As reported in our November 25 Alert, on November 21, 2013, the Illinois Supreme Court held that the longstanding regulations promulgated by the Illinois Department of Revenue (the "Department") for sourcing sales for local retailer’s occupation tax ("ROT") purposes were invalid. In Hartney Fuel Oil Company v. Hamer, the court concluded that a retailer was subject to the ROT in the jurisdiction where its predominant selling activities occurred, notwithstanding the fact that the retailer also engaged in limited activities, including acceptance of orders, in another jurisdiction.¹

Prior to the decision in Hartney, retailers with selling activities in multiple jurisdictions would source their sales to a low tax rate jurisdiction for local ROT purposes by arranging for final acceptance of purchase orders in the low tax rate jurisdiction. This sourcing method was in accordance with the Department’s regulations, which sourced sales for local ROT purposes based on the location of order acceptance, even when a retailer’s predominant selling activities occurred in other places. In Hartney, the Illinois Supreme Court invalidated the Department’s regulations, and rejected the concept that the location of order acceptance should be the sole factor in sourcing sales for local ROT purposes. As noted in our previous Alert, businesses relying on the Department’s regulations to source their Illinois sales for local ROT purposes will need to revise their procedures for reporting and remitting local ROT to comply with the court’s decision in Hartney.

The Department, recognizing that many businesses will need to change their tax collection and reporting procedures as a result of the Hartney decision, has advised that for purposes of determining whether enforcement action is warranted against a retailer for failure to collect and pay the correct local ROT for post-Hartney periods, it will consider whether the retailer made a reasonable, prompt, good faith effort to comply with the Hartney decision. The Department intends to promulgate regulations in the near future to provide additional guidance to taxpayers in ascertaining their local ROT liabilities. These regulations will be based on the applicable statutory language, which requires a fact-specific approach, a fact that was emphasized in the Supreme Court’s decision in Hartney. The Department has asked for input from all interested parties, as it attempts to promulgate new regulations.

Reed Smith’s State Tax Team will continue to monitor developments closely and provide updates as more information regarding the Department’s post-Hartney sourcing regulations becomes available. If you are interested in more details on the application of Illinois’ local ROT sourcing rules in the wake of the Hartney decision, please contact one of the authors of this alert, or the Reed Smith attorney with whom you normally work. For more information on Reed Smith’s Illinois tax practice, visit www.reedsmith.com/iltax. 

1. Hartney Fuel Oil Co. v. Hamer, Ill., No. 2013 IL 115130 (Nov. 21, 2013).

Client Alert 2013-327