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...