New sales tax allocation rules filed

Emergency rules effective immediately

[January 24, 2014]  SPRINGFIELD — The Illinois Department of Revenue filed emergency rules on Wednesday to comply with the Supreme Court's Nov. 21, 2013, decision in Hartney Fuel Oil Co. v. Hamer and to provide Illinois businesses the necessary guidance about how they should allocate the local sales taxes they collect from their customers.

In recent years, the Illinois Department of Revenue has identified situations where a retailer artificially sourced sales to a municipality where the business of selling was not occurring in any meaningful way. In many of these cases, the retailer or its adviser received in return from the municipality a rebate of up to 85 percent of the sales taxes paid. These schemes diverted revenues from the governmental bodies that actually provided services to the retailer, such as fire and police protection. The Department of Revenue has challenged these schemes when auditing these businesses.

The court's decision and the new rules achieve a result that the department has sought for years, clarifying that sales taxes must be paid in the community where the bulk of the business activities occur. These new rules will help to ensure that the correct amount of local sales tax is collected and properly distributed. No state revenue is at issue.

The emergency rules were necessary after the Illinois Supreme Court held that the prior rules were invalid because they were inconsistent with the Retailers' Occupation Tax Act The new rules provide Illinois businesses clear guidance for the vast majority of retail sales, including over-the-counter sales, sales where the selling activities occur out-of-state but are filled from in-state inventory, and other examples. In other situations where business activities are conducted at multiple locations, the rules set out the primary selling activities to be considered, such as:

1. Does the location house company executives with the authority to negotiate and finalize sales transactions?

2. Is this the location where purchase orders are accepted or other contracting actions that bind the seller to the sale are completed?

3. Is the inventory of the goods to be sold housed in this location?

The new rules also provide additional secondary factors to be considered if needed. However, consistent with the Hartney decision, merely relocating purchase order acceptance to a community without conducting any other business in that community will not be sufficient to allocate sales to that community.

The emergency rules will be in effect for 150 days unless the Joint Committee on Administrative Rules, or JCAR, votes by a three-fifths majority of the 12-member panel, or eight votes, to suspend the rules.

In addition to the emergency rules, the Illinois Department of Revenue also filed proposed permanent rules that will replace the emergency rules after the JCAR review process. There is a 45-day first notice period, during which local governments, industry groups and concerned members of the public can file comments or request a public hearing. During the second notice period, also 45 days long, the rules and any modifications or amendments will be reviewed by JCAR. The committee may request from the Department of Revenue additional clarification or information, which must be supplied during the review. At the end of that time, if the committee takes no action, the rules become permanent and any further changes must be filed through a new rulemaking process. In order to stop a rule from becoming permanent, three-fifths of the panel must vote to overturn the rule.

Copies of the emergency rules and the proposed permanent rules are posted at tax.illinois.gov.

[Text from Illinois Department of Revenue file received from the Illinois Office of Communication and Information]