Illinois’ order acceptance rule for sourcing local sales taxes has spurred litigation and endless confusion. The wide differential between local tax rates has encouraged shoppers and retailers to transact business in lower rate jurisdictions – everything from drivers heading across the county line to fill their gas tanks to huge retailers establishing order acceptance facilities in low tax rate jurisdictions. The Illinois Regional Transportation Authority (RTA) has aggressively pursued claims against municipalities and retailers it asserts have violated local sourcing rules. Recently, the RTA suffered a serious setback in its widely publicized effort to retroactively change the rules on order acceptance.
For decades, the Illinois Department of Revenue (IDOR) administered local sales taxes so that the sole factor governing the applicable tax rate was the point at which a retailer accepted a purchase order. This “order acceptance” rule was clear and understandable, and supported by IDOR letter rulings. Some retailers obtained IDOR approval to source their sales to a low rate local jurisdiction where a single employee physically received the buyer’s executed counterpart of the retailer’s offer to sell. In addition, a number of retailers entered into contracts with municipalities in which the municipalities agreed to rebate part of their share of the resulting local tax back to the retailers.
About 10 years ago, the IDOR began backing away from its strict order acceptance rule. Its backtracking eventually led to the Illinois Supreme Court’s recent decision in Hartney Fuel Oil. In Hartney, the Supreme Court rejected the IDOR’s single factor order acceptance test as inconsistent with the underlying statute. The court also held, however, that taxpayers who had relied on the old rule were not liable for transactions occurring before the court’s November 2014 ruling. The court also found that retailers had a legitimate purpose to establish offices to accept orders in low rate jurisdictions solely for the purpose of controlling the tax rate.
While the Hartney case progressed through the court system, the RTA and other local governments began both a public relations campaign and litigation challenging a number of tax sourcing arrangements. One of the leading cases is the RTA’s challenge to United Airlines’ contract to have its purchase orders for aviation fuel accepted in Sycamore, a city outside the RTA’s taxing jurisdiction. The contract called for Sycamore to rebate a portion of the local tax it received back to United. The RTA sued both the City of Sycamore and United under the theory that the fuel sales should be relocated so that they would be subject to the RTA’s taxing power. It claimed that the Sycamore office was a “sham” and sought millions in additional tax.
On April 25, 2014, the Circuit Court of Cook County found that the Hartney ruling meant that United and its affiliates were “legally entitled to… structure their sales so that acceptance of purchase orders occurred in Sycamore and they would owe no RTA retail occupation taxes.” The court rejected the RTA’s theory that Sycamore and United had been unjustly enriched under the agreement. Instead, the court found that the RTA was improperly trying to impose its taxes retroactively and contrary to the Hartney decision. “It is clear that no RTA retail occupation taxes can be collected, in any manner or form, from the United Defendants for any sales where the purchase order was accepted in Sycamore prior to the decision in Hartney.”
The April 25 ruling did not end the United litigation. The court found that there still must be a trial to determine whether United’s purchase orders were accepted in Sycamore. Also, the trial court’s ruling is limited to transactions occurring before the November 21, 2013 Hartney ruling. It does not directly affect tax sourcing arrangements in place after that date.