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Illinois: Teasing out Transaction Tax Sourcing Rules


 Sales tax can be a real tangle.

In response to the Illinois Supreme Court ruling in Hartney Fuel Oil Co. V Hamer, the Illinois Department of Revenue adopted new sales tax sourcing rules on June 25, 2014. This ended a long-standing dispute between Hartney and the Department over what the Department called “sham offices”—offices established in locations with lower sales tax rates for the sole purpose of applying those rates to sales transactions. Hartney fought the charges, and the court ultimately invalidated the way the Department had determined the location of taxable retail activity for Hartney.

The court ruled that “determining whether a seller is engaged in the business of selling’ in a particular jurisdiction within the meaning of the retailers’ occupation tax act requires an analysis of where the retailer engages in the ‘composite of activities’ that comprise its business.” The Department’s new local sourcing rules “provide guidance and direction for retailers and local taxing jurisdictions in applying the fact-specific analysis required by statute and case law.”

Yet confusion remains, as evidenced by questions the Department is still fielding. Recently, for example, the Department issued a General Interest Letter in response to a letter seeking “clarification regarding the proper interpretation of the [new] rule….” The author asks specific questions about several specific terms and phrases, including “primary selling activities” and the “master sales agreements” that often exist between a customer and a retailer.

The Department responds that it is “impossible to impose one-size-fits-all rules” to master sales agreements because they vary widely. As a result, every retailer must “evaluate all of its selling activities to determine whether any three of the five primary selling activities occurred in the same location, and, if not, whether the retailer conducts more selling activities at the location where it keeps inventory or its headquarters.” Sales tax is based on the location of primary selling activities, not the jurisdiction with the most appealing (low) rate, and not necessarily on the location of the staff receiving, processing and/or accepting purchase orders.

Of particular interest is the question, “How does the existence of a master sales agreement between a customer and a retailer affect the application of the presumption applying to sales over the Internet, found at subsection (d)(3) of the rule?" The response:

“Under subsection (d)(3), certain sales of tangible personal property over the Internet are presumed to be subject to Use Tax. This presumption applies when a consumer places an order ‘through a consumer-based retailer website available without limitation on the world wide web.’ As a corollary, sales made through web-based applications accessible only to established members or customers generally would not meet the criteria set forth in subsection (d)(3). The presumption established in that section, therefore, would not apply to such sales.”

Simplify sales tax

It can be challenging for businesses with multiple locations to determine the proper rate of sales tax to apply. Implementing automated sales tax software as a service (SaaS) simplifies transaction tax management and helps businesses apply the right rate to each transaction, every time. Learn more.

photo credit: QuotableKidney via photopin cc


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.