Wipfli Alerts & Updates: Illinois Supreme Court Voids Sales Tax Regulation
December 13, 2013
Taxpayers with multiple retail locations in Illinois impacted by ruling.
The Illinois Supreme Court deemed an Illinois Department of Revenue sales tax regulation regarding the sourcing of sales to the location of order acceptance invalid on November 21, 2013. This decision results in uncertainty for all taxpayers, local governments, and the Illinois Department of Revenue. Specifically, this impacts taxpayers with multiple retail locations in Illinois. Taxpayers now must look to the statute and the “totality of circumstances” to determine the situs of their sales.
The Illinois Retailers’ Occupation Tax is imposed on people engaged in the business of selling tangible personal property to purchasers for use or consumption. Each local jurisdiction may impose its own retailers’ occupation tax, which results in various sales tax rates throughout the state. This tax is determined based on the location of the retailer rather than on the location of the delivery of goods. This becomes difficult for taxpayers who have multiple retail locations. Previously, the Department had attempted to simplify the issue by providing guidance to taxpayers to source their sales based on where the purchase order is accepted. As a result, some retailers have strategically located their sales offices in order to minimize their tax liabilities.
Hartney Fuel Oil Company V. Hamer
The Illinois Supreme Court handed down its opinion in the case of Hartney Fuel Oil Company V. Hamer on November 21, 2013. The Court reversed in part, and affirmed in part, the appellate court judgment.
In Hartney Fuel Oil Co v. Hamer, Hartney ran the daily operations of its business out of Forest View (a Chicago suburb) but maintained its sales office in the Village of Mark. The Village of Mark does not impose a local sales tax. This is a stark contrast to the sales tax that would be imposed in Forest View. During the years under audit, Hartney paid a monthly fee for rented office space and use of a clerk of a local business in Mark to accept orders on behalf of Hartney. While the clerk’s word was binding on Hartney, the bulk of the company’s selling activities took place in Forest View. These activities included marketing, maintaining inventory, price setting, and building and maintaining client relationships. Hartney relied on the regulation’s “bright-line test”—when an order is accepted for a retail sale in Illinois, and the purchaser takes delivery in Illinois, the sale has its situs where the seller accepts the purchase order. The Illinois Department of Revenue asserted that the sales were actually occurring at Hartney’s office in Forest View. However, the circuit court and appellate court both concluded that, based on the regulations, the sales took place in Mark.
Upon receiving the decision of the appellate court, the Department appealed to the Illinois Supreme Court. The court first looked to the statutes that impose tax on “all persons engaged in the business of selling tangible personal property at retail.” The court has previously interpreted the meaning of the “business of selling” to be the “composite of many activities extending from the preparation for...to the passing of title and payment of the purchase price.” The court noted that the statute did not limit the scope to just one or two most important activities. However, the regulations read that, “It is the Department's opinion that the seller's acceptance of the purchase order or other contracting action in the making of the sales contract is the most important single factor in the occupation of selling.” The court found that the “jurisdictional questions” regulations were “too inconsistent with the statutes and case law to stand.” It found the regulation to be invalid. The Illinois Supreme Court reversed the appellate court’s reliance on the regulations.
The court determined that the regulation was invalid because of the inconsistency between the regulations and the statute. Based on the analysis of activities, Hartney would be subject to the sales tax in Forest View. The Court determined that under the Taxpayer’s Bill of Rights Act, Hartney’s penalties and tax must be abated based on the “erroneous written information or advice given by the department.” Since Hartney had relied on the regulations and acted consistently with the regulations, it was not penalized for seeking advantageous tax opportunities.
Uncertainty for Taxpayers
In its decision, the court declared that it was the General Assembly’s task to decide tax policy and has left it to the legislature to write new regulations. This creates uncertainty for all retailers, local governments, and also the Department.
While it is our belief that taxpayers are protected retroactively, it is prudent to review the sourcing of sales going forward. As of November 21, 2013, taxpayers should no longer rely on the “Jurisdictional Questions” section of the sales tax regulations. The order-acceptance approach may no longer be used. The challenge is that taxpayers must apply the “composite of many activities” test to determine the situs of sales. According to its website, the Illinois Department of Revenue plans to “promulgate regulations in the near future to provide additional guidance to taxpayers.” Without specific legislation, retailers will need to work with their tax advisors to determine if they need to increase the amount of sales tax being charged to their customers.
Please contact Craig Cookle at 414.431.9383, Jessica Macklin at 815.626.1277, Daryl Ohland at 920.832.2437, Cathy Sanford at 815.484.5654, or your Wipfli relationship executive for further information.
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