Illinois Issues Final Rules on Tax Situs

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)