Does an Illinois trucking company have to withhold Illinois income tax on wages paid to an out-of-state driver who is dispatched from Illinois but drives interstate routes that originate and end near his home in another state?

Subject

Withholding

Plain-English summary

An accountant representing interstate trucking companies asked the Illinois Department of Revenue for a General Information Letter (GIL) about a recurring withholding question for clients. The example given: an Illinois company employs a driver who lives in Arizona; the driver's loads usually originate and end near his Arizona home, and his "only contact with Illinois is that he is being dispatched from this state." The driver's accountant argued Illinois should not require withholding at all, since the driver "effectively earns his income across state line[s] and should therefore pay only to the state he lives in." The requester noted confusion over a "limited exception for employers that fall under Surface Transportation Board jurisdiction" for "certain trucking companies," and asked whether interstate trucking companies fall under that exception.

The Department did not give a yes-or-no answer for this specific driver. Instead, it walked through the applicable framework:

• Under 35 ILCS 5/701 and 35 ILCS 5/304(a)(2)(B), Illinois employers must withhold on wages that count as "compensation paid in this State." That test looks at whether the work is performed entirely in Illinois, whether out-of-state work is merely "incidental" to Illinois work, or whether the employee's "base of operations" (or the place directing/controlling the work) is in Illinois.
• Separately, federal law (49 U.S.C. 14503(a)(1), reflected in 86 Ill. Adm. Code 100.2590(a)) bars any state other than an employee's state of residence from taxing compensation paid by certain motor carriers to an employee who "performs regularly assigned duties in 2 or more states," if the carrier's transportation is subject to Surface Transportation Board (formerly Interstate Commerce Commission) jurisdiction.

Applying this to the facts presented, the Department stated that Illinois withholding would not be required if (a) the driver's work qualifies for the federal protection, or (b) any Illinois-related service is merely incidental to the work performed in Arizona or another state. But if federal law does not apply and the Illinois service is more than incidental, withholding would be proper if the driver's base of operations is Illinois.

Critically, the Department explicitly declined to resolve whether this driver actually qualifies for the federal exemption, stating "the Department cannot provide further guidance on whether the particular employee referred to in your letter would qualify for the Federal protection," and directed the requester to the Surface Transportation Board's own legal resources to make that determination.

What this means for you

Trucking companies and other multi-state employers

This GIL does not give a blanket answer that dispatch-only contact with Illinois is enough (or not enough) to trigger withholding. Instead, it confirms a three-part analysis: (1) check whether the driver's work is protected by the federal motor-carrier withholding preemption in 49 U.S.C. 14503(a)(1); if not, (2) check whether the Illinois-connected work is merely "incidental" to work performed elsewhere under 86 Ill. Adm. Code 100.7010(c); and if it isn't incidental, (3) determine the driver's "base of operations" under 86 Ill. Adm. Code 100.7010(d). If the base of operations is Illinois, withholding is required even if the driver rarely physically works in Illinois.

Accountants and payroll professionals

Determining whether a client's drivers fall under the federal exception requires consulting Surface Transportation Board resources on which carriers and operations are subject to its jurisdiction — the Department pointed specifically to the STB's legal-resources page for this. A GIL will not make that carrier-specific determination for you; it only explains which rules to apply.

Anyone relying on this letter

This is a General Information Letter, not a Private Letter Ruling. As the Department states in the letter itself, 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" (86 Ill. Adm. Code 1200.120(b) and (c)). A taxpayer wanting a binding answer on their exact facts would need to request a Private Letter Ruling under Section 1200.110(b).

Common questions

Q: Does dispatching a driver from Illinois, by itself, require Illinois withholding?
A: The letter doesn't say dispatch alone is sufficient or insufficient. It explains that withholding turns on whether the driver's Illinois-connected work is more than "incidental" to work performed elsewhere and, if so, whether the driver's "base of operations" is Illinois — dispatch location can be relevant to that base-of-operations analysis but wasn't independently ruled on here.

Q: Are interstate trucking companies automatically exempt from Illinois withholding under federal law?
A: Not automatically. The federal exemption in 49 U.S.C. 14503(a)(1) applies only if the motor carrier provides transportation subject to Surface Transportation Board jurisdiction and the employee "performs regularly assigned duties in 2 or more States." The Department did not confirm whether the requester's client or driver met these conditions.

Q: Did the Department decide whether the Arizona-resident driver in the example is exempt from Illinois withholding?
A: No. The Department stated it "cannot provide further guidance on whether the particular employee referred to in your letter would qualify for the Federal protection" and referred the requester to the Surface Transportation Board's legal resources to make that determination.

Q: What is the "incidental service" test mentioned in the letter?
A: Under 86 Ill. Adm. Code 100.7010(c)(2) and (3), service performed outside Illinois is "incidental" to Illinois-based service if it is necessary to or supportive of the primary Illinois work, or is temporary, transitory, or an isolated transaction. If the out-of-state work is incidental, the employee's entire compensation is still sourced to Illinois for withholding purposes.

Q: What does "base of operations" mean for this analysis?
A: Per 86 Ill. Adm. Code 100.7010(d)(2), it's the place or fixed center from which the individual works — which may be a home office, a location specified in the employment contract for receiving directions, or, absent other controlling facts, the place where business mail, supplies, and records are maintained. Notably, the employer's own base of operations is not controlling.

Q: Is this letter binding on the Illinois Department of Revenue?
A: No. It is a General Information Letter issued under 86 Ill. Adm. Code 1200.120(b) and (c), which is "not a statement of Department policy and is not binding on the Department." A taxpayer wanting a binding determination would need to request a Private Letter Ruling under Section 1200.110(b).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2020/it20-0006-gil.pdf

Original ruling text

IT 20-0006-GIL 03/05/2020 WITHHOLDING
Discusses Federal single state tax withholding requirements for certain employees of motor
carriers. (This is a GIL.)

March 5, 2020
Re: Illinois income tax
Dear Xxxx:
This is in response to your letter received July 16, 2018, in which you request information regarding
Illinois 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 2 Ill. Adm. Code
1200.120(b) and (c), which may be found on the Department's web site at www.tax.illinois.gov. This
General Information Letter replaces and supersedes the General Information Letter previously issued
on September 17, 2018.
Your letter states as follows:
We would like to request a General Information Letter for a Withholding issue which
many of our clients face. We work with interstate trucking companies who transport goods
across state lines. They hire W2 workers from all over the United States. Below is the example
of the issue we face and the reason for the request.
Our client is an Illinois company that hires a driver that lives in Arizona. Driver perfoms
the service across interstate lines, and his loads usually originate near his home town and he
returns back to his home town. His only contact with Illinois is that he is being dispatched from
this state. The accountant for the driver claims that there should be no Illinois deduction, since
the driver has nothing to do with Illinois. He effectively earns his income across state line and
should therefore pay only to the state he lives in. We have provided Publication 130 as
explanation. However, the confusion comes from the limited exception for employers that fall
under Surface Transportation Board jurisdiction. It specifically lists that certain trucking
companies fall under this exception, but it fails to define what is meant by "certain trucking
companies." Do interstate trucking companies fall under the exception, and should the
company withhold Illinois taxes for interstate drivers, or are they exempt under the STB
jurisdiction?
Please, let us know if you need any further details on this matter, and what is the proper
information we should provide to our clients.
RESPONSE
Generally, 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;

IT 20-0006-GIL
Page 2
(2) 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
(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.
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.
Department Regulations Sections 100.7010(c)(2) and (3) provide rules for determining whether an
individual’s service in a particular state is incidental to the primary service performed:
(2)

In determining whether an individual's service performed without this State is incidental
to his service performed within this State for purposes of the test set forth in subsection
(a)(1)(B), the term "incidental" means any service which is necessary to or supportive of
the primary service performed by the employee or which is temporary or transitory in
nature or consists of isolated transactions. The incidental service referred to above may
or may not be similar to the individual's normal occupation so long as it is performed
within the same employer-employee relationship. That is, an individual who normally
performs all of his service in this State may be sent by his employer to another state to
perform service which is totally different in nature from his usual work or he may be sent
to do similar work. So long as such service is temporary or consists merely of isolated
transactions, it will be considered to be incidental to his service performed within this
State, and his entire compensation will be subject to withholding.

(3)

In some cases, it may be difficult to determine whether service performed in another
state is incidental to service performed within this State. In any such case, the facts
(including any contract of employment) should be carefully considered. In many
instances, the contract of employment will provide a definite territorial assignment which
will be prima facie evidence that the service is localized within such territory. However,
the presence or absence of a contract of employment is but one fact to be considered.
In every case, the ultimate determination to be made is whether the individual's service
was intended to be and was in fact principally performed within this State and whether
any service which was performed in another state was of a temporary or transitory
nature or arose out of special circumstances at infrequent intervals. The amount of time
spent or the amount of service performed without this State should not be regarded as
decisive, in itself, in determining whether such service is incidental to service performed
within this State. For example, an individual normally performing service within this
State might be sent on a special assignment to another state for a period of months.

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The service in the other state would nevertheless be incidental to service within this
State if such special assignment were an isolated transaction.
Department Regulations Section 100.7010(c)(4) contains examples that illustrate services that may
be considered incidental to the primary service.
Department Regulations Section 100.7010(d)(2) provides rules for determining an employee’s base
of operations:
The term "base of operations" refers to the place or fixed center from which the individual
works. An individual's base of operations may be his business office (which may be maintained
in his home), or his contract of employment may specify a place at which the employee is to
receive his directions and instructions. In the absence of more controlling factors, an
individual's base of operations may be the place to which he has his business mail, supplies,
and equipment sent or the place where he maintains his business records.
As can be seen, the base of operations of the employer is not controlling. Department Regulations
Section 100.7010(d)(3) contains examples illustrating the determination of an employee’s base of
operations.
Department Regulations Sections 100.7010(b)(2) and 100.2590(a) reference certain Federal law that
limits the authority of Illinois to subject certain nonresident employees of motor carriers to Illinois
income taxation. Regulations Section 100.2590(a) provides, in part:
Federal law affects the authority of the State of Illinois to subject certain employees of
railroads, motor carriers, merchant mariners, and air carriers to Illinois income taxation. By
virtue of the provisions of federal law quoted in subsections (a)(1) through (4) below,
compensation that would otherwise be subject to Illinois income taxation and withholding by
virtue of IITA Sections 302(a) and 304(a)(2)(B) is subtracted from adjusted gross income in
determining Illinois base income pursuant to IITA Section 203(a)(2)(N) and is not subject to
Illinois income tax withholding.
…
49 USC 14503(a)(1) states that no part of the compensation paid by a motor carrier providing
transportation subject to the jurisdiction of the [Interstate Commerce] Commission under
subchapter I of chapter 135 of this title or by a motor private carrier to an employee who
performs regularly assigned duties in 2 or more states as such an employee with respect to a
motor vehicle shall be subject to the income tax laws of any state or subdivision of that state,
other than the state or subdivision thereof of the employee’s residence.
In order to determine if the Federal protection referred to in 86 Ill. Adm. Code 100.2590(a)(1) applies
to the compensation paid to an employee, one needs to first determine if the employee is paid
compensation by certain motor carriers or a motor private carrier. In order for the motor carrier to
qualify, it must “provide transportation” subject to jurisdiction of the Surface Transportation Board
(formerly the “Interstate Commerce Commission), under 49 U.S.C. Subt. IV, Pt. B, Ch. 135, Subch. I.
Second, the employee must “perform regularly assigned duties in 2 or more States.” Applying the
rules set forth above to the facts in your letter, Illinois withholding would not be required if the service
the driver performs qualifies for protection under Federal law, as set forth in 86 Ill. Adm. Code

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100.2590(a)(1). In the alternative, Illinois withholding would not be required if any service the driver
performs in Illinois is merely incidental to the service performed in Arizona or another state. However,
if Federal law does not apply and the service the driver performs in Illinois is more than merely
incidental to the services performed in Arizona or another state, Illinois withholding is proper if the
driver’s base of operations is Illinois. Since a General Information Letter is designed to provide
general information, the Department cannot provide further guidance on whether the particular
employee referred to in your letter would qualify for the Federal protection referred to in 86 Ill. Adm.
Code 100.2590(a)(1). To determine whether an employee does qualify for such protection, please
refer to the legal resources provided by the Surface Transportation Board (formerly the “Interstate
Commerce Commission”) which, as of the date of this letter, can be found at
https://prod.stb.gov/resources/legal-resources/#statutes
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 (217) 782-2844.
Sincerely,

Michael D. Mankowski
Associate Counsel - Income Tax