"Business of Selling" and Not Sales Themselves Determine "Situs of Sale" for Taxation
The Illinois Supreme Court rejected a fuel oil company's attempt to choose the "situs of sale" for sales tax purposes. In Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130 (Nov. 21, 2013),
Hartney, a retailer of fuel oil, had its home office in the Village of Forest View, in Cook County. The company also maintained a sales office in the Village of Mark, in Putnam County. Hartney structured its sales so that all orders were processed through the Mark office, including taking customer orders and execution of sales contracts. Orders were filled, however, from the Forest View office. Neither Putnam county or the Village of Mark imposed its own sales tax, and each rebated a portion of the state sales tax to Hartney. In an audit, the Department of Revenue determined that the proper situs of sale was Forest View, not Mark, and sent a notice of tax liability in the amount of approximately $23 million. Hartney appealed the DOR's determination, and both the circuit court and appellate court held that the proper situs of sale was Mark.
On appeal, the Supreme Court wrestled with the question as to where Hartney's "situs of sale" was for purposes of taxation. First, the Court determined that Hartney had structured its sales to the Mark office in order to avoid liability for sales taxes to Cook County, Forest View, and the RTA, and to take advantage of the sales tax rebate arrangement with Mark and Putnam County. The Court then looked at both state law and the administrative regulations pertaining to "situs of sale" and the business of selling to determine whether Hartney's sales were properly taxed in Mark rather than Forest View. In reviewing the various activities and conduct involved in Hartney's business, the Court concluded that Hartney conducted the bulk of its selling activity in Forest View, including marketing efforts, maintenance of inventory, setting of prices, and cultivation of sales relationships. The Court interpreted the statute and regulations to require that sales taxes be imposed on the "business of selling" and not just the sales themselves. Here, the only activity conducted to Mark was the actual processing of sales orders, which was not enough to find Mark was the "situs of sale" for purposes of taxation.
Although the Court determined that Hartney's business sales should have been taxed in Forest View, it ordered that all back taxes be abated, in part because the Court invalidated the DOR's own regulations and guidance to taxpayers for being inconsistent with state law and cases. The Court also acknowledged that it would be difficult, if not impossible, for Hartney to recover these amounts from its customers.
Post Authored by Julie Tappendorf, Ancel Glink
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