Corporate Close-Up: Illinois Clarifies Special Industry Apportionment for Transportation Companies

Like many states, Illinois requires transportation companies to use a special formula to apportion their multistate income, though its particular formula and associated regulations have undergone multiple revisions in the past 10 years. The latest development on this front occurred recently when Illinois adopted additional regulations that define what exactly a transportation company is.

Under the new regulations, entities with at least 80 percent of gross income from transportation services and ancillary services, averaged over three years, are transportation companies. Transportation services are defined as “the movement of freight or passengers by air, land or water, or the movement of liquid or gaseous substances by pipeline.” The clarification markedly affects airlines, railroad companies, trucking companies, water transportation companies, and companies that own or operate pipelines.

The state also enumerated a non-exhaustive list of qualified “ancillary services” which consists of revenue streams like in-flight sales of food or drinks and airline baggage service fees for airlines, or packaging and warehouse fees for trucking and railroads.

The regulation specifically excludes non-apportionable income from its scope, noting that the treatment of income not included in an entity’s “apportionable business income” or that results from transactions outside the ordinary course of the taxpayer’s regular business activities “is not affected by the classification of the person as a transportation company, and those items are therefore disregarded” for purposes of the gross income test.

Illinois Special Industry Apportionment for Transportation Companies

Under current Illinois law, passenger airlines must apportion income based on actual receipts and mileage (i.e., revenue miles traveled in Illinois over total revenue miles traveled for the year). Airlines engaged in the transport of both passengers and freight must average the passenger revenue mile fraction with the freight revenue mile fraction, weighted to reflect the person's relative gross receipts from passenger and freight airline transportation.

All other transportation companies apportion income based on gross receipts from any movement of people, goods, mail, oil, gas, or any other substance that both originates and terminates in Illinois, plus a portion of the gross receipts of the shipment of these items outside Illinois that originates in one state and terminates in another state. This average is then weighted over total revenue from movement of these items.

If these companies transport both passengers and freight, they must average the miles traveled by each and weigh it against the gross receipts from the movement of each. Railroad transportation companies, on the other hand, must average miles traveled by passengers and freight and weigh it against the relative railway operating income from total passenger and freight services, as reported to the Surface Transportation Board.

Now that Illinois has clearly defined what it means to be a transportation company business entities can properly apportion their multistate transportation and ancillary services income with the applicable special industry formula.                                                                                                                                             

Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: Do the special apportionment rules for transportation companies in Illinois fairly reflect income earned in the state for this industry?

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