My partnership does most of its business outside Illinois but co-owns another partnership that operates entirely inside Illinois, and using the standard single-sales-factor formula makes our Illinois apportionment look much bigger than our actual Illinois activity -- can we use separate accounting instead?

Plain-English summary

A partnership that runs a concert promotion business -- doing most of its activity outside Illinois -- also owns a 50% interest in a second partnership that operates entirely within Illinois. Under Illinois's single-sales-factor apportionment formula (IITA Section 304(a)), the partnership's Illinois apportionment factor is computed by combining its own actual Illinois gross receipts with 50% of the wholly-Illinois second partnership's gross receipts, then dividing by combined total receipts. The taxpayer argued this produced an Illinois apportionment factor "that far exceeds the actual Illinois activity of the business," and petitioned the Department to instead use separate accounting to compute the Illinois income attributable to its investment in the Illinois partnership.

The Department denied the petition. Under IITA Section 304(f) and 86 Ill. Adm. Code 100.3390(c), a taxpayer seeking to depart from the standard statutory formula bears the burden of proving, by clear and convincing evidence, that the formula taxes extraterritorial values and operates unreasonably and arbitrarily to attribute an out-of-proportion share of income to Illinois -- and separately, that the taxpayer's proposed alternative method would fairly and accurately apportion its income instead. The Department found the petition contained no information about the market for the taxpayer's goods or services, and no evidence from which it could determine whether the standard formula actually failed to fairly reflect that market. The taxpayer's submission amounted to an assertion that separate accounting would more accurately reflect its Illinois activity -- which the regulation expressly says is not enough on its own, since "[a]n alternative apportionment method may not be invoked ... merely because it reaches a different apportionment percentage than the required statutory formula."

The denial is without prejudice. The letter notes that if the taxpayer has additional information it did not previously submit, it may supplement its petition and the Department will reconsider. It also reminds the taxpayer that a petition to use an alternative method must be filed at least 120 days before the due date (including extensions) of the first return for which the alternative method is sought, per 86 Ill. Adm. Code 100.3390(e)(1).

What this means for you

Multi-entity or tiered-partnership structures with lopsided in-state/out-of-state activity

Owning a partial interest in an entity that operates entirely in one state (here, Illinois) can pull a disproportionate share of that entity's receipts into your own apportionment factor under the standard formula. If that produces a result you believe is distorted, you cannot simply assert the distortion -- you need concrete evidence about your market and business activity to support a petition.

Anyone planning to petition for alternative apportionment under 86 Ill. Adm. Code 100.3390

Go beyond showing that your proposed method (e.g., separate accounting) yields a smaller or more intuitive number. You must affirmatively document (1) how the standard formula taxes extraterritorial values or is out of proportion to your actual business activity, and (2) why your alternative method fairly and accurately reflects your market or activity in Illinois. A bare assertion that the alternative is "more accurate" will not satisfy the clear-and-convincing-evidence standard.

Taxpayers who receive a denial

A GIL denial for insufficient evidence is not necessarily final -- the Department invited this taxpayer to supplement its petition with additional information for reconsideration. Track the 120-day advance filing deadline under 86 Ill. Adm. Code 100.3390(e)(1) if you plan to refile for the same or a later tax year.

Common questions

Q: Why was this alternative-apportionment petition denied?
A: The taxpayer's petition contained no information about the market for its goods or services and no evidence that the standard single-sales-factor formula failed to fairly represent its Illinois business activity. It essentially only argued that separate accounting would produce a more accurate (lower) result, which the regulation says is not sufficient by itself.

Q: What must a taxpayer prove to get alternative apportionment approved in Illinois?
A: Under 86 Ill. Adm. Code 100.3390(c), the taxpayer must prove by clear and convincing evidence that the statutory formula results in taxation of extraterritorial values and operates unreasonably and arbitrarily to attribute an out-of-proportion share of income to Illinois, and must also prove that its proposed alternative method fairly and accurately apportions income to Illinois.

Q: Does owning a minority interest in an Illinois-only entity affect my apportionment factor?
A: Yes, potentially significantly -- in this case the taxpayer's 50% share of a wholly-Illinois partnership's gross receipts was included in both the numerator and denominator of its own sales-factor calculation, which the taxpayer argued inflated its Illinois apportionment factor beyond its actual Illinois activity.

Q: Can this taxpayer try again?
A: Yes. The Department stated that if the taxpayer has additional information not previously submitted, it may supplement its petition and the Department will reconsider the request.

Citations and references

Statutes, regulations, and prior guidance:

• 35 ILCS 5/304(a) (business income apportionment; single sales factor)
• 35 ILCS 5/304(a)(3) (definition of the sales factor)
• 35 ILCS 5/304(f) (petition for alternative apportionment; Director's authority)
• 2 Ill. Adm. Code 1200.120(b) and (c) (General Information Letters are non-binding)
• 86 Ill. Adm. Code 100.3380(a)(2) (Department-prescribed apportionment methods; petition process)
• 86 Ill. Adm. Code 100.3390(c) (burden of proof for alternative apportionment)
• 86 Ill. Adm. Code 100.3390(e)(1) (120-day petition filing deadline)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2024.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2024/IT24-0002-GIL.pdf

Original ruling text

IT 24-0002-GIL 03/18/2024 ALTERNATIVE APPORTIONMENT
General Information Letter: Alternative apportionment not allowed unless
taxpayer demonstrates sales factor does not fairly reflect market for goods
or services. (GIL)
March 18, 2024
NAME
TITLE
COMPANY
ADDRESS
Re:

Petition for Alternative Apportionment – Separate Accounting
COMPANY
FEIN: ##-#######
Tax Year Ended: YYYY

Dear NAME:
This is in response to your letter dated January 16, 2024, in which you petition the
Department to use an alternative method of allocation or apportionment,
specifically separate accounting. 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 Section
1200.120(b) and (c), which may be found on the Department’s web site at
https://tax.illinois.gov/. For the reasons discussed below, your petition cannot be
granted based on the information provided.
Your petition states as follows:
We are submitting a request for separate accounting for tax period
YYYY and after pursuant to Illinois Admin. Code 86. The normal
allocation and apportionment provisions do not fairly represent the
market for the company’s goods, services, and other sources of
business income.
COMPANY1 (“The partnership) is a concert promotion company
that operates both inside and outside of Illinois. The majority of the
partnership’s activity is outside of Illinois. For the taxable year
ending MONTH DAY, YEAR, the gross receipts for the partnership
were $$$$$, of which $$$$$$$ were derived from Illinois and
$$$$$$$ were derived outside of Illinois. The YYYY total taxable
income for the partnership was $$$$$$$ (per M-3 line 26).
The partnership owns 50% of a separate partnership, COMPANY2
operates solely in Illinois and 100% of their gross receipts are
derived from Illinois. For the taxable year ending MONTH DAY,

YEAR, the gross receipts for COMPANY2 were $$$$$$$. The
YYYY total taxable income for COMPANY2 was $$$$$$$ (per M-3
line 26).
In general, for tax years ending on or after MONTH DAY, YEAR,
persons other than residents who derive business income from
Illinois and one or more other states shall compute their
apportionment factor based on the sales factor. Therefore, the
partnership’s YYYY Illinois apportionment factor was computed by
taking the 50% of total gross receipts from COMPANY2 ($$$$$$$)
plus the actual Illinois gross receipts of the partnership ($$$$$$$)
divided by the total gross receipts from COMPANY2 ($$$$$$$) plus
the total gross receipts of the partnership ($$$$$$$). See attached
calculation enclosed.
This standard apportionment results in Illinois apportionment factor
that far exceeds the actual Illinois activity of the business. We
request that for tax year YYYY and beyond, the partnership be
allowed to use separate accounting to compute the actual Illinois
income derived from its investment in COMPANY2. See attached
calculation enclosed. This would result in an overall Illinois
apportionment factor that more correctly reflects the partnership
business activities in Illinois.
Please contact me at PHONE or E-MAIL should you have any
questions or require additional information.
CALCULATION CHART HAS BEEN REDACTED
RULING
Section 304(a) of the Illinois Income Tax Act (“IITA” 35 ILCS 5/304) provides that
when a nonresident derives business income from Illinois and one or more other
states, such income shall be apportioned to Illinois by multiplying the income by
the taxpayer’s apportionment factor. For taxable years ending on and after
December 31, 1998, except in the case of an insurance company, financial
organization, transportation company, or federally regulated exchange, the
apportionment factor is equal to the sales factor. IITA Section 304(a)(3) defines
the sales factor as a fraction, the numerator of which is the total sales of the
person in Illinois during the taxable year, and the denominator of which is the
total sales of the person everywhere during the taxable year.
Section 304(f) of the IITA states:
If the allocation and apportionment provisions of subsections (a) through
(e) and
of subsection (h) do not, for taxable years ending before December

31, 2008,
fairly represent the extent of a person’s business activity in this
State, or, for taxable years ending on or after December 31, 2008, fairly
represent the market
for the person’s goods, services, or other sources of
business income, the person
may petition for, or the Director may, without a
petition, permit or require, in
respect of all or any part of the person’s
business activity, if reasonable:
(1) Separate Accounting;
(2) The exclusion of any one or more factors;
(3) The inclusion of one or more additional factors which will fairly
represent the
person’s business activities or market in this State; or
(4) The employment of any other method to effectuate an equitable
allocation and
apportionment of the person’s business income.
86 Ill. Adm. Code Section 100.3380(a)(2) states:
The Director has determined that, in the instances described in this
Section, the apportionment provisions provided in IITA Section 304(a)
through (e) and (h) do not fairly represent the extent of a person’s
business activity or market within Illinois. For tax years beginning on or
after the effective date of a rulemaking amending this Section to prescribe
a specific method of apportioning business income, all nonresident
taxpayers shall apportion their business income employing that method in
order to properly apportion their business income to Illinois. Taxpayers
whose business activity or market within Illinois is not fairly represented by
a method prescribed in this Section and who want to use another method
for a tax year beginning after the effective date of the rulemaking adopting
that method may obtain permission to use that other method by filing a
petition under Section 100.3390. For tax years beginning prior to the
effective date of the rulemaking adopting a method of apportioning
business income, the Department will not require a taxpayer to adopt that
method; provided, however, if any taxpayer has used that method for any
of those tax years, the taxpayer must continue to use that method for that
tax year. Moreover, a taxpayer may file a petition under Section 100.3390
to use a method of apportionment prescribed in this Section for any open
tax year beginning prior to the effective date of the rulemaking adopting
that method, and that petition shall be granted in the absence of facts
showing that that method will not fairly represent the extent of a person’s
business activity or market in Illinois.
Taxpayers who wish to use an alternative method of apportionment under these
provisions are required to file a petition complying with the requirements of 86 Ill.
Adm. Code Section 100.3390. Subsection (c) of that regulation provides:

A departure from the required apportionment method is allowed only when
those methods do not accurately and fairly reflect business activity in
Illinois (for taxable years ending before December 31, 2008) or market in
Illinois (for taxable years ending on or after December 31, 2008). An
alternative apportionment method may not be invoked, either by the
Director or by a taxpayer, merely because it reaches a different
apportionment percentage than the required statutory formula. However, if
the application of the statutory formula will lead to a grossly distorted
result in a particular case, a fair and accurate alternative method is
appropriate. The party (the Director or the taxpayer) seeking to utilize an
alternative apportionment method has the burden of going forward with
the evidence and proving by clear and convincing evidence that the
statutory formula results in the taxation of extraterritorial values or
operates unreasonably and arbitrarily in attributing to Illinois a percentage
of income that is out of all proportion to the business transacted in this
State (for taxable years ending before December 31, 2008) or the market
for the taxpayer’s goods, services or other sources of business income in
this State (for taxable years ending on or after December 31, 2008). In
addition, the party seeking to use an alternative apportionment formula
must go forward with the evidence and prove that the proposed alternative
apportionment method fairly and accurately apportions income to Illinois
based upon business activity in this State (for taxable years ending before
December 31, 2008) or the market for the taxpayer’s goods, services or
other sources of business income in this State (for taxable years ending
on or after December 31, 2008).
In order to make a determination under IITA Section 304(h) as to whether or not
the apportionment provisions of subsections (a) through (e) and of subsection (h)
reflect the market for the person’s goods, services, or other sources of business
income, it is necessary that the taxpayer first determine its apportionment under
such sections. If the apportionment under such sections does not fairly reflect the
taxpayer’s market, then an alternative apportionment method may be permitted.
Your petition contains no information relative to the market for the taxpayer’s
goods or services, nor does it contain information by which a determination can
be made as to whether the apportionment resulting under IITA Section 304 fails
to fairly reflect that market. Your request contains no evidence that the statutory
apportionment formula does not fairly represent the extent of the taxpayer’s
business activities in Illinois or that the proposed alternative method of separate
accounting does produce a reasonable result. The facts stated in your petition
are not sufficient to satisfy the burden set forth in 86 Ill. Adm. Code Section
100.3390(c). Because your request merely states that separate accounting for
the taxpayer’s Illinois income more accurately reflects its Illinois activity, your
petition for alternative apportionment does not meet the regulatory requirement
and cannot be granted at this time.

Accordingly, your petition for alternative apportionment for tax year ended YYYY
cannot be granted. However, if you have additional information related to this
request that was not previously submitted, you may supplement your petition and
we will reconsider your request. Please note that 86 Ill. Adm. Code Section
100.3390(e)(1) requires a petition to be filed at least 120 days prior to the due
date (including extensions) for the first return for which permission is sought to
use the alternative apportionment method.
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.
Sincerely,
Jennifer M. Uhles
Associate Counsel (Income Tax)