Did regularly arranging Illinois repair services through local independent contractors create Illinois income-tax nexus for an out-of-state LLC?

Plain-English summary

IDOR did not issue a final nexus ruling, but it viewed the arrangement as likely taxable. The out-of-state LLC used local contractors to perform recurring repairs at Illinois customer buildings, set not-to-exceed amounts or solicited bids, paid the contractors, and billed customers plus a management fee.

The nexus regulation protected only limited activity through independent contractors. IDOR warned that building the business around regular contractor use could jeopardize that protection. Because nexus required all facts and circumstances, the Department said a final conclusion belonged in an audit.

The GIL also described the then-applicable market-sourcing rule for services and the filing duty when a nonresident had Illinois tax liability.

What this means for you

Map how often contractors work in Illinois and who controls pricing, work orders, scheduling, acceptance, payment, and customer billing. An independent-contractor label does not decide nexus.

Common questions

Q: Did the GIL conclusively find nexus?
A: No.

Q: Did it say the activity was likely taxable?
A: Yes.

Citations and references

• 35 ILCS 5/201–203, 502(a)
• 35 ILCS 5/304(a)(3)(C-5)(iv)
• 86 Ill. Adm. Code 100.9720(c)(4)–(6)

Subject

Public Law 86-272/Nexus

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2012.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2012/it-12-0007.pdf

Original ruling text

IT 12-0007-GIL 03/15/2012 PUBLIC LAW 86-272/NEXUS
General Information Letter: Nexus issues are not generally suitable for resolution by
letter ruling.
March 15, 2012
Dear:
This is in response to your letter dated November 15, 2011 in which you state the following:
On behalf of a client, hereafter referred to as AAA (an alias), we are respectfully requesting a
general information letter concerning nexus for income tax purposes for the State of Illinois.
Specifically we are inquiring if based on the business activities of AAA as described below,
would nexus exist for purposes of income taxation to AAA including for registration and
reporting purposes.
AAA is organized as a limited liability company under the laws of the State of STATE. All of
the members of AAA are residents of STATE. AAA has only one physical location and it is in
STATE. All employees work solely in STATE. AAA has agreements with national companies
(AAA’s customers) to arrange repairs and maintenance to their customer’s commercial
buildings that are located in various states. For example if a customer’s commercial building
that is located in Illinois has a water leak, the corporate national office will call directly to AAA
to get services of a plumber. The customer’s corporate national office may be located in
another state or possibly in Illinois. AAA then will locate local contractors (e.g. plumbers in
Illinois for this example), and then usually issue a repair order on a not-to exceed basis to a
local contractor (e.g. plumber). A not-to exceed order is a work order where the price is set by
AAA at a limit that the contractor cannot exceed. The contractor (e.g. plumber) can choose
whether to accept such an order or counter with different amount. As an alternative to a notto-exceed order, on occasion AAA will get bids and then issue a repair order to the contractor
(e.g. plumber). The repair order will direct the contractor (e.g. plumber) to contact the building
manager to schedule and make the repairs. Upon completion of the repairs AAA will pay the
contractor’s (e.g. plumber) bill. AAA will then bill their commercial building customer for the
cost of the contractor (e.g. plumber) and add on AAA’s management fee. Management fees
usually run from 14% to 23% of the contractor’s bill. AAA has no pre-existing arrangement
with the contractors and no continuing one after the job is completed. Repair and maintenance
work could include such items as plumbing, electrical, painting and other general building
repairs.
Based our review of federal law and Illinois statutes and rules it does not appear AAA’s
activities would create nexus for income taxation purposes for registration and reporting to
Illinois. Nonetheless, we are seeking a general information letter on this matter.

According to the Department of Revenue (“Department”) regulations, the Department may issue only
two types of letter rulings: Private Letter Rulings (“PLR”) and General Information Letters (“GIL”).
The regulations explaining these two types of rulings issued by the Department can be found in 2
Ill.Adm.Code §1200, or on the website http://www.tax.illinois.gov/LegalInformation/regs/part1200.
Due to the nature of your inquiry and the information presented in your letter, we are required to
respond with a GIL. GILs are designed to provide background information on specific topics. GILs,
however, are not binding on the Department.

IT 12-0007-GIL
March 15, 2012
Page 2

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.
The citation for the Illinois Department of Revenue regulation clarifying nexus is 86 Ill.Adm.Code
Section
100.9720
and
can
be
found
on
the
Department’s
website
at
http://tax.illinois.gov/LegalInformation/regs/Part100/100-9720.pdf. Please refer to subsections (c)(4)
entitled “Unprotected Activities,” (c)(5) entitled “Protected Activities” and (c)(6) entitled “Independent
Contractors.” This will provide you with a helpful guideline in determining whether your client’s
activities will subject them to Illinois income taxation.
Your question is whether your client will owe Illinois income taxes as a result of operating a repair and
maintenance call center for national companies with multi-site locations. Your client’s business
consists of coordinating contracted labor on an as-needed basis for its national customers, some of
them located in Illinois. According to the limited facts in your letter, it appears that the “contracted”
work is performed by independent contractors. If so, please note the regulation states the use of
independent contractors may only afford a nonresident immunity from taxation for “limited activities.”
The fact that your client’s business is entirely set up around using independent contractors on a
regular basis may jeopardize the protections afforded in 86 Ill.Adm.Code Section 110.9720(c)(6).
The question of nexus is highly fact-dependent. Therefore, the Department does not issue rulings
regarding whether a taxpayer has nexus with the State. Such a determination can only be made in
the context of an audit where a Department auditor has access to all relevant facts and
circumstances. Based on the limited facts presented in your letter, however, it seems likely that
contracting sales of services in Illinois on a regular basis will subject your client to Illinois income
taxation.
IITA Section 304(a)(3)(C-5) is most applicable to the situation addressed in your letter because your
client’s activities are sales other than sales of tangible personal property. IITA Section 304(a)(3)(C5) states as follows:
(C)

Sales, other than sales governed by paragraphs (B), (B-1), (B-2), (B-5) and (B-7), are in
this State if:
…
(iv)
Sales of services are in this State if the services are received in this State. For
the purposes of this section, gross receipts from the performance of services provided
to a corporation, partnership, or trust may only be attributed to a state where that
corporation, partnership, or trust has a fixed place of business. If the state where the
services are received is not readily determinable or is a state where the corporation,
partnership, or trust receiving the service does not have a fixed place of business, the
services shall be deemed to be received at the location of the office of the customer

IT 12-0007-GIL
March 15, 2012
Page 3
from which the services were ordered in the regular course of the customer's trade or
business. If the ordering office cannot be determined, the services shall be deemed to
be received at the office of the customer to which the services are billed. 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. The Department shall
adopt rules prescribing where specific types of service are received, including, but not
limited to, publishing, and utility service.
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 general information letter 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