Tax Situs Regulation Held Invalid in Illinois

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

Posted on November 26, 2013