Where does a sale take place for purposes of the local portion of the state sales tax? For lots of localized businesses, it’s a straightforward question. But what about businesses that operate in multiple counties — particularly where some portion of the sales function is separated from the rest of the day to day business? That’s the question presented in Hartney Fuel Oil Co. v. Hamer, which was argued during the September term at the Illinois Supreme Court. It’s a potentially high-stakes question: the simpler it is to move a sales tax locus, the more incentive there will be to do so. Our detailed description of the underlying facts and lower court holdings is here. Our preview of the oral argument is here.
The plaintiff in Hartney resells fuel oil to railroads, trucking companies, gas stations and other fuel distributors. In 1995, it moved its sales operation out of Forest View in Cook County. By 2003, the sales operation had landed in Mark, in Putnam County.
The plaintiff had two kinds of sales during the relevant period. First, there were daily purchase orders. The customer was informed by fax or email of the next day’s price, and responded to the sales office: what it needed, how much, where and when. The sales agent in Mark accepted the order and made the arrangements. Second, there were long-term purchase orders. A fully executed contract was mailed from the Mark sales office to the customer. Originals were stored in Mark, with copies to the customer as well as the plaintiff’s accounting department in Forest View.
The Department of Revenue audited the plaintiff (not for the first time) for the period of 2005 through mid-2007. The auditors ultimately concluded that all sales occurred in Forest View rather than Mark, and the plaintiff got a bill for $23.1 million in past-due taxes. The plaintiff paid under protest and sued; the board of commissioners of Putnam County and the board of trustees from Mark joined the suit, seeking the local share of the sales taxes. The Circuit Court found for the plaintiffs. The Third District affirmed, adopting a bright-line test: where acceptance of the order occurs, sales tax liability is fixed.
Counsel for the intervenor governments led off the argument. Counsel argued that the Appellate Court erred for at least three reasons: (1) the regulations which the Appellate Court construed are incompatible with the bright-line, acceptance-is-all rule; (2) the Appellate Court’s rule is also incompatible with the statute; and (3) even if mere acceptance, without more, is sufficient to fix the tax locus, on the facts before the court, the sham doctrine barred the conclusion that sales occurred in Mark. Counsel argued that the purchase order test can be easily manipulated by retailers to locate taxes in the most advantageous place. The regulations don’t say that the place of acceptance is the only relevant factor, counsel argued; they merely say that it’s the most important factor. Justice Garman asked whether the regulations list other factors, and counsel conceded that they did not. Justice Garman asked whether that was significant, but counsel said no. The regulations stated that in order to locate the sales tax liability, enough of the business activity must occur within the taxing jurisdiction to conclude that the seller is engaged in the business of selling with respect to that sale. Counsel argued that nobody reviewing the record could possibly say that anything was going on in Mark — the acceptance of the sales was a sham. Justice Burke asked whether the test was different for an out-of-state seller as opposed to one that was in-state, but doing business in another county. Counsel argued that there was no single factor controlling. Justice Burke asked whether acceptance occurred by sending a fax to the Mark office, or whether acceptance involved something else. Counsel argued that the taxpayer’s Mark office was nothing but a place to receive faxes and a mail box. The arrangement, counsel insisted, was nothing but a subterfuge to avoid the tax. Justice Thomas asked whether the court needed to agree that the acceptance was a sham for the appellant to win, and counsel said no. Justice Garman asked whether the employee running the Mark office had the authority to bind the plaintiff, and counsel said she did.
Counsel for the state appellants argued next. Justice Burke asked whether the state was challenging the view that acceptance had happened in Mark for purposes of the appeal. Counsel responded that the state was not challenging the factual finding, but was challenging the notion that acceptance alone was enough to fix the tax locus. Justice Thomas asked whether it was of any consequence that the Department’s audit manual concluded that the place of acceptance controls for sales tax liability. Counsel responded that the manual deals with possible issues that might arise in a summary fashion, and recommends using statutes and regulations to illuminate disputes when necessary. The manual was by no means dispositive, counsel noted. Justice Garman asked whether the Appellate Court should have given deference to the Department’s interpretation of the statutes and regulations. Counsel responded that if the Department’s interpretation of its own regulations was reasonable, it should be deferred to; but the question was really one of law, and if the Department got it wrong, the Court would doubtless say so. Justice Garman 1pointed out that counsel was nonetheless inviting the court to ignore the audit manual, and asked him to reconcile that with any request for deference. Counsel explained that the manual is not law; rather, the manual as a whole invites auditors to rely on facts when appropriate to deviate from the manual’s advice. Further, counsel argued, internal guidance from the Department couldn’t change the courts’ years-long construction of the term "in the business of selling." Counsel concluded by accusing the plaintiff of having taken guidance intended for good faith, bona fide retailersand taken it out of context as a way to avoid taxes. The proper standard, counsel argued, was that the sales tax locus happened where the most important selling activities took place, regardless of where acceptance was.
Counsel for the taxpayer began by emphasizing that there is nothing wrong with structuring business affairs to reduce the tax incidence on the company’s customers. The taxpayer here did so in full view of the Department, counsel argued; it had hidden nothing and was embarrassed by nothing. Justice Garman asked whether the plaintiff was bound if the Mark employee accepted an offer which she shouldn’t have. Counsel agreed the taxpayer was bound. Justice Thomas argued that the taxpayer had arguably received the benefits of Cook County services, and was now trying to minimize taxes. What would stop other Cook County businesses from doing the same thing? Counsel responded by arguing that the concern that Cook County’s finances would collapse absent reversal was overblown; the regulations which were the basis for the court’s holding had been in place for years. Justice Thomas pointed out that this would be the first major Supreme Court decision on the issue. Counsel answered that if anyone concluded that the acceptance-only rule wouldn’t work, the Legislature should either change the regulation or the statute. Justice Thomas asked whether the taxpayer relied to some extent on the concept of estoppel. Counsel agreed that it did, but argued that the Court could find for the taxpayer without reaching the issue. The factual issue of where the acceptance was settled the question, counsel argued, and that should be the end of the matter under the regulations. Counsel concluded by arguing that his client and other taxpayers are entitled to rely on the Department’s view, expressed again and again over the years, that the place of acceptance of the order is conclusive for the locus of the tax.
Leading off rebuttal, counsel for the State returned to the issue of how the State could simultaneously ask for deference and yet disavow its own audit manual. Counsel explained that while regulations go through notice and comment, manuals don’t. Justice Burke asked whether the Department conceded that there was acceptance in Marks. Counsel agreed that the Department was not challenging that finding, but rather was challenging the legal significance of those established facts. Counsel disputed the taxpayer’s citation to Private Letter Rulings in recent years finding that the place of acceptance, without more, fixes the locus of sales taxes. Counsel argued that the PLRs are hypothetical scenarios, not precedents citable, let alone enforceable, against the state.
We expect Hartney Fuel Oil to be decided in the next two to four months.