The Illinois Department of Revenue (Department) issued emergency rules on Jan. 22, 2014 to provide immediate guidance to Illinois retailers in determining certain local retailers’ occupation tax obligations in the wake of the Illinois Supreme Court decision in Hartney Fuel Oil Company v. Hamer, which invalidated the Department’s prior rules governing the sourcing of such taxes.
Retailers’ occupation taxes
In general, the retailers’ occupation tax statutes permit local taxing jurisdictions to impose retailers’ occupation taxes on any business engaged in the business of selling tangible personal property in their territories. The retail businesses reimburse themselves for the retailers’ occupation tax liability by collecting use taxes from the purchasers. The determination of the jurisdiction in which a business would need to pay retailers’ occupation taxes has been the subject of controversy between certain retailers and various taxing authorities.
Sourcing of retailers’ occupation tax and the Hartney decision
Prior to Hartney, in order to reduce Illinois sales tax (which refers to the combination of the retailers’ occupation tax imposed on the retailer and the use tax collected from the buyer) imposed on a retail transaction, retailers would often structure the transaction so that the final order acceptance occurred in a jurisdiction with low or no local sales tax. This sourcing method was in accordance with the prior rules promulgated by the Department, which permitted sales for local retailers’ occupation tax purposes to be sourced to the jurisdiction in which the sales order was accepted.
The Court in Hartney determined that the language of the retailers’ occupation tax statute required a fact-intensive inquiry to source the sales for local retailers’ occupation tax purposes to the jurisdiction where the predominate selling activities occurred.
Consequently, the Court invalidated the Department’s rule permitting sales for local retailers’ occupation tax purposes to be sourced to the jurisdiction in which the sales order was accepted. The Department’s emergency rulemaking fills the void left by the Hartney decision.
Fact-intensive inquiry for sourcing under the emergency rules
The emergency rules set forth a fact-intensive inquiry to source the sales to the jurisdiction where the predominate selling activities occurred. The emergency rules identify four primary selling activities that will determine where a multi-jurisdictional retailer is engaged in “the business of selling.” These four primary factors are:
- The location of the offer;
- The location of the acceptance;
- The location of the inventory; and
- The location of the sales personnel.
If these four primary factors do not reveal the location in which the retailer is engaged in the business of selling, then the emergency rules provide five additional, secondary factors that may be considered to determine the correct taxing jurisdiction. These five secondary factors are:
- The location of the seller’s administrative functions;
- The location of the solicitation;
- The location where contracts are received;
- The location where title passes; and
- The location where the goods are delivered.
The Department noted in a letter accompanying the issuance of the emergency and proposed rules that some retailers may be unsatisfied with the guidance provided because they prefer a bright line rule or a one-factor test. The Department explained that the retailers’ occupation tax acts prevent it from complying with the wishes of those taxpayers. The Department stated that “[m]any states have avoided the uncertainty that is inherent in a retailers’ occupation tax by adopting a streamlined sales tax regimen that links sales tax to the place where the tangible personal property is delivered. If Illinois wishes to pursue such a policy, it must be initiated by the General Assembly, rather than the Department.”
Effective period for emergency rules
The Department also issued proposed permanent rules, which are subject to public comment and review by the Illinois Joint Committee on Administrative Rules (JCAR). The Department’s emergency rules are in effect for 150 days unless JCAR takes action to suspend them.
Click here to read our prior Multistate Tax Update on the Hartney decision.
Click here to read the Department’s letter about the emergency rules.