Weekly Round-Up: Illinois Puts an End to Popular Tax Avoidance Strategy

In the aftermath of a 2013 Illinois Supreme Court decision, Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130, concluding that a seller incurs retailers' occupation taxes in the local jurisdiction where its predominant selling activities occur, the Illinois Department of Revenue filed emergency regulations to help businesses determine their local sales tax obligations, Bloomberg BNA Correspondent Michael Bologna writes in this week’s issue of the Weekly State Tax Report.  

The emergency rules were needed to address uncertainties created by Hartney, which concluded that sellers incur liability under Illinois's Retailers' Occupation Tax Act in the local jurisdiction where the predominant selling activity occurs, Revenue Director Brian Hamer said. The ruling also invalidated department rules for determining which local taxes apply for multijurisdictional retailers, Bologna said.  

The emergency regulations clarify that sales taxes must be paid in the jurisdiction in which the bulk of the business activities occur and entirely reject the theory that local sales tax situs is fixed exclusively on the locality where sales are accepted, Bologna writes.  

The regulations also snuff out a local sales tax avoidance strategy in which taxpayers shift their liabilities from high-tax jurisdictions, primarily in the Chicago region, to low-tax jurisdictions, Bologna says.    

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, Bloomberg BNA State Tax Law Editor Christopher Young explained in a recent blog post on Hartney . 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, Young writes.   

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, Young said.   

For a closer look at the emergency regulations issued by Illinois, check out Bologna’s article here .   

Continue the discussion on the BBNA State Tax Group on LinkedIn : What impact do you think the emergencyrules will have on retailers operating in Illinois? Will Hartney spur other jurisdictions to take a closer look at local sales tax sourcing rules?  

In other developments…

Tennessee Bill Would Adopt Amazon, Click-Thru Nexus in Tennessee (SB2298/HB1537) , according to a new alert by Bradley Arant Boult Cummings LLP

New Florida Tax Incentive Report Reveals Inefficiencies, Ideas for Reform , by the Tax Foundation

Top Fiscal Issues for 2014 Legislative Sessions , by the National Conference of State Legislatures

Compiled by Priya D. Nair
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