Emergency Regulations in Illinois Address Sales Tax Situsing

The Illinois Department of Revenue (the “Department”) recently filed emergency regulations that provide guidance following the Illinois Supreme Court’s decision in Hartney Fuel Oil Co v. Hamer as to how sales should be sourced for local sales tax purposes. The emergency regulations are drafted to be effective immediately. Illinois taxpayers should carefully review the emergency regulations and evaluate how retail sales would be sourced under such rules. The fact-intensive inquiry could potentially alter the local sourcing of sales for certain taxpayers.

As background, the Illinois local Retailers’ Occupation Taxes are imposed on taxpayers engaged in the business of selling tangible personal property at retail within the locality. Determining the location of a business’s selling activities is critical for situsing transactions. The taxpayer in Hartney Fuel Oil followed existing Department guidance that allowed businesses to use the single element of purchase order acceptance as the bright-line factor for determining location of selling and, therefore, the local taxing jurisdiction. The Illinois Supreme Court in Hartney Fuel Oil found that while the taxpayer had followed regulatory guidance, the regulation improperly narrowed the scope and intent of the statute, and accordingly the court struck down the regulation.

Sourcing Sales under Emergency Regulations: Fact-Intensive Analysis

Following the court’s analysis, the emergency regulations remove the sole emphasis on purchase order acceptance and support a fact-specific inquiry. The emergency regulations provide factors that should be examined to determine where the business of selling occurs. The emergency guidance provides four ‘Primary Factors’ and five ‘Secondary Factors’ to be employed in the determination of where the business of selling takes place.  The Primary Factors are:

1)     the location of officers, executives, and employees with the ability to negotiate and bind the seller;

2)     the location where offers are prepared and made;

3)     the location where purchase orders are accepted; and

4)     the location of tangible personal property sold - if such property is in inventory at the time of sale or delivery.

If the Primary Factors fail to provide a clear outcome of where the business of selling occurs, the Department has identified the following Secondary Factors which are then to be considered:

  • the location where marketing and solicitation occur;
  • the location where purchase orders are received when purchase orders are accepted, processed, or fulfilled in a location different from where they are received;
  • the location of the delivery of the property to the purchaser;
  • the location where title passes; and
  • the location of the retailer’s ordering, billing, accounts receivable, and other administrative functions.

Common selling operations

Before considering either the Primary or Secondary Factors, a seller may fit into a category that the Department has identified as “Common Selling Operations.” If a taxpayer falls into one of these categories, the Department has set out the guidance for situsing sales, with no further need to analyze additional selling activities. The common selling operations are:

                        i.        over-the-counter sales;

                       ii.        in-state inventory/out-of-state selling activity;

                      iii.        long term blanket contracts;

                      iv.        sales through vending machines;

                       v.        sales from vehicles carrying uncommitted goods; and

                      vi.        sales of coal or other minerals.

Conclusion

Although a bright-line test is no longer available for taxpayers to follow, the Department establishes the requirement for an objective review of the ‘activities of selling.’ The emergency regulations provide that the Department has the right to look beyond the form of a transaction to its substance to determine where “enough of the business of selling took place.” This proposed new method for situsing sales could have significant impacts on sales tax liabilities and require careful review by Illinois taxpayers.

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