Illinois Department Of Revenue Adopts Final Rules For Sourcing Of Local Sales Tax

The Illinois Department of Revenue recently has adopted final rules1 concerning the sourcing of sales for local retailers' occupation tax (ROT) purposes that are designed to implement the Illinois Supreme Court's ruling in Hartney Fuel Oil Co. v. Hamer.2 In Hartney, the Court struck down the Department's long-standing rules governing the sourcing of sales for local ROTs. The Court held that the bright-line purchase order acceptance test contained in the rules was contrary to law. Also, the Court held that the determination of the proper location for sourcing local ROTs requires a fact-specific inquiry into the totality of a retailer's selling activities. The final rules, which differ from the emergency and proposed rules issued earlier this year, are intended to provide guidance for retailers in sourcing local sales to the location where they are "engaged in the business of selling tangible personal property."

Background

In Illinois, retailers are subject to a state-level ROT, as well as locally-imposed ROTs. The major issue for Illinois retailers is that the local ROT rates are 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. To further complicate matters, unlike most other states, Illinois law provides that sales are sourced to the location of the seller.

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 provided that in sourcing sales between those local jurisdictions in which selling activities occur, "the most important single factor in the occupation of selling" was the "acceptance" of the purchase order.3 In Hartney, the Illinois Supreme Court concluded that the definition of selling for purposes of the local ROTs is determined by a composite of many activities requiring a fact-intensive inquiry.4 After Hartney invalidated the existing rules, the Department adopted emergency rules on January 22, 20145 and proposed permanent rules on February 7, 20146 to implement the Court's holding. Prior to adopting the final rules,7 the Department made a number of changes in response to comments received, as well as additional changes agreed upon with the Illinois General Assembly's Joint Committee on Administrative Rules (JCAR).

Selling Activities Determine Taxing Jurisdiction

The final rules explain that selling activities, rather than actual sales, determine the jurisdiction in which a retailer is subject to local ROTs.8 Thus, the jurisdiction in which the sale takes place is not necessarily the jurisdiction where the tax is owed. The occupation of selling is comprised of "the composite of many activities extending from the preparation for, and the obtaining of, orders for goods to the final consummation of the sale by the passing of title and payment of the purchase price."9 Thus, establishing where "the taxable business of selling is being carried on" requires a fact-specific inquiry into the composite of activities that comprise the retailer's business.10

A seller incurs ROT in the county (taxing jurisdiction) in which its predominant and most important selling activities take place.11 Isolated or limited business activity within a jurisdiction does not...