Sales Tax Slice: Illinois Supreme Court Dissects and Deduces on the ‘Source’ of Confusion

In Illinois, sourcing for the local retail occupation taxes is no longer fixed exclusively by the place of order acceptance. In other words, just because a retailer accepts an order for goods or services at a location two hours outside of Chicago, all while operating the core of its business activities within Cook County, does not mean it avoids Chicago-region local retail occupation taxes. That’s what the Illinois Supreme Court ruled in Hartney Fuel Oil Co. v. Hamer .  

Prior to (and as exhibited in) Hartney, a popular tax avoidance strategy involved leasing office space outside the high-tax jurisdictions in the Chicago region, and then contracting with a local business for the services of a clerk to take orders at that location. The strategy was designed to shift local tax liabilities from the Chicago region to lower tax jurisdictions in other areas of the state. The reason for the strategy’s popularity? According to the court, when structured and executed properly, it complied with the Illinois Department of Revenue’s regulations.

Heck, the court, citing both the department’s own regulations and the Taxpayer’s Bill of Rights, even abated a little over $23 million of Hartney’s tax liabilities for participating in such a strategy.

Indeed, under those regulations, the court determined that as long as a sale was at retail and the purchaser accepted delivery within the state, the situs of the sale occurred at the purchase order acceptance location.  

So all businesses had to do was set up an office outside a high tax jurisdiction, accept purchase orders at that location, and then escape local taxes, right? Yes, but not anymore. 

While concluding that such an interpretation was correct, the court ruled that a single-factor test for determining the situs of a retail sale was too inconsistent with the statute and case law to stand and accordingly held the regulations invalid. Instead, the court held that such a determination requires a “fact-intensive inquiry” into whether a retailer engaged in the “business of selling” in a particular locality for the purpose of imposing the local retail occupation taxes.

As the dust begins to settle, however, Hartneystill casts a cloud of uncertainty over local retailers’ occupation tax obligations and responsibilities. The department has issued a notice   stating that it intends to promulgate new regulations “in the near future,” and warning businesses engaging in similar Hartney-type tax avoidance strategies.

In the meantime, however, businesses must conduct their own fact-intensive inquiries with only Hartney and other relevant case law to guide them. From Hartney, the one thing that is clear is that the structure of that particular strategy is impermissible. 

However, the court identified some indicia for where a retailer is engaging in the “business of selling.” Specifically, the court cites “the bulk of its selling activity” being the location where Hartney “carried out all of its marketing efforts, maintained inventory, set prices, and cultivated relationships.”  

Furthermore, the court stated, “[w]hile the clerk . . . could bind Hartney, the clerk participated in no other aspect of the business of selling.” Such a statement may indicate that merely assigning additional, sales-related responsibilities to a contract clerk may have tilted a fact-intensive inquiry in favor of the lower taxing jurisdiction.

Thus, the scramble for businesses to comply with yet-to-be promulgated regulations has officially begun. 

Continue the discussion on the BBNA State Tax Group on LinkedIn : How big of a game-changer is Hartneyfor businesses conducting sales in the Chicago region?

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