Did a registered-agent service avoid Illinois income-tax nexus when it had no employees or owned property in Illinois?

Plain-English summary

IDOR would not issue a definitive nexus ruling, but it warned that the registered-agent service's paid Illinois address and document-delivery arrangement was likely outside Public Law 86-272 protection. The company had no Illinois employees or owned property, but it provided clients a physical Illinois address and subcontracted with a local law firm to accept and transmit service-of-process documents.

Public Law 86-272 protected a nondomiciliary corporation only when its in-state activities were limited to solicitation of orders for tangible personal property. IDOR said this paid delivery-related activity was likely unprotected and beyond mere solicitation. If the activity was not de minimis, the federal immunity would be lost.

The de minimis test considered the taxpayer's entire business and both the qualitative and quantitative connection to Illinois. Regular, systematic, or company-policy activity normally was not trivial. Separately, Section 502(a) required a corporation qualified to do business in Illinois to file an Illinois return when it had to file a federal return, regardless of whether Illinois tax was due.

What this means for you

Do not assume that having no Illinois employees, property, or large revenue automatically eliminates nexus or filing duties. Analyze the exact in-state services, agents, address, payment arrangement, regularity, Illinois qualification, and the business as a whole.

Common questions

Q: Did IDOR conclusively find nexus?
A: No. It said nexus was too fact-specific for a definitive ruling and provided general guidance.

Q: Was the paid registered-agent arrangement protected solicitation?
A: IDOR said it was likely unprotected and beyond mere solicitation.

Q: Could a small amount of unprotected activity be disregarded?
A: Only if it was de minimis under the qualitative-and-quantitative test applied to the taxpayer's entire business.

Citations and references

• Public Law 86-272
• 35 ILCS 5/201, 202, 502(a)
• 86 Ill. Adm. Code 100.9720(c)(2), (4), (5)
• Quill Corp. v. North Dakota, 504 U.S. 298 (1992)

Subject

Public Law 86-272/Nexus

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2011.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2011/it-11-0006.pdf

Original ruling text

IT 11-0006-GIL 03/11/2011 PUBLIC LAW 86-272/NEXUS
General Information Letter: Nexus issues are not generally suitable for resolution by
letter ruling.
March 11, 2011
Dear:
This is in response to your letter dated November 22, 2010 in which you state the following:
We are a registered agent service, and we provide services to clients in all 50 states,
including yours. Our services include providing a physical address to our clients, where
a process server could deliver a law suit to us on our clients behalf. We subcontract
with a local law firm, and they scan the documents to us if they receive something
locally. Our business is qualified with the Secretary of State, and has to be listed on
peoples filings as the registered agent. Since we began in 2008, we have been
reporting income to all states on the personal level, and some States have had a
business gross receipts tax on top of my personal return, based upon which state our
client needed our assistance in and the dollar amounts made there. As we have started
researching individual state rules regarding nexus and income tax filing requirements,
we believe that we have filed income taxes in error in nearly all states.
The purpose of this letter is to ask for some clarification about whether our business has
nexus in your state or not. Although state rules vary slightly, in general, we have
learned that in order to have nexus, one or more of the following must be true:

1. Employees located or working in your state
2. Owned or leased property in your state
3. More than $250,000 gross income earned in your state
4. At least 25% of our total business property, payroll, or income in your state.
   All of our property and all of our employees are located in the state of STATE (a state
   with income tax). And we are far below the $250,000 threshold for gross income. We
   really only make a few thousand dollars in each State, and do not plan on making a lot
   of money in each State. Therefore, we believe that we do not have nexus in nearly all
   of the 50 states. If that is true, we also do not have an income tax filing requirement.
   We recognize that each state’s rules are slightly different, however. For this reason, we
   want to hear from you directly regarding nexus rules in your state, and what the rules
   are for reporting income to your state. We wish to abide by the rules, but what we have
   found is we make so little that we’re sending in small amounts to State, and most of
   what we’ve sent in so far, we wouldn’t have had to. It is so time consuming and
   cumbersome for not a lot of money. Hopefully you will provide some clarity in this
   matter for us. Please call me with any questions. Either way, a formal response would
   be best if available, along with a plan of action to shut down our account with the
   Department of revenue if you determine we are allowed to.
   *

*

*

*

The determination as to whether a taxpayer has nexus to subject it to Illinois Income Tax is extremely

IT 11-0006-GIL
March 11, 2011
Page 2
fact-specific. Therefore, the Department does not issue rulings regarding whether a particular
taxpayer has nexus with the State. However, general information regarding nexus with Illinois for
income tax purposes may be provided.
Section 201 of the Illinois Income Tax Act (“IITA”), 35 ILCS 5/101 et seq, imposes a tax measured by
net income on taxpayers for the privilege of earning or receiving income in this State. The Due
Process and Commerce Clauses of the Federal Constitution limit the power of Illinois to subject
foreign taxpayers to Illinois tax. The Due Process Clause requires that there exist some minimum
connection between a state and the person, property, or transaction it seeks to tax (Quill Corp. v.
North Dakota, 504 U.S. 298, 112 S.Ct. 1904 (1992)). Similarly, the Commerce Clause requires that
the tax be applied to an activity with a substantial nexus with the taxing state. Id. Where any part of
a foreign corporation’s income is allocable to Illinois in accordance with the provisions of Article 3 of
the IITA, Illinois can demonstrate the connection, or nexus, necessary to subject a foreign corporation
to tax. Therefore, unless protected by Public Law 86-272, a foreign corporation is liable for Illinois
income tax where any portion of its income is allocated to Illinois.
Public Law 86-272 precludes any state from subjecting a nondomiciliary corporation to a net income
tax where such corporation’s only activities within the state for the taxable year consist of solicitation
activities for sales of tangible personal property. Regarding Public Law 86-272, Department
Regulations Section 100.9720(c)(2)(A) states:
If a nonresident taxpayer’s activities exceed “mere solicitation” as set forth in subsection (a) of
PL 86-272 (subsection (c)(1)(A) of this Section), it obtains no immunity under that federal
statute. The taxpayer is subject to Illinois income tax and personal property tax replacement
income tax for the entire taxable year and its business income is apportioned under IITA
Section 304. Whether a nonresident taxpayer’s conduct exceeds “mere solicitation” depends
upon the facts in each particular case.
Section 100.9720(c)(4) of the Department Regulations contains a list of activities that are considered
to be beyond “mere solicitation” for purposes of P.L. 86-272. Included in that list of unprotected
activities is the following:
Q)
The maintenance of any office or other place of business in this State that does not
strictly qualify as an “in-home” office as described in subsection (c)(5)(M) shall, by itself, cause
the loss of protection under PL 86-272. A telephone listing or other public listing within the
State for the nonresident or for an employee or other representative of the nonresident in such
capacity or other indication through advertising or business literature that the nonresident or its
employee or representative can be contacted at a specific address within the State shall
normally be determined as the nonresident maintaining within this State an office or place of
business attributable to the nonresident or to its employee or representative in a representative
capacity. However, the normal distribution and use of business cards and stationary
identifying the employee’s or representative’s name, address, telephone and fax numbers and
affiliation with the nonresident shall not, by itself, be considered as advertising or otherwise
publicly attributing an office to the nonresident or to its employee or other representative.
S)
Conducting any activity that is not on the list of “protected activities” in subsection (c)(5),
and that is not entirely ancillary to requests for orders even if the activity helps to increase
purchases.

IT 11-0006-GIL
March 11, 2011
Page 3

According to the facts presented in your letter, your services include providing a physical address in
Illinois to your clients where a process server may deliver documents. Your business is qualified with
the Secretary of State because it is “listed” on court filings as the “registered agent.” Although you
have no employees in Illinois, you “subcontract” with local law firms to accept deliveries on your
behalf as the “registered agent.” Under the protected activities list in (c)(5) of Department
Regulations paragraph (H) explains that “coordinating … deliveries without payment or other
consideration” would be protected. In your case, however, there is payment involved in “delivering”
documentation to your clients that come from process servers. Your activities are likely unprotected
and will be considered beyond “mere solicitation” for purposes of P.L. 86-272. If so, the next question
is whether the unprotected activity of “delivering” documents such as court filings is de minimus.
A taxpayer that engages in unprotected activity within Illinois, unless such activity is de minimus, is
not entitled to immunity under the federal statute. Regulations Section 100.9720(c)(2)(D) sets forth
the test for determining whether unprotected activities are de minimus.
De minimus activities are those that, when taken together, establish only a trivial additional
connection with this State. An activity regularly conducted within this State on a regular or
systematic basis or pursuant to a company policy (whether such policy is in writing or not) shall
normally not be considered trivial. Whether an activity consists of a trivial or non-trivial
additional connection with this State is to be measured on both a qualitative and quantitative
basis. If the activity either qualitatively or quantitatively creates a non-trivial connection with
this State, then the activity exceeds the protection of PL 86-272. The amount of unprotected
activities conducted within this State relative to the amount of protected activities conducted
within this State is not determinative of the issue of whether the unprotected activities are de
minimus. The determination of whether an unprotected activity creates a non-trivial connection
with this State is made on the basis of the taxpayer’s entire business activity, not merely its
activities conducted within this State. An unprotected activity that would not be de minimus if it
were the only business activity of the taxpayer conducted in this State will not be de minimus
merely because the taxpayer also conducts a substantial amount of protected activities within
this State, nor will an unprotected activity that would be de minimus if conducted in conjunction
with a substantial amount of protected activities fail to be de minimus merely because no
protected activities are conducted in this State.
As the above provisions indicate, the conduct of providing a physical address for paying clients in
Illinois for process servers to deliver documents to those clients may result in the loss of protection
under Public Law 86-272 unless it can be shown that such deliveries are de minimus. A factual
determination must be made taking into account the taxpayer’s entire business activities.
Section 502(a) of the IITA (35 ILCS 5/502(a)) sets forth the requirements for filing Illinois income tax
returns. That section states:
(a) In general. A return with respect to the taxes imposed by this Act shall be made by every
person for any taxable year:
(1)

For which such person is liable for a tax imposed by this Act, or

(2)

In the case of a resident or in the case of a corporation which is qualified to do business

IT 11-0006-GIL
March 11, 2011
Page 4
in this State, for which such person is required to make a federal income tax return, regardless
of whether such person is liable for a tax imposed by this Act.
Under this section, a nonresident must file an Illinois income tax return if it incurs a liability for tax
imposed under Section 201 of the IITA (or in the case of a corporation qualified to do business in
Illinois, if it is required to file a federal return). A nonresident is liable for Illinois income tax under
Section 201 if it computes “Illinois net income” as defined under IITA Section 202. IITA Section 202
defines Illinois net income as that portion of the taxpayer’s “base income” as defined in Section 203,
which is allocated or apportioned to Illinois under the provisions of Article 3 of the IITA, less certain
deductions.
As stated above, this is a GIL which does not constitute a statement of policy that either applies,
interprets or prescribes tax law. It is not binding on the Department. Should you have additional
questions, please do not hesitate to contact our office.
Sincerely,

Heidi Scott
Associate Counsel - Income Tax