State & Local Tax Alert - Grant Thornton LLP

State & Local Tax Alert
Breaking state and local tax developments from Grant Thornton LLP
Release date
February 18, 2011
Illinois Circuit Court Holds Acceptance of Sales Orders in County
Is Necessary to Impose Local Sales Tax
An Illinois circuit court has held that a seller that did not engage in the business of selling
tangible personal property within a county cannot be subject to a home rule county’s
sales tax, the Retailers’ Occupation Tax (“ROT”). 1 The seller was headquartered in a
county that imposed a local sales tax, but accepted sales orders in a sales office located in
a county that did not impose a local sales tax. Therefore, the seller was not subject to a
local sales tax.
Background
The taxpayer, a family owned business headquartered in Illinois, was a supplier of diesel
fuel, gasoline and bulk lube oil. While the taxpayer was headquartered in Cook County,
Illinois, it maintained a separate designated sales office in Putnam County, Illinois where
all sales transactions were completed. As part of its business, the taxpayer fulfilled daily
purchase transactions with customers who were provided bid pricing information from
its office in Cook County. Daily purchase order customers were directed to place their
orders with the taxpayer’s sales representatives at its designated sales office in Putnam
County. In other words, all orders for the taxpayer’s goods were received and accepted
at its sales office in Putnam County.
The Illinois Department of Revenue claimed that the taxpayer was subject to the local
ROT in Cook County. The taxpayer argued that it should only be subject to Illinois state
sales tax, as all of its sales took place in Putnam County, which has no applicable local
sales taxes. The court ruled in favor of the taxpayer.
Home Rule County Retailers’ Occupation Tax
An Illinois regulation provides that any county which is a home rule unit is authorized to
impose a local ROT on all persons engaged in the business of selling tangible personal
property in the county, on the gross receipts from sales made in the course of such
business. 2 In order for a seller to incur tax liability under the local ROT, a sale must be
made in the course of the seller’s engaging in retail business within that county. A
regulation provides that “enough of the selling activity must occur within the home rule
county to justify concluding that the seller is engaged in business within the home rule
States
Illinois
Issue/Topic
Sales and Use Tax
Contact details
Alex Laskowski
Chicago
T 312.602.9004
E alex.laskowski@us.gt.com
Mike D’Addio
Chicago
T 312.602.8985
E mike.d’addio@us.gt.com
Paul Bogdanski
Chicago
T 312.602.8269
E paul.bogdanski@us.gt.com
Giles Sutton
Charlotte
T 704.632.6885
E giles.sutton@us.gt.com
Jamie Yesnowitz
Washington, DC
T 202.521.1504
E jamie.yesnowitz@us.gt.com
Chuck Jones
Chicago
T 312.602.8517
E chuck.jones@us.gt.com
Angela McNeany
Chicago
T 312.602.8174
E angela.mcneany@us.gt.com
www.GrantThornton.com/SALT
1 Hartney Fuel Oil Co. v. Department of Revenue, Tenth Circuit Court of Illinois, Nos. 08-MR-11, 08-
MR-13, 08-MR-15, Jan. 26, 2011.
2 ILL. ADMIN. CODE tit. 86 § 220.101(a).

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county with respect to that sale.” 3
Required Level of Selling Activity
As provided in the regulations, a seller will be subject to the local ROT if the seller is
engaged in the business of selling in that county. In determining if a seller is “engaged in
the business of selling,” a regulation provides that a seller’s acceptance of a purchase order
or other actions in making a sales contract is “the most important single factor in the
occupation of selling.” 4 In other words, the “business of selling” occurs when orders are
being accepted. Therefore, if an order is accepted at a seller’s place of business within the
county, it will be subject to the local ROT. It is important to note that a rebuttable
presumption exists in which the Department will assume that the seller has accepted the
purchase order at the place of business in which the order is received. 5
In the case of the taxpayer, who accepted all of its daily purchase orders at its designated
sales office in Putnam County, the fact that the pricing bids were faxed to customers from
its office located in Cook County did not constitute enough selling activity to support
taxation in that location. As noted in the regulation, “mere solicitation of orders” does
not constitute doing business. 6
As applied to long-term purchase contracts, a regulation provides that the sales tax situs of
deliveries made under long-term contracts is deemed to be within the home rule county
only if the contract “must be implemented by the purchaser’s placing of specific orders
when goods are wanted.” 7 In the case of the taxpayer, its long-term purchase contracts
did not require the placing of orders when goods were wanted. Instead, the customers’
needs under the long term-contracts were determined and fulfilled by a common carrier
making delivery when goods were needed in order to maintain customer-determined fuel
inventory levels, without an actual order being placed by the customer.
In situations where sales are made pursuant to long-term contracts under which the
purchaser is not required to place specific orders, the sales tax situs is deemed to revert to
the place of acceptance of the contract. Again, in the case of the taxpayer, no specific
orders were being placed in accordance with the long-term contracts and all master
contracts were accepted at the taxpayer’s sales office in Putnam County. The court,
therefore, deemed Putnam County to be the sales tax situs.
3 ILL. ADMIN. CODE tit. 86 § 220.115(b)(1).
4 ILL. ADMIN. CODE tit. 86 § 220.115(c)(1).
5 Id.
6 See ILL. ADMIN. CODE tit. 86 § 220.115(b)(2) (“For example, the Supreme Court has held that
mere solicitation and receipt of orders within a taxing jurisdiction, where the orders were subject to
acceptance outside the taxing jurisdiction and title passed outside the taxing jurisdiction, with the
goods being shipped from outside the jurisdiction to the purchaser in the jurisdiction, did not
constitute engaging in the business of selling within the jurisdiction.”). The regulation cites to the
standard used for purposes of determining whether a corporation is subject to the income tax of a
particular state under Public Law No. 86-272.
7 ILL. ADMIN. CODE tit. 86 § 220.115(e).

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The court here found that the audit process was flawed, incomplete, factually
unsupported, and legally in error. The court pointed out that the auditor misstated the
focus of the analysis that is required under the regulations. The regulatory standards were
not applied to the home rule taxing venue, but instead, the audit focused on whether
enough selling activity occurred in Putnam County. The main issue in the regulations is
whether the Department can support the determination that there is “enough selling
activity” in the home rule municipality, Cook County, to enforce the home rule taxation.
As previously stated, the court found that there was not enough selling activity in the
home rule municipality to enforce taxation in Cook County.
Commentary
The Illinois circuit court’s decision is important for retailers who maintain offices in more
than one county. As was the case with the taxpayer, most retailers prefer to conduct
business in a county with a comparatively low sales tax rate, with all other things being
equal. In order to enhance the small profit margin associated with the type of business the
taxpayer engaged in, the taxpayer changed its sales operation locations several times
looking for a situs that would be competitively advantageous for sales tax purposes. In
order to take advantage of the favorable sales tax rate in one county, it is imperative that a
retailer maintain a dedicated sales facility and have that facility solely accept sales orders.
As evidenced by this decision, if the taxpayer had accepted any orders at its office in Cook
County, it would have been considered to be engaging in the business of selling and would
be subject to the local ROT on its gross receipts. The taxpayer clearly had to carefully
ensure that it did not accept any orders in Cook County in order to obtain this result.
Based on the language used by the court, it will be interesting to see whether the
Department will appeal this decision. The court continually pointed out, in uncommonly
strong terms, that the audit process was flawed and premised on incomplete, factually
wrong, and legally misunderstood findings. If the audit had been properly conducted, the
Department likely would have favored the taxpayer’s continued and previously condoned
practice of operating a separate, dedicated sales office in a tax venue of its choice.
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