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Illinois Department of Revenue Goes After Sham Offices

  • Jan 24, 2014 | Gail Cole

 What makes an office an office? Is it the size of the building it's in?

What makes a sales office a sales office? It turns out that some businesses define a sales office differently than the Illinois Department of Revenue, with taxing applications. As a result, the department is proposing emergency rules to “provide Illinois businesses necessary guidance about how they should allocate the local sales taxes they collect from their customers.”

The emergency rules were sparked by a dispute between the Illinois Department of Revenue and Hartney Fuel Oil Company. While headquartered in Forrest View, Cook County, Hartney opened a series of offices in a number of small towns before finally settling on the town of Mark, Illinois. The company contracted with a local store to provide office space and personnel, and from that point on, fuel purchase orders for the business were received, accepted and processed in Mark. The motivation behind the move was simple, legal, and not concealed: Mark has a significantly lower rate of sales tax than Forrest View.

The IDOR called the Mark office a sham and took Hartney to court to obtain millions in back taxes. As explained by the department, the Court cited the Illinois’ local Retailer’s Occupation Tax Acts and “concluded that a seller incurs retailers’ occupation taxes in the local jurisdiction where its predominant selling activities occur, even if it also engages in very limited activities in other places.” In other words, Hartney won.

Now IDOR has filed “both emergency and proposed rules in response to the Supreme Court’s decision… and to provide additional guidance to taxpayers in ascertaining their local retailers’ occupation tax liabilities.” They clarify “that sales taxes must be paid in the community where the bulk of the business activities occur.” For businesses with activities in multiple locations, “the rules set out the primary selling activities to be considered, such as:

  • Does the location house company executives with the authority to negotiate and finalize sales transactions;
  • Is this the location where purchase orders are accepted or other contracting actions that bind the seller to the sale are completed;
  • Is the inventory of the goods to be sold housed in this location?"

These emergency rules seek to put revenue in the hands of the “governmental bodies that actually” provide services to the retailer. They will “take effect immediately and will be in effect for 150 days unless a legislative panel suspends them.”

The Department of Revenue is not the only governmental agency unhappy with the status quo. The Regional Transport Authority (RTA) has lodged similar complaints against American and United Airlines. It accused those companies of operating sham offices in outlying towns that pay them to open shop there, and it took them to court.

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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.