Ill. Admin. Code tit. 86 § 100.3380
IITA Section 304(f) provides that, if the allocation and apportionment provisions of Section 304(a) through (e) and (h) do not, for taxable years ending before December 31, 2008, fairly represent the extent of a person's business activity in this State, or do not, for taxable years ending on or after December 31, 2008, fairly represent the market for the person's goods, services, or other sources of business income, the person may petition for, or the Director may require, in respect of all or any part of the person's business activity, if reasonable:
The Director has determined that, in the instances described in this Section, the apportionment provisions provided in IITA Section 304(a) through (e) and (h) do not fairly represent the extent of a person's business activity or market within Illinois. For tax years beginning on or after the effective date of a rulemaking amending this Section to prescribe a specific method of apportioning business income, all nonresident taxpayers shall apportion their business income employing that method in order to properly apportion their business income to Illinois. Taxpayers whose business activity or market within Illinois is not fairly represented by a method prescribed in this Section and who want to use another method for a tax year beginning after the effective date of the rulemaking adopting that method may obtain permission to use that other method by filing a petition under Section 100.3390. For tax years beginning prior to the effective date of the rulemaking adopting a method of apportioning business income, the Department will not require a taxpayer to adopt that method; provided, however, if any taxpayer has used that method for any of those tax years, the taxpayer must continue to use that method for that tax year. Moreover, a taxpayer may file a petition under Section 100.3390 to use a method of apportionment prescribed in this Section for any open tax year beginning prior to the effective date of the rulemaking adopting that method, and that petition shall be granted in the absence of facts showing that that method will not fairly represent the extent of a person's business activity or market in Illinois.
EXAMPLE: A corporation rents a 10-story building at an annual rental rate of $1,000,000. The corporation occupies two stories and sublets eight stories for $1,000,000 a year. The net annual rental rate of the taxpayer is at least two-tenths of the corporation annual rental rate for the entire year, or $200,000.
EXAMPLE: A corporation's salesman operates out of an office in Illinois. He regularly calls on customers both within and without Illinois. Orders are approved by him and transmitted to the corporation's headquarters in State A. For taxable years ending before December 31, 2008, if the property sold by the salesman is shipped from a state in which the corporation is not taxable to a purchaser in a state in which the corporation is not taxable, the sale is attributable to Illinois.
EXAMPLE: In 1990, Corporation A, a calendar year taxpayer, sells stock with an adjusted basis of $98,000,000 for $100,000,000, realizing a federal net capital gain of $2,000,000. Only the net capital gain of $2,000,000 shall be reflected in A's sales factor for the taxable year ending December 31, 1990.
EXAMPLE 1: Taxpayer expects that, during its next production cycle, it will need 10 tons of commodity Y for its interstate manufacturing business. Commodity Y is a raw material used by Taxpayer in the manufacture of its inventory. In order to hedge against exposure to changes in the price of commodity Y, Taxpayer enters into a forward contract to purchase 10 tons of commodity Y. The forward contract is identified as a hedging transaction under IRC section 1221(b)(2)(A). Under subsection (c)(6)(B), any income, gain or loss recognized with respect to the forward contract shall be excluded from the numerator and denominator of the sales factor.
EXAMPLE 2: On January 1, 2008, Taxpayer owns 10 tons of commodity X, which it holds for sale in the ordinary course of business and expects to sell during its taxable year ending December 31, 2008. To hedge against price fluctuations in commodity X, on January 10, 2008, while Taxpayer still owns commodity X, it sells the equivalent of 10 tons of commodity X futures contracts on a futures exchange. Taxpayer expects to sell commodity X to customers in various states, including Illinois. The futures contract is identified as a hedging transaction under IRC section 1221(b)(2)(A), and Taxpayer properly identifies the futures contract as required under subsection (c)(6)(D) as hedging gross receipts from sales of commodity X. Under subsection (c)(6)(C), any gain or loss taken into account by Taxpayer during its taxable year with respect to the futures contract shall be included in the denominator of the sales factor, and included in the numerator of the sales factor in the same proportion that gross receipts from actual sales of commodity X during the taxable year are included in the numerator of the sales factor. If a loss is recognized on the futures contract, the loss is treated as a reduction (but not below zero) of the gross receipts from the sale of commodity X in computing the sales factor.
EXAMPLE 3: Taxpayer is a corporation on the accrual method of accounting with the U.S. dollar as its functional currency. On January 1, 2008, Taxpayer acquires 1,500 British pounds ([POUND]) for $2,250 ([POUND]1 = $1.50). The acquisition of [POUND]1,500 is properly identified by Taxpayer as a hedging transaction under IRC section 1221(b)(2)(A). On February 5, 2008, when the spot rate is [POUND]1 = $1.55, Taxpayer purchases inventory from its supplier by paying [POUND]1,500. Accordingly, Taxpayer recognizes $75 exchange gain for federal income tax purposes upon disposition of the British pounds. The $75 exchange gain shall be excluded from both the numerator and denominator of the sales factor under subsection (c)(6)(B).
EXAMPLE 4: Taxpayer is a calendar year corporation with the U.S. dollar as its functional currency. Based on past experience, Taxpayer anticipates making 2009 first quarter sales to customers in New Zealand of 100,000 New Zealand dollars (NZD). In order to hedge against currency fluctuations related to the anticipated first quarter sales, on December 31, 2008, Taxpayer enters into a forward contract to sell 100,000 NZD on March 31, 2009 for $48,000. The forward contract is identified as a hedging transaction under IRC section 1221(b)(2)(A), and the Taxpayer properly identifies the transaction as hedging its anticipated New Zealand sales in accordance with subsection (c)(6)(D). During the first quarter of its 2009 taxable year, Taxpayer makes sales to its New Zealand customers of 90,000 NZD. Under IITA Section 304(a), gross receipts from its New Zealand sales shall be included in the denominator of the Taxpayer's sales factor and excluded from the numerator of the sales factor. Under subsection (c)(6)(C), any gain or loss recognized on the forward contract shall be included in the denominator of the Taxpayer's sales factor and excluded from the numerator of the factor. This treatment is appropriate even though the Taxpayer's sales to New Zealand customers were less than anticipated. Any loss recognized on the forward contract shall be treated as a reduction (but not below zero) of the gross receipts from sales to New Zealand customers that are included in the denominator of the sales factor.
EXAMPLE 1: Taxpayer is a corporation on the accrual method of accounting with the U.S. dollar as its functional currency. On January 1, 2008, Taxpayer converts $13,000 to 10,000 British pounds ([POUNDS]) at the spot rate of [POUNDS]1 = $1.30 and loans the [POUNDS]10,000 to Y for 3 years. The terms of the loan provide that Y will make interest payments of [POUNDS]1,000 on December 31 of 2008, 2009 and 2010 and will repay Taxpayer's [POUNDS]10,000 principal on December 31, 2010. Based on average spot rates for 2008, 2009 and 2010 of [POUNDS]1 = $1.32, [POUNDS]1 = $1.37 and [POUNDS]1 = $1.42, respectively, Taxpayer accrues interest income of $1,320 for 2008, $1,370 for 2009, and $1,420 for 2010. Under IITA Section 304(a), the accrued interest income shall be included in the denominator of Taxpayer's sales factor, but excluded from the numerator of its sales factor. Based on spot rates on December 31, 2008, December 31, 2009 and December 31, 2010 of [POUNDS]1 = $1.35, [POUNDS]1 = $1.40 and [POUNDS]1 = $1.45, respectively, Taxpayer recognizes for federal income tax purposes exchange gain of $30 upon receipt of the interest on December 31 of 2008, 2009 and 2010. In addition, Taxpayer recognizes, for federal income tax purposes, exchange gain of $1,500 upon repayment of the loan principal on December 31, 2010. Under subsection (c)(7)(A), the $30 of exchange gain recognized with respect to the accrued interest for 2008, 2009 and 2010 shall be included in the denominator of Taxpayer's sales factor and excluded from the numerator of its sales factor. The $1,500 of exchange gain with respect to the repayment of principal on December 31, 2010 shall be excluded from both the numerator and denominator of Taxpayer's sales factor because repayment of principal on a loan is not included in the sales factor.
EXAMPLE 2: Taxpayer is a corporation on the accrual method of accounting with the U.S. dollar as its functional currency. On January 15, 2008, Taxpayer sells inventory for 10,000 Canadian dollars (C$). The spot rate on January 15, 2008 is C$1 = U.S. $.55. Under IITA Section 304(a), $5,500 in gross receipts from this sale shall be included in the denominator of Taxpayer's sales factor and excluded from the numerator of the sales factor. On February 23, 2008, when Taxpayer receives payment of the C$10,000, the spot rate is C$1 = U.S. $.50. For federal income tax purposes, Taxpayer recognizes ($500) of exchange loss upon receipt of C$10,000 on February 23, 2008. Under subsection (c)(7)(A), the ($500) exchange loss with respect to the January 15, 2008 sale shall be included in the denominator of the Taxpayer's sales factor and excluded from the numerator of the sales factor. The exchange loss is reflected as a reduction of the denominator of the Taxpayer's sales factor.
EXAMPLE 1: Retailer purchases 1,000 moccasins from vendor, who provides a margin guarantee of $17. The moccasins retail for $25 each. At the end of the season, the 20 remaining moccasins are marked down to $9. Vendor remits $160 to retailer, computed as follows: 20 X ($17-$9). The $160 does not constitute gross receipts includable in the sales factor, as it is a reduction to the cost of the moccasins.
EXAMPLE 2: Retailer runs a promotion offering buy-one-get-one-half-off for Minty Toothpaste. Retailer and Vendor have an arrangement for vendor to provide a $0.75 discount for each item sold at a reduced price. Retailer sells 1,000 tubes of Minty Toothpaste during the promotional period. Vendor provides a $375 discount to Retailer for the items sold at a reduced price, computed as follows: 500 X $0.75. The $375 does not constitute gross receipts includable in the sales factor, as it is a reduction to the cost of Minty Toothpaste.
* Cooperative advertising, which is a sharing arrangement for the costs of advertising depicting the vendor's products, such as a weekly circular;
* Salary or payroll allowances, which are an incentive to provide more space or staff; and
* Up-front cash payments and long-term agreements that compensate the retailer for a commitment to purchase a targeted volume of goods over a period of time. These are recorded as a liability when received and recognized as income when purchases are made.
* The ratio of the number of retail locations in Illinois over the total number of retail locations, or
* The ratio of the gross receipts from retail locations in Illinois over the total gross receipts.
EXAMPLE: Retailer W sells greeting cards for all occasions. Retailer W and Vendor Q have entered into an agreement under which Vendor Q pays Retailer W an allowance of $5 per hour to remove damaged cards and maintain the seasonal greeting card inventory. Retailer W's employee spends 300 hours monitoring the inventory during the year, and Vendor Q pays Retailer W $1,500 ($5 times 300 hours). This income is considered gross receipts and must be included in the sales factor denominator. Retailer W has 15 stores in Illinois and 5 stores in Wisconsin, so $1,125 ($1,500 times 15/20) would be included in the sales factor numerator.
EXAMPLE: Company Software, headquartered in Illinois, has three foreign affiliates: Software France, Software Germany and Software Hungary. They enter into a contract to jointly develop a new tax preparation software package. Company Software will provide the programming and each foreign affiliate will contribute knowledge of the language and tax laws in their country. The total cost of developing the software is $5,000,000. Each affiliate reimburses Company Software for 20% of the costs ($3,000,000 total) plus each affiliate will pay Company Software 2% of the costs as an administrative fee ($60,000 total). When completed, Company Software will own a 60% interest in each country's version of the software and the foreign affiliate will own a 40% interest. The foreign affiliates are 80/20 companies and are not included in Company Software's Illinois income tax return. Because Company Software and the affiliates will share in the expected benefits of the agreement, this should be characterized as a cost-sharing agreement with a markup. The reimbursed expenses will be excluded from Company Software's apportionment factor. The markup is an administrative fee. As such, the markup will be considered receipts from the sale of services and will be included in the apportionment factor.
EXAMPLE: Company Pharma, headquartered in Illinois, has a foreign affiliate Pharma Ireland, which owns intellectual property for a drug that it wants to distribute in the United States. Pharma Ireland pays Company Pharma to conduct drug trials for obtaining FDA approval to distribute the drugs. The drug trials are conducted in Illinois. Pharma Ireland reimburses Company Pharma its costs of $100,000 for conducting the trials plus a 5% markup ($105,000 total). The ownership of the intellectual property remains entirely with Pharma Ireland after the drug is approved. Pharma Ireland is an 80/20 company and is not included in Company Pharma's Illinois income tax return. The contract is a cost-plus service contract because ownership of the intellectual property remains with Pharma Ireland, and Company Pharma will not share in the profits from sales of the drug. Both the reimbursed costs ($100,000) and the markup ($5,000) may be included in the denominator of Company Pharma's sales factor under 86 Ill. Adm. Code 100.3370(a)(1)(b). Continuing the analysis for determining whether the receipts will be included in the sales factor numerator, the services were received in Illinois where the drug trials were conducted, but Pharma Ireland does not have a place of business in Illinois, so the services will be sourced to the location where the services were ordered. Provided that Company Pharma is subject to tax in Ireland, the $105,000 will be sourced to that country. If Company Pharma is not subject to tax in Ireland, the $105,000 will be excluded from both the numerator and the denominator of the sales factor.
EXAMPLE: Partner and Partnership are engaged in a unitary business. Partner owns a 20% interest in Partnership. Partnership has $10,000,000 in sales everywhere, $3,000,000 of which are to Partner, and $4,000,000 in Illinois sales, $1,000,000 of which are to Partner. In computing its apportionment factor, Partner shall include $1,400,000 from Partnership in its everywhere sales (20% of Partnership's $10,000,000 in everywhere sales, after eliminating the $3,000,000 in sales to Partner) and $600,000 from Partnership in its Illinois sales (20% of Partnership's $4,000,000 in Illinois sales, after eliminating the $1,000,000 in sales to Partner). Also, Partner must eliminate any sales it made to Partnership.
EXAMPLE 1: Corporation A owns a 50% interest in P-1, a partnership. Corporation A and P-1 are engaged in a unitary business within the meaning of IITA Section 1501(a)(27). P-1 itself conducts no business activities in Illinois, and the Illinois numerator of its apportionment factor is zero. P-1 holds a 50% interest in P-2, a partnership doing business exclusively in Illinois. P-1 has $1.4 million of taxable business income, not including any income from P-2. P-2 has base income of $1 million, all of which is business income, and on a separate-entity basis, all of its business income would be apportioned to Illinois.
EXAMPLE 2: If Corporation A and P-2 are not members of the same unitary business group, Corporation A would compute its business income apportioned to Illinois by including $700,000 (50% of $1.4 million) of P-1's business income in Corporation A's business income, and 50% of P-1's apportionment factors in its apportionment factors. Corporation A also would include in its Illinois net income its 50% share of P-1's 50% share of the base of P-2 apportionable to Illinois, or $250,000 (50% of 50% of $1 million).
EXAMPLE 3: If Corporation A, P-1 and P-2 are members of the same unitary business group, P-1 shall include 50% of P-2's business income and 50% of P-2's apportionment factors in its own business income and apportionment factors. Accordingly, P-1's business income will be $1.9 million (the $1.4 million it earned directly plus its 50% share of P-2's $1 million in business income). Corporation A will then compute its business income apportioned to Illinois by including its 50% share of P-1's business income, or $950,000 (50% of $1.9 million) with its business income and its 50% share of P-1's apportionment factors (which will include P-1's share of P-2's apportionment factors) in its apportionment factors.
EXAMPLE 4: If Corporation A, P-1 and P-2 are unitary, but P-1 is excluded from the unitary business group of Corporation A and P-2 because those entities apportion their business income under IITA Section 304(a) and P-1 is a financial organization that apportions its business income under IITA Section 304(c) and the taxable year ends prior to December 31, 2017, Corporation A shall include in its business income and apportionment factors its 50% share of P-1's 50% share of the business income and apportionment factors of P-2. Also, Corporation A's Illinois net income includes 50% of the business income of P-1 apportioned to Illinois by P-1 using its own apportionment factors. Because, in this example, P-1 is not doing business in Illinois, none of its business income is included in Corporation A's Illinois net income.
EXAMPLE 5: In a taxable year ending December 31, 2017, a combined group is comprised of two corporations: Financial Organization (which apportions its business income using the financial organization formula under IITA Section 304(c)) and Insurance Company (which apportions its business income using the premiums factor under IITA Section 304(b)). Financial Organization is a 20% partner in Partnership, which apportions its business income using the sales factor formula under IITA Section 304(a). Partnership is engaged in a unitary business with the members of the combined group. The apportionment data for the members of the unitary business group are as follows:
Company | Everywhere Sales | Respective Section 304 Formula | ||
Numerator | Denominator | Percentage | ||
Insurance Co. | $200 | $9 | $150 | 6.000 % |
Financial Org. | $300 | $75 | $250 | 30.000 % |
Partnership | $500 | $100 | $500 | |
Financial Org.'s Partnership Share | $100 | $20 | $100 | 20.000 % |
Grand Total | $600 | |||
The apportionment percentages of each member of the group are computed as follows:
Company | A | B | C | D | E |
Section 304 Apportionment Percentage | Subgroup Everywhere Sales | A * B | Group Everywhere Sales | C ÷ D | |
Insurance Co. | 6.000% | $200 | $12.00 | $600 | 2.000 % |
Financial Org. | 30.000% | $300 | $90.00 | $600 | 15.000 % |
Financial Org.'s Partnership Share | 20.00 0% | $100 | $20.00 | $600 | 3.333 % |
Financial Organization's apportionment percentage is 18.333 % (the 15.000% computed under Section 100.3600 and its 3.333% share of Partnership's apportionment percentage computed under Section 100.3600) and the apportionment percentage of the group is 20.333 %.
Ill. Admin. Code tit. 86, § 100.3380
Amended at 32 Ill. Reg. 10170, effective June 30, 2008