Article

Illinois DOR Changes Sales Tax Sourcing Rules for Place of Sale: Drops Bright-Line Test for Facts & Circumstances Approach

January 31, 2014

The Illinois Department of Revenue recently issued Emergency Regulations changing long standing rules for determining the proper location of where a sale takes place. These Regulations were promulgated in response to a recent Illinois Supreme Court decision, Hartney Fuel Oil Co. V. Hamer [2013 IL 115130 (2013)]. The issue in this case was where a company should source its sales for local sales tax purposes when multiple locations are possible.

Prior to Hartney, the general (bright-line) rule was to source sales where orders were accepted. However, the Department of Revenue alleged that certain companies were improperly placing sales offices in remote (lower-tax) locations to achieve a lower overall sales tax rate and thus depriving the RTA, Cook and other surrounding counties of sales tax revenue.

Under the new Emergency Regulations, sales tax must be paid in the community "where the bulk of the business activities occur."  To determine this, retailers must now evaluate numerous factors.

The Emergency Regulations look at four primary factors:

  • Location of officers, executives and employees with discretion to negotiate on behalf of, and to bind, the seller
  • Location where offers are prepared and made
  • Location where purchase orders are accepted or other actions are completed to bind seller
  • Location of inventory if tangible personal property is in retailer's inventory at the time of sale or delivery.

In addition, the Regulations also look to secondary factors if, after consideration of the above factors, the location is still unclear. These factors include location: (1) where marketing and solicitation occur: (2) where purchase orders or other contractual documents are received (when orders are accepted, processed, or fulfilled in another location); (3) location of the delivery of the property to the purchaser; (4) where title passes, and (5) location of retailer's ordering, billing and other administrative departments.

While these factors may work well to address a perceived abuse, they have the effect of creating more confusion and uncertainty for retailers who sell goods over the phone or through the Internet and have multiple locations in the state (e.g., sales, administrative and inventory are in different locations). In certain close calls, it may be advisable to seek a ruling from the state.

The Department's Emergency Regulations are in effect for 150 days unless the Joint Committee votes to suspend them.

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