How did Illinois source wages when an Illinois resident with an Illinois base of operations worked 75% in Illinois and 25% in Ohio?

Plain-English summary

Illinois said 100% of the employee's wages were sourced to Illinois if the employee's base of operations was in Illinois, even though 25% of the work occurred in Ohio. Under the quoted rule, multistate compensation was paid in Illinois when some service occurred in Illinois and the employee's base of operations was there.

The GIL described a base of operations as a relatively permanent place from which the employee starts work and customarily returns for instructions, customer communications, supplies, equipment repair, or other functions needed for work elsewhere. It was not simply a percentage-of-days test.

The allocation also affected the Illinois resident credit for tax paid to Ohio. If the resident's only income was wages allocated entirely to Illinois under Illinois rules, the GIL said the credit limit was zero because no wages would be sourced outside Illinois if every state used those rules. The Department therefore asked the employer to report the wages allocated to Illinois on the W-2.

What this means for you

Determine the employee's actual base of operations before splitting wages by workdays. Also analyze the other state's tax and Illinois's credit limitation separately; paying tax elsewhere did not by itself make the income foreign-source under Illinois's allocation rule in this GIL.

Common questions

Q: Did working 25% of the time in Ohio mean only 75% of wages went on the Illinois W-2?
A: No, not when the employee's base of operations was in Illinois. The GIL sourced 100% of the wages to Illinois.

Q: Did Illinois automatically allow a credit for the Ohio tax?
A: No. On the stated assumption that the resident's only income was wages allocated entirely to Illinois, the GIL said the Illinois credit limit was zero.

Citations and references

• 35 ILCS 5/302(a)
• 35 ILCS 5/304(a)(2)(B)
• 35 ILCS 5/601(b)(3)
• Multistate Tax Commission Model Regulation § IV.14, as quoted in the GIL
• 86 Ill. Adm. Code 1200.110(b) and 1200.120(b), (c)

Subject

Compensation

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2015/it-15-0007-gil.pdf

Original ruling text

IT 15-0007 GIL – 7/14/2015 – Compensation.
Compensation of an employee performing services in multiple states is sourced entirely
to the state in which the employee’s base of operations is located.
July 14, 2015
Re:

Allocation of Wage Income

Dear Ms. XXXX:
This is in response to your letter dated April 17, 2015, in which you request a letter ruling. The
nature of your request 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. tax.illinois.gov.
In your letter you have stated the following:
We are trying to what amount should be reported in box 16 on Form W-2
when an employee lives and works in Illinois 75% of the time and works in
Ohio 25% of the time. Our payroll software provider has stated the following
since the employee posed the question for his 2014 form W-2 as to 100% of
his state taxable wages are Illinois and 25% of his state taxable wages are for
Ohio:
"We have always reported the total taxable amount when the is work and
resident, even though we calculate the correct amount of tax based on the
way the employee is setup in employee us tax authority [e.g. 75% work in
the work resident state and 25% in another work state]. The work and
resident state will show 100% of the taxable in the state accumulator.
Based on the documentation we have and past history for other employers,
we are handling the situation correctly in the employee us accumulators
and for reporting purposes."'
I spoke with someone at the Illinois Taxpayer Assistance office today and was
told that if the taxable wages for Illinois match the federal taxable wages, the
assumption is made that 100% of the employee's wages were earned in
Illinois; and if the employee tries to claim a credit for the time worked and
taxes paid in Ohio, the credit would not be recognized by Illinois.
Can you please provide something in writing to clarify what amount should be
reported as taxable wages for the State of Illinois. It seems like 75% should be
reported for Illinois; and 25% should be reported for Ohio. As the taxpayer
services agent at Illinois stated, when the two copies of the w-2 showing the
state taxable wages are added together they should total the federal taxable
wages.

Response
In the allocation and apportionment provisions of Article 3 of the Illinois Income Tax Act,
Section 302(a) (35 ILCS 5/302) provides:
All items of compensation paid in this State (as determined under Section
304(a)(2)(B)) to an individual who is a nonresident at the time of such payment
and all items of deduction directly allocable thereto, shall be allocated to this
State.
Section 304(a)(2)(B) of the Illinois Income Tax Act (35 ILCs 5/304) provides that, for
employees other than professional athletes:
Compensation is paid in this State if:
(i) The individual's service is performed entirely within this State;
(ii) The individual's service is performed both within and without this
State, but the service performed without this State is incidental to the individual's
service performed within this State; or
(iii) 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.

Multistate Tax Commission Model Regulation Section IV.14 defines “base of operations” as
“the place of more or less permanent nature from which the employee starts his work and to
which he customarily returns in order to receive instructions from the taxpayer or
communications from his customers or other persons or to replenish stock or other materials,
repair equipment, or perform any other functions necessary to the exercise of his trade or
profession at some other point or points.”
Under these provisions, if an employee’s base of operations is in Illinois, 100% of his or her
wages will be sourced to Illinois even if he or she works 25% of the time in Ohio and, under
Ohio law, the employee is taxed on 25% of his or her wages.
For more guidance on the application of these allocation provisions, see Publication 130, Who is
Required
to
Withhold
Illinois
Income
Tax,
which
can
be
found
at
http://www.iltax.com/Publications/Pubs/Pub-130.pdf
These allocation provisions also affect residents in the computation of the credit allowed for
taxes paid to other states. That credit is allowed by Section 601(b)(3) of the Illinois Income Tax
Act (35 ILCS 5/601), which also provides:
For taxable years ending on or after December 31, 2009, the credit provided under this
paragraph for tax paid to other states shall not exceed that amount which bears the same
ratio to the tax imposed by subsections 201(a) and (b) otherwise due under this Act as the
amount of the taxpayer's base income that would be allocated or apportioned to other

states if all other states had adopted the provisions in Article 3 of this Act bears to the
taxpayer's total base income subject to tax by this State for the taxable year.
In other words, a resident is entitled to a credit for any taxes paid to other states on income taxed
by Illinois, but the total credit cannot exceed a limit. The limit equals the amount of Illinois
income tax attributable to the income that is sourced outside Illinois using Illinois’ allocation and
apportionment provisions, determined by taking the taxpayer’s Illinois tax before credits, and
multiplying it by a fraction equal to the base income that would be allocated or apportioned to
other states if they all used Illinois allocation and apportionment rules, divided by the taxpayer’s
total base income.
If the resident’s only income is from wages allocated to Illinois under Section 304(a)(2)(B) of
the Illinois Income Tax Act, the limit on his or her credit for taxes paid to other states is zero
because, if they followed Illinois’ allocation provisions, no other state would tax those wages.
As a result, we ask the employer to report on the W-2 the amount of wages allocated to Illinois
under our law in order to allow the employee to compute the amount of credit to which he or she
is entitled.
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 are not under audit and you wish to obtain a binding Private Letter Ruling regarding your
factual situation, please submit all of the information set out in items 1 through 8 of Section
1200.110(b). If you have any further questions, you may contact me at (217) 782-7055.
Sincerely,

Paul S. Caselton
Deputy General Counsel – Income Tax