When an online retailer opens a large in-state fulfillment center and headquarters, is it required to collect that city's local (home-rule) Retailers' Occupation Tax on its Illinois internet sales, instead of just the state use tax?

Plain-English summary

An online home-furnishings retailer was about to open a large (1.2-million-square-foot) fulfillment center and headquarters office in an Illinois city and asked the Illinois Department of Revenue to confirm where its Illinois sales should be sourced for local Retailers' Occupation Tax ("ROT") purposes -- that is, which municipality's local sales tax rate applies, not whether Illinois tax is owed at all.

Before the facility opened, the company had no physical presence in Illinois and simply collected the state use tax (6.25%, no local component) on internet orders shipped to Illinois customers. Once the fulfillment center opened, the company would have physical presence and inventory in that city, which raised the question of whether it now had to collect the combined state and local home-rule ROT for that city instead.

The Department's sourcing rule (86 Ill. Adm. Code 270.115) looks at five "primary selling activities" -- essentially, where solicitation, order acceptance, invoicing, inventory, and headquarters functions occur -- and sources a sale to whichever single jurisdiction where three or more of those activities take place. The Department found that once the new facility opened: (1) sales fulfilled from the company's own inventory at that city, and (2) sales "drop-shipped" straight from out-of-state vendors to Illinois customers, both involved three or more primary selling activities occurring at the company's new headquarters city (notably, invoicing and headquarters location). As a result, both categories of sales must be sourced to that city, meaning the company must collect and remit the state ROT plus that city's (and the Regional Transportation Authority's) local home-rule tax rate on them, rather than treating them as out-of-state internet sales subject only to the state use tax.

What this means for you

E-commerce and online retailers opening Illinois facilities

If your company sets up a headquarters, distribution center, or fulfillment center in an Illinois city and performs functions there like invoicing, order processing, or holding your primary Illinois inventory, the Department can source your sales -- including sales it fulfills through drop-shipping from outside the state -- to that city for local ROT purposes. Physical presence plus enough "primary selling activities" concentrated in one place can flip your obligation from simple state use tax collection to combined state-and-local ROT collection.

Business owners and multi-state retailers

The ruling illustrates the practical dilemma remote sellers face when they add in-state inventory: at the instant of sale, a retailer often does not yet know which warehouse or vendor will fulfill a given order, making it hard to charge the "correct" tax rate up front. The Department resolved this by looking to where the company's headquarters and primary inventory are located (factors under 86 Ill. Adm. Code 270.115(c)(1)(D) and (E)), rather than requiring a location-by-location, order-by-order determination.

Accountants and tax professionals

The ruling applies the post-Hartney Fuel Oil sourcing framework in 86 Ill. Adm. Code 270.115, focusing on the five primary selling-activity factors in subsection (c)(1) and the three-or-more-activities test in subsection (c)(2). It also confirms that drop-shipped sales can be sourced to a company's headquarters location even when the shipped item never physically enters that jurisdiction, because invoicing and headquarters functions can independently satisfy the primary-activities test. The local 1.25% portion of the combined state Retailers'/Service Occupation Tax is then allocated to that municipality under 30 ILCS 105/6z-18 and 6z-20.

Common questions

Q: Does opening a warehouse in Illinois automatically require collecting local sales tax there?
A: Not automatically -- it depends on how many of the five "primary selling activities" under 86 Ill. Adm. Code 270.115(c)(1) occur at that location. Here, the Department found that the company's headquarters city satisfied at least three of the five factors (including invoicing and headquarters location, plus inventory location for warehouse-fulfilled sales), which triggered sourcing to that city.

Q: Does this ruling also cover sales drop-shipped by outside vendors, where the product never touches the company's own warehouse?
A: Yes. The Department found that drop-shipped sales sent directly from out-of-state vendors to Illinois customers were still sourced to the company's headquarters city, because the company was "engaged in the business of selling" there through activities like invoicing, even though the physical inventory for those particular sales was never in that city.

Q: Can another company rely on this ruling for its own facts?
A: No. This is a Private Letter Ruling, binding on the Department only as to the specific taxpayer that requested it, and only to the extent the facts it described are correct and complete. It expires 10 years from issuance under 2 Ill. Adm. Code 1200.110(e), or earlier if the law or facts change materially.

Q: What tax rate applies once sales are sourced to the city?
A: The company must collect and remit the state Retailers' Occupation Tax rate (6.25%) plus the home-rule municipal ROT rate for that city and the applicable Regional Transportation Authority (RTA) rate, rather than only the flat 6.25% state use tax it had been collecting as a remote seller with no Illinois presence.

Citations and references

Regulations and statutes:

• 86 Ill. Adm. Code 270.115 (local ROT sourcing rule; primary and secondary factors)
• 86 Ill. Adm. Code 270.115(c)(1) (five primary selling-activity factors)
• 86 Ill. Adm. Code 270.115(c)(2) (three-or-more-activities sourcing rule)
• 86 Ill. Adm. Code 270.115(d) (presumptions for dispersed/complex selling operations)
• 86 Ill. Adm. Code 131.155 (remote retailer collection based on delivery destination)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures and 10-year expiration)
• 30 ILCS 105/6z-18, 6z-20 (State Finance Act allocation of local ROT/SOT share)

Case law:

• Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130
• Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316 (1943)
• Svithiod Singing Club v. McKibbin, 381 Ill. 194 (1942)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2022.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2022/st22-0005-plr.pdf

Original ruling text

ST-22-0005 05/03/2022 LOCAL TAXES
The occupation of selling is comprised of the composite of many activities
extending from the preparation for, and the obtaining of, orders for goods to the
final consummation of the sale by the passing of title and payment of the
purchase price. Thus, establishing where "the taxable business of selling is being
carried on" requires a fact-specific inquiry into the composite of activities that
comprise the retailer’s business. 86 Ill. Adm. Code 270.115. (This is a PLR.)
May 3, 2022
NAME
ADDRESS
Dear NAME:
This letter is in response to your letter dated January 26, 2022, in which you
requested 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 who 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 www.tax.illinois.gov to review
regulations, letter rulings and other types of information relevant to your inquiry.
Review of your request disclosed that all the information described in paragraphs
1 through 8 of Section 1200.110 appears to be contained in your request. This Private
Letter Ruling will bind the Department only with respect to COMPANY, for the issue or
issues presented in this ruling, and is subject to the provisions of subsection (e) of
Section 1200.110 governing expiration of Private Letter Rulings. Issuance of this ruling
is conditioned upon the understanding that neither COMPANY, nor a related taxpayer is
currently under audit or involved in litigation concerning the issues that are the subject
of this ruling request. In your letter you have stated and made inquiry as follows:
On behalf of our client, COMPANY, (“COMPANY”), a subsidiary of
COMPANY (“PARENT”), we request the Illinois Department of Revenue
to issue a Private Letter Ruling with respect to the factual situation
discussed below. Our request is pursuant to 2 Ill. Adm. Code 1200.110.
We request a ruling for purposes of determining the correct “sourcing” for
local retailers’ occupation tax (“ROT”) on sales of products by the
COMPANY and whether such sales are subject to the retailers’
occupation tax of the CITY (“CITY”), where the COMPANY is
headquartered, regardless of the location in the state where the products

COMPANY/NAME
Page 2
May 3, 2022
are delivered or used. We also include the original of a letter submitted by
the Mayor of the CITY (and a redacted copy of the letter to remove
confidential information) in support of this request.
GENERAL INFORMATION
1.
Enclosed please find original form IL 2848, Powers of Attorney,
authorizing ATTORNEY1 and ATTORNEY2 (“ATTORNEYS”) to represent
each of COMPANY and PARENT before the Illinois Department of
Revenue (the “Department”).

2. This Private Letter Ruling (“PLR”) is not requested with regard to
   hypothetical or alternative proposed transactions. This PLR is requested
   to determine the ROT consequences of the proposed business practices
   and activities of the COMPANY.
   3.
   The COMPANY is not currently engaged in litigation with the
   Department in regard to this or any other tax matter.
3. The COMPANY is not currently under audit by the Department in
   regard to this or any other tax matter.
4. The Department has not previously ruled regarding this matter for the
   COMPANY. In addition, the COMPANY has not submitted the same or
   similar issue to the Department.
5. The COMPANY requests that certain information be redacted from the
   PLR prior to dissemination to others. The COMPANY requests that its
   name, address, and location of its office, the name of its parent company,
   the name of its representatives, all references to Exhibits, and the Exhibits
   themselves be redacted.
6. The COMPANY knows of no authority contrary to the authorities
   referred to and cited below.
   STATEMENT OF MATERIAL FACTS
   COMPANY is an Illinois limited liability company, with its principal place of
   business in the CITY. It is a wholly-owned subsidiary of PARENT.
   COMPANY was formed to operate the fulfillment center and office located
   in the CITY and to accept and fulfull [sic] all orders for shipment to Illinois
   destinations. The COMPANY will be managed by a Board of Directors or
   Managers.

COMPANY/NAME
Page 3
May 3, 2022
COMPANY is leasing on a long term basis a 1.2 million square foot facility
being constructed in the CITY to the specifications of the COMPANY. The
facility will contain a fulfillment center/distribution center as well as an
office for work by employees of the COMPANY, including one of the
COMPANY’s Directors. The Director will maintain his office at the
COMPANY’S headquarters in the CITY. The COMPANY plans to open the
facility in the CITY when construction is completed, which is anticipated to
occur in MONTH YEAR. The COMPANY will have 200 employees during
the first year of operation. It is anticipated that the number of jobs will
increase as sales by the COMPANY increase, and fulfillment from the
facility in the City increases accordingly.
The long term lease was entered into, and significant construction costs
have been incurred by the COMPANY and PARENT, in order to permit the
COMPANY to reduce the time for fulfilling its Illinois customers’ orders by
providing storage of a large volume of inventory at the facility in the CITY.
It is estimated that the fulfillment center will operate on a 24 hour, 7 day a
week, basis and fulfill virtually every SKU (and product option) for tangible
personal property available for sale by the COMPANY; the number of
SKUs and product options of tangible personal property available for sale
by the COMPANY will be greater than ten million. It is anticipated that the
distribution center will fulfill almost $$$ million of average annual sales to
Illinois customers during the first ten years. The estimated construction
costs and expenses for the facility, racks, furniture and fixtures is over $$$
million.
Like PARENT, which is also an online retailer, COMPANY will be selling
home furnishings to consumers and businesses. The COMPANY will be
maintaining a substantial inventory of products at the distribution center in
the CITY to serve its Illinois customers. The principal location for fulfilling
the COMPANY’s orders to Illinois destinations will be the COMPANY’s
facilities in the CITY.
It is anticipated that approximately 95% of the COMPANY’s orders will be
taken online. The remaining orders will be received on the phone by
customer service representatives. Over one-third to one-half of the
COMPANY’s orders will likely be multiple product orders, where a
purchaser will order more than one product or SKU to be shipped to the
same destination. While the primary location for fulfilling the COMPANY’s
orders will be from the COMPANY’s fulfillment center in the CITY, a
number of the orders likely will be fulfilled by the COMPANY’s vendors.
These so called drop ship orders can be fulfilled from anywhere in the
United States and are shipped directly to the purchaser.

COMPANY/NAME
Page 4
May 3, 2022
Online ordering from the COMPANY will be done through the PARENT’s
website. A person who shops on the website will place products to purchase in
his/her shopping cart, which includes the product and the price of the product.
When ready for checkout, the customer will be taken to the checkout page,
which contains in effect an order form from the COMPANY, listing each product
to be purchased, the price of the product, the tax to be charged (which is
populated by a server located in the cloud based on the customer’s delivery
address), the total amount to be paid by the purchaser, the identity of the seller
as the COMPANY in the case of Illinois orders and the payment method. The
customer then submits an order by clicking on the button to purchase, which
purchase order is based on the total amount specified in the checkout page.
That submission gives the COMPANY the authority to charge the customer’s
credit card for the total amount approved by the purchaser, which includes the
sales tax. The COMPANY will then approve the order through a server located
in the cloud. After approval, the COMPANY will send by email from its office in
the CITY an invoice to the customer confirming the sale. The entire transaction,
from submission of an order to approval of the order, is almost instantaneous,
taking less than 25 milliseconds. We are submitting with this request the
planned confirmatory invoice from the COMPANY.
RULING REQUESTED
The applicable Illinois regulation, found in 86 Ill. Adm. Code Section
270.115 (the “Rule”), sets forth the ground rules for sourcing of the
retailers’ occupation tax. The COMPANY requests a ruling that, once the
fulfillment center in the City is opened, all of its sales in Illinois are sourced
to the CITY for purposes of the retailers’ occupation tax, because the
COMPANY will be engaged in selling activities in the CITY with respect to
its sales in Illinois. The authorities supporting this requested ruling and the
authorities in opposition are described below. But first some background is
in order.
THE DILEMMA FOR THE COMPANY UNDER THE ILLINOIS TAX
STRUCTURE
A remote retailer—i.e. a retailer that does not have a physical presence in
Illinois—is required to collect the retailers’ occupation tax on sales to
Illinois, which tax consists of both the state tax at the rate of 6.25% on the
retail sales price and the local retailers’ occupation tax of the destination of
the shipment; i.e. the location to which the goods are shipped. See
https://www2.illinois.gov/rev/research/taxinformation/sales/Pages/Frequen
tly-Asked-Questions-(FAQs)-for-Marketplace-Facilitators,-MarketplaceSellers,-and-Remote-Retailers.aspx. See 86 Ill. Adm. Code 131.155. The
local rates vary from .5% to about 5% in Chicago. However, per the
statute and applicable regulations, a retailer with a physical presence in

COMPANY/NAME
Page 5
May 3, 2022
Illinois is required to collect only the use tax, which is the state rate of
6.25% of the price, and does not include any local tax, unless the retailer
is subject to the home rule municipal retailers’ occupation tax of a location.
Under the applicable law, a retailer is subject to a municipality’s retailers’
occupation tax if it is engaged in the retail business of selling in the
municipality. And if the sale is fulfilled from inventory in Illinois, the retailer
is deemed to be engaged in the retail business of selling and thus subject
to the retailers’ occupation tax of the municipality where the inventory is
located.
See
https://www2.illinois.gov/rev/research/taxinformation/sales/Pages/Frequen
tly-Asked-Questions-(FAQs)-for-Marketplace-Facilitators,-MarketplaceSellers,-and-Remote-Retailers.aspx
In approximately MONTH YEAR the COMPANY will be opening a large
distribution facility in the CITY, where it will be maintaining a substantial
inventory of products to serve its Illinois customers. Thus, it will have a
physical presence in Illinois and must determine whether to collect (and
therefore charge its customers) only the state use tax at the rate of 6.25%
or to collect and remit the retailers’ occupation tax at the state rate of
6.25% and the CITY and RTA combined tax rate, because of its inventory
located in the CITY and the other selling activities it undertakes in the
CITY.
The Rule sets forth certain principles, including “presumptions,” for
determination of whether a retailer is subject to a municipality’s local home
rule tax. The dilemma posed by the Rule for the COMPANY is that
application of these presumptions to the COMPANY will mean that it is a
“roll of the dice” whether the COMPANY will be charging its customers at
the correct tax rate. If it charges only the state use tax, it will be liable for
the home rule tax if the CITY and RTA tax was properly due; i.e. if the sale
is fulfilled from products in the CITY. If it bills its customers both the state
and the CITY/RTA tax, but only the state tax is due because the products
never “touched” the CITY, then it will have overcharged its customers.
PRESUMPTIONS UNDER THE RULE
Subsection (d) of the Rule lists two presumptions that may have an
inconsistent result as applied to the way the COMPANY will be doing
business once the facility in the CITY is opened. Subsection (d)(2)
provides that if a retailer’s selling activities take place in jurisdictions
outside the State but the tangible property sold to the customer is in
inventory at a location in Illinois at the time of sale, the retailer is deemed
to have been engaged in selling activities at the location of the inventory
at the time of sale if the location is in Illinois and therefore subject to the
retailers’ occupation tax of the municipality where the inventory is located.

COMPANY/NAME
Page 6
May 3, 2022
Recent publications of the Department of Revenue underscore that the
determination of whether the retailers’ occupation tax applies added an
additional modification to Subsection (d)(2) pointing to the location of the
inventory at the time of delivery, which, of course, will occur after the sale
is made.
Subsection (d)(3) of the Rule sets forth the presumption that all internet
sales are sourced outside of Illinois and therefore subject only to the use
tax, “unless there is clear and convincing evidence the predominant and
most important selling activities take place in this State.” Under
Subsection (d)(3)(A) of the Rule, “clear and convincing evidence includes
(but is not limited to) the fact that the inventory is in the possession of the
retailer in the jurisdiction at the time of sale,” requiring the retailer to collect
and remit that jurisdiction’s home rule tax.
The applications of these presumptions to the COMPANY produces the socalled Hobbesian choice for the COMPANY. As described above, within .25
milliseconds of a customer placing an order, the COMPANY informs the
customer of the tax on the products listed on the order form and accepts the
order. At that time, it does not know the location of the inventory of the
product or products used to fulfill the order. Currently, neither the PARENT
nor the COMPANY maintains inventory at Illinois locations, so the decision is
simple and correct; charge the Illinois use tax at the rate of 6.25%.
But that will change once the CITY facility is opened. The COMPANY will
maintain a substantial inventory at its facility in the CITY, so that at the time of
sale—the order is placed and the COMPANY accepts the order—there is a
likelihood that the products for the order may be fulfilled from the facility in the
CITY. But there is no certainty that is the case. That can only be determined
after-the-fact. So, if the COMPANY applies the presumption of Subsection
(d)(3) and charges the CITY tax, but the product is fulfilled from a location
outside of the CITY, then it has overcharged the customer. Yet if it charges the
customer only the state tax rate of 6.25%, the Illinois Department of Revenue
could assert that the COMPANY is liable for the local home rule rate if it turns
out the COMPANY did fulfill the order from inventory in the CITY.
Nor can the COMPANY charge the customer’s credit card to the extent it
undercharged the tax on the order. That would be inconsistent with the
agreement with the customer in the first place, not to mention a potential
source of customer dissatisfaction.
An additional source of errors and complications occurs for multi-product
orders, which will comprise up to 50% of the orders. In that case, one product
may be fulfilled from inventory in the CITY while the second or third products
may be shipped from a location anywhere in the United States. Application of

COMPANY/NAME
Page 7
May 3, 2022
the presumptions under Subsection (d)(2) and (d)(3) would require different
tax rates on the same order, a substantial source of confusion for the
customers, the COMPANY and the Department. Similar complications arise
for products that are not in stock but are “backordered,” meaning that a sale
takes place but the location for fulfillment may not be determined until long
after the sale.
RECONCILIATION OF THE DILEMMA POSED BY THE
INCONSISTENT PRESUMPTIONS
The foundation for the presumptions in the Rule provides a sound basis for
reconciling this anomalous situation. Subsection (d)(1) of the Rule provides as
follows:
“For certain classes of retailers with unique, complicated or
widely dispersed selling activities, determining appropriate
tax situs in every situation presents substantial
administrative difficulties for both retailers and tax
enforcement personnel. Subsections (d)(2) through (d)(5)
provide administrative "short cuts" that balance the
administrative difficulties presented by certain selling
operations against the need for accurate tax
assessment.” (emphasis added)
The reason for the “short cut” of the presumptions in Subsections (d)(2) and
(d)(3) is to provide for an accurate tax assessment in light of administrative
difficulties. Use of these presumptions will produce an inaccurate result for
many orders, regardless of whether the COMPANY charges the combined
state and the CITY tax rates based on the presumption in Subsection (d)(2), or
the use tax at the state rate based on the presumption in Subsection (d)(3).
And it is not only administratively difficult, but impossible for the COMPANY to
determine the proper tax rate to charge its customers at the time of sale.
The way to balance these two countervailing considerations is an interpretation of
the language of Subsection (d)(3), providing an exception to sourcing outside the
state when “there is clear and convincing evidence that the predominant and
most important selling activities take place in this State,” in light of the statute
adopting the Home Rule Municipal Retailers’ Occupation Tax. As stated in the
Rule, ‘retailers will incur local retailers’ occupation tax in a jurisdiction in Illinois if
they ‘enjoyed the greater part of governmental [services and] protection’ in that
jurisdiction. See Subsection (b)(4) of the Rule, quoting from Harney Fuel Oil Co.
v. Hamer, 2013 IL 115130, paragraph 34. This interpretation of “the Act links the
retailer’s tax liability to where it principally enjoys the benefits of government
services.” 86 Ill. Adm. Code Section 270.115(b)(4), citing Svithiod Club v.
McKibbin, 38 Ill. 194, 199 (19420

COMPANY/NAME
Page 8
May 3, 2022
ILLINOIS, AND THE CITY IN PARTICULAR, PROVIDE
THE LION’S SHARE OF GOVERNMENTAL SERVICES TO THE
COMPANY
The Company, organized in Illinois to conduct sales to Illinois residents
principally from inventory located in the CITY, enjoys, by far, its greater part of
(or indeed only) government services from the CITY. Police and fire protection
provided by the CITY along with maintenance of the road and other necessary
elements of the infrastructure are some of the many benefits that the
COMPANY will enjoy in the CITY. The letter from the CITY in support of this
request describes those services provided by the CITY.
AT LEAST THREE OF THE FIVE
“PRIMARY SELLING ACTIVITIES” WILL TAKE PLACE IN THE CITY.
Subsection (c) of the Rule sets forth the composite of selling activities test for
retailers conducting activities in multiple jurisdictions based on five “primary”
factors described in Subsections (1)(A)-(E). We will skip Factors (A)-(C) for the
time being and focus on Factors (D) and (E), and then return to (A)-(C).
Review of the COMPANY’s activities under Factors (D) and (E) indicate that
the primary location for selling activities is the CITY. Factor (D) looks to where
the inventory is located at the time of its sale or delivery. That certainly will be
the CITY in many cases. The COMPANY distribution center in the CITY will be
the only location maintained by the COMPANY for housing inventory for
delivery of products to its Illinois customers. While the COMPANY will use
products stored at locations that its affiliates and third parties maintain, its
distribution facility in the CITY will be the principal place for fulfilling customer
orders. Any other facility will account for only a small percent of the Illinois
orders once the CITY distribution center is opened.
Factor (E) looks to the headquarters of the retailer. The COMPANY is
headquartered in the CITY. When the facility opens in YEAR, the COMPANY
will employ over 200 persons. The facility will be the location where daily
decisions regarding fulfillment of orders from inventory located in the CITY are
made. In addition, a member of the Board of Directors of the COMPANY is
assigned to the headquarters office of the COMPANY in the CITY.
With regard to Factors (A)-(B), we note that, based on the information from the
PARENT, over 95% of orders for the COMPANY’S products will be received
and accepted by servers located in the cloud and for which payment by credit
card is tendered and received by servers also located in the cloud. Thus, the
COMPANY’s activities in the categories of Factor (A) (location of sales
personnel exercising discretion and authority to solicit customers and to bind

COMPANY/NAME
Page 9
May 3, 2022
the seller to the sale) and Factor (B) (location where the seller takes action that
binds it to the sale, including acceptance of the order) all happen in cyberspace,
except for those orders handled by customer service. In a real sense with
regard to the vast majority of the COMPANY’s orders the activities of solicitation
of the orders and acceptance of the order happen everywhere and nowhere. All
of such activities take place on servers located in the cloud, so it is impossible
to say in which state let alone municipality the activity takes place.
Category (C) of the Rule refers to the location where payment is received or
where invoices are issued. Payment will be received by the COMPANY’s
acceptance of credit cards, so that payment is received at servers located in
cyberspace. But the COMPANY will be transmitting the invoice confirming the
products ordered and the total price from its headquarters in the CITY. Thus,
Factor (C) points to the CITY as the sourcing location.1
Subsection (c)(2) of the Rule provides that if a retailer engages in three or more
primary selling activities outside Illinois, the retailer is required to collect the use
tax and not the retailers’ occupation tax. For most if not all of its orders, the
retailer, the COMPANY, will not be engaged in more than two activities
described in Subsections (c)(1)(A)-(E) outside the State of Illinois. The CITY is
the only location in Illinois where three or more activities described in
Subsections (A)-(E) occur.
CONCLUSION
In light of the underlying basis for the Rule, and the circumstances by which the
COMPANY will be selling products to its Illinois customers, it is respectfully
submitted that all sales of products by the COMPANY to its Illinois customers
should be sourced to the CITY, so that the COMPANY will be obligated to
collect and remit the retailers’ occupation tax of the state and the home rule rate
of the CITY and the RTA.
In a follow-up email, you stated the following:
[T]his email confirms that the first two factors under 86 Ill. Adm. Code
270.115(c)(1)(a) and (b) are performed by PARENT on the web. In a sense, the
activities are performed anywhere and everywhere by PARENT, because they
are done on servers maintained in the cloud.
As to the first activity, Subsection (a), there are no sales personnel but the
solicitation is done by PARENT through the website, which is hosted in the
cloud. As to the second, the location where offers are made to the customers, is
also done on the cloud-based server by PARENT.

COMPANY/NAME
Page 10
June 27, 2022
Once the customer submits his/her credit card, the order is sent to COMPANY,
which in turn invoices the customer per the invoice I attached to the Letter Ruling
Request. The invoice provides the details regarding the order. That is per factor
3, Subsection (c), under Rule 270.115(c)(1).
DEPARTMENT’S RESPONSE:
In response to the Illinois Supreme Court decision in Hartney Fuel Oil Co. v.
Hamer, 2013 IL 115130, 376 Ill. Dec. 294 (2013), the Illinois Department of Revenue
revised the administrative rules that govern the sourcing of local retailers’ occupation
taxes. See, for example, 86 Ill. Adm. Code 270.115. This rule provides that:
The occupation of selling is comprised of "the composite of many activities
extending from the preparation for, and the obtaining of, orders for goods
to the final consummation of the sale by the passing of title and payment of
the purchase price". Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316, 321 (1943).
Thus, establishing where "the taxable business of selling is being carried
on" requires a fact-specific inquiry into the composite of activities that
comprise the retailer’s business. Hartney Fuel Oil Co. v. Hamer, 2013 IL
115130, paragraph 32 (citing Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316,
321-22 (1943). 86 Ill. Adm. Code 270.115(b)(2).
Based on a review of the activities described in your letter, the supplemental
information provided to the Department, and an analysis of the Department’s
regulations found at 86 Ill. Adm. Code 270.115, the Department finds that, f or periods
after COMPANY opens its new headquarters in CITY, with respect to sales of items in
COMPANY’s inventory in CITY, COMPANY is engaged in three or more primary selling
activities in CITY, Illinois. Therefore, these sales should be sourced to CITY, Illinois.
See 86 Ill. Adm. Code 270.115(c)(2).
Further, based on a review of the activities described in your letter, the
supplemental information provided to the Department, and an analysis of the
Department’s administrative rules found at 86 Ill. Adm. Code 270.115, the Department
finds that, f or periods after COMPANY opens its new headquarters in CITY, with
respect to sales in which items are drop shipped directly by an out-of-state vendor to
COMPANY’s customers, COMPANY is “engaged in the business of selling” (within the
meaning of 86 Ill. Admin. Code 270.115(b)(1)) in CITY. Therefore, these sales should
be sourced to CITY, Illinois. See 86 Ill. Adm. Code 270.115. This conclusion is reached
based on a number of factors and the overall complexity of COMPANY’s selling
activities. The fact pattern presented here is not specifically addressed in Department
rules. Therefore, we must look at the guidelines established in the rule for sourcing
sales. The rule points out that:

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[A] seller incurs Home Rule Municipal Retailers' Occupation Tax if its
predominant and most important selling activities take place in the
municipality. Isolated or limited business activities within a jurisdiction do
not constitute engaging in the business of selling in that jurisdiction when
other more significant selling activities occur outside the jurisdiction, and
the business predominantly takes advantage of government services
provided by other jurisdictions. Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316,
322-23 (1943); Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130,
paragraphs 30 through 35. 86 Ill. Adm. Code 270.115(b)(5).
In addition, the rule states that:
It is the intent of the Home Rule Municipal Retailers' Occupation Tax that
retailers will incur local retailers' occupation tax in a jurisdiction in Illinois if
they "enjoyed the greater part of governmental [services and] protection"
in that jurisdiction. Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130,
paragraph 34 (quoting Svithiod Singing Club v. McKibbin, 381 Ill. 194, 197
(1942)). By allowing the municipality to impose tax on retailers who
conduct business in the municipality, the Home Rule Municipal Retailers'
Occupation Tax Act links the retailer's tax liability to where it principally
enjoys the benefits of government services. Svithiod Club v. McKibbin, 38
Ill. 194, 199 (1942). 86 Ill. Adm. Code 270.115(b)(4).
When selling activities are so varied, "it is…not possible to prescribe by definition
which of many activities must take place in [a jurisdiction] to constitute it an occupation
conducted in [that jurisdiction]….". Ex-Cell-O-Corp. v. McKibbin, 383 Ill. 316, 321-22
(1943); see also Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130, paragraph 36. See 86
Ill. Adm. Code 270.115(b)(3). The Department "may look through the form of a
putatively [multijurisdictional] transaction to its substance" to determine where "enough
of the business of selling took place" and, thus, where the seller is subject to local
retailers' occupation tax. Marshall & Huschart Mach. Co. v. Dep't of Revenue, 18 Ill. 2d
496, 501 (1960); Fed. Bryant Mach. Co. v. Dep't of Revenue, 41 Ill. 2d 64, 67 (1968);
Int'l-Stanley Corp. v. Dep't of Revenue, 40 Ill. App. 3d 397, 406 (1st Dist. 1976); Hartney
Fuel Oil Co. v. Hamer, 2013 IL 115130, paragraph 31. See 86 Ill. Adm. Code
270.115(b)(6).
The Department’s sourcing rule provides five primary selling activities to consider
in determining the location of a sale. See 86 Ill. Adm. Code 270.115(c)(1). Your letter
and follow-up email points out that COMPANY does not engage in solicitation of sales
(subsection (c)(1)(A)) or the acceptance of purchase orders, submission of offers, or
other actions that bind the seller to a sale (subsection (c)(1)(B)) as those activities are
done by COMPANY, a separate parent company of COMPANY. As such, those two
primary selling activities are inapplicable to determining where these sales are sourced.
Two primary selling activities that are conducted by COMPANY in CITY, Illinois include
the preparation of invoices (subsection (c)(1)(C)) and the location of COMPANY’s

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headquarters (subsection (c)(1)(E)). The Department’s rule provides that a retailer
engaging in three or more primary selling activities in one location in the State or
outside of the State for a particular sale shall remit either the retailers’ occupation tax
imposed at that in-State location or Use Tax for the out-of-State location, respectively.
See 86 Ill. Adm. Code 270.115(c)(2). Only two primary selling activities are conducted
by COMPANY in CITY, Illinois in regard to these sales.
The location of inventory at the time of its sale or delivery for sales fulfilled by thirdparty vendors could be anywhere in the United States. Third-party vendor facilities will likely
account for a number of Illinois orders once the CITY distribution center is opened, and, from
order to order, the same item may be shipped from either CITY or a drop ship location,
depending on availability. The various possible locations of third-party inventory
present the same type of “unique, complicated or widely dispersed selling activities” that
make “determining appropriate tax situs in every situation” difficult “for both retailers and
tax enforcement personnel.” See 86 Ill. Adm. Code 270.115(d)(1). The Department has
provided administrative “short cuts” to “balance the administrative difficulties presented
by certain selling operations against the need for accurate tax assessment.” See id.
While an administrative short cut specifically addressing this fact pattern has not yet
been provided in the Department’s regulations, the administrative difficulties presented
by these selling activities and the need for accurate tax assessment must also be
balanced.
COMPANY’s distribution center in CITY will be the only location maintained by
COMPANY for housing inventory for delivery of products to its Illinois customers. While
COMPANY will use products stored at locations that its affiliates and third parties maintain, its
distribution facility in CITY will be the principal place for fulfilling customer orders. In addition,
CITY is where COMPANT’s primary inventory for the Illinois market is maintained
(subsection (c)(1)(D)). These facts, combined with the applicable primary selling
activities, persuade us that, rather than out of state (where sales could be fulfilled from
inventory drop shipped directly to COMPANY’s customers on limited occasions),
COMPANY principally enjoys the benefits of government services in CITY with respect
to these sales. Therefore, these sales should be sourced to CITY, Illinois.
If a person is determined to be engaged in the business of selling in a given
location under the rules cited above, then the local portion of the State Retailers’
Occupation Tax and Service Occupation Tax (i.e. the 1.25% portion of the 6.25% tax) is
allocated under Sections 6z-18 and 6z-20 of the State Finance Act (30 ILCS 105/6z-18
and 6z-20) to the same location as determined under the rules cited above. With
respect to COMPANY’s sales discussed here, that location is CITY.
The factual representations upon which this ruling is based are subject to review
by the Department during the course of any audit, investigation, or hearing and this
ruling shall bind the Department only if the factual representations recited in this ruling
are correct and complete. This Private Letter Ruling is revoked and will cease to bind
the Department 10 years after the date of this letter under the provisions of 2 Ill. Adm.

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Code 1200.110(e) or earlier if there is a pertinent change in statutory law, case law,
rules or in the factual representations recited in this ruling.
I hope this information is helpful. If you have further questions concerning this
Private Letter Ruling, you may contact me at (217) 782-2844. If you have further
questions related to the Illinois sales tax laws, please visit our website at
www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217)
782-3336.
Very truly yours,
Samuel J. Moore
Private Letter Ruling Committee Chairman
SJM:AKO:ako