Illinois Local Sales Tax Sourcing Uncertainty Is Over Replaced By Chaos: Hartney Wins Tax Situs Suit, But Governing Regulations Are Invalidated

On November 21, 2013, in Hartney Fuel Oil Company v. Hamer, the Illinois Supreme Court determined that the longstanding regulations for sourcing sales for local sales and use tax purposes promulgated by the Illinois Department of Revenue (the "Department") were invalid.1 The Supreme Court's decision was also notable because the court applied the Illinois Taxpayers Bill of Rights2 to protect the taxpayer against liability and penalties for periods in which the taxpayer relied on flawed regulations. The Hartney decision, however, has resulted in a situation where chaos and uncertainty will govern the sourcing of transactions for Illinois local sales tax purposes until a new sourcing can be established through the promulgation of new regulations or the passage of new legislation.

Background

Local sales tax rates vary in Illinois. This has resulted in local jurisdictions competing for sales tax revenue by offering businesses tax-sharing arrangements. Under these arrangements, local taxing jurisdictions would offer businesses tax benefits as an incentive to source their sales to the jurisdiction. These tax-sharing arrangements relied on the Illinois sales tax sourcing regulations, in particular 86 Ill. Admin. Code § 220.115, which sourced sales to the local jurisdiction where the order resulting in the sale was accepted by the vendor.

In Hartney, the Illinois Supreme Court affirmed the decisions of the lower courts, which had held that the bright line sourcing rule in the Department's regulation, based on the place of order acceptance, was not a valid interpretation of either the Home Rule County, the Home Rule Municipal, or the Regional Transportation Authority Retailers Occupation Tax Acts.3 However, the Illinois Supreme Court nonetheless held that Hartney Fuel Oil Company ("Hartney") and any other similarly situated taxpayers that relied on the Department's invalid regulations to source sales for local sales tax purposes for prior periods were entitled to a full abatement of tax, interest and penalty because of their detrimental reliance on the Department's invalid regulations.

Hartney, a retailer of fuel oil, maintained a home office in Forest View, Illinois, located in Cook County. Hartney simultaneously maintained a sales office in a separate location in the Village of Mark, situated in Putnam County, Illinois. The Mark office was the location where Hartney accepted all of its orders. Under this arrangement, Hartney did not source any of its sales to Forest View, and thus, was able to avoid collecting the retail occupation taxes of Cook County, the Village of Forest View, and the Regional Transportation Authority on its sales. Instead, Hartney sourced its...