As previously reported in our April update, the City of Chicago, Regional Transportation Authority and Cook County have filed lawsuits against the City of Kankakee, Village of Channahon and a number of private companies that facilitated the location of retail sales order acceptance offices in Kankakee and Channahon, typically from elsewhere in Illinois. Relocation of sales order acceptance offices to these municipalities resulted in retailers eliminating collection and payment of local sales taxes. In addition, retailers typically benefitted from sales tax revenue sharing agreements in place with these municipalities.
Discovery requests were recently issued by plaintiffs to numerous “respondents in discovery,” consisting of the retailers relocating sales offices to Kankakee and Channahon that have not yet been named as defendants. The retailers filed motions to quash the discovery requests, based on the position that the Illinois Department of Revenue is given exclusive authority by state law to administer and oversee the collection of Illinois state and local sales and use taxes. This litigation remains in its initial stages, with oral argument heard August 25th on the respondents’ motions to quash.
As a side note to this litigation, the Illinois Department of Revenue adopted, effective June 24, 2014, new regulations focusing on five primary indicia of selling, rather than just sales order acceptance, in sourcing sales. These factors include location of sales personnel, order acceptance, payment, inventory, and retailer headquarters. If the location of a sale cannot be determined from these factors, six secondary factors are then considered. The new regulations also include a rebuttable presumption that sales on the worldwide web are sourced outside Illinois, which results in subjecting these sales to Illinois use tax rather than sales tax. Since local use taxes are limited to sales of titled tangible property, such as motor vehicles and airplanes, under this presumption most internet sales will not be subject to local sales/use taxes. The Regional Transportation Authority, whose sales tax collections stand to be adversely affected by this presumption, filed a complaint on June 27th in Cook County Circuit Court requesting that the new regulations be declared invalid based on the assertion that the internet sales presumption has no statutory basis.
Taxpayers that have located sales order acceptance offices in low Illinois tax jurisdictions in order to minimize local sales taxes due on sales, would be well advised to be ready to defend their historical sourcing of sales. In addition, in light of the Department’s newly adopted regulations, retailer review of sales sourcing is advisable at this time to confirm it remains valid.