Did a foreign manufacturer lose P.L. 86-272 protection when it approved its distributor's customers and used an Illinois home-office salesperson?

Plain-English summary

The Illinois home-office salesperson's missionary sales could be protected, but customer approval by that employee could create unprotected activity and nexus unless it was de minimis. The foreign manufacturer sold rum to an unrelated distributor outside Illinois. Its Illinois-resident employee worked from an in-home office, encouraged Illinois wholesalers to buy from the distributor, did not accept orders, and did not handle products in Illinois.

Those solicitation facts fit listed protected activities, including an in-state employee's solicitation, missionary sales to indirect customers, and a properly limited in-home office. The complication was that the manufacturer “approved” the distributor's customers.

If the distributor could not sell without the manufacturer's authorization, approval was likely beyond mere solicitation. If the Illinois employee did not perform that approval, IDOR said no nexus would result from it. If the employee did, protection depended on whether the approval was de minimis. A one-time approval for each customer's creditworthiness followed by distributor-only sales might qualify, but the determination required the taxpayer's entire business facts.

What this means for you

Document not only who accepts orders but also who approves customers, credit, or distributor accounts and where that work occurs. Keep an Illinois home-office employee's duties strictly within protected solicitation if relying on Public Law 86-272.

Common questions

Q: Was the Illinois employee's home office automatically disqualifying?
A: No. A properly limited in-home office used only for protected activities could retain protection.

Q: Was encouraging wholesalers to buy from the distributor protected?
A: It could be protected missionary sales when the distributor took and finalized the orders outside Illinois.

Q: Could customer approval defeat protection?
A: Yes, if sales required the manufacturer's approval and the Illinois employee performed it, unless the activity was de minimis.

Citations and references

• 15 U.S.C. § 381
• 35 ILCS 5/201, 502(a)
• 86 Ill. Adm. Code 100.9720(c)(2), (4), (5)
• Wisconsin Department of Revenue v. William Wrigley, Jr. Co., 505 U.S. 214 (1992)
• Quill Corp. v. North Dakota, 504 U.S. 298 (1992)

Subject

Public Law 86-272/Nexus

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2010/ig100018.pdf

Original ruling text

IT 10-0018-GIL 07/23/2010 PUBLIC LAW 86-272/NEXUS
General Information Letter: Nexus issues are not generally suitable for resolution by
letter ruling.
July 23, 2010
Dear:
This is in response to your letter dated June 11, 2010 in which you state the following:
By this letter, we request that the Office of Legal Services within the Illinois Department of
Revenue ("Department") issue a Letter Ruling or General Information Letter to our client,
COMPANY, Inc. ("COMPANY"), pursuant to Title 2, Part 1200, §1200.110 or §1200.120, Ill.
Admin. Code. Specifically, we request the Department's determination that COMPANY does
not have sufficient nexus with Illinois such that COMPANY is not subject to the state's
corporate income tax and replacement tax jurisdiction under 35 ILCS, Art. 5, §201. Attached
to this letter as Exhibit A is a Power of Attorney.
I.

BACKGROUND INFORMATION
A.

Identification of Taxpayer
COMPANY, Inc.
STREET
CITY, STATE ZIP CODE
FEI No. XX-XXXXXXX

B.

Statement Under Title 2, Part 1200, §1200.110

To the best our knowledge and the knowledge of COMPANY, the Department has not
previously ruled on the same or similar issue for COMPANY or a predecessor, and neither
COMPANY nor the undersigned have previously submitted the same or a similar issue to the
Department but withdrew it before a letter ruling was issued. Finally, COMPANY is unable to
locate any authorities contrary to COMPANY's position as discussed in Section V below.
II.

FACTS

COMPANY is a foreign corporation whose principal business is manufacturing and/or selling
beverage alcohol products, particularly rum. COMPANY's headquarters and manufacturing
facilities are located in COUNTRY. COMPANY is not qualified or registered with the Illinois
Secretary of State for purposes of conducting business within the state.
Products manufactured by COMPANY are sold throughout the world, including the United
States, generally by third party distributors. In COUNTRY, COMPANY distributes its own as
well as some products manufactured by others. With respect to the United States market, for
the current year and all years prior to this request, COMPANY sold its products to an
unrelated, third-party distributor located in the State of STATE. This distributor then re-sold the
products to wholesalers throughout the United States, including Illinois. COMPANY sold the
product to the distributor F.O.B. COUNTRY. All sales by the distributor to wholesalers were
made by the distributor F.O.B. COUNTRY or F.O.B. non-Illinois storage facilities owned or

IT 10-0018-GIL
July 23, 2010
Page 2
leased by the distributor. Although COMPANY had to approve of the distributor's customers,
the sales were made by the distributor and not by COMPANY.
COMPANY has never owned or maintained tangible personal property or real property in the
state. Further, COMPANY did not make any sales in Illinois. Rather, all Illinois sales of
product manufactured by COMPANY were made by the distributor or by unrelated wholesalers
or retailers. Prior to MONTH of 2009, COMPANY did not have any employees or
representatives located in Illinois. On MONTH 1, 2009, however, COMPANY hired an Illinoisresident employee whose responsibility was to increase purchases of its product.
COMPANY's Illinois-resident employee worked from his "in-home" offices since COMPANY did
not maintain an office or work location in the state. The employee engaged in the marketing
activities on behalf of COMPANY by contacting wholesalers in Illinois for purposes of
encouraging purchases of COMPANY-manufactured products from COMPANY's distributor.
All orders for these products were placed by the buyers with COMPANY's distributor. The
employee did not have the authority to accept any purchase orders and all of the sales were
finalized outside of Illinois. In addition, the employee did not handle the product in the state as
all orders were filled by shipment or delivery from points outside of Illinois.
III.

LAW

Illinois imposes the corporate income tax and replacement tax upon all corporations on the
privilege of earning or receiving income in or as a resident of the state. 35 ILCS, Art. 5, §201
The Department's rule explains that activity conducted in interstate commerce may establish
sufficient nexus with Illinois to permit imposition of the corporate income and replacement
taxes on a non-resident taxpayer, as well, when the non-resident earns or receives income in
Illinois within the meaning of the Illinois Income Tax Act. Title 86, Part 100, §100.9720(a), Ill.
Admin. Code.
However, Public Law 86-272 (codified at 15 U.S.C. §381 et. seq.), restricts states' tax
jurisdiction with respect to sales solicitation activities if the taxpayer's activity is limited to
solicitation of orders for sales of tangible personal property. Title 86, Part 100, §100.9720, Ill.
Admin. Code. The Department's rule provides the following examples of activities that
ordinarily fall within the scope of "solicitation" under P.L. 86-272:
A) Soliciting orders for sales by any type of advertising.
B)
Soliciting orders for sales by an in-state resident employee or
representative of the non-resident, so long as that person does not maintain or
use any office or place of business in the State, besides an "in-home" office….
C) Carrying samples and promotional materials only for display or for
distribution without charge or other consideration.
D) Furnishing and setting up display racks and advising customers on the
display of the nonresident's products without charge or other consideration.
E) Providing automobiles to sales personnel for their use in conducting
protected activities.
F) Passing orders, inquiries and complaints on to the home office.

IT 10-0018-GIL
July 23, 2010
Page 3
G) Missionary sales activities; i.e., the solicitation of indirect customers for the
nonresident's goods. For example, a manufacturer's solicitation of retailers to
buy the manufacturer's goods from the manufacturer's wholesale customers
would be protected if those solicitation activities are otherwise immune.
H) Coordinating shipment or delivery without payment or other consideration
and providing information relating to shipment or delivery either prior or
subsequent to the placement of an order.
I) Checking of customers' inventories without charge (for re-order, but not for
other purposes such as quality control).
J) Maintaining a sample or display room for two weeks (14 days) or less at
any one location within the State during the tax year.
K) Recruiting, training or evaluating sales personnel, including occasionally
using homes, hotels or similar places for meetings with sales personnel.
L) Mediating direct customer complaints when the purpose is solely for
ingratiating the sales personnel with the customer and facilitating requests for
orders.
M) Owning, leasing, using or maintaining personal property for use in the
employee's or representative's "in-home" office located within the residence of
the employee or other representative that is not publicly attributed to the
nonresident or to the employee or other representative of the nonresident in a
representative capacity or automobile, when that use is solely limited to the
conducting of protected activities. Therefore, the use of personal property
such as a cellular telephone, facsimile machine, duplicating equipment,
personal computer and computer software, shall not, by itself, remove the
protection under this Section, so long as the use of the office is limited to:
i)

soliciting and receiving orders from customers;

ii)
transmitting orders outside the State for acceptance or rejection
by the nonresident; or
iii)
other activities that are protected under P.L. 86-272 or this
Section.
N) Shipping or delivering goods into this State by means of vehicles or other
modes of transportation owned or leased by the nonresident taxpayer or by
means of private carrier, whether by motor vehicle, rail, water, air or other
carrier and irrespective of whether a shipment or delivery fee or other charge
is imposed, directly or indirectly, upon the purchaser.
Title 86, Part 100, §100.9720(c)(5), Ill. Admin. Code. The Department's rule also lists the
following examples of activities that ordinarily fall outside of the scope of "solicitation" and are
not protected by P.L. 86-272 unless they are de minimis within the meaning of Wisconsin Dept.
of Revenue v. William Wrigley, Jr. Co., 505 U.S. 214 (1992):
A) Making repairs or providing maintenance or service to the property sold or
to be sold.
B)

Collecting current or delinquent accounts, whether directly or by third

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July 23, 2010
Page 4
parties, through assignment or otherwise.
C) Investigating creditworthiness;
D) Installation or supervision of installation at or after shipment or delivery.
E) Conducting training courses, seminars or lectures for personnel other than
personnel involved only in solicitation of sales of tangible personal property.
F) Providing any kind of technical assistance or services, including, but not
limited to, engineering assistance or design service, when one of the purposes
of the assistance or service is other than for facilitation of the solicitation of
orders.
G) Investigating, handling, or otherwise assisting in resolving customer
complaints, other than mediating direct customer complaints when the sole
purpose of such mediation is to ingratiate the sales personnel with the
customer.
H) Approving or accepting orders.
I) Repossessing property.
J) Securing deposits on sales.
K) Picking up or replacing damaged or returned property.
L) Hiring, training, or supervising personnel, other than personnel involved
only in solicitation.
M) Maintaining a sample or display room in excess of two weeks (14 days) at
any one location within the State during the tax year.
N) Carrying samples for sale, exchange or distribution in any manner for
consideration.
O) Owning, leasing, or maintaining any of the following facilities or property instate:
i)

Repair shop.

ii)

Parts department.

iii)

Any kind of office other than an in-home office.

iv)

Warehouse.

v)

Meeting place for directors, officers, or employees.

vi)
Stock of goods other than samples for sales personnel or that
are used entirely ancillary to solicitation.
vii) Telephone answering service that is publicly attributed to the
nonresident in his or her representative status.
viii) Mobile stores, i.e., vehicles with drivers who are sales personnel
making sales from the vehicles.
ix)
P)

Real property or fixtures to real property of any kind.

Consigning stock of goods or other tangible personal property to any

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July 23, 2010
Page 5
person, including an independent contractor, for sale.
Q) The maintenance of any office or other place of business in this State that
does not strictly qualify as an "in-home" office … shall, by itself, cause the loss
of protection under PL 86-272. A telephone listing or other public listing within
the State for the nonresident or for an employee or other representative of the
nonresident in such capacity or other indication through advertising or
business literature that the nonresident or its employee or representative can
be contacted at a specific address within the State shall normally be
determined as the nonresident maintaining within this State an office or place
of business attributable to the nonresident or to its employee or representative
in a representative capacity. However, the normal distribution and use of
business cards and stationary identifying the employee's or representative's
name, address, telephone and fax numbers and affiliation with the nonresident
shall not, by itself, be considered as advertising or otherwise publicly
attributing an office to the nonresident or to its employee or other
representative.
R) Entering into franchising or licensing agreements; selling or otherwise
disposing of franchises and licenses; or selling or otherwise transferring
tangible personal property pursuant to such franchise or license by the
franchiser or licensor to its franchisee or licensee within the State.
S) Conducting any activity that is not on the list of "protected activities" in
subsection (c)(5), and that is not entirely ancillary to requests for orders, even
if the activity helps to increase purchases.
Title 86, Part 100, §100.9720(c)(4), Ill. Admin. Code.
IV.

ISSUE FOR DETERMINATION

The issue presented for determination is whether the COMPANY has corporate nexus with
Illinois under Title 86, Part 100, §100.9720 and, therefore, is subject to the tax jurisdiction of
the state under 35 ILCS, Art. 5, §201.
V.

ANALYSIS

Under Illinois law, the activities of COMPANY and its employees do not cause the company to
have nexus with the state under Title 86, Part 100, §100.9720 and, therefore, COMPANY is
not subject to the tax jurisdiction of Illinois under 35 ILCS, Art. 5, §201.
The activities of COMPANY and its employees within Illinois fall within those that are protected
under P.L. 86-272 and Title 86, Part 100, §100.9720(c)(5). COMPANY has never owned or
maintained tangible personal property or real property in the state. Further, COMPANY did not
make any sales in Illinois. Rather, all Illinois sales of product manufactured by COMPANY
were made by the distributor or by unrelated wholesalers or retailers.
In addition, the one COMPANY-employee's activities within Illinois have been limited solely to
"solicitation," which has been defined as: (1) speech or conduct that explicitly or implicitly
invites an order, and (2) activities that neither explicitly nor implicitly invite an order, but are
entirely ancillary to requests for an order. See, Wisconsin Dept. of Revenue v. Wrigley, 505

IT 10-0018-GIL
July 23, 2010
Page 6
U.S. 214, 223 (1992). The Illinois-resident employee worked from his "in-home" office since
COMPANY did not maintain an office or work location in the state. The employee engaged in
the marketing activities on behalf of COMPANY by contacting wholesalers in Illinois for
purposes of encouraging purchases of COMPANY-manufactured products from the distributor.
All orders for these products were placed by the buyers with COMPANY's distributor. The
employee did not have the authority to accept any purchase orders and all of the sales were
finalized outside of Illinois. In addition, the employee did not handle the product in the state as
all orders were filled by shipment or delivery from points outside of Illinois. Finally, neither
COMPANY nor the Illinois employee has engaged in any activity that would have caused the
sales transactions to lose protection under P.L. 86-272 and Title 86, Part 100, §100.9720.
As a result, it is COMPANY's position that the company does not have nexus with the state
under Title 86, Part 100, §100.9720 and, therefore, is not subject to Illinois' tax jurisdiction
under 35 ILCS, Art. 5, §201. Therefore, COMPANY is requesting the Department of Revenue
issue a Letter Ruling or General Information Letter stating that COMPANY's activities do not
create nexus with the state and, consequently, COMPANY is not subject to tax under 35 ILCS,
Art. 5, §201.
VI.

REQUEST FOR ORAL PRESENTATION

COMPANY, by and through undersigned counsel, hereby requests the opportunity for a
telephone conference to discuss this request prior to the Department's determination of the
issue presented herein.
VII.

DECLARATION OF REPRESENTATIVES

The undersigned hereby certify to the Department that we are attorneys in good standing with
the Florida Bar and that we are authorized to represent COMPANY in this request.
*

*

*

The determination as to whether a taxpayer has nexus to subject it to Illinois Income Tax is extremely
fact-specific. Therefore, the Department does not issue rulings regarding whether a particular
taxpayer has nexus with the State. However, general information regarding nexus with Illinois for
income tax purposes may be provided.
Section 201 of the Illinois Income Tax Act (“IITA”), 35 ILCS 5/101 et seq, imposes a tax measured by
net income on taxpayers for the privilege of earning or receiving income in this State. The Due
Process and Commerce Clauses of the Federal Constitution limit the power of Illinois to subject
foreign taxpayers to Illinois tax. The Due Process Clause requires that there exist some minimum
connection between a state and the person, property, or transaction it seeks to tax (Quill Corp. v.
North Dakota, 504 U.S. 298, 112 S.Ct. 1904 (1992)). Similarly, the Commerce Clause requires that
the tax be applied to an activity with a substantial nexus with the taxing state. Id. Where any part of
a foreign corporation’s income is allocable to Illinois in accordance with the provisions of Article 3 of
the IITA, Illinois can demonstrate the connection, or nexus, necessary to subject a foreign corporation
to tax. Therefore, unless protected by Public Law 86-272, a foreign corporation is liable for Illinois
income tax where any portion of its income is allocated to Illinois.

IT 10-0018-GIL
July 23, 2010
Page 7
The United States Constitution restricts a state’s power to subject to income tax foreign corporations
and other nonresidents. The Due Process Clause requires that there exist some minimum
connection between a state and the person, property, or transaction the state seeks to tax. (Quill
Corp. v. N. Dakota, 504 U.S. 298 (1992)) Similarly, the Commerce Clause requires that a state’s tax
be applied only to activities with a substantial nexus to the taxing state. (Id.) In the case of foreign
corporations, Illinois may assert nexus to tax unless the corporation falls under the protection
provided under Public Law 86-272. (15 U.S.C. § 381) Public Law 86-272 precludes any state from
subjecting a nondomiciliary corporation to a net income tax where such corporation’s only activities
within the state for the taxable year consist of solicitation activities for sales of tangible personal
property.
Regarding Public Law 86-272, Department Regulations Section 100.9720(c)(2)(A) states:
If a nonresident taxpayer’s activities exceed “mere solicitation” as set forth in subsection (a) of
PL 86-272 (subsection (c)(1)(A) of this Section), it obtains no immunity under that federal
statute. The taxpayer is subject to Illinois income tax and personal property tax replacement
income tax for the entire taxable year and its business income is apportioned under IITA
Section 304. Whether a nonresident taxpayer’s conduct exceeds “mere solicitation” depends
upon the facts in each particular case.
You cite Section 100.9720(c)(4) of the Department Regulations in your letter which contains a list of
activities that are considered to be beyond “mere solicitation” for purposes of P.L. 86-272. Included in
that list of unprotected activities are the following:
H)

Approving or accepting orders.

S)

Conducting any activity that is not on the list of "protected activities" in subsection (c)(5),
and that is not entirely ancillary to requests for orders, even if the activity helps to
increase purchases.

According to the facts presented in your letter, your client “approves” the distributor’s customers. If
the distributor is unable to sell products to customers without authorization from your client, then your
client’s activities are likely unprotected and will be considered beyond “mere solicitation” for purposes
of P.L. 86-272. The question then becomes whether the approval is done by the Illinois employee. If
not, no nexus would result. If yes, the next question is whether the unprotected activity of “approving”
sales is de minimus.
A taxpayer that engages in unprotected activity within Illinois, unless such activity is de minimus, is
not entitled to immunity under the federal statute. Regulations Section 100.9720(c)(2)(D) sets forth
the test for determining whether unprotected activities are de minimus.
De minimus activities are those that, when taken together, establish only a trivial additional
connection with this State. An activity regularly conducted within this State on a regular or
systematic basis or pursuant to a company policy (whether such policy is in writing or not) shall
normally not be considered trivial. Whether an activity consists of a trivial or non-trivial
additional connection with this State is to be measured on both a qualitative and quantitative
basis. If the activity either qualitatively or quantitatively creates a non-trivial connection with
this State, then the activity exceeds the protection of PL 86-272. The amount of unprotected

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Page 8
activities conducted within this State relative to the amount of protected activities conducted
within this State is not determinative of the issue of whether the unprotected activities are de
minimus. The determination of whether an unprotected activity creates a non-trivial connection
with this State is made on the basis of the taxpayer’s entire business activity, not merely its
activities conducted within this State. An unprotected activity that would not be de minimus if it
were the only business activity of the taxpayer conducted in this State will not be de minimus
merely because the taxpayer also conducts a substantial amount of protected activities within
this State, nor will an unprotected activity that would be de minimus if conducted in conjunction
with a substantial amount of protected activities fail to be de minimus merely because no
protected activities are conducted in this State.
As the above provisions indicate, the conduct of approving customers may result in the loss of
protection under Public Law 86-272 unless it can be shown that such approval is de minimus when
considering the taxpayer’s entire business activity. For example, if your client does a one-time
“approval” for each customer perhaps for credit-worthiness reasons and those “approved” customers
become regular customers of the distributor so that all sales after the initial approval are handled by
the distributor only, the one-time involvement by your client may be considered de minimus. A factual
determination must be made taking into account the taxpayer’s entire business activities.
Section 502(a) of the IITA (35 ILCS 5/502(a)) sets forth the requirements for filing Illinois income tax
returns. That section states:
(a) In general. A return with respect to the taxes imposed by this Act shall be made by every
person for any taxable year:
(1)

For which such person is liable for a tax imposed by this Act, or

(2)
In the case of a resident or in the case of a corporation which is qualified to do business
in this State, for which such person is required to make a federal income tax return, regardless
of whether such person is liable for a tax imposed by this Act.
Under this section, a nonresident must file an Illinois income tax return if it incurs a liability for tax
imposed under Section 201 of the IITA (or in the case of a corporation qualified to do business in
Illinois, if it is required to file a federal return). A nonresident is liable for Illinois income tax under
Section 201 if it computes “Illinois net income” as defined under IITA Section 202. IITA Section 202
defines Illinois net income as that portion of the taxpayer’s “base income” as defined in Section 203,
which is allocated or apportioned to Illinois under the provisions of Article 3 of the IITA, less certain
deductions.
As stated above, this is a GIL which does not constitute a statement of policy that either applies,
interprets or prescribes tax law. It is not binding on the Department. Should you have additional
questions, please do not hesitate to contact our office.
Sincerely,

Heidi Scott
Associate Counsel - Income Tax