Lessons from Hartney: How to Reduce Tax Forum Shopping by Illinois Retailers

            The Illinois’ Local Retailers’ Occupation Tax Acts (ROT Acts) allows “municipal governments and the Regional Transportation Authority (RTA) to impose a retail occupation tax ‘upon all persons engaged in the business of selling tangible personal property at retail within the county, municipality, or metropolitan region.”[i] Leading up to the recent Illinois Supreme Court decision in Hartney Fuel Oil Co. v. Hamer, a number of Illinois retailers with selling activities in multiple jurisdictions sought to pay Illinois Local Retailer Occupation Taxes only in the lowest tax rate jurisdictions where they accepted purchase orders, even when their predominant selling activities occurred in other places.[ii]  This narrow interpretation of the “business of selling” in the ROT Acts complies with the Department of Revenue (DOR) regulations regarding the Acts, which establish a bright-line rule for purchase order acceptances.[iii]

            Although the ability to tax forum shop by setting up “skeletal” sales locations is economically favorable to retailers, it has resulted in grave consequences for Illinois counties with comparatively high tax rates. For instance, Cook County has a 9.5% tax rate, significantly higher than other jurisdictions such as Dekalb County with a tax rate of 8%.[iv] In one example, “the RTA claimed that United and American Airlines, which set up offices in DeKalb County to buy jet fuel, deprived public transit agencies of nearly $300 million during the past seven years.”[v] This is fundamentally unfair to the collection of tax revenues by the RTA and Cook County because American and United Airlines primarily operate in Cook County.  Furthermore, these airline examples are inconsistent with the legislature’s goal in passing the ROT Acts which was to “collect taxes in relation to services enjoyed by the retailer.”[vi]Therefore, the question before the Illinois Supreme Court in Hartney was what is the proper definition of “the business of selling,” as intended by the legislature in the ROT Acts?[vii]

Application: The Hartney Decision

            Hartney Fuel Oil Company is an Illinois retailer of fuel oil. In addition to its [main] Forest View office in Cook County, Hartney has a ‘sales’ office in Mark in Putnam County.[viii] Hartney’s interpretation of the ROT Acts was that the “relevant regulations set a bright-line test: where the purchase order is accepted for a sale at retail in Illinois, and the purchaser takes delivery in Illinois, the sale has its situs where the seller accepts the purchase order.”[ix] Accordingly, Hartney was paying the retail occupation tax based on the location of its sales office in Putnam County, where the sales tax rate is 2.5 percentage points lower than in Cook County.[x] The Illinois Department of Revenue and Local Governments brought a lawsuit against Hartney, arguing that the regulations instead present a fact-intensive inquiry, which would require Hartney to pay the retail occupation tax in Forest View where it predominately operates.[xi] 

            The court ultimately concludes that only a totality-of-the-circumstances view for determining “the business of selling” accords with the legislative intent of the local ROT Acts.[xii] In so holding, the court finds that the DOR regulations establishing a bright-line rule for purchase order acceptances are inconsistent with the statute. As stated by the court, “We are persuaded that this regulation impermissibly narrows the local ROT Acts, contrary to the legislature’s intention to allow local governments to collect taxes from retailers in their jurisdictions.”[xiii] To comply with the court’s opinion, the DOR filed emergency regulations in January 2014, and will write new regulations including three additional business activities: “where the offer is made, the location of inventory and the location of sales personnel authorized to negotiate and finalize transactions.”[xiv] The court ultimately abated Hartney’s assessment for the taxes owed to Forest View, Cook County, and the RTA because “the court found there was nothing illegal about Hartney Fuel Oil relying on now-invalid regulations.”[xv]


            The court in deciding to permit Hartney to avoid liability for its back tax liability makes clear, “We can’t blame businesses for spotting and exploiting this loophole.”[xvi] Accordingly, the key challenge facing Illinois lawmakers post-Hartney is how to prevent these types of tax loopholes from forming. The answer, at least in the Hartney case, is the need for more legislative clarity. To explain, since the legislature did not clearly define what it meant by “the business of selling” in the ROT Acts, the DOR had to step in to provide regulatory guidance. However, the DOR in providing a “bright-line” rule for taxation to occur in the jurisdiction where the purchase order is accepted created too narrow of a test, undermining the legislature’s goal.

            The DOR’s initiative to rewrite the ROT Acts’ regulations to include three additional business activities is a good short-term solution to remedy the tax loophole by conforming to the legislator’s intent of taxing retailers in the location where they perform the majority of their business.[xvii] However, a better long-term solution would be for the Illinois Legislature to rewrite the ROT Acts to incorporate a more streamlined taxation structure because under the current set of standards a business could potentially be taxed in four different jurisdictions. To simplify the current four-part balancing standard while making it broad enough so businesses cannot go “tax forum-shopping,” Illinois legislatures should consider adopting a tax structure modeled after the West Virginia Business and Occupation Tax (B & O tax).[xviii] Under this structure, a particular city divides its businesses into industry classifications, and the classifications requiring greater resource use are taxed at higher rates.[xix] A business is subject to the B & O tax in a particular city if the business collects the majority of its gross receipts in that city and its services are directed from that city, or if its principal office is located in that city and it has not been taxed by another municipality.[xx]Washington and Ohio also collect a B & O tax but on a state-wide basis.[xxi] Implementing this tax structure in Illinois would make it easier for business owners to determine where they will be taxed, while simultaneously holding businesses financially accountable to the RTA and the local government for their resource use.



[i] Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130, 998 N.E.2d 1227, 1234 (my emphasis).

[ii] http://tax.illinois.gov/News/HartneyDecision.htm               

[iii] Court Shuts Down Sales Tax Havens, The Chicago Tribune, Nov. 28, 2013, http://articles.chicagotribune.com/2013-11-28/opinion/ct-sales-tax-haven-edit-1128-20131128_1_hartney-fuel-oil-co-illinois-supreme-court-sales-taxes


[iv] Id.


[v] Ameet Sachdev, Illinois Supreme Court Tosses Department of Revenue’s Tax-Collection Rules, The Chicago Tribune, Nov. 22, 2013,  http://articles.chicagotribune.com/2013-11-22/business/ct-biz-1122-sales-tax-ruling-20131122_1_illinois-supreme-court-hartney-fuel-oil-co-suburban-taxing-districts


[vi] Hartney, 998 N.E.2d at 1237,1238.


[vii] Id. at 1240.              

[viii] Id. at 1232.

[ix] Id.

[x] Ameet Sachdev, supra note v.

[xi] Hartney, 998 N.E.2d at 1234.

[xii] Id.at 1238.

[xiii] Id.at 1245.

[xiv] Ameet Sachdev, Illinois Creates New Local Sales Tax Rules, The Chicago Tribune, Jan. 22, 2014, http://articles.chicagotribune.com/2014-01-22/business/chi-illinois-local-sales-tax-rules-20140122_1_sales-taxes-illinois-supreme-court-sycamore


[xv] Ameet Sachdev, supra note v.

[xvi] Supra, note iii.  

[xvii] Hartney, 998 N.E.2d at 1237,1238.                                                           


[xix] Id.

[xx] Id.