After many years, the Illinois Department of Revenue has finalized market-based sourcing regulations for apportionment of receipts from sales of other than tangible personal property. This development comes more than eight years after the Illinois General Assembly changed the state’s apportionment scheme.
In 2008, Illinois added 35 ILCS 5/304(a)(3)(C-5)(iv), which sources gross receipts from the performance of services to the state where the service is received. Additionally, 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.
Beyond the throwback and throwout rules for services provided by the statute, the Department was tasked with issuing regulations to cover the sourcing of specific types of services. This took longer than expected after the Department issued proposed regulations and subsequently withdrew them.
Under the now final regulations contained in Ill. Admin. Code tit. 86, § 100.3370(c)(6)(D), which are apparently applicable for all tax years since 2008,services are assigned to the numerator of the Illinois sales factor to the extent that the receipts may be attributed to services received in Illinois. However, receipts from services are distinguished based on the types of services provided.
If the subject matter of the service is an item of tangible personal property, then the service is received in Illinois if possession of the property is restored to the recipient of the service under the rules applicable to sales of tangible personal property. If the subject matter of the service is an item of real property, the service is received in Illinois if the property is located in the state. For personal services such as medical treatment services, the service is received in Illinois if the individual is located in the state at the time the service is performed.
For services performed by a taxpayer that are directly connected to or in support of services received in Illinois, those services are also received in the state. The regulations provide an example where credit card fees received by a credit card company for payment of services performed on an individual’s car at an automotive repair facility are sourced to Illinois if the services are purchased at a facility in Illinois.
If the state where the services are received cannot be readily determined, the services are deemed received at the location of the office of the customer where the services were ordered in the regular course of the customer’s trade or business. If the ordering office cannot be determined, then the services are deemed received at the office of the customer to which services are billed.
For services 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, the residential address is used for purposes of the above approximation rule. If the services are provided to a corporation, trust or partnership, and the services are received in a state in which the entity does not have a place of business, the services are deemed received at the location of the office from which the services were ordered, or if that location cannot be determined, at the location where the customer was billed.
In the case of services performed by the taxpayer as a subcontractor or as an agent acting on behalf of a principal, if either the contractor or principal has a fixed place of business in the state where the services are received, the services are deemed received in the state where the customer has a fixed place of business.
In the case of a taxpayer who is not a dealer with respect to the item of intangible property, if the income producing activity of the taxpayer is performed both in Illinois and out-of-state and the greater proportion of the income producing activity of the taxpayer is performed in-state based on costs of performance. Here, “intangible personal property” includes only an item that can ordinarily be resold or otherwise reconveyed by the person acquiring the item from the taxpayer and does not include any obligation of the taxpayer to make any payment, perform any act, or otherwise provide anything of value to another person.
Continue the discussion on LinkedIn: Are the new Illinois regulations sufficiently detailed to provide taxpayers appropriate guidance?
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