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Illinois: Sham Offices and Sales Tax

  • Aug 28, 2013 | Gail Cole

 Illinois: Cook County wants tax revenue from satellite sales offices.

Update, 11.22.13: The Illinois Supreme Court has ruled in favor Hartney Fuel Oil Company. The Illinois Department of Revenue must "abate Hartney's penalties and retail occupation tax liability for the relevant period because Hartney’s actions were consistent with the Department of Revenue’s regulations in effect at the time."

What makes a sales office a sales office? Answer right, and you could be rewarded more than $23 million in back taxes.

Hartney Fuel Oil Company is a major Midwestern petroleum marketer with upwards of $200 million in annual sales. Prior to 2008, the company was headquartered in Forest View, Illinois, which is in Cook County. In 2008, Hartney moved its operations to the small town of Mark.

Yet Hartney had a presence in Mark before making the big move there. Between 2003 and 2008, most of the company's sales were run through a satellite office in Mark.

Sales tax motivates move

Why move a sales office to Mark, which is almost 100 miles southwest of Forest View and has a population of approximately 550 people? Because of sales tax, of course. The current rate of sales tax in Forest View is 9%: 6.25% state rate; 0.75% county home rule; 1% home rule; and 1% RTA. There are no local taxes in Mark, so the current rate is the state rate of 6.25%. That amounts to substantial savings.

As outlined in a September 2012 court opinion, Hartney first moved its sales operations out of Forest View to Du Page County in 1985, "because the lower tax rates in Du Page County allowed it to offer competitive prices to customers." After several moves, the company eventually settled its sales operations in Mark, Putnam County. There it "contracted with Putnam County Painting to provide office space and personnel. The agreement named Putnam Painting to be its managing sales agent and to provide Hartney with a sales representative to receive, accept, and process fuel purchase orders from Hartney customers." Putnam Painting received $1,000 month for office space and personal sales services.

Hartney was audited by the Illinois Department of Revenue (IDOR) eight times between 1990 and the 2012 appeal. Five audits "covered periods during which Hartney had a sales office separate from its Forest View headquarters." All sales were found to occur in the counties where the company's satellite sales offices were located, and those county's tax rates were found to apply. The company was not asked to pay the Forest View sales tax on those sales.

However, an IDOR audit covering the period between January 1, 2005 and June 30, 2007, determined that "Hartney's sales were attributable to Forest View, not Mark." IDOR then issued a notice of tax liability for that period amounting to $23,111,939.11 (Forest View's 1% ROT rate, Cook County's 0.75% ROT rate, the Regional Transportation Authority's 0.75% ROT rate, interest and penalties).

Hartney paid the taxes under protest, and then brought the case to trial court. The court found Hartney's daily and long-term sales throughout the subject audit period to be "sitused and taxable at its dedicated sales office located in the Village of Mark, County of Putnam, Illinois." In its September 2012 opinion, the 3rd Court of Appeals affirmed the judgment of the trial court.

Justice Mary McDade, writing the Court of Appeals opinion, acknowledged that Hartney moved to Mark in order to take advantage of the lower rate of sales tax. However, she points out that there is no law against doing so:

"[I]t seems clear to us that Hartney has intentionally structured its sales locations and procedures in a deliberate attempt to minimize its tax liability. We find no indication in the statutory authority before us or in the Administrative Code of legislative intent to prohibit such business decisions."

Dissenting, Justice Carter wrote:

"[T]he evidence showed that virtually all of the sales activity took place at Hartney's main office in Forest View. The Mark 'sales' office was created in an attempt to avoid paying the additional ROTs. The Mark office merely served as a mailbox and a fax line for Harteny, where an order-taker would take the orders from customers and fax those orders to the main office in Forrest View."

Next step, the Illinois Supreme Court

There is a lot of money at stake, and so the arguments continue. On September 11, 2013, the Illinois Supreme Court will hear arguments in the case of Hartney Fuel Oil Company et al. v. Board of Trustees of the Village of Forest View, etc, et al.

It's a sham

Hartney is not the only company to set up satellite offices in areas with lower rates of sales tax--offices that some have called shams. Some of these offices reportedly have no signs on the street to indicate that they exist or are not identified in office directories. At some offices, no one answers a knock.

The Cook County Regional Transit Authority wants the tax revenue from those sales. It is currently involved in lawsuits with American Airlines and American Airlines, which it alleges are running "sham business operations" in Sycamore in order to pay less sales tax. It is also seeking tax revenue from Channahon and Kankakee, for similar reasons. Read the RTAs press releases about these lawsuits here.

Sales tax rebates

If some companies take advantage of lower sales tax rates through satellite sales offices, some also reportedly enter into agreements whereby municipalities agree to rebate sales taxes if a company opens a sales office there. In response to that, Forest View in 2011 joined an RTA lawsuit regarding sales tax agreements, citing the "need to maintain a level playing field for all businesses and a desire to end the detrimental practice of … tax avoidance agreements on economic development throughout the region." According to an RTA press release, legislation passed in 2004 "forbids any municipality from entering into a tax sharing agreement with a company if that company isn't engaged in any legitimate business within the new municipality and should be rightfully paying its taxes to another local government."

If nothing else, these lawsuits remind that sales tax is a noticeable cost for businesses and an important source of state and local revenue. Businesses take pains to reduce the rates of sales tax imposed. State and local governments take pains to collect sales tax revenue.

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.