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Clearchoice Escapes Nearly $500K Illinois Retailer Occupation Tax

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Recently in Chicago, the Cook County Circuit Court ruled that the Illinois Department of Revenue (the “Department”) overreached when it sought to impose Retailer’s Occupation Tax (“ROT,” the state’s sales tax on retail transactions) on receipts from sales of cell phones and wireless calling plans sold by Clearchoice Mobility, Inc. (“Clearchoice”).
(CLEARCHOICE MOBILITY, INC., f/k/a CLEARCHOICE WIRELESS, INC., Plaintiff, v. BRIAN HAMER, in his capacity as Director of the Illinois Department of Revenue; ALEXI GIANOULIAS, in his capacity as Treasurer of Illinois; and THE ILLINOIS DEPARTMENT OF REVENUE, Defendants, IN THE CIRCUIT COURT OF COOK COUNTY ILLINOIS COUNTY DEPARTMENT - LAW DIVISION TAX AND MISCELLANEOUS REMEDIES SECTION; Case No. 2010 L 051694, Judge Eileen O’Neill Burke; quotations are from the Memorandum Decision and Order.)

In June 2009, the Department audited Clearchoice for July 2005 through September
2007, during which time Clearchoice had two primary sources of income: sales to the public of cell phones and accessories, and commissions from AT&T (d/b/a Southwestern Bell Mobile Systems) for selling wireless telephone service plans under an Agency Commission Agreement between the two telco’s (the “Agreement”). The Department charged that Clearchoice had underpaid the ROT due by failing to include revenue from the commissions in its computation of taxable gross receipts, and it issued Clearchoice a Notice of Tax Liability for a hefty $432,908.42 (which the Department now calls “the Contested Amounts”). The Department’s Informal Conference Board reviewed the matter and issued a non-dispositive Action Decision on August 18, 2010, following which Clearchoice paid the assessment in full, as demanded, then filed the Complaint that brought the case before the Circuit Court.

The “Arguments of the Parties” boiled down to Clearchoice’s assertion that the Department had mischaracterized the commissions Clearchoice received from AT&T as “rebate or reimbursement for the potential loss that Clearchoice would incur for the discounted phones” it sold as a package with the service plans. Clearchoice claimed that the Department’s “basis for this re-attribution is the fact that the sale of the two products is made at the same time,” and stated that “there is no statutory language in the ROT Act authorizing such reattribution.” Those receipts, Clearchoice insisted, “were solely compensation for securing contracts with AT&T for wireless services” and were not “rebates” at all, nor intended to make Clearchoice whole for any perceived shortfall it might incur on the sales of the handsets.

“The Department argues that commissions are ‘gross receipts’ and taxable under the
ROT. In order to establish the amount of the ROT, the Department contends that the sale of cellular phones at deep discounts in connection with the sale of telephone service must include both: 1) the amount paid by the customer for the cell phone; and 2) any rebate the cell phone retailer receives from the cellular phone service provider to offset the loss the cellular phone retailer would suffer due to selling cell phones for less than cost”; that “the Ilinois General Assembly intended all compensation received by a seller, including payments from third parties, to be included”; and that “the Contested Amounts are ‘gross receipts’ ... because they are inextricably linked to the cell phones sales.”

Judge Burke cut through the persiflage and rightly placed reliance upon the Agreement
as controlling both the intent and the subsequent actions of the parties: “[T]he Agency Commission Agreement clearly provides the Contested Amounts paid to Clearchoice by AT&T are for the activation of cell phone service plans and not the supplementation of the cell phone purchase” and further observed that it “provides compensation for activation of cell phone plans based upon the type of post-paid cell phone service plan ... Therefore, the Agency Commission Agreement clearly articulates the Contested Amounts paid to Clearchoice by AT&T pursuant to the agreement are for activation of various cell phone service plans and not compensation for subscriber purchases of cell phones.”

The Court additionally observed – as a sidebar, if you will – that, had the non-hardware portion of the sales been of prepaid rather than of post-paid service, such transactions would have been considered transfers of tangible personal property and been deemed susceptible to the ROT – a very different outcome, indeed!

About the Author: Marc Palmer Kram is a Senior Tax Analyst at Wolters Kluwer Tax & Accounting US, where he performs quality control and troubleshooting on the vast taxability database supporting its best-in-class CCH tax-compliance software, and then sometimes writes about what he finds. Learn more about him by visiting his author bio page. Learn more about Wolters Kluwer at and

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1 Responses to Clearchoice Escapes Nearly $500K Illinois Retailer Occupation Tax

  • Posted by Joe on June 24, 2013 1:30am:

    Great post! ;)


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