Voiding Of Illinois Sales Tax Regulation Leads To Prospective Uncertainty For Sourcing Sales

The Illinois Supreme Court recently struck down an Illinois Department of Revenue (Department) regulation sourcing sales to the location of order acceptance. While the Supreme Court found that the Taxpayers' Bill of Rights protected the taxpayer from retrospective liability, going forward, Illinois retailers need to closely evaluate their filing positions. The decision will lead to a period of chaos for taxpayers, local governments and the Department.

In a highly anticipated decision, Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130 (November 21, 2013), the Illinois Supreme Court struck down the Illinois Department of Revenue's (Department) regulation sourcing sales to the location of order acceptance. While the Taxpayers' Bill of Rights protected the taxpayer from liability for back taxes, Illinois retailers need to closely evaluate their filing positions on a prospective basis. The decision creates a chaotic situation for taxpayers, local governments and the Department.

The Illinois Retailers' Occupation Tax is an unusual form of sales tax that sources sales based on the location of the retailer rather than the location of delivery. It is imposed on the privilege of engaging in the occupation of making retail sales. Various local governments (municipalities, counties and special purpose agencies) may impose their own retailers' occupation taxes. As a result, there are dozens of different tax rates in the state. The applicable rate depends on where a retailer is carrying on its retail occupation. When a retailer operates in multiple locations, that determination can be difficult. For decades, the Department sought to simplify the question by interpreting its sourcing regulation to mean that the retailer is carrying on its occupation at the location where it accepts purchase orders. Some retailers have engaged in tax planning to place the location of order acceptance in more favorable jurisdictions, and local governments have offered economic development incentives to retailers in exchange for locating a sales office within the jurisdiction.

In Hartney, the Department audited and challenged the taxpayer's claim that its sales were sourced to a sales office in the Village of Mark, in Putnam County, where no local sales tax applied, instead of the taxpayer's office in Forest View, a suburb of Chicago with a significant local sales tax burden. During the years at issue, Hartney had an arrangement with an unrelated company in Putnam County, by...