United States: Illinois: The Department’s Effort To Bring Order To Local Sales Tax Sourcing Spreads The Chaos To The State Sales And Use Tax Regime

The list of potential side-effects of medication can often lend some validity to the aphorism that the remedy is worse than the disease. Tax regulations are not required to list the potential side-effects, but the remedy proposed by the Illinois Department of Revenue (the "Department") for Illinois' local sales tax sourcing ailments may indeed be worse than the disease. The Department issued a Second Notice, including a revised version of its proposed local retailers' occupation tax (sales tax) sourcing regulations May 29, 2014. This version substantially revises the Department's initial draft, and provides a "remedy" that is likely to make some taxpayers feel worse. The Joint Committee on Administrative Rules ("JCAR") will consider the Second Notice revisions at its June 17, 2014 meeting, a necessary step prior to formal adoption of the regulations, so there is still time and opportunity to seek revisions to the proposed sourcing rules included in the Second Notice.

The sourcing of sales for Illinois local sales tax purposes has been in chaos since the Illinois Supreme Court's late 2013 Hartney Fuel Oil1 decision. The Hartney decision invalidated the Department's longstanding regulations that treated the place of "order acceptance" as the location where the occupation of selling and the incidence of the local occupation (sales) tax occurred. Since the issuance of the Illinois Supreme Court's decision in Hartney, the Department has issued emergency regulations and proposed permanent regulations that identified, but did not weigh, the factors that comprise the occupation of selling that might occur in multiple locations.2 Also since that time, the city of Chicago, the village of Skokie, Cook County, and the Regional Transportation Authority have hauled more than 100 companies into a judicial discovery process to establish where the occupation of selling took place for such companies in the pre-Hartney periods.3 These developments have introduced a significant amount of uncertainty into the sourcing of sales for purposes of Illinois' local sales tax. If this was not bad enough, with the issuance of the Second Notice, the Department has now introduced uncertainty into the sourcing of sales for the state use tax as well.

The Department's Second Notice for its Proposed Regulations

The Second Notice that the Department filed with JCAR makes significant changes to the Department's original proposed permanent regulations. The proposed regulations originally identified primary factors, each equally weighted, which by their presence in a particular jurisdiction would indicate a possible situs for the occupation of selling, and identified a set of secondary factors, also equally weighted, for additional consideration if the primary factors failed to be conclusive. Under the Department's original proposal, the tie-breaker among multiple jurisdictions having both primary and secondary factors was to be a consideration of which jurisdiction provided the greater support of government services to the retailer.4 The Second Notice revises that analysis by providing a tiered sequence for its application.

The Second Notice provides that for multi-jurisdictional retailers, the place of the "predominant and most important Selling Activities" is determined by the location in which "three or more Primary Selling Activities" take place.5 The Second Notice also provides that "A retailer engaging in three or more Primary Selling Activities outside the State shall collect and remit the Illinois Use tax, except as provided in subsection (d).6 Nothing would be wrong with this rule, if the Primary Selling Activities did not include among them the act of "order acceptance" – meaning the place where authority is exercised to "bind the seller to a sale."

In 1955, Illinois enacted its Use Tax in reaction to the 1951 decision of the U.S. Supreme Court in Norton v. Department of Revenue.7 There, the U.S. Supreme Court held that, notwithstanding the existence of a retail operation in Chicago, not all of Norton's gross receipts from sales to Illinois could be subject to Illinois sales tax, and therefore, no Illinois sales tax would apply to the gross receipts from purchasers' orders accepted outside Illinois and shipped to Illinois from outside Illinois.

The new draft identifies six secondary selling activities. The secondary selling activities are intended to be used to determine the sourcing location when no individual jurisdiction has more than two primary selling activities. However, if applying the secondary selling activities review for vendors with multi-jurisdictional primary selling activities does not yield a sourcing location, then the sourcing defaults to either the jurisdiction where the inventory for the sale is located, or to the jurisdiction that is the location of the vendor's headquarters, depending on which jurisdiction is the location of more selling activities (whether primary or secondary).

The Impact on the State Use Tax

Because the Second Notice provides that "[f]or purposes of determining where a retailer is engaged in the business of selling it does not matter whether the retailer is engaged in Selling Activities in taxing jurisdictions in multiple States, or in multiple jurisdictions in the State" and thus, "[t]he legal standard is the same," it is now possible for a vendor to have order acceptance within Illinois and still not trigger an Illinois sales tax collection obligation on a sale shipped from outside Illinois if the requisite three primary and secondary selling activities take place outside Illinois. Likewise, it is possible for a vendor to have order acceptance outside Illinois and shipment from outside Illinois and be required to collect Illinois sales tax, rather than use tax, if the requisite three selling activities take place at a location within Illinois.

Aside from disregarding or tacitly overruling the Norton decision, the Second Notice is also directly contrary to existing Illinois sales tax regulations. The Department's state sales tax regulation section 130.610(d)(3) provides that "where the sale is made by or through an out-of-State place of business of the seller, Retailers' Occupation [sales] Tax liability will, nevertheless, be incurred . . . (A) where the seller or his authorized representative accepts an order in Illinois so as to create a contract, or (B) where the order is received in Illinois on behalf of the seller and someone in Illinois has authority to accepted [sic] such order so as to create a contract (whether such authority is exercised in the particular case or not.)"8 There is no way to reconcile this existing regulation with the contrary provisions of the Second Notice.

Whereas the status quo prior to the Second Notice was that of general uncertainty regarding the sourcing of sales for purposes of local taxes, the Second Notice has now created uncertainty regarding whether certain sales are subject to the state sales tax or the state use tax. Although the state sales and use taxes are imposed at identical rates (6.25 percent), vendors collecting the state sales tax (as opposed to the state use tax) are also responsible for collecting the additional local sales taxes. As a result of the Second Notice, it is unclear whether certain existing state use tax collectors are now subject to the state sales tax and whether existing retailers subject to the sales tax are now required to collect state use tax. This uncertainty has implications beyond the local rate differential, given the current proclivity of Illinois to add chaos to the sales and use tax regime by allowing individuals to pursue routine sales and use tax audit issues through the use of its False Claims Act.9

More to Come

On May 30, 2014, the General Assembly passed Senate Bill (S.B. 2612) and it now awaits the governor's signature. SB 2612 provides sourcing criteria for non-controversial, non-multi-jurisdictional transactions that are also covered by the Second Notice and set forth long-established standards for over-the-counter sales, remote sales with delivery at an in-state retail location for pickup, vending machine food sales, and sales of coal at the point of extraction.

The Hartney decision's broad holding was that determining the location of the business of selling could not be determined by a single or primary criterion; therefore, many agreed that established single-criterion standards in use without controversy were themselves at risk if not codified in statute. Although it is believed that the governor will sign SB 2612 into law, because the General Assembly passed an admittedly unbalanced budget (revenues do not match expenditures) that also awaits the governor's signature, there is reason to be cautious about even non-controversial legislation. Reed Smith will continue to monitor and provide updates regarding the developments in this area. .

Footnotes

1 Hartney Fuel Oil Co. v. Hamer, 998 N.E.2d 1227 (2013).

2 See RS Tax Alert "Illinois Issues Emergency Sales Tax Sourcing Regulations" (January 27, 2014).

3 See RS Tax Alert "WARNING: Illinois Courts Will Not Abide By Sales Tax Audit Result" (February 4, 2014).

4 See RS Tax Alert "Illinois Issues Emergency Sales Tax Sourcing Regulations" (January 27, 2014).

5 See, e.g., Second Notice, for 86 Ill. Admin. Code. § 220.115(c)(2).

6 Id.

7 Norton Co. v. Department of Revenue of State of Illinois, 340 U.S. 534 (1951).

8 86 Ill. Admin. Code Sec. 130.610(d)(3).

9 See RS Tax Alert "WARNING: Illinois Courts Will Not Abide By Sales Tax Audit Results" (February 4, 2014).

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