inference due to the state's destruction of records related to discussions and results of the previous audits. See Hartney Fuel Oil Co. v. Department of Revenue, Tenth Circuit Court of Illinois, Nos. 08-MR-11, 08-MR-13, 08-MR-15, Jan. 26, 2011.

4 The Circuit Court cited 86 ILL. ADMIN. CODE tit. 86 § 220.115(c)(1).

5 For further discussion of the Appellate Court decision, see GT SALT Alert: Illinois Appellate Court Holds Acceptance of Sales Orders in Jurisdiction Is Necessary to Impose Local Sales Tax.

6 The Appellate Court equated this threshold inquiry to determinations of whether courts have personal jurisdiction over individuals. These are procedural decisions and not determinations of fact.

7 Ex-Cell-O Corp. v. McKibbin, 384 Ill. 316 (1943).

8 See Kean v. Wal-Mart Stores, Inc., 919 N.E.2d 926 (Ill. 2009).

9 See 20 ILL. COMP. STAT. 2520/1—2520/7.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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.

In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
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.


    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.


    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.


    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.


    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.


    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.


    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 .


    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