Friday, January 24th, 2014

Department of Revenue’s New Sales Tax Allocation Emergency and Proposed Rules Following Hartney Decision

On Jan. 22, 2014, the Illinois Department of Revenue filed emergency rules to comply with the Illinois Supreme Court’s recent decision in Hartney Fuel Oil Co. v. Hamer that we addressed in a previous article.  According to this decision, a seller incurs retailers’ occupation taxes in the local jurisdiction where its predominant selling activities occur, even if it also engages in very limited activities in other taxing jurisdictions.

At the time of the decision, the Department of Revenue stated that the Hartney decision would not have any impact on the overwhelming majority of Illinois retailers because most retailers are engaged in traditional over-the-counter sales, and these retailers consistently have collected and paid local sales tax for the jurisdiction where such sales take place.  The Department also noted that a number of retailers with selling activities in multiple jurisdictions had a long-standing practice of collecting and paying local retailers’ occupation taxes only in the lower tax rate jurisdictions where they arranged for final acceptance of purchase orders, even if their predominant selling activities occurred in other taxing jurisdictions. This is the practice that was rejected by the Supreme Court in its decision.

The emergency rules are intended to provide Illinois businesses the necessary guidance about how they should allocate the local sales taxes they collect from customers.  Specifically, the regulations establish a set of factors to determine the proper taxing jurisdiction for a business that operates in multiple jurisdictions.  To do so, the regulations identify four primary selling activities, namely the place of the offer to sell, the place of the acceptance of such offer, the goods and inventory location and where the sales personnel are found.  In the event that these four “selling activities” do not identify the predominant location of the business for taxing purposes, the regulations then point to five additional factors.  These include the location of the seller’s administrative functions, where solicitations take place, where contracts are received, where the transfer of title of the goods at issue occurs and where the goods are delivered.  If consideration of these factors still fails to identify the proper tax jurisdiction, then the regulations allow the Department to make a determination of the appropriate tax jurisdiction based on he locality where the seller receives the bulk of government services and consistent with an analysis of the statutory purposes and judicial interpretations of State’s sales tax provisions.

The emergency rules will be in effect for 150 days unless the Joint Committee on Administrative Rules votes to suspend them.

The Department of Revenue also filed virtually identical proposed rules that will permanently replace the emergency rules following the Joint Committee on Administrative Rules review process.  Under the rule-making process and for a period of 45 days following the filing of proposed rules, interested groups (including local governments) and the general public are allowed to submit comments or request a public hearing.  A second 45-day period follows in which the Department and JCAR can agree to modify or amend the proposed rules.  Ultimately, the proposed regulations, as potentially modified or amended, become permanent at the conclusion of the rule-making process.

In public hearings held by the Department of Revenue in December 2013, impacted municipalities urged the governor and the Department to promulgate rules that would adhere to the original intent of the law characterized as raising revenue from retailers who benefit from the services that units of local government provide.  Others asked the Department to move forward with the rule making process to ensure fairness and clear direction to retailers and to allow for sales tax agreements between retailers and local governments.  We would encourage our clients to take full advantage of the comment period and submit their input.

Carlos S. Arevalo

Author: Carlos S. Arévalo