On November 21, 2013, in Hartney Fuel Oil Company v. Hamer, the Illinois Supreme Court determined that the longstanding regulations for sourcing sales for local sales and use tax purposes promulgated by the Illinois Department of Revenue (the “Department”) were invalid.1 The Supreme Court’s decision was also notable because the court applied the Illinois Taxpayers Bill of Rights2 to protect the taxpayer against liability and penalties for periods in which the taxpayer relied on flawed regulations. The Hartney decision, however, has resulted in a situation where chaos and uncertainty will govern the sourcing of transactions for Illinois local sales tax purposes until a new sourcing can be established through the promulgation of new regulations or the passage of new legislation.


Local sales tax rates vary in Illinois. This has resulted in local jurisdictions competing for sales tax revenue by offering businesses tax-sharing arrangements. Under these arrangements, local taxing jurisdictions would offer businesses tax benefits as an incentive to source their sales to the jurisdiction. These tax-sharing arrangements relied on the Illinois sales tax sourcing regulations, in particular 86 Ill. Admin. Code § 220.115, which sourced sales to the local jurisdiction where the order resulting in the sale was accepted by the vendor.

In Hartney, the Illinois Supreme Court affirmed the decisions of the lower courts, which had held that the bright line sourcing rule in the Department’s regulation, based on the place of order acceptance, was not a valid interpretation of either the Home Rule County, the Home Rule Municipal, or the Regional Transportation Authority Retailers Occupation Tax Acts.3 However, the Illinois Supreme Court nonetheless held that Hartney Fuel Oil Company (“Hartney”) and any other similarly situated taxpayers that relied on the Department’s invalid regulations to source sales for local sales tax purposes for prior periods were entitled to a full abatement of tax, interest and penalty because of their detrimental reliance on the Department’s invalid regulations.

Hartney, a retailer of fuel oil, maintained a home office in Forest View, Illinois, located in Cook County. Hartney simultaneously maintained a sales office in a separate location in the Village of Mark, situated in Putnam County, Illinois. The Mark office was the location where Hartney accepted all of its orders. Under this arrangement, Hartney did not source any of its sales to Forest View, and thus, was able to avoid collecting the retail occupation taxes of Cook County, the Village of Forest View, and the Regional Transportation Authority on its sales. Instead, Hartney sourced its sales to Mark and, as a result, was able to apply a much lower local tax rate to its sales.

The Department audited Hartney for the period January 1, 2005 through June 30, 2007, and determined the proper situs of Hartney’s sales to be Forest View, not Mark. As a consequence, the Department assessed Hartney with more than $20 million of tax, interest, and penalty. Hartney paid the assessment and sued for a refund in Putnam County Circuit Court. Putnam County and the Village of Mark joined in the case seeking declaratory and injunctive relief to find Mark to be the proper situs of Hartney’s selling activity. Forest View, Cook County and the Regional Transportation Authority intervened as defendants.

At issue were the legislative intent of the local retail occupation tax (“ROT”) statutes and the interpretation of these statutes by the Department’s administrative regulations. Hartney argued that the plain language of the regulations established a bright-line test for determining the situs of retail occupation tax liability based on the location of order acceptance. The Department argued that the regulations required a fact-intensive inquiry, based on the totality of the circumstances to determine where the “business of selling” took place. The location of order acceptance was an important, but not a determinative, factor in this determination.

Legislative Intent of the Retail Occupation Tax

The Illinois Supreme Court noted that the various local ROT statutes did not define the “business of selling.” The court then looked to the prior judicial interpretation of what constituted the “business of selling” in Standard Oil Co v. Department of Finance.4 In that case, the Illinois Supreme Court held that the ROT was a tax on the occupation of retail selling, not on the sales themselves. The court deduced that because the local ROT statutes used language that was almost identical to the state ROT to describe the target of the tax, both the state ROT and local ROT language signal the legislature’s acceptance of the “composite of many activities” analysis found in Ex-Cell-O Corp. v. McKibbin.5

Was the Department’s Regulation a Valid Implementation of the Local ROT Statutes?

In invalidating the Department’s sourcing regulation, the Illinois Supreme Court determined that it was not a valid interpretation of the various local ROT statutes.

The court determined that the legislative intent of the local ROT statutes was to permit home rule municipalities and counties to enact retail occupation taxes to place some of the burden of paying for local government services on the retailers who enjoyed the benefits of those services. Thus, the court concluded that that the Department’s regulation impermissibly narrowed the application of the local ROT Acts, because it ignored the fact-intensive inquiry contemplated in Ex-Cell-O. Instead, by focusing exclusively on one factor to determine the tax situs of sales, the Department’s regulation impermissibly limited the scope of the local ROTs in a way that the legislature had never intended.

In Hartney’s case, the bulk of the selling activities of the business, including marketing, inventory, pricing, and cultivating sales relationships, occurred in Forest View. In contrast, only limited sales activity took place in Mark. Under the Department’s regulation, Hartney’s sales were sourced to Mark based purely on the fact that orders were accepted in Mark, notwithstanding the fact that the bulk of Hartney’s sales activities took place in Forest View. Thus, under the Department’s regulation, Hartney would have been able to enjoy the benefits of services offered by Forest View, Cook County and the local transportation district, without contributing to the tax base of any of those jurisdictions. Therefore, the court held the Department’s regulation to be invalid.


Notwithstanding its determination that the Department’s sourcing regulation was invalid, the Illinois Supreme Court barred the Department from collecting the assessed tax, interest and penalties from Hartney, because Hartney had relied on the Department’s regulation in determining not to source its sales to Forest View. The court determined that under the Taxpayers’ Bill of Rights, the Department had a duty to abate taxes and penalties assessed based upon erroneous written information or advice given by the Department.6 In this case, Hartney had acted consistently with the Department’s sourcing regulation, and therefore the court upheld the abatement of Hartney’s penalties and retail occupation tax liability for the audit period.

What’s Next? Chaos!

In the world of Illinois sales taxation, sourcing by place of order acceptance was one of the basic principles. The sudden elimination of that principle by the court’s decision will have several likely consequences.

Of course, all sales tax sourcing software is, for now, uncertain in its accuracy. While the Hartney case was pending, the Department proposed draft regulations that identified multiple indicia as determinative of where the selling activity took place. However, the Department’s proposed draft failed to identify which indicia were to be treated as decisive if found in one location. As a consequence, the proposal would merely have emboldened every local jurisdiction in which one indicia of a vendor’s selling activities occurred to either sue other local jurisdictions for the ROT revenue collected by that vendor, or to file claims with the Department for erroneous distribution of local ROT revenues. The same flaw that doomed the Department’s proposed draft – failure to prioritize among the indicia of where selling activity occurs – also doomed fledgling legislative efforts that were undertaken during the pendency of the Hartney case.

In fact, it is now conceivable that a vendor that is currently collecting and remitting the Illinois Use Tax on its business transactions may, as a result of the fact-intensive inquiry required by Hartney, determine that the contacts with Illinois that give it nexus for use-tax collection purposes now define the location where its sale is made, and those contacts should now determine the local jurisdiction that has the authority to require the vendor to collect its ROT. After all, if order acceptance is not the controlling factor in sourcing sales, and neither is the location of inventory, then even if those two factors are outside Illinois, there may be other factors, beyond mere solicitation of sales, that are within Illinois and sufficiently strong to cause the vendor’s selling activity to be sourced to a local jurisdiction within Illinois for local ROT purposes. All vendors will now need to review their sales tax sourcing determinations based on a fact-intensive inquiry, which includes a review of all business actions from the preparation for, and the obtaining of, orders for goods to the final consummation of the sale.

Economic development projects that were financed in part by local sales tax revenues, like tax increment financing or sales tax-backed bonds, may be affected as well. It is unclear how large the impact will be, but one cannot eliminate the possibility that a shift in sales tax revenues away from a local ROT jurisdiction to other local ROT jurisdictions would be a source of concern for investors in instruments issued or guaranteed by the local ROT jurisdiction that is losing tax revenue.

The Taxpayer Bill of Rights protects taxpayers against liability and penalties that occur as a result of the taxpayer’s reliance on erroneous written information issued by the Department, but it does not apply to claims by local governments against the Department. As a consequence, claims for the Department to reallocate previously distributed local ROT revenues may increase in frequency as a result of the Supreme Court’s holding in Hartney. However, if such claims become too frequent or too intense, this may lead to a legislative solution sooner rather than later.

The Department has not yet given any indication of whether it will treat vendor reliance on the Department’s sourcing regulation after November 21, 2013 as protected by the Taxpayer Bill of Rights, or whether it will allow vendors to continue to rely on the Department’s sourcing regulation at least until the date when the Supreme Court issues a mandate to the lower court, rendering its decision final. It is also unclear whether the Department intends to fill the gap in guidance by issuing an emergency regulation, or whether the Department will defer issuing guidance to allow the legislature an opportunity to provide guidance on an expedited basis.

Until a new law or regulation is in place, everyone claiming to represent a jurisdiction where any aspect of a vendor’s selling activity (other than the order acceptance) occurs can file suit seeking to lay claim to the vendor’s local ROT collections. Thus, vendors may face suits based on local ROT rate differences from class action, consumer protection, and false claim lawyers, or they may suffer unprecedented consequences from adjustments to local tax distributions that counties and municipalities may obtain from the Department. In other words, until new legislation or regulations governing the sourcing of sales are in effect, vendors will have exposure for local ROT anywhere their business activities extend.