After an eight-year battle, the Illinois Supreme Court reversed the Appellate Court and affirmed the Circuit Court’s decision to dismiss the motion by the City of Chicago and the Village of Skokie to file a fourth amended complaint with prejudice. The Illinois Supreme Court ruled, in part, that the Illinois Department of Revenue (the “Department”) has the exclusive jurisdiction to audit and reallocate use tax among local governments in the state.


The Illinois sales tax and the Illinois use tax are both imposed at the rate of 6.25 percent, with 5 percent allocated to the state, and the remaining 1.25 percent allocated among local governments. For sales tax, the 1.25 percent portion of the tax is distributed to the municipality (1%) and to the county (0.25%) where the sale actually occurred. For use tax, the 1.25 percent portion is deposited in the State and Local Sales Tax Reform Fund administered by the Department. From this fund, 20 percent is disbursed to Chicago, 10 percent to the Regional Transportation Authority Occupation and Use Tax Replacement Fund, 0.6 percent to the Madison County Mass Transit District, $3.15 million to the Build Illinois Fund, and the remainder of the fund is disbursed to all other municipalities (other than Chicago) based on their population.

The City of Chicago and the Village of Skokie (the “Plaintiffs”) sued the City of Kankakee and the Village of Channahon (the “Defendants”), as well as a number of Internet retail sellers and brokers alleging that the sellers made sales that were incorrectly sourced to the Defendants for purposes of local sales tax. Prior to 2014, the Illinois Administrative Code allowed the sourcing of sales to municipalities for sales tax purposes if an authorized representative in the municipality accepted orders on behalf of the seller. The Plaintiffs asserted that the Defendants had diverted use tax revenues from other local governments in the state by paying incentive rebates to retailers in exchange for reporting sales as being accepted for purposes of sales tax in the defendant municipalities, when the sales were actually made outside of Illinois. The Plaintiffs alleged that despite the sales being accepted in the defendant municipalities, little or no meaningful sales activity for the Internet retailers took place in the retailers’ Kankakee and Channahon offices, and therefore asserted that the retail defendants should have collected and remitted Illinois use tax rather than sales tax.

The Plaintiffs sought leave to file a fourth amended complaint seeking, among other things, declaratory relief and a claim for unjust enrichment. The Circuit Court denied the Plaintiffs’ motion with prejudice. The Circuit Court based its decision, in part, on the fact that declaratory relief was unnecessary, because the alleged misconduct stopped in 2014 after a change in law,1 and, in part, on its determination that the Department is vested with exclusive jurisdiction over use tax distribution matters between localities, given the explicit statutory authority granted to the Department to audit tax payments and redistribute them among local governments in the State.

The Appellate Court reversed the Circuit Court and held that the courts in Illinois have jurisdiction to decide whether certain sales are correctly sourced for purposes of use tax. The Illinois Supreme Court reversed the Appellate Court and affirmed the Circuit Court’s decision finding that the Department has exclusive authority over Plaintiffs’ claims against Defendants.2

The Illinois Supreme Court’s Decision

In a unanimous decision,3  the Illinois Supreme Court ruled that the Circuit Court lacked subject-matter jurisdiction to consider Plaintiffs’ claims regarding use tax.  The Supreme Court also concluded that resolving the Plaintiffs’ claim in the manner they requested would require the Circuit Court to conduct a complete sales and use tax audit to determine the proper situs of thousands of sales over a period of at least fourteen years.  Ultimately, the Illinois Supreme Court determined that the Department has exclusive authority and responsibility over auditing the sourcing and reporting of sales for use tax purposes, and that the Department can correct any errors in sourcing occurring within a six month period preceding the time a misallocation is discovered.  Finally, the Court also determined that although the Illinois Legislature had authorized municipalities to bring causes of action regarding the incorrect sourcing of sales tax revenue resulting from rebate agreements entered into after June 1, 2004, the Legislature had not extended same authorization to the incorrect reporting or sourcing of use tax revenue.

The Justices relied on a textual interpretation of the statutes in issue to arrive at their decision in this case.  In part, the Illinois Supreme Court may have reached its decision to bring to an end a protracted dispute between Illinois municipalities, which would have resulted in significant payments from one municipality to another.