Does Illinois source an investment advisor's fee receipts to the location of the investment funds' underlying investors, or to the billing address of the fund itself?

Plain-English summary

This Illinois Private Letter Ruling addresses a narrow but recurring apportionment question for investment advisors: when a company earns management, transfer-agent, or 12b-1 fees for advising Regulated Investment Companies (mutual funds organized as Delaware Statutory Trusts), where do those receipts get "sourced" for the Illinois sales factor?

The taxpayer, a C corporation investment advisor, historically sourced its advisory receipts by looking through to the state where the funds' ultimate shareholders lived, using census-type data as a proxy since individual shareholder addresses are often unknown (many investors hold shares through intermediaries with omnibus accounts). After Illinois adopted revised market-based sourcing regulations in 2017 (86 Ill. Adm. Code 100.3370(c)(6)(D)(iii)), the taxpayer asked the Department to confirm it could instead source these receipts to the office of the fund to which the services are billed.

The Department agreed. Under the statutory sourcing waterfall in 35 ILCS 5/304(a)(3)(C-5)(iv), receipts from services to a corporation, partnership, or trust can only be attributed to a state where that customer has a "fixed place of business." Here, the investment funds had no tangible property, payroll, or physical presence anywhere -- their books, records, and asset custody were all handled by an independent custodian in another state, and their board of trustees met at various locations (including occasionally in Illinois) without maintaining any office. Because the funds had no fixed place of business, and their "ordering office" could not be determined, the ruling applied the next rung of the sourcing waterfall: sourcing to the office of the customer to which the services are billed. Since the custodian's office (where the funds' bills were serviced) was located outside Illinois, the ruling means these advisory receipts are not attributed to Illinois's sales factor numerator.

The ruling also draws a distinction that matters for similar advisors: under Example 5 of 86 Ill. Adm. Code 100.3370(c)(6)(D)(iii), services provided separately to individual investors (like account statements or allocations of earnings) are sourced to where those investors reside or have their billing address. But investment advisory services performed for the fund itself -- not separately for each investor -- fall into a different category and are not sourced by looking through to investors at all.

What this means for you

Investment advisors and fund managers

If you provide advisory, brokerage, or similar services to an investment fund (rather than services delivered separately to each investor), this ruling illustrates that Illinois's sourcing rules may look to the fund's own fixed place of business, ordering office, or billing office -- not to where the fund's underlying shareholders live. If the fund has no fixed place of business and no determinable ordering office, the receipts may ultimately source to wherever the fund's bills are serviced, such as a custodian's office.

Accountants and tax professionals preparing apportionment schedules

This PLR walks through the full statutory waterfall in 35 ILCS 5/304(a)(3)(C-5)(iv): (1) fixed place of business of the customer, (2) if not determinable, the customer's ordering office, and (3) if that's not determinable either, the customer's billing office. It's a useful worked example of how the Department applies 86 Ill. Adm. Code 100.3370(c)(6)(D)(iv), including the point that an independent custodian's office is not automatically imputed to the fund as its "fixed place of business."

Business owners with similar fund-servicing arrangements

If your company services investment funds and has historically sourced receipts to investor locations by estimation, this ruling shows one path the Department has approved for confirming a billing-office sourcing methodology instead -- but only after a full facts-and-circumstances PLR request, and only for the taxpayer that requested it.

Common questions

Q: Can I rely on this ruling for my own company's sourcing position?
A: No, not directly. This is a Private Letter Ruling under 2 Ill. Adm. Code 1200.110, and by its own terms it binds the Department only with respect to the specific company that requested it, and only to the extent the facts submitted were correct and complete. Other taxpayers, even in similar situations, cannot rely on it as authority for their own returns -- though it can be instructive as to how the Department applies the sourcing regulations.

Q: Why didn't the Department source the receipts to where the funds' investors live?
A: Because the regulation's Example 5 sources investor-location-based receipts only for services provided separately to investors (such as investor statements or allocations of earnings). Investment advisory services performed for the fund as a whole -- not separately for each investor -- fall outside that rule, so the Department did not look through to investor location for these receipts.

Q: Why was the fund treated as having no fixed place of business?
A: The funds had no tangible assets, payroll, or offices of their own. Their books, records, and asset custody were maintained by an independent custodian, and under the incorporated federal rules (26 CFR 1.864-7), an independent agent's office is not treated as the fixed place of business of the principal, regardless of the agent's contracting authority.

Q: What happens if the underlying facts change?
A: The ruling explicitly states it binds the Department only if the material facts as recited are correct and complete, and that it will cease to bind the Department if there is a pertinent change in statutory law, case law, rules, or in the material facts recited in the ruling.

Citations and references

Statutes and regulations:

• 35 ILCS 5/304(a)(3)(A) (definition of the sales factor)
• 35 ILCS 5/304(a)(3)(C-5)(iv) (market-based sourcing waterfall: fixed place of business, ordering office, billing office)
• 35 ILCS 5/1501(a)(9.5) (definition of "fixed place of business," tied to IRC Section 864)
• 86 Ill. Adm. Code 100.3370(c)(6)(D)(iii), Example 5 (sourcing of investment fund services; distinguishing services to the fund from services provided separately to investors)
• 86 Ill. Adm. Code 100.3370(c)(6)(D)(iv) (billing-office rule when the ordering office is not determinable)
• 26 CFR 1.864-7(b)(1), (b)(2), (d)(1)(i) (federal "fixed place of business" and independent-agent rules, incorporated by reference)
• 2 Ill. Adm. Code 1200.110 (private letter ruling procedure and binding effect)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2019.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2019/it19-0002-plr.pdf

Original ruling text

IT 19-0002-PLR 08/14/2019

SALES FACTOR

Gross Receipts from Investment Advisory Services are Sourced to Billing
Address of Customer
August 14, 2019
Re:

Request for Private Letter Ruling
COMPANY
FEIN: ########

Dear Xxxx:
This is in response to your letter dated February 28, 2019 in which you request a Private
Letter Ruling on behalf of COMPANY. Review of your request for a Private Letter Ruling
indicates that all information described in paragraphs 1 through 8 of subsection (b) of 2
Ill. Adm. Code 1200.110 is contained in your request. This Private Letter Ruling will bind
the Department only with respect to COMPANY. Issuance of this ruling is conditioned
upon the understanding that COMPANY. and/or any related taxpayer(s) is not currently
under audit or involved in litigation concerning the issues that are the subject of this ruling
request.
The facts and analysis as you have presented states as follows:
We are writing to request a Private Letter Ruling under 2 Ill. Admin. Code §
1200.110, on behalf of our client, COMPANY. (hereinafter “Taxpayer”), in relation
to its Illinois Corporation Income and Replacement Tax Return sales factor
computation. Taxpayer requests your ruling with respect to the sourcing of receipts
received from advisory services performed on behalf of investment funds under
the newly amended (effective August 3, 2017) sales factor regulations (specifically
86 Ill. Admin. Code §100.3370(6)(D)(iii)). Taxpayer respectfully requests
permission to source receipts received from advisory services performed on behalf
of investment funds to the office of the fund to which the services are billed.
Taxpayer is not currently under audit and does not have litigation pending with the
Illinois Department of Revenue (“Department”). Further, the issue addressed in
this Private Letter Ruling is not an issue being examined as part of a Department
audit or pending litigation.
Facts
Taxpayer is an investment advisor located in STATE and is designated as a C
Corporation for both Illinois and federal tax purposes. Taxpayer earns the majority
of its revenue for services it performs as the investment advisor for investment
funds, which are Delaware Statutory Trusts. Taxpayer does not have an ownership

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interest in the investment funds, other than an investment in shares of certain
mutual funds, in the same way that unaffiliated investors own shares of the funds.
Taxpayer “sponsors” the funds, by setting up the funds, soliciting investors, and
managing the funds. The investment funds (generally Regulated Investment
Companies or “RICs) pay Management Fees. Transfer Agent Fees and 12b-1 fees
to the Taxpayer. Historically, in states with market based sourcing or special
industry-specific rules for mutual fund service providers, the Taxpayer uses the
location of the underlying shareholders of the RICs to apportion income to each
state. Since a large portion of the investing public invests in RICs through
independent financial advisors (intermediaries with omnibus accounts), the
individual underlying shareholder information is difficult, if not impossible, to obtain,
and what information is obtained may not accurately reflect where the
shareholders actually live. As such, the Taxpayer has concluded that using census
information in order to source the service revenue provides a reasonable reflection
of where the ultimate benefit of the services are received.
The investment funds have no fixed assets, physical presence or employees. As
such, the funds do not have a physical presence in any state. The investment
funds’ trustees (“Trustees”) are elected by the shareholders of the investment
funds. Services provided to the investment funds are approved by the Board of
Trustees, who do not maintain an office and as such have no physical presence.
The Trustees meet several times throughout the year at various locations in the
United States. The meetings are both telephonic and in-person. Of the at least four
annual in-person meetings per year, typically one is held in the state of Illinois. The
individual Trustees reside in various states. The books and records are
maintained, and fund assets are held by a custodian located in STATE 1.
Taxpayer’s address is used for tax return filing purposes. The Taxpayer sends its
bills electronically to the custodian located in STATE 1, and the custodian transfers
money from the funds to the Taxpayer.
Conclusion of the taxpayer
For the reasons stated below, Taxpayer respectfully requests the following ruling:
Taxpayer should source receipts related to advisory services performed on
behalf of investment funds to the office of the fund to which the services are
billed for purposes of computing its Illinois sales factor numerator.
Analysis
A tax is imposed on the net income of every individual, corporation, trust, and
estate. In the case of a corporation, the tax is imposed on the base income which
is allocated or apportioned to Illinois. Illinois apportioned income is determined by
multiplying the taxpayer’s base income by a ratio of sales sourced to Illinois over

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total sales everywhere. At issue in this request is the sourcing rules for the sales
of advisory services performed on behalf of investment funds.
Sales of service are sourced to Illinois using a tiered market-based “waterfall”
methodology.
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
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
which the services are billed. 35 ILCS §5/304(a)(3)(C-5)(iv)
The term “fixed place of business” has the same meaning as that term is given in
Section 864 of the Internal Revenue Code and the related Treasury regulations.
(See 35 ILCS §5/1501(a)(9.5).)
A) As a general rule, a fixed place of business is a fixed facility, that is, a place,
site, structure or other similar facility through which the taxpayer engages in a trade
or business. (See 26 CFR 1.864-7(b)(1).)
B) A taxpayer is not considered to have a fixed place of business merely because
the taxpayer uses another person’s fixed place of business, whether or not the
other person and the taxpayer are related persons, through which to transact a
trade or business, if the trade or business activities of the taxpayer in that fixed
place of business are relatively sporadic or infrequent, taking into account the
overall needs and conduct of that trade or business. (See 26 CFR 1.864-7(b)(2).)
C) A fixed place of business of an agent of the taxpayer who is not an independent
agent is not a fixed place of business of the taxpayer unless the agent has the
authority to negotiate and conclude contracts in the name of the taxpayer, and
regularly exercises that authority. (See 26 CFR 1.864-7(d)(1)(i).)
D) A fixed place of business of an independent agent of the taxpayer shall not be
treated as the office or other fixed place of business of the taxpayer, irrespective
of whether the agent has authority to negotiate and conclude contracts in the name
of the principal and regularly exercises that authority.

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E) For purposes of this subsection (b)(1), “independent agent” means a general
commission agent, broker or other agent of an independent status acting in the
ordinary course of his or her business in that capacity.
Here, the funds have no tangible property, payroll or physical presence anywhere.
Furthermore, both Illinois and federal law hold that the office of an agent operating
independently and in the ordinary course of its business shall not be attributed to
the principal irrespective of whether the agent has authority to negotiate and
conclude contracts in the name of the principal, and regularly exercises that
authority. Taxpayer is retained as an investment advisor in its ordinary course of
business for multiple investment funds owned by shareholders across the country.
Taxpayer is in the business of providing investment advice and managing the
funds for the benefit of each fund’s shareholders. Taxpayer does not “own” the
funds as in a subsidiary relationship, in fact the funds are a client of the taxpayer.
The custodian is in the business of performing back office functions for the
investment funds and handles the custody of the assets, money movements, and
accounting of the investment funds. The custodian operates in its ordinary course
of business and performs similar services for thousands of investment funds as an
independent agent. As such, the investment funds should not be deemed to have
a fixed place of business under Illinois law.
Under 35 ILCS § 5-304(a)(3)(C-5)(iv), Taxpayer has historically taken the position
that the benefit of the investment services are received by the investment funds’
ultimate owners.
On August 3rd, 2017, the Department adopted revised sourcing regulations.
Relevant to Taxpayer and the stimulus for this private letter ruling request, the
adopted regulations added the following example:
Example 5. Services performed by an investment fund on behalf of an investor are
received in this State if the investor resides in this State (in the case of an
individual) or has its ordering or billing address in this State (for other investors).
In the case of services provided by Taxpayer to or on behalf of the investment fund
that are directly connected with services provided separately to the investors, such
as preparation of communications and statements to investors, and allocations of
earnings and distributions to investors, the service is also received in this State to
the extent the investors reside (or have their ordering or billing address) in this
State. Accordingly, receipts of Taxpayer for these services are allocated to this
State on the basis of the ratio of: the average of the outstanding shares in the fund
owned by shareholders, partners or other investors residing (or having their
ordering or billing address) within this State at the beginning and end of each
taxable year of the taxpayer; and the average of the total number of outstanding
shares in the fund at the beginning and end of each year. Residence or ordering
or billing address of the shareholder, partner, or other investor is determined by
the mailing address in the records of the investment fund or the taxpayer. Services
provided to an investment fund that are not directly connected to or in support of

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services provided separately to investors, such as brokerage services or
investment advising, are not received by the customer at the location of its
investors. 86 Ill. Admin. Code §100.3370(6)(D)(3).
The quoted language above divides investment fund services into two categories.
The first category is comprised of services provided separately to investors. This
first category is sourced to the location of the investors. The second category is
comprised of services not directly provided separately to the investors. This
second category is not sourced to the location of the investors and expressly
includes investment advisory services. Because the majority of Taxpayer’s
services fall into the second category, under the amended regulations, these
services should not be sourced to the location of the investors.
Illinois law states that 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. When the
corporation, partnership, or trust has no fixed place of business, Taxpayer would
apply the statutorily-provided tiered methodology for sourcing to where the
services are received that has a fixed place of business, ordering office, or billing
office of the investment funds. Here, the state where the services are received is
not readily determinable, thus the services shall be deemed to be received at the
location of the office of the customer 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 which the services are billed. The investment funds do not have an
ordering office. Because the location of an ordering office cannot be determined,
the services would ultimately be sourced to the office of the customer which the
services are billed. Considering that the investments of the funds are held by the
custodian and the books and records of the investment funds are maintained by
the custodian in STATE 1, and all bills of the investment funds are serviced by the
custodian in STATE 1, it appears the billing office is located in STATE 1. As such,
by following the Department’s adopted revised sourcing regulations and applying
the statutorily-provided tiered methodology for sourcing to where the services are
received, the Taxpayer ultimately will source 100% of their advisory services to the
location of the custodian’s billing office, which is in STATE 1.
Summary
The revised regulations adopted on August 3rd, 2017, state that services provided
to an investment fund that are not directly connected to or provided separately to
investors should not be sourced to the state in which the ultimate investor resides.
Taxpayer has historically sourced a portion of their investment advisory services
to Illinois by looking through to the ultimate investor and is seeking confirmation to
begin using the location of the office of the customer which the services are billed
to source the investment advisory services going forward.

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Statement of Authorities Contrary to the Taxpayer’s View
Neither the Taxpayer nor the Taxpayer’s representatives are aware of any contrary
rulings, cases, statutes or regulations to the position requested in this letter.
RULING
Section 304(a)(3)(A) of the Illinois Income Tax Act (“IITA” ; 35 ILCS 5/304(a)(3)(A))
defines the sales factor for taxpayers other than insurance companies, financial
organizations, federally regulated exchanges, and transportation companies, as follows:
The sales factor is a fraction, the numerator of which is the total sales of the person
in this State during the taxable year, and the denominator of which is the total sales
of the person everywhere during the taxable year.
IITA Section 304(a)(3)(C-5) provides, in part, for taxable years ending on or after
December 31, 2008, sales, other than sales governed by paragraphs (B), (B-1), (B-2), (B5) and (B-7), are in this State if any of the following criteria are met:
…
(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 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 services are received, including, but not
limited to, publishing, and utility service.
Department Regulations Section 100.3370(c)(6)(D)(iii) provides that services received in
Illinois include, but are not limited to:
Services performed by a taxpayer that are directly connected to or in support of
services received in this State are also services received in this State.

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This rule is illustrated in Example 5 of the regulation, which provides:
Example 5. Services performed by an investment fund on behalf of an investor are
received in this State if the investor resides in this State (in the case of an
individual) or has its ordering or billing address in this State (for other investors).
In the case of services provided by Taxpayer to or on behalf of the investment fund
that are directly connected with services provided separately to the investors, such
as preparation of communications and statements to investors, and allocations of
earnings and distributions to investors, the service is also received in this State to
the extent the investors reside (or have their ordering or billing address) in this
State. Accordingly, receipts of Taxpayer for these services are allocated to this
State on the basis of the ratio of: the average of the outstanding shares in the fund
owned by shareholders, partners or other investors residing (or having their
ordering or billing address) within this State at the beginning and end of each
taxable year of the taxpayer; and the average of the total number of outstanding
shares in the fund at the beginning and end of each year. Residence or ordering
or billing address of the shareholder, partner or other investor is determined by the
mailing address in the records of the investment fund of the taxpayer. Services
provided to an investment fund that are not directly connected to or in support of
services provided separately to investors, such as brokerage services or
investment advising, are not received by the customer at the location of its
investors.
In addition, Department Regulations Section 100.3370(c)(6)(D)(iv) provides the following
special rule:
Under IITA Section 304(a)(3)(C-5)(iv), if the state where the services are received
is not readily determinable, the services shall be deemed to be received at the
location of the office of the customer from which the services were ordered in the
regular course of the customer’s trade or business, or, if the ordering office cannot
be determined, at the office of the customer to which the services are billed. If the
service is provided to an individual who provides a residential address as the place
from which the services are ordered or to which the services are billed, rather than
an office address, the residential address shall be used. For purposes of this
provision, the state where services are received is not readily determinable if the
facts necessary to make the determination are not contained in the books and
records of the taxpayer or any person related to the taxpayer within the meaning
of 26 USC 267(b) or if the available facts would allow reasonable persons to reach
different determinations of the state in which the services were received.
Your letter indicates that the receipts which are the subject of this ruling request consist
of revenues for services the Taxpayer performs as investment advisor to investment
funds. Under Department Regulations Section 100.3370(c)(6)(D)(iii)(Example 5), these
services are not received by the Taxpayer’s customer, the investment fund, at the location
of its investors. Moreover, none of the rules in Section 100.3370(c)(6)(D)(iii) applies to

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determine where the Taxpayer’s investment advisory services are received. Your letter
indicates that Taxpayer’s customers do not own any physical assets, nor do they have
employees. The activities of the funds are controlled by boards of trustees, which meet
several times throughout the year (sometimes remotely) at various locations in the United
States, including Illinois. In addition, your letter indicates that the books and records of
the funds, as well as custody of all funds’ assets, are maintained by a custodian located
in STATE 1. Based on these facts, reasonable persons may disagree as to the state in
which the Taxpayer’s investment advisory services are received. Accordingly, under
Regulations Section 100.3370(c)(6)(D)(iv), the Taxpayer’s services shall be deemed to
be received at the location of the office of the customer from which the services were
ordered in the regular course of the customer’s trade or business, or, if the ordering office
cannot be determined, at the office of the customer to which the services are billed. Note
that for purposes of determining the ordering office of the customer, the ordering office is
not determinable if the facts necessary to make that determination are not contained in
the books and records of the Taxpayer or any person related to the Taxpayer within the
meaning of 26 USC 267(b). In this case, your letter represents that the ordering office
cannot be determined. Accordingly, the Taxpayer’s investment advisory services shall
be deemed to be received at the office of the customer to which the services are billed.
This ruling shall bind the Department as provided herein. The facts upon which this ruling
is based are subject to review by the Department during the course of any audit,
investigation or hearing and this ruling shall bind the Department only if the material facts
as recited and incorporated in this ruling are correct and complete. This ruling shall bind
the Department for all taxable years, except as limited pursuant to 2 Ill. Adm. Code
1200.110(d) and (e). This ruling will cease to bind the Department if there is a pertinent
change in statutory law, case law, rules or in the material facts recited in this ruling.
Sincerely,

Brian L. Stocker
Chairman, PLR Committee (Income Tax)