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A service provider that installs racking systems for customers is considered a construction contractor who must pay Illinois use tax on its purchases because the racking systems are materials that are permanently affixed to real estate. Even though there were contradictory letter rulings on similar facts, the Department ruled that racking systems that are bolted to the floor, intended for removal within a few years and attached in such a manner that there is not permanent damage to the real property are deemed permanently attached and the installer is deemed a contractor.  Tangible personal property that a construction contractor purchases that will be permanently affixed to or incorporated into real property is subject to use tax. (ST 13-0002-PLR, Illinois Department of Revenue, July 31, 2013)


Representative Lamar Smith (Republican, Texas) has introduced a bill to bar multiple taxes on digital goods and services.  Smith had proposed an earlier bill which failed to pass.  This bill is a revised version of the earlier bill. The proposed bill – called the Digital Goods and Services Tax Fairness Act of 2013 – would only allow a state to tax sales of digital goods and services to customers with a tax address within that state. Additionally, states would be barred from imposing multiple taxes on digital goods. The bill defines digital goods as sounds, images, data and facts maintained in digital form. Internet access service is not included as a digital good in the bill. (H.R. 3724)


Illinois has issued emergency rules regarding the sourcing of local retailers’ occupation tax liabilities, effective January 22, 2014, for 150 days.  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.  The emergency rules provide guidance on how to apply the composite of selling activities test to common selling operations.  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.The rules also outline the application of the composite of selling activities test to multijurisdictional intrastate retailers.  The rules list primary and secondary factors to consider, as well as the principles used to determine a seller’s location.  Primary factors include the location of various activities, such as the location of officers, executives and employees with discretion to negotiate on behalf of, and to bind, the seller and the location where offers are prepared and made, among other factors.  The secondary factors, which can be used if the jurisdiction is not clear after applying the primary factors, look to the locations of additional selling activities. The rules state that if determining the taxing jurisdiction is a close question for multijurisdictional sellers, the department will look to the principle that the retailer incurs local tax in the jurisdiction where it "enjoyed the greater part of governmental protection and benefitted by being conducted under that protection."


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. To see our previous news item on this case, click here: Tax Situs Regulation Held Invalid in Illinois. The Department also issued draft permanent rules.  Any business with concerns should contact the Department of Revenue during their comment period.  Copies of the emergency and draft regulations can be found here.


For an update to this item, click here: Illinois Issues Final Rules on Tax Situs.


(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)


On October 18, 2013, the Illinois Supreme Court ruled 6-1 that the state's click-through nexus law is pre-empted by federal law.  This decision upholds lower court rulings in favor of Performance Marketing Association. The Illinois Supreme Court specifically found that the click-through nexus law is pre-empted by the Internet Tax Freedom Act (Click here for more information on the Internet Tax Freedom Act).  For previous news items on this topic, click here and here.


UPDATE: Due to law changes, new click-through provisions are now effective. For additional information, see Illinois Enacts Click-Through Nexus Legislation.


(Performance Marketing Ass’n, Inc. v. Hamer, Illinois Supreme Court, No. 114496, October 18, 2013)



The Illinois Supreme Court has affirmed an appellate court’s ruling that a company was not liable for local sales taxes imposed at the location of the company’s home office because it accepted purchase orders at a sales office located in a county and city that did not impose local sales taxes. In making this ruling, it concluded that the regulation promulgated by the Department of Revenue did define situs for imposing local tax where purchase order acceptance occurs.  However, the court held that the regulation relied on by the company for determining the location for the application of local sales taxes was not valid. The regulation did not contain a fact-intensive approach for determining a seller’s location as previously determined in the Ex-Cell-O case. The court held that the regulation restricted the scope of intended statutory taxation by allowing only the acceptance of purchase orders to determine location. The court ruled that the applicable statutes and case law governing how local sales taxes are applied required that the location of a seller’s business of selling property be determined using a fact-intensive approach. The regulation provides that for sales tax purposes, the sale of property occurs where a purchase order is accepted. Arguments offered in favor of the taxpayer focused on the needs for certainty in tax enforcement.  The Court referred these points to the General Assembly to decide.  The Court has ruled that the “business of selling” requires a fact-intensive test to determine the proper situs based on a composite of all the activities related to making a sale.  Therefore, the “Jurisdictional Questions” embodied in the Department’s Regulation 86 Ill. Adm. Code 220.115, 270.115, and 320.115 are too inconsistent with the statutes and case law and are held invalid.  Regardless of this finding, the Court ruled that the refund of tax was due to Hartney.  The Taxpayers' Bill of Rights Act imposes upon the Department a duty to “abate taxes and penalties assessed based upon erroneous written information or advice given by the Department.” 20 ILCS 2520/4(c) (West 2008).  The Department's own written regulations provide guidance to taxpayers as to their liability. While we do not find Hartney's approach to retail occupation tax liability consistent with the statute or this court's precedent, the company did act consistently with the Department's regulation published at the time. It is now up to the General Assembly to craft a statute and for the Department to interpret it into a regulation.  Until that time, reliance on the location of the acceptance of the purchase order is likely in the best interest of sellers.  (Hartney Fuel Oil Co. v. Hamer, Illinois Supreme Court, No. 2013 IL 115130, November 21, 2013)


To view the update to this news item, click here: Illinois Issues Emergency Rules on Tax Situs



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