United States: Illinois Department Of Revenue’s Local Retailers’ Occupation Tax Sourcing Rules Pass Hurdle; Sourcing Rules For Internet Sales Raise Questions

Last Updated: June 23 2014
Article by Michael J. Wynne, Denise M. Obrochta and Jennifer C. Waryjas

Most Read Contributor in United States, October 2017

During its June 17 meeting, the Illinois Joint Committee on Administrative Rules ("JCAR")1 approved the Department of Revenue's ("DOR") proposed local retailers' occupation tax rules ("Local ROT Sourcing Rules")2 issued pursuant to the DOR's May 29, 2014 Second Notice. This step in the Illinois rulemaking process is procedurally important because JCAR's approval allows the DOR to formally adopt these proposed rules.3 However, JCAR has requested the DOR to work with "affected parties" to mitigate such parties' concerns.4 Who is deemed an "affected party," and the extent to which the DOR will work with such "affected parties," will presumably unfold during the next few weeks.5

The approved version of the Local ROT Sourcing Rules improves upon the earlier proposed version issued in March 2014, by clarifying that a retailer's predominant selling activities occur at the location where three out of five of the listed Primary Selling Activities occur.6 The approved version of the Local ROT Sourcing Rules nonetheless continues to cause some confusion under the various retailer occupation tax statutes, and adds confusion under the use tax statutes for certain retailers that are required to apply the Primary Selling Activities test. For details regarding the potential use tax confusion, please see our June 5, 2014 Client Alert.

The primary focus of the questioning from JCAR to the DOR during its June 17 meeting was on the sourcing rules for "Sales Over the Internet" set forth in proposed Regulation section 220.115(d)(3). Subsection (d) excludes four classes of retailers from application of the Primary Selling Activities test, and the potential subsequent Secondary Selling Activities test.7 For these classes of retailers, specific sourcing rules are provided. Subsection (d)(3) provides that, with regard to certain sales made over the Internet, the DOR "will presume that the retailers' predominant Selling Activities take place outside of [Illinois]" and that "[t]herefore, such a sale will be subject to the Illinois Use Tax Act...."8 Further, in order for this Internet-sales sourcing rule to apply to sales, such sales must meet the following criteria:

  • The sale is made through a consumer-based retailer website;
  • The consumer-based retailer website is "available without limitation on the world wide web"; and,
  • The retailer ships the property to the customer in Illinois.

These criteria should prevent retailers that utilize an Internet-based platform to fulfill customer orders for tangible personal property pursuant to pre-existing sales contracts from using the subsection (d)(3) sourcing rule for Internet sales. For example, if a manufacturer sells parts to a customer pursuant to an existing contract, and the customer directs the manufacturer via the Internet to ship the parts, the subsection (d)(3) Internet-sales sourcing rule should not apply to this transaction.

In contrast, the subsection (d)(3) sourcing rule would apply to a retailer that offers tangible personal property on the Internet to any and all potential consumers in the public-at-large, whereby the consumers can immediately order the tangible personal property on the retailer's website by providing payment and shipping/delivery information, thus beginning and ending the sale and purchase of the tangible personal property in one single, Internet-based transaction. However, it should be noted that if an Internet-based seller sells tangible personal property that is located in Illinois at the time of the sale, or that is subsequently produced by the retailer in Illinois and then delivered to a location in Illinois, the sale will be sourced to the inventory location in Illinois at the time of the sale.9

The special sourcing rules for qualifying sales over the Internet in subsection (d) are reasonable from a tax policy perspective. As stated in proposed Regulation § 220.115(d)(1), "[f]or certain classes of retailers with unique, complicated, or widely dispersed Selling Activities, determining appropriate tax situs in every situation presents substantial administrative difficulties for both retailers and tax enforcement personnel," and that subsection (d) "provides administrative 'short cuts' that balance the administrative difficulties presented by certain selling activities against the need for accurate tax assessment." Indeed, without these administratively efficient sourcing rules, the determination of where an Internet-based sale occurs – e.g., where the server or servers reside that solicit and execute Internet sales, where the inventory is located, or other locations in the sales lifecycle – will certainly be the subject of much litigation in the future. A rebuttable presumption is an appropriate and effective mechanism to maintain a fair balance of competing interests where the facts may so warrant.


1.For an explanation of JCAR's role in the Illinois legislative and regulatory process, go to http://www.ilga.gov/commission/Jcar/.

2.The proposed Local ROT Sourcing Rules amend each of the Illinois regulations listed in this footnote, and do so using uniform language and section numbers. However, for ease of citation and reference hereinafter, only the Home Rule County Retailers' Tax regulation § 220.115 will be cited. Each of the regulations amended by the approved Local ROT Sourcing Rules is as follows: Home Rule County Retailers' Occupation Tax (86 Ill. Admin. Code 220, 38 Ill. Reg. 4047); Home Rule Municipal Retailers' Occupation Tax (86 Ill Admin. Code 270;38 Ill. Reg.4060); Regional Transportation Authority Retailers' Occupation Tax (86 Ill. Admin. Code 320; 38 Ill. Reg. 4073); Metro East Mass Transit District Retailers' Occupation Tax (86 Ill. Admin. Code 370; 38 Ill. Reg. 4086); Metro-East Park and Recreation District Retailers' Occupation Tax (86 Ill. Admin. Code 395; 38 Ill. Reg. 4099); County Water Commission Retailers' Occupation Tax (86 Ill. Admin. Code 630; 38 Ill. Reg. 4112); Special County Retailers' Occupation Tax for Public Safety (86 Ill Admin. Code 670; 38 Ill. Reg. 4125); Salem Civic Center Retailers' Occupation Tax (86 Ill. Admin. Code 690; 38 Ill. Reg. 4138); Non-Home Rule Municipal Retailers' Occupation Tax (86 Ill. Admin. Code 693; 38 Ill. Reg. 4151); and County Motor Fuel Tax (86 Ill. Admin. Code 695; 38 Ill. Reg. 4164).

3.The Department will formally adopt the proposed rules blessed by JCAR under Second Notice by filing the proposed rules with the Illinois Secretary of State for publication in the Illinois Register.

4.JCAR's request for the DOR to work with "affected parties" is technically an informal request because JCAR is filing a Certificate of No Objection without a Recommendation; had JCAR filed a Recommendation with the Certificate of No Objection, the DOR would have been required to respond to the Recommendation in writing within 90 days, and could have modified or withdrawn the proposed rules in response to the JCAR Recommendation.

5.The Regional Transportation Authority is already suggesting it may pursue legal action to prevent formal adoption of the Local ROT Sourcing Rules as approved by JCAR.

6.Proposed 86 Ill. Admin. Code § 220.115(c)(2).

7.The four classes of retailers excluded from application of the Primary Selling Activities test are: retailers with inventory in Illinois when the Illinois inventory is delivered to a purchaser located in Illinois; sales over the Internet; leases with an option to purchase; and sales of coal or other minerals. Proposed 86 Ill. Admin. Code §§ 220.115(d)(2) – (5).

8.This presumption in favor of applying use tax for qualifying Internet sales may be overcome if "there is clear and convincing evidence the retailer's predominant and most important Selling Activities take place in [Illinois]." Proposed 86 Ill. Admin. Code §§ 220.115(d)(3)(A) – (B).

9.Proposed 86 Ill. Admin. Code § (d)(2).

This article is presented for informational purposes only and is not intended to constitute legal advice.

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