Did an Illinois-headquartered employer have to withhold Illinois tax when its nonresident truck drivers performed all services in another state?

Plain-English summary

Illinois withholding was not required if the nonresident drivers performed no services in Illinois. Their employer was headquartered in Illinois and asserted that their base of operations or direction and control was there, but the drivers said they lived and worked entirely in another state.

Section 304(a)(2)(B) required at least some Illinois service before the base-of-operations test could make compensation Illinois-paid. With none, the wages were classified as paid in the other state.

What this means for you

Employer headquarters and employee service location are different facts. Confirm actual routes and duties before withholding from a nonresident.

Common questions

Q: Did an Illinois employer automatically create Illinois wages?
A: No.

Q: Did an asserted Illinois work base matter with zero Illinois services?
A: No, under the rule applied.

Citations and references

• 35 ILCS 5/701(a)
• 35 ILCS 5/304(a)(2)(B)
• 86 Ill. Adm. Code 100.3120(a)(2)

Subject

Compensation

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2013.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2013/it-13-0009.pdf

Original ruling text

IT 13-0009-GIL 08/26/2013 COMPENSATION
General Information Letter: Employee compensation of a nonresident is not sourced to
Illinois unless the nonresident performs some services in Illinois.
August 26, 2013
Dear:
This is in response to your letter dated August 13, 2013. The nature of your letter requires that we
respond with a General Information Letter (GIL). A GIL 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 accessed from the Department’s web site at www.ILtax.com.
Your letter states as follows:
I talked to one of your agents on this matter and he told me to contact you for help. The
problem is that there is 6 truck drivers here in CITY1, STATE that live and work in CITY1,
STATE and the company that we work for is located in CITY2, IL. Each week they deduct
Illinois income taxes from our pay check even though we only work in CITY1, STATE. I tried to
tell them that we do not need to have this taken out because we do not work or live there in
Illinois. So attached is the response I got back from them. This letter does not make sense to
me because they the company pays corporate Illinois taxes for the business but we should not
have to pay Illinois state income taxes there when we work in CITY1, STATE. Please clear this
up with us drivers in CITY1, STATE and or the Company in Illinois. They will only change this if
you tell them otherwise. This would be greatly appreciated for us here in CITY1, STATE.
Your employer’s letter, a copy of which was included with your letter, states:
We are in receipt of your letter requesting exemption from Illinois state tax withholding. Based
on our thorough research with the Illinois Department of Revenue, we have substantiated that
COMPANY is following the proper procedures outlined in Department of Revenue Publications
by withholding Illinois state taxes from your wages. While you are a resident of STATE, your
base of operations from which the service you provide is directed or controlled in the State of
Illinois.
Therefore, we will continue to deduct Illinois state taxes from your wages. At the end of the tax
year, you must file an IL 1040 and follow the guidelines provided for a non-resident of the
state.
If you disagree with this decision, please have the Illinois Department of Revenue provide us
written justification that supports a determination to exempt you from state withholding.
RULING
Section 701(a) of the Illinois Income Tax Act (“IITA” 35 ILCS 5/701) requires every employer
maintaining an office or transacting business in Illinois to withhold Illinois income tax on wages that
constitute “compensation paid in this State” under IITA Section 304(a)(2)(B). Section 304(a)(2)(B)
states that compensation is paid in this State if:
(1) The individual’s service is performed entirely within this State;
(2) The individual’s service is performed both within and without this State, but the service

IT 13-0009-GIL
August 26, 2013
Page 2
performed without this State is incidental to the individual’s service performed within this
State; or
(3) Some of the service is performed within this State and either the base of operations, or if
there is no base of operations, the place from which the service is directed or controlled is
within this State, or the base of operations or the place from which the service is directed or
controlled is not in any state in which some part of the service is performed, but the
individual’s residence is in this State.
As can be seen, where no part of an individual’s service is performed within Illinois, income tax
withholding is not required. This is true regardless of the fact that the individual’s base of operations is
in Illinois.
Department Regulations Section 100.3120(a)(2) elaborates on these rules as follows:
The [rules regarding compensation paid in this State] are to be applied in such manner that if
they were in effect in other states an item of compensation would constitute compensation
“paid in” only one state. Thus, if an item would, under these rules, constitute compensation
paid in a state other than Illinois because the individual’s service was localized in such other
state …, it could not also be compensation paid in Illinois.
Your letter suggests that the services you perform for COMPANY are performed entirely within the
STATE. If that is in fact the case, then your wages are not considered compensation paid in Illinois.
The rules under IITA Section 304(a)(2)(B) and Regulations Section 100.3120(a)(2) would classify
your wages as compensation paid in STATE. Accordingly, your employer would not be required to
withhold Illinois income tax.
As stated above, this is a GIL. A GIL 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 have further questions
regarding this GIL, please call (217) 782-7055.
Sincerely,

Brian L. Stocker
Associate Counsel (Income Tax)