Illinois: The Department’s Effort To Bring Order to Local Sales Tax Sourcing Spreads the Chaos to the State Sales and Use Tax Regime

by Reed Smith

The list of potential side-effects of medication can often lend some validity to the aphorism that the remedy is worse than the disease. Tax regulations are not required to list the potential side-effects, but the remedy proposed by the Illinois Department of Revenue (the “Department”) for Illinois’ local sales tax sourcing ailments may indeed be worse than the disease. The Department issued a Second Notice, including a revised version of its proposed local retailers’ occupation tax (sales tax) sourcing regulations May 29, 2014. This version substantially revises the Department’s initial draft, and provides a “remedy” that is likely to make some taxpayers feel worse. The Joint Committee on Administrative Rules (“JCAR”) will consider the Second Notice revisions at its June 17, 2014 meeting, a necessary step prior to formal adoption of the regulations, so there is still time and opportunity to seek revisions to the proposed sourcing rules included in the Second Notice.

The sourcing of sales for Illinois local sales tax purposes has been in chaos since the Illinois Supreme Court’s late 2013 Hartney Fuel Oil1 decision. The Hartney decision invalidated the Department’s longstanding regulations that treated the place of “order acceptance” as the location where the occupation of selling and the incidence of the local occupation (sales) tax occurred. Since the issuance of the Illinois Supreme Court’s decision in Hartney, the Department has issued emergency regulations and proposed permanent regulations that identified, but did not weigh, the factors that comprise the occupation of selling that might occur in multiple locations.2 Also since that time, the city of Chicago, the village of Skokie, Cook County, and the Regional Transportation Authority have hauled more than 100 companies into a judicial discovery process to establish where the occupation of selling took place for such companies in the pre-Hartney periods.3 These developments have introduced a significant amount of uncertainty into the sourcing of sales for purposes of Illinois’ local sales tax. If this was not bad enough, with the issuance of the Second Notice, the Department has now introduced uncertainty into the sourcing of sales for the state use tax as well.

The Department’s Second Notice for its Proposed Regulations The Second Notice that the Department filed with JCAR makes significant changes to the Department’s original proposed permanent regulations. The proposed regulations originally identified primary factors, each equally weighted, which by their presence in a particular jurisdiction would indicate a possible situs for the occupation of selling, and identified a set of secondary factors, also equally weighted, for additional consideration if the primary factors failed to be conclusive. Under the Department’s original proposal, the tie-breaker among multiple jurisdictions having both primary and secondary factors was to be a consideration of which jurisdiction provided the greater support of government services to the retailer.4 The Second Notice revises that analysis by providing a tiered sequence for its application.

The Second Notice provides that for multi-jurisdictional retailers, the place of the “predominant and most important Selling Activities” is determined by the location in which “three or more Primary Selling Activities” take place.5 The Second Notice also provides that “A retailer engaging in three or more Primary Selling Activities outside the State shall collect and remit the Illinois Use tax, except as provided in subsection (d).6 Nothing would be wrong with this rule, if the Primary Selling Activities did not include among them the act of “order acceptance” – meaning the place where authority is exercised to “bind the seller to a sale.”

In 1955, Illinois enacted its Use Tax in reaction to the 1951 decision of the U.S. Supreme Court in Norton v. Department of Revenue.7 There, the U.S. Supreme Court held that, notwithstanding the existence of a retail operation in Chicago, not all of Norton’s gross receipts from sales to Illinois could be subject to Illinois sales tax, and therefore, no Illinois sales tax would apply to the gross receipts from purchasers’ orders accepted outside Illinois and shipped to Illinois from outside Illinois.

The new draft identifies six secondary selling activities. The secondary selling activities are intended to be used to determine the sourcing location when no individual jurisdiction has more than two primary selling activities. However, if applying the secondary selling activities review for vendors with multi-jurisdictional primary selling activities does not yield a sourcing location, then the sourcing defaults to either the jurisdiction where the inventory for the sale is located, or to the jurisdiction that is the location of the vendor’s headquarters, depending on which jurisdiction is the location of more selling activities (whether primary or secondary).

The Impact on the State Use Tax Because the Second Notice provides that “[f]or purposes of determining where a retailer is engaged in the business of selling it does not matter whether the retailer is engaged in Selling Activities in taxing jurisdictions in multiple States, or in multiple jurisdictions in the State” and thus, “[t]he legal standard is the same,” it is now possible for a vendor to have order acceptance within Illinois and still not trigger an Illinois sales tax collection obligation on a sale shipped from outside Illinois if the requisite three primary and secondary selling activities take place outside Illinois. Likewise, it is possible for a vendor to have order acceptance outside Illinois and shipment from outside Illinois and be required to collect Illinois sales tax, rather than use tax, if the requisite three selling activities take place at a location within Illinois.

Aside from disregarding or tacitly overruling the Norton decision, the Second Notice is also directly contrary to existing Illinois sales tax regulations. The Department’s state sales tax regulation section 130.610(d)(3) provides that “where the sale is made by or through an out-of-State place of business of the seller, Retailers’ Occupation [sales] Tax liability will, nevertheless, be incurred . . . (A) where the seller or his authorized representative accepts an order in Illinois so as to create a contract, or (B) where the order is received in Illinois on behalf of the seller and someone in Illinois has authority to accepted [sic] such order so as to create a contract (whether such authority is exercised in the particular case or not.)”8 There is no way to reconcile this existing regulation with the contrary provisions of the Second Notice.

Whereas the status quo prior to the Second Notice was that of general uncertainty regarding the sourcing of sales for purposes of local taxes, the Second Notice has now created uncertainty regarding whether certain sales are subject to the state sales tax or the state use tax. Although the state sales and use taxes are imposed at identical rates (6.25 percent), vendors collecting the state sales tax (as opposed to the state use tax) are also responsible for collecting the additional local sales taxes. As a result of the Second Notice, it is unclear whether certain existing state use tax collectors are now subject to the state sales tax and whether existing retailers subject to the sales tax are now required to collect state use tax. This uncertainty has implications beyond the local rate differential, given the current proclivity of Illinois to add chaos to the sales and use tax regime by allowing individuals to pursue routine sales and use tax audit issues through the use of its False Claims Act.9

More to Come On May 30, 2014, the General Assembly passed Senate Bill (S.B. 2612) and it now awaits the governor’s signature. SB 2612 provides sourcing criteria for non-controversial, non-multi-jurisdictional transactions that are also covered by the Second Notice and set forth long-established standards for over-the-counter sales, remote sales with delivery at an in-state retail location for pickup, vending machine food sales, and sales of coal at the point of extraction.

The Hartney decision’s broad holding was that determining the location of the business of selling could not be determined by a single or primary criterion; therefore, many agreed that established single-criterion standards in use without controversy were themselves at risk if not codified in statute. Although it is believed that the governor will sign SB 2612 into law, because the General Assembly passed an admittedly unbalanced budget (revenues do not match expenditures) that also awaits the governor’s signature, there is reason to be cautious about even non-controversial legislation. Reed Smith will continue to monitor and provide updates regarding the developments in this area.

  1. Hartney Fuel Oil Co. v. Hamer, 998 N.E.2d 1227 (2013).
  2. See RS Tax Alert “Illinois Issues Emergency Sales Tax Sourcing Regulations” (January 27, 2014).
  3. See RS Tax Alert “WARNING: Illinois Courts Will Not Abide By Sales Tax Audit Result” (February 4, 2014).
  4. See RS Tax Alert “Illinois Issues Emergency Sales Tax Sourcing Regulations” (January 27, 2014).
  5. See, e.g., Second Notice, for 86 Ill. Admin. Code. § 220.115(c)(2).
  6. Id.
  7. Norton Co. v. Department of Revenue of State of Illinois, 340 U.S. 534 (1951).
  8. 86 Ill. Admin. Code Sec. 130.610(d)(3).
  9. See RS Tax Alert “WARNING: Illinois Courts Will Not Abide By Sales Tax Audit Results” (February 4, 2014).


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Reed Smith | Attorney Advertising

Written by:

Reed Smith

Reed Smith on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.