Illinois Issues Emergency Sales Tax Sourcing Regulations

Feb. 6, 2014

On Jan. 22, the Illinois Department of Revenue issued emergency regulations in response to the Illinois Supreme Court’s decision in Hartney Fuel Oil Company v. Hamer. The regulations are effective immediately and will be in effect for 150 days. The department also issued proposed regulations that are similar to the emergency regulations except that they delete the provisions for long-term and blanket contracts. The proposed rules are subject to two 45-day review periods under the General Assembly’s Joint Committee on Administrative Rules (JCAR), during which public comments will be accepted. If approved by JCAR, the proposed regulations will take effect immediately.

The sales tax treatment of over-the-counter sales and sales processed at a single location in Illinois will not be affected. Before the Hartney decision, sales having elements such as solicitation, pricing, creditworthiness check, order acceptance, and inventory location that took place in multiple locations within and outside of Illinois generally were sourced under a bright-line test placing the sales in the location where final order acceptance took place.

Long-term or blanket contracts are agreements between a buyer and seller to sell goods at a fixed price for a period of time. In these arrangements the sales price is not renegotiated for every transaction. The overturned and emergency regulations contain guidance on sourcing long-term or blanket contract sales. The proposed regulations do not contain a special provision for these sales and require analysis under the same sourcing rules applicable to all other transactions.

In Hartney, the court ruled that the final order acceptance test was not authorized by the underlying statutes, which require an analysis of multiple factors in sourcing of sales tax. The court prevented the department from using the invalid regulations against Hartney, as the taxpayer was allowed to reasonably rely on the old regulations under the Taxpayer Bill of Rights. The emergency regulations are a response to that ruling, and it is the department’s position that taxpayers are required to begin moving away from the final order acceptance sourcing as of the date of the Hartney decision, though the department stated it would grant some leeway during this transitional period.

The emergency regulations list five primary factors and four secondary factors in their analysis but do not set forth any test for how the factors should be weighted or evaluated to determine the sales tax source of transactions. While the Illinois Department of Revenue maintains the position that these factors should encompass the majority of taxpayer fact patterns, the primary consideration for sourcing under the emergency regulations focuses on the subjective notion of determining which local government provides the most services for the seller. Because many businesses sell products through different sales channels with different approval processes, it is likely that some taxpayers will need to make an educated guess about the proper sourcing of their sales.

The emergency regulations will have the most effect on businesses with sales activity in multiple locations. These companies should evaluate their current sourcing positions to determine if any adjustments need to be made. Businesses that accept sales orders only in their Illinois locations, such as captive procurement companies and in-state sales offices (particularly those linked to local revenue sharing agreements), might face changes to sourcing under the emergency regulations.

Active commentary on the proposed regulations is anticipated. Affected businesses should work with their advisers and industry groups during the comment periods to identify examples of transactions that are problematic under the proposed regulations.

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