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.

Background

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

Commentary

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.

Footnotes

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.

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