How does Illinois source a nonresident self-employed consultant's income when the client is headquartered in Illinois but the work is mostly done elsewhere?

Plain-English summary

A tax preparer wrote to the Illinois Department of Revenue about a nonresident client: a Virginia resident who does consulting work nationwide as a self-employed individual. In 2016, that client was physically present in Illinois for only 12 days (out of roughly 240 working days) while performing a contract for a company headquartered in Illinois, paid as a monthly retainer rather than by the hour or by job. Two Department customer service representatives had told the preparer that 100% of that contract's income was taxable in Illinois simply because the client's headquarters was in Illinois, and the preparer asked whether that was really correct, or whether the income should instead be allocated based on days worked in the state (e.g., 12 days out of 240).

The Department's answer: the customer service reps were right, but not for the "headquarters" reason they gave. The Department explained that the wage-sourcing rules the preparer had been researching (which turn on physical presence and workdays) apply to wages, not to this kind of self-employment/business income. For business income from services, Illinois instead applies its services-sourcing rule in the Illinois Income Tax Act: receipts from services are sourced to Illinois if the services are "received" in Illinois, and for services provided to a corporation, partnership, or trust, that means wherever that business client has a fixed place of business. Because the client's Illinois-headquartered company had a fixed place of business in Illinois, the Department concluded the services were received there, so the entire contract's income was sourced 100% to Illinois — regardless of the taxpayer's small number of physical workdays in the state.

The letter is explicitly a General Information Letter (GIL): it is not a statement of Department policy and is not binding on the Department, and the Department noted the taxpayer could instead request a binding Private Letter Ruling by submitting the information required for that process.

What this means for you

Self-employed consultants and other nonresident service providers

If you're a nonresident who performs consulting or other personal services for an Illinois-based business client, don't assume Illinois sourcing works like wage sourcing (counting your days physically present in the state). If the income is business/self-employment income rather than wages, Illinois applies its services-sourcing rule, which looks at where your client is fixed for business purposes — not at how many days you personally spent in Illinois. A retainer contract with an Illinois-headquartered corporate client can be sourced 100% to Illinois even if you barely set foot in the state.

Accountants and tax preparers

This letter is a useful reminder to classify the income correctly before picking a sourcing rule. Wage compensation is sourced under 35 ILCS 5/304(a)(2) and its "received in Illinois" test (see also Illinois Publication 130), which can be day-count driven. Business income from services is instead sourced under 35 ILCS 5/304(a)(3)(C-5)(iv), which looks to where the service is "received" — for a corporate/partnership/trust client, that's the client's fixed place of business, not a proportion of workdays. Getting this classification wrong (as the preparer's clients' 2016 return risked doing, by asking a day-count question) can lead to under- or over-sourcing income.

Businesses paying nonresident consultants

If your Illinois-headquartered business pays retainer-based consulting fees to nonresident, self-employed contractors, be aware that the Department's sourcing analysis for the consultant's income looks at your company's fixed place of business, not the consultant's travel schedule. This letter doesn't address your own withholding or reporting obligations, but it signals how the Department views where such services are "received" for sourcing purposes.

Anyone relying on Department phone guidance

The preparer here had already been told the same bottom-line answer twice by Department customer service representatives, but for the wrong legal reason (headquarters location, rather than the fixed-place-of-business/services-sourcing rule). This letter is a reminder that oral guidance from a phone representative isn't authoritative, and even a written GIL like this one is not binding Department policy — a Private Letter Ruling is the only way to get a binding answer to a specific fact pattern.

Common questions

Q: Is a nonresident consultant's income taxed by Illinois based on the number of days physically worked there?
A: Not if the income is self-employment/business income. This letter distinguishes wage sourcing (which can be day-count driven under 35 ILCS 5/304(a)(2)) from business-income sourcing for services, which instead looks at where the services are "received" under 35 ILCS 5/304(a)(3)(C-5)(iv).

Q: How does Illinois decide where a service is "received" for a business client?
A: Under 35 ILCS 5/304(a)(3)(C-5)(iv), gross receipts from services provided to a corporation, partnership, or trust may only be attributed to a state where that entity has a fixed place of business. Here, the client company was headquartered in Illinois, so the Department treated the services as received in Illinois.

Q: Does that mean 100% of the contract income was sourced to Illinois even though the consultant was there only 12 days?
A: Yes, according to this letter. Because the services were treated as received in Illinois (the client's fixed place of business), the Department concluded the entire retainer for that contract was sourced to Illinois, regardless of the taxpayer's limited physical presence.

Q: The letter also describes a third scenario involving a company not headquartered in Illinois with contacts in 10 states — did the Department answer that one?
A: No. The letter's RULING section addresses only the first scenario (the Illinois-headquartered client). It does not separately resolve the taxpayer's second and third hypotheticals about partial allocation methods or the non-Illinois-headquartered client.

Q: Can the taxpayer rely on this letter as binding?
A: No. It is a General Information Letter under 86 Ill. Adm. Code 1200.120(b) and (c) — it is not a statement of Department policy and is not binding on the Department. The letter notes that a taxpayer not under audit can instead request a binding Private Letter Ruling by submitting the information listed in 86 Ill. Adm. Code 1200.110(b).

Citations and references

• 35 ILCS 5/304(a)(2) (sourcing of compensation/wages for personal services performed partly within and partly without Illinois)
• 35 ILCS 5/304(a)(2)(B) (when nonresident wage compensation is considered received in Illinois)
• 35 ILCS 5/304(a)(3)(C-5)(iv) (sourcing of gross receipts from services to a corporation, partnership, or trust based on the client's fixed place of business)
• 86 Ill. Adm. Code 1200.120(b) and (c) (General Information Letters are not binding Department policy)
• 86 Ill. Adm. Code 1200.110(b) (information required to request a binding Private Letter Ruling)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2017.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2017/it-17-0013-gil.pdf

Original ruling text

IT 17-0013-GIL 12/27/2017

Residency/Non-residency

Sourcing self-employment income (This is a GIL.)

December 27, 2017

Re: Sourcing self-employment income

Dear Xxxxx:
This is in response to your letter received December 18, 2017, in which you requested information
regarding sourcing of Illinois individual income tax. 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.
Your letter states as follows:
I ask your guidance with respect to a question concerning the 2016 Illinois income tax return
that was prepared for the above captioned individuals and the proper allocation of income to
the State of Illinois for compensation earned by a non-resident, self-employed individual for
consulting services performed for an Illinois based company.
I have reviewed the Illinois regulations regarding sourcing of revenue (Title 86, Part 100,
Section 100.3370, Section 5(iii)) and have spoken with two of your department’s customer
service representatives but am still not clear on the proper allocation of income to be taxed in
Illinois.
The 2016 Illinois return that we prepared for the above clients included 100% of the income
earned by the taxpayer for consulting services under a contract for a company headquartered
in Illinois. Both customer service representatives with your agency with whom I spoke indicated
that 100% of the income from that contract is taxable in Illinois for the sole reason that the
headquarters of the company was in Illinois, despite the fact that my client was physically
present in Illinois for only 12 days in 2016 and the and the majority of the work on the contract
was done outside of Illinois.
Here are the facts of the case:
• The taxpayer is a domiciliary resident of Virginia who performs consulting services for
various clients throughout the country and who receives self-employment income for those
services. In most cases, the client receives a monthly retainer for services so there is not
direct payment for a direct service, no hourly payment and no “per job” payment. There
may be times where the taxpayer enters a state to give a speech or to make a presentation
for which he is paid a specific amount but no such event occurred in 2016 in Illinois.
•

The taxpayer’s base of operations is his home office in Virginia. His work product consists
of written documents, communicated electronically, or participation in teleconferences or
other digital communications.

•

In 2016, the taxpayer was physically present in Illinois for 12 days (non-consecutive) at the
request of his client. The taxpayer’s physical presence in Illinois for those 12 days was de

IIT 17-0013-GIL
Page 2
minimis to the overall work that he performed for the client in 2016 and incidental to the
volume of his work for this client.

I ask your guidance regarding the following situations:

1. Is the entire amount of the retainer paid by an Illinois company (a company that is
   headquartered in Illinois) taxable as Illinois source income regardless of the number of
   days of physical presence in the state?
2. If the entire amount of the retainer paid by an Illinois company (a company that is
   headquartered in Illinois) is not fully taxable in Illinois, what is the appropriate method of
   allocation? E.g. Taxpayer is in Illinois 12 days for his client X during the 2016 tax year. Is
   the allocation of the retainer earned from this client based on 12 days/240 working days
   during the year? Or some other method?
3. The taxpayer has a contract with ABC Company, which is not headquartered in Illinois. As
   part of the contract, for which he receives a retainer, he is physically present in 10 different
   states during the tax year, for 2 days at a time, one of which is Illinois. How would the
   income from that contract be allocated—10%? Because 10% of his time was physically
   present in Illinois or 2 days/240 working days during the year? Or none at all?
   Illinois Code Section 304(a)(2) indicates that “gross receipts for the performance of personal
   services performed partly within and partly without this State . . . shall be attributable to this
   State only if a greater portion of the services were performed in this State, based on costs of
   performance.” Another indicates that the “throwout” rule applies.
   The taxpayer maintains that his physical presence in Illinois was incidental to the overall
   performance of his services as his availability to his clients at all times (via electronic means)
   represents the very reason for which he has the contract.
   I would appreciate your guidance on these issues.
   RULING
   The factors you reference would be pertinent if the income constituted wages. (See IITA section
   304(a)(2)(B) and Publication 130 for information on when compensation is considered received in
   Illinois by non-residents.) Given that the nature of the income in question constitutes business
   income, we look to the allocation and apportionment rules in Article 3 of the Illinois Income Tax Act.
   IITA section 304(a)(3)(C-5)(iv) provides:
   Sales of services are in this State if the services are received in this State. For 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.
   35 ILCS 5/304(a)(3)(C-5)(iv). Based on the information provided in your letter, the services appear to
   be received in Illinois by a corporation, partnership or trust with a fixed place of business in Illinois.
   Therefore, the income from that contract would be sourced 100% to Illinois.

IIT 17-0013-GIL
Page 3
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 regarding this letter, you may contact me at (312) 814-1722.
Sincerely,

Brian E. Fliflet
Deputy General Counsel, Income Tax