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.

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