The apparent purpose of this provision is to impose a time schedule within which the Department might be able either to release the entire amount held in escrow or at least reduce the amount by giving effect to the filing of returns and payment of tax obligations that seller may have accomplished in the 60 days period.
In a recent actual case, the seller had filed all tax returns it was required to file and had paid in full all of its tax obligations by the sixtieth day after the stop order initially issued. Under those facts, the Department should have issued a "60 days notice" releasing the bulk sale escrow in its entirety. This was not done. Instead, the Department orally insisted that it was not required to issue a "60 days notice" and could require the continuance of the full escrow based solely on its initial stop order.
The Department's position that it need not give the "60 days notice" results in a violation of a statutory requirement. The statute specifies:
[P]urchaser ... is relieved of any duty to continue to withhold from the purchase price and of any liability [for seller's tax obligations] ... if the Department fails to notify the purchaser ... in the manner provided herein ... within 60 days after issuance of the initial order to withhold ....19
While the statutory language appears to be self executing, as a practical matter no buyer or escrow agent is likely to release an escrow to seller simply as the result of passage of time without instructions from the Department, in view of the warning given in the standard text used in stop orders and the total lack of incentive for a buyer or escrow agent to take a chance. Consequently, the Department defeats the express requirement of the statute simply by ignoring it, causing a bulk sale escrow to continue in full beyond the 60 days, without reason or time limit.
Improper levy on escrowed funds
The third problem with the Department's administration of the bulk sales provisions is by far the most serious. This involves not a fault of omission--a failure to do what it should as is the case in the preceding two problems-- but one of commission. This third problem involves an active violation of the statutory tax assessment process which the Department is entrusted to understand and carry out.
After the actual bulk sale mentioned above, the Department three times, in relatively quick succession, ordered the buyer to pay to the Department part of the escrowed funds withheld from the purchase price under an earlier bulk sale stop order. In each case, the amount ordered to be paid over was claimed by the Department to be a tax liability due on account of the seller's failure to file a tax return under the state's Income Tax Act. Each of the three times the Department was in error in its factual premise that a required tax return had not been filed.20 While those factual mistakes by the Department are evidence of a defective administration, they are not the most serious part of the problem.
Far more serious is the fact that in each of the three levies on the escrowed funds, the Department, without any notice to the seller-taxpayer that there was a claimed failure to file a return or that any amount was due from the seller-taxpayer by reason of a claimed failure to file, unilaterally and in secret determined that an amount of tax was due and payable on account of an allegedly unfiled return. The Department went on to estimate the amount of tax due because of the supposedly unfiled return and then, after secretly finding that amount to be unpaid, the Department demanded that the buyer pay the so-called unpaid tax from the escrowed funds.
Each of the letters demanding payment from the escrow cited the statutory bulk sales provisions as authority for the Department's right to demand payment from the escrow. It is true that the statutory bulk sales provisions require a buyer to pay to the Department escrowed funds withheld from a seller pursuant to a stop order, when ordered by the Department, but only "[i]f the seller ... has failed to pay the tax, penalty, and interest due from him ...."21 However, there is nothing in the bulk sales provisions that establishes how or when any tax, penalty or interest becomes due and payable by a seller-taxpayer. That subject is left entirely to long established and clearly expressed provisions found elsewhere in the Illinois tax statutes.
Under the Illinois Income Tax Act, tax becomes payable only by a well defined assessment procedure.22 If the seller-taxpayer had in fact failed to file a return required by the Income Tax Act, the Department could estimate the amount due under the unfiled return, but would have to "issue a notice of deficiency to the taxpayer" setting forth "the amount of tax and penalties proposed to be assessed."23 (Emphasis added.) The time when the proposed assessment would become final and payable then would depend upon whether the seller-taxpayer files a "protest."24 Further, when an amount is deemed assessed under the statutory provisions, the Department must give notice to the party liable for "any unpaid portion of such assessment."25 When notices of liability are sent to a taxpayer, the Illinois Taxpayer's Bill of Rights Act requires certain information to be included, such as "an explanation of tax liabilities and penalties."26
In short, before any tax could be due on account of an unfiled return, the seller-taxpayer would have to be notified of a proposed assessment and allowed an opportunity to protest, and in the event the assessment became final and payable, another notice would have to be given to the seller-taxpayer by the Department. All notices would have to comply with the Taxpayer's Bill of Rights Act. None of this was done by the Department for any of its three demands.
What the Department did in the actual case here discussed was to create for itself a new kind of assessment power for which there is no statutory basis. Moreover, such claimed power in fact violates both the well established statutory assessment process and the Illinois Taxpayer's Bill of Rights Act.
Conclusion
The bulk sales provisions are an obscure, badly written part of the Illinois tax statutes. The Department's administration of the provisions adds to the problem by ignoring, in two instances, specific statutory requirements and, in a third instance, by violating long established and clearly written statutory requirements.
It might be that the bulk sales provisions are just a puddle in the backwater of the overall scheme of Illinois taxation, but that does not diminish their importance for those to whom the provisions apply. This is a very muddy puddle which should be cleaned up or eliminated.
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1. 35 ILCS 120/5j.
2. 35 ILCS 5/902(d) (hereinafter "BSP").
3. E.g., incorporated into the Use Tax Act, the Service Use Tax Act, the Service Occupation Tax Act and the Cigarette Use Tax Act by 35 ILCS 105/12, 110/12, 115/12 and 135/14, respectively.
4. BSP, first paragraph.
5. U.C.C. section 6-102 (2001) with accompanying Official Comments.
6. BSP, first paragraph.
7. Id.
8. Id.
9. The term "transferee" is defined elsewhere in the Illinois Income Tax Act to include "donee, heir, legatee and distributee ..." 35 ILCS 5/1405.
10. Other provisions in the Income Tax Act seem to indicate that a transferee in a transfer not for value may be liable for a transferor's tax obligations even if the transferee gives timely notice of the transfer under the bulk sales provisions. 35 ILCS 5/905/m and 5/1405.
11. For the sake of brevity, references to "transfers" are subsumed in references herein to "sales."
12. BSP, first paragraph.
13. Id.
14. Id.
15. BSP, second paragraph.
16.BSP, first paragraph.
17. BSP, second paragraph.
18. Id.
19. BSP, third paragraph. Contrary to its recent position on this subject, the Department in its Informational Bulletin, FY 90-14, January 1990, acknowledged the mandatory nature of the "60 days notice" requirement.
20. Even after orally acknowledging to seller-taxpayer that a particular demand was issued in error, the Department allowed the erroneous demand to remain outstanding. The Department did not notify the buyer of the error or rescind the erroneous demand which it had issued to buyer.
21. BSP, fourth paragraph.
22. 35 ILCS 5/903. Under subsection (a)(1) of this provision, tax shown due on a return is assessed when the return is filed. If a greater amount is due because of a mathematical error in the return, the Department is to notify the taxpayer without issuing a "notice of deficiency." For amounts due because of other issues with the return or because no return has been filed, a "notice of deficiency" must be issued to the taxpayer by the Department which in turn gives rise to the taxpayer's right to pursue a protest procedure. Id., at subsection (a)(2); and 35 ILCS 5/904 and 5/908.
23. 35 ILCS 5/904(b).
24. 35 ILCS 5/904(d) and 5/908.
25. 35 ILCS 5/902(a).
26. 20 ILCS 2520/4; and Illinois Code of Regulations, Title 86, ch. I, sec. 205.20.
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