Illinois apportionment of service income and unitary partnerships.

• Author: Weber, Mindy Tyson

Effective for tax years ending on or after Dec. 31, 2008, Illinois enacted a form of market sourcing for sales of services. As part of this change, Illinois implemented a service receipts throw-out provision that excludes a taxpayer's sales of services from the sales factor when the taxpayer is not subject to tax in the state where the services are received. When applied to partnerships with one or more unitary partners (partners whose business activities are integrated and interdependent), the impact of this provision may be substantially reduced or eliminated because partnerships and unitary partners combine their nexus profiles. However, issues with Illinois's forms may make reporting based upon this position difficult.

Illinois Services Apportionment

Under 35 III. Comp. Stat. 5/304(a) (3)(C-5)(iv), a taxpayer's gross receipts from sales of services are included in the numerator of the Illinois sales factor if the services are received in Illinois. If the state where the customer receives the services cannot be determined or is a state where the recipient does not have a fixed place of business, the services are deemed to be received at the location from which the customer ordered the services. In instances where the ordering office cannot be determined, the services are deemed to be received at the location at which the customer was billed for the services. When the taxpayer is not subject to tax in the state where the customer receives the services, the gross receipts from the sale of those services are excluded from both the numerator and denominator of the taxpayer's sales factor.

Subject to Tax

Under 35 III. Comp. Stat. 5/303(f), a taxpayer is subject to tax in another state for the purposes of the throw-out rule provided in 35 Ill. Comp. Stat. 5/304(a) (3)(C-5)(iv) if either (1) the taxpayer is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax in the state; or (2) the state has the jurisdiction to subject the taxpayer to a net income tax, regardless of whether it actually does so. The provisions of III. Admin. Code, tit. 86, [section].100.3200(a)(2) subject a taxpayer to one of the taxes enumerated in 35 111. Comp. Stat. 5/303(f ) if the tax imposed reasonably relates to the taxpayer's income-producing activities in the state and the taxpayer actually pays the tax due. Further, III. Admin. Code, tit. 86, 5100.3200(a)(2) provides that a...