Tuesday, December 3rd, 2013

Illinois Supreme Court Creates New Guidelines for Determining Location of Retail Sales Tax Liability

In late November, the Illinois Supreme Court issued an eagerly awaited decision in Hartney Fuel Oil Company v. Hamer, a case involving the appropriate jurisdiction for the payment of retail sales tax under Illinois law.  The decision has not been released in final form yet.  The case involved a dispute between many parties including the Illinois Department of Revenue (the “Department”) and the RTA on one side, and the Hartney Fuel Oil Company and the Village of Mark on the other.  Although Hartney conducted much of its sales business from its home office in the Village of Forest View, Illinois – where any sales would have been subject to the higher Forest View, Cook County and RTA taxes – the actual orders for fuel were taken by phone in the Village of Mark outside of the Forest View, Cook County and RTA taxing area.

Under the longstanding and generally understood interpretation of the Department’s regulations, Hartney treated the Village of Mark as the location or situs of the sales since the purchase orders were accepted there and thus paid sales tax for that jurisidiction. The Department however concluded that the actual situs of selling activity was the Forest View office where Hartney conducted the bulk of its sales activities apart from the actual order-taking which took place in Mark.  Under protest, Hartney paid the taxes, interest and penalties assessed by the Department and then sued for a refund. The circuit court and appellate courts both sided with Hartney concluding that the Department’s regulations interpreting state sales tax law had included a bright-line test to the effect that the situs of the sale and tax liability was in Mark because that was the location the purchase orders were accepted regardless of other sales activity that took place elsewhere.

On appeal to the Illinois Supreme Court, the court found that the question of where sales actually take place is more complex than just a simple bright line situs of sale test and that the Department should look to all of the facts to determine where the sale takes place.  Thus, if all the activities of sale except for the final order-taking occur elsewhere, the situs might not be the place the order was taken but the place where the other activities were conducted.  The court found that the Department’s existing regulations misapplied state law by suggesting that the situs of sales test was a bright line test, and therefore the court found that the regulations would have to be changed.

While this effectively means that Hartney and the Village of Mark “lost” this litigation, in fact the court concluded that under the Taxpayers Bill of Rights Act Hartney should not be liable for the taxes paid and collected under that old but incorrect standard, especially because the Department’s regulations had included the situs of sale test. Going forward, however, the old situs of sale standard will not apply and Illinois retailers who conduct sales activities in more than one location – and municipalities that have been benefiting from the tax revenue generated by such sales – will need to reevaluate their practices. After the ruling, the Department posted a notice on its website indicating its intent to pass new regulations in the near future requiring a fact-specific approach to determining the situs of sale: http://www.revenue.state.il.us/News/HartneyDecision.htm.

We will continue to monitor this matter.  If you have any questions in the interim, however, please contact Ruth Schlossberg at rschlossberg@zrfmlaw.com or 815-459-2050 for more information.


Ruth Alderman Schlossberg

Author: Ruth A. Schlossberg