Illinois Supreme Court’s recent opinion (Hartney Fuel Oil Company v. Hamer) closed a regulatory loophole regarding local sales tax sourcing. The Supreme Court declared that the bright-line test currently used by the Illinois Department of Revenue to determine sales tax situs narrowed the scope of the related tax regulations and was therefore invalid.
The case examines the tax strategy of Hartney. To minimize its Illinois sales tax liability, Hartney accepted purchase orders in the Village of Mark, Illinois, where the overall sales tax rate was lower, but conducted all of its sales related activities in the Village of Forest View, Illinois, where the rate was higher. The Department of Revenue applied its bright-line test to determine the sales situs, “where purchase orders are accepted, tax liability is incurred.” By establishing an office in the Village of Mark to accept purchase orders, Hartney established the Village of Mark as its sale situs and lowered its sales tax liability in 2005 through 2007. In 2008, the Department of Revenue determined that Hartney’s sales situs should be the Village of Forest View and found Hartney liable in the amount of approximately $23 million in unpaid sales tax.
Hartney paid the $23 million in back taxes, interests and penalty but subsequently filed a challenge to the Department of Revenue’s decision. The Department of Revenue lost at the trial and appellate court levels and then appealed to the Supreme Court. In November 2013, the Supreme Court stated “While we do not find Hartney’s approach to retail occupation tax liability consistent with the statute . . . the Company did act consistently with the Department’s regulations published at the time.” The Supreme Court upheld the lower court decisions entitling Hartney to reimbursement of sums paid.
It is anticipated that the Supreme Court’s opinion in this case may discourage similar sales tax strategies in Illinois.