Illinois Supreme Court Adopts Totality of Circumstances Test for Sales Tax Situs

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This morning, the Illinois Supreme Court handed down its highly anticipated decision in Hartney Fuel Oil Co. v. Hamer. Hartney Fuel Oil raises an important question of Illinois business and tax law: how does one determine which local jurisdiction is entitled to collect sales tax on a transaction? Our detailed summary of the facts and lower court decisions is here. Our report on the oral argument is here.

The taxpayer in Hartney Fuel Oil is a retailer of fuel oil. The taxpayer’s home office throughout the relevant years was in Forest View, which is part of Cook County – a high-tax jurisdiction. From the Forest View office, the company set fuel prices, cultivated customer relationships and handled billing and accounting.

But for many years, the taxpayer has maintained a separate location as its sales office. No one at the sales office was directly employed by the company; it contracted with another company to borrow the services of a clerk. The sales office was moved from time to time over the years, ultimately winding up in Mark, Illinois, which is located in comparatively low-tax Putnam County (indeed, both Mark and Putnam County gave the taxpayer a partial rebate of taxes payable on its sales).

Both short-term and long-term contracts were closed by the taxpayer in the Mark office. Daily orders would be directed by telephone to the sales office. Anyone who called Forest View instead would be told to call the Mark office. The clerk in Mark was armed with a list of customers pre-approved for credit purchases, and had the authority to accept (or reject) an order on the spot, binding the taxpayer. Long-term contracts were sent by customers to Mark, and if the president of the company had not yet signed, he would travel to Mark to do so.

The Department of Revenue audited the taxpayer’s sales activities from 2005 through mid-2007, ultimately concluding that sales tax liability had been triggered in Forest View, not Mark. The Department presented the taxpayer with a bill for over $23 million. The taxpayer paid under protest and sued for a refund. Both the circuit court and the Appellate Court sided with the taxpayer, holding that the location where orders were accepted conclusively established the situs of sales tax liability.

The Court began by addressing the three statutes at issue: the Home Rule County Retailers’ Occupation Tax Law, the Home Rule Municipal Retailers’ Occupation Tax Act, and the Regional Transportation Authority Act. All three statutes authorized a tax “upon all persons engaged in the business of selling tangible personal property” at retail within the jurisdiction. The Court pointed out that it had long ago defined the Retailers’ Occupation Tax act as a tax on the occupation of retail selling, not one on the sale itself. Where the occupation – as opposed to the sale – took place depended on “the composite of many activities extending from the preparation for, and the obtaining of, orders for goods to the final consummation of the sale by the passing of title and payment of the purchase price.” Therefore, simply placing a clerk in a low-tax jurisdiction to accept orders, while keeping the remainder of one’s business pursuits in another county, was not sufficient to transfer tax liability under the statute, which depended on a fact-intensive, totality of the circumstances test. This made sense, the Court pointed out, since the purpose of local sales taxes is to reduce at least somewhat the tax burden on real property by transferring part of that burden to retail businesses in proportion to their use of local governmental services.

But that wasn’t the end of the inquiry, the Court found. Next, it turned to the Department’s regulation implementing the sales tax statutes – 86 Illinois Administrative Code 220.115.

The Department pointed to Section 220.115(b) of the regulation, arguing that by providing that “enough of the selling activity must occur within the home rule county to justify concluding that the seller is engaged in business” within that county, the regulation had adopted the totality-of-the-circumstances test imposed by the statute. The taxpayer, on the other hand, pointed to subsection (c) of the statute: “the seller’s acceptance of the purchase order . . . is the most important single factor in the occupation of selling. If the purchaser order is accepted at the seller’s place of business within the county or by someone who is working out of the place of business . . . or if a purchase order that is an acceptance of the seller’s complete and unconditional offer to sell is received by the seller’s place of business within the home rule county or by someone working out of that place of business, the seller incurs Home Rule County Retailers’ Occupation Tax liability in that home rule county.” The Department responded that construing subsection (c) as conclusively setting the sales tax situs as the place of acceptance rendered subsection (b) meaningless.

The Court concluded that neither side was entirely right. Instead, the Court concluded that subsection (b) described a threshold inquiry: was enough going on in a particular jurisdiction to qualify as the business of selling for purposes of the sales tax? Subsection (c) dealt with a slightly different question: when multiple jurisdictions met the threshold test, which jurisdiction prevails? So applying that construction to the facts at hand, the regulations seemed to fix sales tax liability in Mark. But since a regulation can’t narrow or broaden the scope of taxation under a statute approved by the legislature, the Court struck down the regulation.

But that didn’t mean that the taxpayer owed the tax bill. According to the Taxpayers’ Bill of Rights Act, the Department must return to the taxpayer taxes and penalties assessed on the basis of erroneous written information or advance the taxpayer receives from the Department. 20 ILCS 2520/4(c).  Although moving the sales office to Mark wasn’t good enough to change the tax situs strictly as a matter of the statutes, the taxpayer had acted in accordance with the Department’s erroneous regulations. So the taxpayer was entitled to a refund of the taxes and penalties.

So where does all this leave us? First and foremost, the Department of Revenue now faces the complex job of rewriting the sales tax regulations. Since the statutes have been definitively interpreted to tax the occupation of selling, not a particular sale – a question decided by the totality of the circumstances – avoiding a high-tax jurisdiction is likely to require far more extensive changes than simply opening a rental office with a telephone. So although the taxpayer ultimately won the refund in Hartney Fuel Oil, the decision qualifies as a win for Cook County.