Illinois Department Of Revenue Issues New Draft Rules For Sourcing Of Local Sales Tax

On January 22, 2014, the Illinois Department of Revenue adopted emergency rules, and on February 7, 2014 proposed permanent rules, to implement the Illinois Supreme Court's ruling in Hartney Fuel Oil Co. v. Hamer.1 In Hartney, the Court struck down the Department's long-standing rules governing the sourcing of sales for locally imposed retailers' occupation taxes. The Court held that the bright-line purchase order acceptance test contained in the rules was contrary to law. Additionally, the Court held that the determination of the proper location for sourcing locally imposed retailers' occupation taxes requires a fact-specific inquiry into the totality of a retailer's selling activities. The rules are the Department's attempt to implement the Supreme Court's decision by providing guidance in the form of a fact-intensive inquiry for retailers with multiple Illinois locations.

Background

It is important to understand the statutory basis of the Illinois "sales taxes" in order to understand the local sourcing issues. What is commonly referred to in Illinois as the "sales tax" is actually a combination of the Retailers' Occupation Tax ("ROT"), the Use Tax ("UT"), the Service Occupation Tax ("SOT"), the Service Use Tax ("SUT") and various locally-imposed retailers' occupation taxes.2 The ROT is a tax imposed on the occupation of selling3 and is measured by the selling price of tangible personal property sold by a retailer to a customer in Illinois.4 The UT is a tax imposed on purchasers of tangible personal property in Illinois5 that is measured by the purchase price.6 The local retailers' occupation taxes are imposed on the occupation of selling and are measured by the selling price of tangible personal property sold by an Illinois retailer to a customer in the state. Illinois law does not provide parallel locally imposed use taxes in the same way that the UT parallels the ROT. Rather, the locally imposed retailers' occupation taxes grant retailers a right of reimbursement and collection from purchasers.7 With the exception of Cook County and the City of Chicago, a purchaser does not incur a local use tax obligation simply by being present in, or a resident of, a local jurisdiction.

For almost 60 years, Department rules provided a bright-line test for determining the proper location for sourcing locally imposed taxes - the location where the purchase order was accepted. The Department's local sourcing rules stated that in sourcing sales between those local jurisdictions in Illinois in which selling activities occur, "the most important single factor in the occupation of selling" was the "acceptance" of the purchase order.8 In Hartney, the Illinois Supreme Court concluded that the definition of selling for purposes of the local retailers' occupation taxes is determined by a composite of many activities requiring a fact-intensive inquiry and the Court relied on case law construing the ROT.9 The Court held that by limiting the determination of the proper local taxing jurisdiction to purchase order acceptance, the Department's rules impermissibly construed the sourcing requirements of the local ROT laws. After Hartney invalidated the existing rules, the Department was required to adopt emergency rules and propose permanent rules to implement the Court's holding.10

Emergency and Proposed Permanent Sourcing Rules Issued

On January 22, 2014, the Department adopted emergency rules. The Department proposed permanent rules on February 7, 2014.11 The emergency rules take effect immediately and remain in effect for 150 days or until the adoption of the permanent rules, whichever occurs first.12 The proposed rules will become permanent rules through the normal rulemaking process of the Illinois Administrative Procedure Act ("IAPA").13 The two sets of rules are identical.

The Illinois General Assembly's Joint Committee on Administrative Rules ("JCAR") has not...