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Illinois has issued final sourcing rules submitted to the Secretary of State for publication in the Illinois Register regarding the sourcing of local retailers’ occupation tax liabilities.  Second Notice comment period ends no later than July 12, 2014 and a hearing was held on June 17, 2014.  The effective date is not yet published but since the emergency regulations issues in January have expired it should be assumed these will be adopted and are currently effective.  Similar to the emergency rules focus on a fact-specific inquiry into the composite of selling activities that comprise a retailer’s business in order to determine the jurisdiction in which the retailer must collect local retailers’ tax, however, the final rules give more specific direction.  The final rules provide guidance on how to apply the composite of selling activities test to common selling operations.  A key difference is that interstate and intrastate retailers will be treated the same.  Therefore, the mere fact that the inventory originated outside of Illinois will not be the sole factor in determining whether a use tax rather than a sales tax applies.  If the composite of the selling activities occur within Illinois then the Retailer’s Occupation Tax (sales tax) will apply which will include the appropriate local taxes. 


The rules note that for most retailers, the jurisdiction in which they are engaged in the business of selling is not open to reasonable dispute.  The rules also address sourcing of local tax liability for a number of other seller situations including: in-state inventory/out-of state selling activity, long-term or blanket contracts, sales through vending machines, sales from vehicles carrying an uncommitted stock of goods, sales of coal or other minerals, and acceptance of orders in a county where the seller is not doing business.


For retailers that have activities occurring in multiple locations, the final rules do differ from the emergency rules.  There are 5 primary selling activities.  If the retailer conducts at least 3 of these activities in the same location, then that location will be the location where the transaction will be sourced.  If within Illinois, then this will be the situs for determining the local tax under the Retailer’s Occupation Tax.  If outside of Illinois, then the Use Tax will apply and local tax will not apply.  The 5 primary activities are: 


  1. Location of sales personnel exercising discretion and authority to solicit customers on behalf of a seller and to bind the seller to the sale;
  2. Location where the seller takes action that binds it to the sale, which may be acceptance of purchase orders, submission of offers subject to unilateral acceptance by the buyer, or other actions that bind the seller to that sale;
  3. The location where payment is tendered and received, or from which invoices are issued with respect to each sale;
  4. Location of inventory if tangible personal property that is sold is in the retailer's inventory at the time of its sale or delivery; and
  5. The location of the retailer's headquarters, which is the principal place from which the business of selling tangible personal property is directed or managed. In general, this is the place at which the offices of the principal executives are located. When executive authority is located in multiple jurisdictions, the place of daily operational decision making is the headquarters.


If the retailer performs 2 or less of these primary activities in the same location, then the secondary rules come into play.  These include:


  1. Location where marketing and solicitation occur;
  2. Location where the seller engages in activities necessary to procure goods for sale;
  3. Location of the retailer's officers, executives or employees with authority to set prices or determine other terms of sale if determinations are made in a location different than that identified in subsection (c)(1)(A);
  4. Location where purchase orders or other contractual documents are received when purchase orders are accepted, processed or fulfilled in a location or locations different from where they are received;
  5. Location where title passes; and
  6. Location where the retailer displays goods to prospective customers, such as a showroom.


When taking into account all of the primary and secondary activities, a retailer that is not engaged in the business of selling in a jurisdiction under the primary activies is engaged in the business of selling in the jurisdiction where its inventory is located under subsection (c)(1)(D), or where its headquarters is located under subsection (c)(1)(E), whichever jurisdiction is the location where more selling activities occur, considering both primary and secondary selling activities.   In the event, there is no locations where multiple selling activities occur, then the retailer is  presumed to be engaged in the business of selling at the location of its headquarters absent clear and convincing evidence to the contrary.


The emergency rules were issued in response to the Illinois Supreme Court’s invalidation of the department’s prior tax situs rules in Hartney Fuel Oil Co. v. Hamer.  For more information about the emergency rules click here: Illinois Issues Emergency Rules on Tax Situs. For more information on the Hartney Fuel Oil case, click here: Tax Situs Regulation Held Invalid in Illinois.


(86 Ill. Adm. Code 220-115, 86 Ill Adm. Code 270-115, 86 Ill. Adm. Code 320-115, 86 Ill. Adm. Code 370-115, 86 Ill Adm. Code 395-115, 86 Ill. Adm. Code 630-120, 86 Ill. Adm. Code 670-115, Ill Adm. Code 690-115, 86 Ill. Adm. Code 693-115, and 86 Ill. Adm. Code 695-115, Illinois Department of Revenue, effective as noted)


Illinois has enacted legislation that imposes an annual reporting requirement on Illinois taxpayers that receive corporate or personal income tax credits, sales tax exemptions, or the abatement of property tax under the Economic Development for a Growing Economy Tax Credit Act, the River Edge Redevelopment Zone Act, or the Enterprise Zone Act, including the High Impact Business program. Recipients of any of the above incentives must provide the Department of Commerce and Economic Opportunity a detailed list of the occupation or job classifications and number of new employees or retained employees to be hired in full-time, permanent jobs; a schedule of anticipated starting dates for new hires and the actual average wage by occupation or job classification; and the total payroll to be created as a result of the incentives. Select data must be provided quarterly while other information is required annually.(P.A. 98-0397 (H.B. 1544), Laws 2013, effective August 16, 2013)


The Illinois Department of Revenue has issued a general information letter stating that it intends to propose regulations concerning online software transactions including application service providers, software hosting, and Web-based software.The Department believes that the proper forum for providing guidance regarding these transactions is through a formal administrative rulemaking process rather than through individual inquires such as letter ruling requests. The Department is currently researching the nature and type of services and products provided by these types of providers. Therefore, the Department will not address fact specific request for ruling requests until after it has issued the revised rules.  No expected date for the rules has been indicated.  (General Information Letter ST 13-0049-GIL, Illinois Department of Revenue, September 11, 2013, released November 2013)


Illinois service occupation tax (SOT) applies to sales of prescription drugs to prescription drug providers (PDPs) under the Medicare Part D Prescription Plan because the drugs are not sold directly to the government. Sales to Medicare and Medicaid are exempt as sales to a government body. Under the plan, the government provides funds on a per capita basis to the PDPs, and the PDPs act as private insurance companies under contract with the government. The SOT is not considered a premium tax, fee, or other similar assessment that federal law prohibits from being imposed by any state on payments that a PDP makes on behalf of a Part D Plan.(General Information Letter ST 13-0037-GIL, Illinois Department of Revenue, August 2, 2013)


Illinois has enacted legislationeffective June 1, 2014 that amends the sales and use tax treatment of electricity, natural or artificial gas and water.  Per the legislation, transactions involving the following are exempt from retailers’ occupation tax, use tax, service occupation tax (SOT), and service use tax (SUT): electricity delivered to customers by wire; natural or artificial gas that is delivered to customers through pipes, pipelines, or mains; and water that is delivered to customers through pipes, pipelines, or mains.  The sales and use tax machinery and equipment exemption does not apply to machinery and equipment, repair and replacement parts, or in-house manufactured machinery and equipment used in: the generation of electricity for wholesale or retail sale; the generation or treatment of natural or artificial gas for wholesale or retail sale that is delivered to customers through pipes, pipelines, or mains; or the treatment of water for wholesale or retail sale that is delivered to customers through pipes, pipelines, or mains. Per the legislation, for purposes of the retailers’ occupation tax, use tax, SOT, and SUT, the term "computer software" includes software used to operate machinery and equipment used in: the generation of electricity for wholesale or retail sale; the generation or treatment of natural or artificial gas for wholesale or retail sale that is delivered to customers through pipes, pipelines, or mains; or the treatment of water for wholesale or retail sale that is delivered to customers through pipes, pipelines, or mains. (P.A. 98-583 (S.B. 2243), Laws 2013, effective June 1, 2014)



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