Could a multistate service partnership avoid Illinois's throwout rule and source exam fees by where the examinations occurred?

Plain-English summary

IDOR denied the requested alternative method because the partnership did not prove that the statutory throwout rule grossly distorted its Illinois activity. The partnership performed collateral examinations around the country, conducted its administrative functions in Illinois, and wanted exam-fee revenue tied to work outside Illinois excluded from its Illinois revenue calculation.

The petition appeared to assume that a state with no partnership filing requirement was automatically a state where the partnership was not taxable. Section 303(f)(2), however, treated a person as taxable in another state when that state had jurisdiction to impose a net income tax even if it did not actually impose one. IDOR told the partnership to recompute the factor under the correct standard because that might resolve some or all of the issue.

Alternative apportionment required clear and cogent evidence that the statutory formula taxed extraterritorial values and attributed income to Illinois out of all proportion to Illinois business. The petition supplied no such evidence. IDOR allowed supplementation and also noted that a petition had to be filed at least 120 days before the due date, including extensions, of the first original return for which permission was requested.

What this means for you

Before seeking alternative apportionment, determine other-state taxability by jurisdiction—not merely whether the state requires a partnership return. Then document both the statutory formula's distortion and why the proposed method fairly reflects Illinois activity.

Common questions

Q: Does no other-state partnership filing requirement mean the taxpayer is not taxable there?
A: Not necessarily. Jurisdiction to impose a net income tax could satisfy Section 303(f)(2) even if no tax was actually imposed.

Q: Was relief denied simply because the proposed method produced a different percentage?
A: Relief was denied because the petition did not prove gross distortion or disproportionate attribution to Illinois.

Q: Could the partnership supplement the petition?
A: Yes. IDOR invited supplementation under 86 Ill. Adm. Code 100.3390.

Citations and references

• 35 ILCS 5/303(f)
• 35 ILCS 5/304(a)(3)(C-5)(iv), 304(f)
• 86 Ill. Adm. Code 100.3200
• 86 Ill. Adm. Code 100.3390(c), (e)(1)

Subject

Alternative Apportionment

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/ig100030.pdf

Original ruling text

IT 10-0030-GIL 12/09/2010 ALTERNATIVE APPORTIONMENT
General Information Letter: Petition for alternative apportionment contained insufficient
information for the Department to grant the petition.
December 9, 2010
Dear:
This is in response to your letter dated October 7, 2010, in which you request permission to source
sales without regard to the “throwout” rule in Section 304(a)(3)(C-5)(iv) of the Illinois Income Tax Act
(the "IITA"; 35 ILCS 101 et seq.), pursuant to Section 304(f) of the IITA. The nature of your letter and
the information you have provided require that we respond with a General Information Letter, which is
designed to provide general information, is not a statement of Department policy and is not binding on
the Department. See 86 Ill. Adm. Code 1200.120(b) and (c), which may be found on the
Department's web site at www.revenue.state.il.us. For the reasons discussed below, your petition
cannot be granted at this time.
In your letter you have stated the following:
IITA Section 304(a)(3) provides that if sales are not claimed in another state they will be
attributed to Illinois. This method doesn’t represent fairly the extent of the partnership
operations and we hereby petition under IITA Section 304(f) for an alternative method of
apportionment.
The partnership operates in many states across the United States; many of which do
not have any filing requirements for partnerships. The operations of the LLC are to
perform exams and other procedures for bank customers of their borrowers’ collateral,
including, but not limited to, accounts receivable and inventory. Illinois accounts for
roughly 25% of the taxpayer’s revenue from these exams. The collateral exams are
conducted in Illinois and various other states and allocating 100% of taxpayer’s income
would not fairly represent the extent of their business activity in the state.
We are allocating all payroll and property factors to the state of Illinois because the
administrative functions of the LLC are conducted in Illinois, but propose that we only
allocate revenues derived from exam functions in Illinois be considered in the revenue
apportionment calculation. Exam work performed in other states would be excluded
from the Illinois apportionment calculation.
For the amended 2008 tax return, revenues apportioned to Illinois consisted of exam
fees for exams performed in the state of Illinois which is less than the gross revenues
derived from exams performed in all states. The Taxpayer’s accounting system is set
up to track sales by state and we request permission to use this method of
apportionment with respect to exam fee revenues derived from work performed in the
state of Illinois.
Response
Alternative Apportionment Petitions
Section 304(f) of the IITA provides:

IT 10-0030-GIL
December 9, 2010
Page 2
If the allocation and apportionment provisions of subsections (a) through (e) and of
subsection (h) do not fairly represent the extent of a person's business activity in this
State, 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:
(1)

Separate accounting;

(2)

The exclusion of any one or more factors;

(3)
The inclusion of one or more additional factors which will fairly represent
the person's business activities in this State; or
(4)
The employment of any other method to effectuate an equitable allocation
and apportionment of the person's business income.
Taxpayers who wish to use an alternative method of apportionment under this provision are required
to file a petition complying with the requirements of 86 Ill. Adm. Code Section 100.3390, which may
be found on the Department's web site at www. tax.illinois.gov.
86 Ill. Adm. Code Section 100.3390(c) provides:
An alternative apportionment method may not be invoked, either by the Director or by a
taxpayer, merely because it reaches a different apportionment percentage than the
required statutory formula. However, if the application of the statutory formula will lead
to a grossly distorted result in a particular case, a fair and accurate alternative method is
appropriate. The party (the Director or the taxpayer) seeking to utilize an alternative
apportionment method has the burden or going forward with the evidence and proving
by clear and cogent evidence that the statutory formula results in the taxation of
extraterritorial values and operates unreasonably and arbitrarily in attributing to Illinois a
percentage of income which is out of all proportion to the business transacted in this
State. In addition, the party seeking to use an alternative apportionment formula must
go forward with the evidence and prove that the proposed alternative apportionment
method fairly and accurately apportions income to Illinois based upon business activity
in this State.
Sales Factor Throwout Rule
The so-called “throwout” rule is contained in Section 304(a)(3)(C-5)(iv) of the IITA, which provides
that:
If the taxpayer is not taxable in the state in which the services are received, the sale
must be excluded from both the numerator and the denominator of the sales factor.
Section 303(f) of the IITA provides that a person is “taxable in another state” if:
(1) In that state he 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;
or

IT 10-0030-GIL
December 9, 2010
Page 3

(2) That state has jurisdiction to subject the taxpayer to a net income tax
regardless of whether, in fact, the state does or does not.
For more detailed guidance, see 86 Ill. Adm. Code Section 100.3200.
In your petition, you appear to misconstrue these provisions as requiring exclusion from the sales
factor of all “sales [that] are not claimed in another state” because other states “do not have any filing
requirements for partnerships.” This construction is contrary to Section 303(f)(2), which provides that
a person may be “taxable in another state” even if that state does not actually impose a tax on that
person.
Conclusion
Your petition contains no evidence that, assuming the taxpayers activities in other states are such
that the other states have no jurisdiction to subject it to an income tax, application of the throwout rule
would operate “unreasonably and arbitrarily in attributing to Illinois a percentage of income which is
out of all proportion to the business transacted in this State.” Accordingly, the petition cannot be
granted at this time.
Please review your computation of the sales factor under Section 304(a)(3)(C-5) of the IITA, and see
if application of the proper standard for determining whether the taxpayer is “taxable in another state”
will not eliminate some or all of the issues you raise about the statutory apportionment factor.
Please note that 86 Ill. Adm. Code Section 100.3390(e)(1) requires a petition to be filed at least 120
days prior to the due date (including extensions) for the first return for which permission is sought to
use the alternative apportionment method. Although your letter was dated October 7, 2010, the
envelope was postmarked October 20, 2010. A petition filed on October 20, 2010, will allow a
taxpayer to use the requested method on original returns due on or after February 17, 2011, if
granted. Earlier years, including particularly the 2008 tax year for which you have already filed an
amended return, can be dealt with if and when this petition is granted.
As stated above, this is a general information letter which does not constitute a statement of policy
that applies, interprets or prescribes the tax laws, and it is not binding on the Department. If you still
believe that your petition should be granted, please supplement the petition in accordance with the
provisions of 86 Ill. Adm. Code Section 100.3390. If you have any questions, you may contact me at
(217) 524-3951.

Sincerely,

Paul S. Caselton
Deputy General Counsel -- Income Tax