Illinois - State high court invalidates local Retailer’s Occupation Tax sourcing regulations 

December 2:  The Illinois Supreme Court invalidated certain regulations that provided guidance on how taxpayers are to source receipts under various laws—the Home Rule County Retailers’ Occupation Tax Law, the Home Rule Municipal Retailers’ Occupation Tax Act, and the Regional Transportation Authority Act (collectively the local Retailer’s Occupancy Tax (ROT) Acts).* Hartney Fuel Oil Co. v. Hamer, 2013 Il 115130 (Ill. November 21, 2013)

*Home Rule County Retailers’ Occupation Tax Law (55 Ill. Comp. Stat. 5/5-1006); Home Rule Municipal Retailers’ Occupation Tax Act (65 Ill. Comp. Stat. 5/8-11-1); Regional Transportation Authority Act (70 Ill. Comp. Stat. 3615/4.03).

The Illinois high court further abated penalties assessed against the taxpayer because in the court’s view, the Illinois Department of Revenue had provided erroneous written information to taxpayers, and under the state's Taxpayer Bill of Rights, the Department of Revenue is bound to abate taxes and penalties resulting from the taxpayer relying on erroneous information provided by the Department.

Read the high court’s decision [PDF 157 KB]


Under Illinois law, home rule counties, municipal governments, and the regional transportation authority may impose local Retail Occupation Taxes (ROTs) on persons engaged in the “business of selling” tangible personal property within their county, municipality, or metropolitan region.

The case before the state high court addressed what is meant to be “engaged in the business of selling” within a local jurisdiction so that local ROTs may be imposed on a particular transaction.

The taxpayer had its home office in Forest View, Illinois, and marketed its products, set fuel prices, cultivated customer relationships, and performed a number of other tasks from the Forest View office.

During the period at issue, the taxpayer operated a sales office in Mark, Illinois. The sales office was staffed by a leased employee who accepted all orders for the taxpayer’s products in Mark.

Under the taxpayer’s interpretation of the local situs-ing regulations, its receipts from sales of products to customers receiving delivery in Illinois were sitused to Mark where all customer purchase orders were accepted. As a result, the taxpayer did not collect the three local ROTs that were imposed at the Forest View office location (including tax imposed by Cook County, the Village of Forest View, and the Regional Transportation Authority).

On audit, the Department of Revenue took the position that the taxpayer’s receipts were to have been sitused to its Forest View office. As such, the taxpayer was assessed tax, interest, and penalties exceeding $23 million.

The taxpayer paid the taxes under protest and then sued for a refund in state circuit court. After the circuit court held that the Department's regulations established a bright-line test for sourcing receipts—to the location where purchase orders were accepted—the Department appealed. A state appellate court affirmed the circuit court decision, and the Department and the affected localities appealed to the Illinois Supreme Court.

Positions before the high court

The taxpayer’s position before the Illinois Supreme Court was that the regulations established a bright-line test for determining where local ROTs were to be sitused—i.e., to the location where purchase orders were accepted.

In contrast, the Department of Revenue and the affected localities argued that the regulations adopted “a totality of the circumstances test,” which was supported by legislative intent and prior court decisions. Simply put, under a totality of the circumstances test, the activities occurring at the Forest View office could potentially be considered in determining the proper situs of the taxpayer’s receipts.

Supreme Court’s decision

To resolve the dispute, the high court reviewed the local ROT Acts and the corresponding regulations.

The state high court first concluded that although the local ROT Acts were silent on how sales were to be sitused, they were designed to allow local jurisdictions to tax the composite of selling activities taking place within their borders and incorporated language similar to the state Retailer’s Occupation Tax law.

Looking to state-level guidance on the “business of selling,” the high court concluded that the “business of selling” under the local ROT Acts likewise contemplated a fact-intensive “composite of many activities.”

Next, the Illinois high court queried whether the regulation supported its finding. Examining the overall structure of the regulation, the state high court observed that various provisions affirmatively determined the situs of taxation in certain situations—as opposed to listing factors to be considered in applying a “totality of the circumstances” test. Notably, the subsection at issue concluded that situs for local ROT was where purchase orders were accepted at the seller’s place of business within the jurisdiction. The high court concluded that the regulations impermissibly narrowed the local ROT Acts because they failed to properly prescribe the fact-intensive inquiry contemplated by case law and intended to be applied when the General Assembly incorporated the “business of selling” language in the local ROT imposition statutes.

The high court found that an argument made by the local governments involved in the dispute that the taxpayer’s sales office sourcing approach constituted a sham transaction was “unavailing” because it followed the prescriptions of the regulation.

Despite invalidating the regulations, the high court held that the Department of Revenue had a duty under the Taxpayer Bill of Rights Act to abate the taxpayer’s ROT liability vis-à-vis Forest View, Cook County, and the Regional Transportation Authority. Under the Illinois Taxpayer Bill of Rights Act, taxes and penalties assessed upon a taxpayer as a result of erroneous written information or advice given by the Department must be abated.

KPMG observation

Although the taxpayer’s tax, penalties, and interest were abated, and given that other taxpayers ought to be able to rely on the now-invalidated regulations for past periods, considerable uncertainty exists as to how sales are to be sitused for purposes of local ROTs on a going-forward basis. Although it is clear that a “totality of the circumstances” test applies, there is little guidance as to how that test is to be applied in future cases. Taxpayers with similar structures face considerable uncertainty and may be at risk for future assessments.

On November 27, 2013, the Department of Revenue issued a statement addressing the decision, in which the Department cautioned that taxpayers sourcing receipts to the location of a sales office—despite predominant selling activities being conducted in other jurisdictions—need to revise their procedures for reporting local ROTs taxes to comply with the Hartney decision. In determining whether enforcement action is warranted against a retailer for failing to collect and remit the local ROTs going forward, the Department will consider whether the taxpayer has made a reasonable, prompt, good faith effort to comply with the decision.

The Department of Revenue also confirmed that it will be promulgating revised regulations in the near future.

For more information, contact a KPMG State and Local Tax professional:

Jill Nielsen

+1 312 665 2794

Drew Olson

+1 312 665 2897

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