How did Illinois's 2014 local sales-tax sourcing rules locate primary selling activities, sales offices, master agreements, and Internet sales?

Plain-English summary

A stakeholder asked IDOR to clarify local Retailers' Occupation Tax sourcing rules adopted in 2014 after Hartney Fuel Oil Co. v. Hamer, focusing on sales personnel, contracts, invoices, master sales agreements, and Internet orders.

The rules looked for the jurisdiction where a retailer conducted the composite of activities comprising its selling business. A retailer generally was engaged in selling where at least three of five primary activities occurred: employing sales personnel, entering the sales contract, establishing payment terms, maintaining inventory, and directing or managing the business.

To source sales to a sales office separate from headquarters and inventory, the office had to conduct all first three activities. Its personnel needed actual discretion and authority to solicit customers and bind the seller; the binding-contract activity occurred where personnel took the final action committing the retailer; and payment activity occurred where payment was tendered or received or where personnel prepared and submitted the invoice.

Master sales agreements had no one-size-fits-all rule. The retailer had to examine negotiation, consummation, performance, and all selling activities rather than rely only on where later purchase orders were received, processed, or accepted.

Under the 2014 Internet rule described, an order placed through a consumer website open without limitation on the public web was presumed subject to Use Tax. Web applications restricted to established members or customers generally did not meet that presumption's criteria.

What this means for you

This is historical guidance on rules adopted in 2014. Local sourcing followed the substance and location of a retailer's full selling operation, not a formal invoice address or one isolated order-acceptance step.

Common questions

How many primary activities generally established a location? At least three of five.

Could a master agreement determine sourcing by itself? No.

Did restricted customer web applications automatically get the public-website presumption? Generally no.

Citations and references

• 86 Ill. Adm. Code 320.115(c) and (d).
• Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2015/st-15-0001.pdf

Original ruling text

ST 15-0001-GIL 01/07/15 Local Taxes
This letter discusses primary selling activities under the local sourcing rules. (See 86 Ill. Adm.
Code 220.115.) (This is a GIL.)
January 7, 2015

Dear xxx:
This letter is in response to your letter dated December 16, 2014, in which you request
information. The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”)
are issued by the Department in response to specific taxpayer inquiries concerning the
application of a tax statute or rule to a particular fact situation. A PLR is binding on the
Department, but only as to the taxpayer that is the subject of the request for ruling and only to the
extent the facts recited in the PLR are correct and complete. Persons seeking PLRs must comply
with the procedures for PLRs found in the Department’s regulations at 2 Ill. Adm. Code
1200.110. The purpose of a General Information Letter (“GIL”) is to direct taxpayers to
Department regulations or other sources of information regarding the topic about which they
have inquired. A GIL is not a statement of Department policy and is not binding on the
Department. See 2 Ill. Adm. Code 1200.120. You may access our website at tax.illinois.gov to
review regulations, letter rulings and other types of information relevant to your inquiry.
As a general matter, your inquiry does not fit comfortably within the strictures of either a
PLR or a GIL because the requester is not a taxpayer, and the request contains no specific factual
information. Nevertheless, because you have inquired about rules that were only recently
promulgated, and about which many stakeholders may have questions, your inquiry is
sufficiently conducive to a response by GIL.
In your letter you have stated and made inquiry as follows:
XXX seeks clarification regarding the proper interpretation of the rule promulgated on
July 25, 2014 that addresses “jurisdictional questions” concerning the local jurisdiction Retailers’
Occupation Tax (see, e.g., 86 Ill. Adm. Code 320.115), in light of the Illinois Supreme Court’s
recent opinion in Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130 (2013).
Specifically, xxx seeks guidance from the Department on the following questions
regarding the proper interpretation of 86 Ill. Adm. Code 320.115:
Question 1: How are the terms “discretion” and “authority” found in the first of the
primary selling activities, subsection (c)(1)(A), to be interpreted in light of the Illinois Supreme
Court’s opinion in Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130 (2013), and in light of the
other authorities cited by the Department in sections (a) and (b) of the rule?
Question 2: How does the existence of a master sales agreement between a customer
and a retailer affect the application of the first factor of the primary selling activities test? For
example, when a sale to a customer has been pre-approved in whole or in part by a retailer under
the terms of a master sales agreement, can sales personnel who subsequently process or “accept”
purchase orders submitted by the customer satisfy the first primary selling activity?

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January 7, 2015
Question 3: How is the phrase “takes action that binds it to the sale” found in the second
of the primary selling activities, subsection (c)(1)(B), to be interpreted in light of the Illinois
Supreme Court’s opinion in Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130 (2013), and in light
of the other authorities cited by the Department in sections (a) and (b) of the rule?
Question 4: How does the existence of a master sales agreement between a customer
and a retailer affect the application of the second factor of the primary selling activities test? For
example, when there is a contractual relationship between the retailer and the customer prior to
the acceptance of a purchase order, is the subsequent acceptance of a purchase order sufficient on
its own to satisfy the second primary selling activity?
Question 5: How is the phrase “from which invoices are issued” found in the third of the
primary selling activities, subsection (c)(1)(C), to be interpreted in light of the Illinois Supreme
Court’s opinion in Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130 (2013), and in light of the
other authorities cited by the Department in sections (a) and (b) of the rule? Is it possible, for
example, for retailers to satisfy the third of the primary selling activities at a location where
invoices simply leave the hands of retailers’ personnel, despite that they are generated by
personnel in a different location?
Question 6: How does the existence of a master sales agreement between a customer
and a retailer affect the application of the presumption applying to sales over the Internet, found
at subsection (d)(3) of the rule?
DEPARTMENT’S RESPONSE:
I.

The Sourcing Rules

The Department adopted the sourcing rules that are the subject of this inquiry on June 25,
2014. The rules implement retailers’ occupation tax statutes, which allow municipalities,
counties and other municipal corporations to impose taxes on persons “engaged in the business
of selling” in their jurisdictions. See, e.g., 55 ILCS 5/5-1006 (authorizing counties to impose
retailers’ occupation tax on persons “engaged in the business of selling” within the county); 70
ILCS 3615/4.03(e) (authorizing the Regional Transportation Authority to impose a tax on
persons “engaged in the business of selling” within a six-county region).
The Illinois Supreme Court held in Hartney Fuel Oil Co. v. Hamer that determining
whether a seller is “engaged in the business of selling” in a particular jurisdiction within the
meaning of the retailers’ occupation tax acts requires an analysis of where the retailer engages in
the “composite of activities” that comprise its business. 2013 IL 115130 ¶¶ 32-36. The local
sourcing rules adopted by the Department provide guidance and direction to retailers and local
taxing jurisdictions in applying the fact-specific analysis required by statute and case law.
The sourcing rules are divided into four parts. The first part provides relevant definitions.
See, e.g., 86 Ill. Adm. Code 320.115(a). Next, the regulations set forth the legal standard derived
from the statutory language and case law interpreting that language. Id. § 320.115(b).
Subsection (c) then applies that legal standard to retailers conducting selling activities in multiple
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jurisdictions. Id. § 320.115(c). In particular, subsection (c) identifies those selling activities
generally most important to the business of selling, id. § 320.115(c)(1), (c)(4), and explains the
combination of selling activities that comprise the business of selling in a particular location. Id.
§ 320.115(c)(2), (c)(5), (c)(6). Lastly, subsection (d) recognizes that certain selling operations
“with unique, complicated or widely dispersed selling activities” do not fit within traditional
retail models. For certain retailers that fit within this category, subsection (d) provides
“administrative shortcuts that balance the administrative difficulties presented by certain selling
operations against the need for accurate tax assessment.” 86 Ill. Adm. Code 320.115 (d)(1).
The four sections in the rule should be read together so that the legal standards set forth
in subsection (b) inform the interpretation and application of the selling activities and
presumptions identified in subsections (c) and (d). For example, when evaluating where a
retailer engages in the selling activities identified in subsection (c), the Department, consistent
with subsection (b)(6), will seek to identify the location where the substance of the activity takes
place.
You have inquired about the meaning of the first three “primary selling activities,” in
subsection (c)(1), and how the rules apply to sales made under a “master sales agreement.”
II.

The Primary Selling Activities Test

Under the rule, a retailer is “engaged in the business of selling in” a particular taxing
jurisdiction if it conducts at least three of five “primary selling activities” there. 86 Ill. Admin.
Code § 320.115(c)(1)-(2). The primary selling activities are: employing sales personnel,
entering a contract for the sale of goods, establishing terms of payment, maintaining inventory
and directing/managing the business. § 320.115(c)(1). These activities are “primary” for two
reasons.
First, they are nearly universal. Most sales of tangible personal property require someone
doing the selling, (c)(1)(A); property to sell, (c)(1)(D); a contract for sale, (c)(1)(B); the payment
of money, (c)(1)(C); and someone to direct and manage the business, (c)(1)(E). Because almost
every retailer undertakes these activities, almost every retailer will be able to identify the
location where these activities occur, and determine if three of these activities take place in a
single location. Thus, the primary selling activities test in subsection (c) satisfies important
practical criteria: it is predictable for retailers and administrable for the Department.
The primary selling activities also are “primary” because they are reasonable proxies for
locations where retailers engage in multiple selling activities and take advantage of government
services. See Hartney ¶¶ 34-36. The location of a retailer’s headquarters, warehouses, and sales
offices are places where, generally, retailers engage in numerous selling activities, including
marketing, procurement, solicitation, negotiation, order acceptance, collection, administration,
and initiation of delivery. Thus, these locations do not represent single selling activities at all,
but instead serve as proxies for a composite of activities critical to the business of selling. See,
e.g., Hartney ¶ 62. Moreover, these locations generally are physical structures where employees
come and go on a daily basis, taking advantage of roads, bridges, police, fire, education, and
transportation, which are the core services provided by local governments.
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The other two primary selling activities – the location where sales contracts are entered,
(c)(1)(B), and payment arranged, (c)(1)(C) – serve as checks on the primacy of headquarters,
inventory and sales personnel. There may be atypical retailers that do not engage in multiple
selling activities in their headquarters, or warehouses, or sales offices. The requirement that
three primary selling activities occur in one location, however, prevents these atypical retailers
from sourcing sales to locations where only insignificant selling activity occurs. Thus, the rule
identifies locations where a composite of sales activity generally occur, and requires that at least
three universal and critical selling activities occur in a single location.
In practice, the rule requires retailers to examine their selling operations to determine in
which of three locations they conduct the composite of activities that comprise their business of
selling: (1) the place from which they direct and manage their businesses; (2) the place where
they store inventory, or (3) their bona fide sales offices. Each of these locations is a place where
retailers are likely to engage in multiple selling activities and require the support and protection
of government services. Hartney ¶ 36. None of these locations are likely to house only “minor
steps in the business of selling.” Hartney ¶ 61.
III.

Sales Office

As noted above, the rule permits a retailer to source its sales to one of three locations:
headquarters, location of inventory or sales office. However, the circumstances that allow
sourcing to a sales office are more limited than those that allow sourcing to headquarters or the
location of inventory. Under subsections (c)(2) and (c)(5), a retailer may source to the location
of inventory or to its headquarters if it conducts at least three primary selling activities at that
location or if a majority of primary and secondary activities occur there. However, a retailer
may source to a sales office separate from its headquarters and inventory only if it conducts all of
the first three primary selling activities in that location. The following description of the first
three primary selling activities provides further guidance on when this standard may be met.
Subsection (c)(1)(A) – Location of Sales Personnel. Subsection (c)(1)(A) identifies as
a primary selling activity the place where “sales personnel” are located. Sales personnel are
defined as those “exercising discretion and authority to solicit customers on behalf of a seller and
to bind the seller to the sale.” To meet this definition, sales personnel must have actual power to
determine whether or not a retailer will do business with a given customer.
See
http://www.merriam-webster.com/dictionary/discretion (“discretion” is “the right to choose
what
should
be
done
in
a
particular
situation”);
http://www.merriamwebster.com/dictionary/authority (“authority” means “the power or right to direct or control”).
Thus, the first of the primary selling activities refers to those individuals to whom the retailer has
delegated significant authority to decide when, where, and to whom the retailer will sell goods,
and who hold the power to “bind the seller to the sale” based on their decisions. If there is no
single location where sales personnel exercise sufficient discretion and authority to both solicit
customers and complete sales, then the retailer cannot rely on the first selling activity when
determining where to source its sales.

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Subsection (c)(1)(B) – Agreement to Sell. Subsection (c)(1)(B) identifies as a primary
selling activity the “location where the seller takes action that binds it to the sale.” This refers to
the location where the retailer’s personnel perform the final action necessary to commit the
retailer to a contractually binding relationship.
Subsection (c)(1)(C) – Payment. Subsection (c)(1)(C) identifies as a primary selling
activity the “location where payment is tendered or received, or from which invoices are issued
with respect to each sale.” This provision recognizes that a seller may receive payment at its
place of business or have payment sent directly to a third party, like a financial institution. It also
recognizes that payment may be made in advance of delivery, at the time of delivery, or after
delivery pursuant to an invoice. If payment is “tendered or received” at a seller’s business
location, then a retailer may satisfy the third primary selling activity at that location. If payment
is not “tendered or received” at a seller’s place of business, then this selling activity occurs at the
location where the retailer engages in the conduct necessary to prepare and submit an invoice.
In summary, under the rule, in order to source a sale to a sales office separate from a
retailer’s headquarters or the place where it keeps inventory, a retailer must meet all three of the
first three primary selling activities described above. This means the retailer must employ sales
personnel, solicit customers, enter agreements, accept payment or prepare invoices, and bind
itself to performance in that location. § 320.115(c)(1)(A)-(c)(1)(C).
IV.

Master Sales Agreements

None of the provisions in the rule specifically apply to sales made under a “master sales
agreement.” This is because the diversity of terms within “master sales agreements” makes it
impossible to impose one-size-fits-all rules applicable to all such agreements. Rather, subsection
(c) requires a retailer to evaluate all of its selling activities to determine whether any three of the
five primary selling activities occurred in the same location, and, if not, whether the retailer
conducts more selling activities at the location where it keeps inventory or its headquarters. A
retailer selling pursuant to a “master sales agreement” therefore must include among the
activities it reviews those activities associated with the negotiation, consummation and
performance of the agreement. The broad inquiry required by subsection (c) precludes retailers
from relying solely on the location of the personnel who receive, process or accept purchase
orders under a “master sales agreement” or any other sales agreement. See Hartney, 2013 IL
115130 ¶ 62.
Under subsection (d)(3), certain sales of tangible personal property over the Internet are
presumed to be subject to Use Tax. This presumption applies when a consumer places an order
“through a consumer-based retailer website available without limitation on the world wide web.”
As a corollary, sales made through web-based applications accessible only to established
members or customers generally would not meet the criteria set forth in subsection (d)(3). The
presumption established in that section, therefore, would not apply to such sales.

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I hope this information is helpful. If you require additional information, please visit our
website at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at
(217) 782-3336.

Sincerely,

Paul Berks
Deputy General Counsel
Illinois Department of Revenue
100 W. Randolph Street, 7th Floor
Chicago, IL 60601
(312) 814-4680
[email protected]

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