Our previews of the Illinois Supreme Court's September docket continue with Hartney Fuel Oil Co. v. Hamer, which will be argued this morning in Chicago.
Our detailed summary of the facts and lower court rulings in Hartney Oil is here. The plaintiff in Hartney resells fuel oil to railroads, trucking companies, gas stations and other fuel distributors. About 1985, the plaintiff moved its sales operations out of Forest View, in high-tax Cook County, to Elmhurst in DuPage County. Plaintiff moved the office several additional times in the years that followed.
In 2003, plaintiff moved its sales operation to Mark in Putnam County. The company contracted with a local painting contractor to provide office space and personnel. The agreement provided that personnel of the contractor would receive, accept and process fuel purchase orders from customers.
Plaintiffs' sales were of two types: daily purchase orders and long-term purchase orders. With respect to daily orders, sales personnel in Mark typically accepted the order on the spot. Occasionally, sales personnel rejected the order in accordance with credit lists they had been provided with in advance. Accordingly, in most cases, no one from the principal office in Forest View was involved with a sale until the invoice was sent out. Long-term orders were signed by the customer and returned to the Mark office; if already signed by the plaintiff's president, the order was final at that time. Otherwise, the president of the plaintiff company travelled to Mark to sign the order.
The Department had audited the plaintiff multiple times. In the first part of 1998, an initial audit had concluded that sales occurred in Du Page County, resulting in a multi-million dollar tax levy. Later that year, the plaintiff moved its sales office to La Salle County. A further audit covering the period 1998-2001 concluded that sales occurred in La Salle County at the sales office. In the summer of 2003, yet another audit was opened. According to the Appellate Court, nobody from the Revenue Department visited the Mark office or spoke to anyone employed there during the audit, and as the audit was wrapping up, the Department destroyed the files from its previous audit investigations of the company.
The plaintiff paid the tax under protest, and then sued to recover. The plaintiff was joined by Putnam County and the trustees of the Village of Mark. The Circuit Court found for the plaintiffs, and the Appellate Court affirmed.
Look for the oral argument in Hartney Oil to focus on a debate about the language of the administrative regulations. Several different sections of the Administrative Code contain the same language:
Without attempting to anticipate every kind of fact situation that may arise in this connection, it is the Department’s opinion, in general, that the seller’s acceptance of the purchase order or other contracting action in the making of the sales contract is the most important single factor in the occupation of selling. If the purchase order is accepted at the seller’s place of business within the county or by someone who is working out of that place of business and who does not conduct the business of selling elsewhere within the meaning of subsections (g) and (h) of this Section, 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 if the sale is at retail and the purchaser receives the physical possession of the property in Illinois.
The Department of Revenue will fix on the first sentence. The statement that place of acceptance is "the most important single factor" arguably means that it isn't the only factor. But then again, there's the second sentence of the paragraph, which arguably says that if the place of acceptance is at the seller's place of business, sales tax liability is fixed at that location. So which is it? The Appellate Court held that the place of acceptance was decisive. Since acceptance of both short-term and long-term purchase orders took place in Mark, according to the Court, that presumption necessarily meant that sales-tax liability was imposed in Mark. Justice Robert L. Carter dissented, arguing that the regulations imposed a totality of the circumstances test, not a bright-line place-of-acceptance one.
Because of the amount of sales tax revenue potentially at stake in the Court's holding, Hartney Oil is one of the "big Three" of the term, alongside Kanerva and Spanish Two Court Condominium. If the Court holds that simply moving a sales office is insufficient to shift sales tax liability to a less high-tax jurisdiction, such strategic transfers are likely to be far more expensive, and therefore far less common. On the other hand, if the Court holds that the plaintiff's Mark sales office was sufficient to redirect sales tax liability in Hartney Oil, such transfers may become more common.
We expect a decision in Hartney Oil in two to three months.