How did Illinois source receipts from online counseling, eBooks, and audio or DVD courses sold by an out-of-state internet business?

Plain-English summary

Illinois used different sales-factor rules for the online business's different products. The business proposed counseling services, teleseminars and virtual retreats, eBooks, memberships, and physical audio or DVD courses. Its website host was outside Illinois, while the shopping-cart provider used Illinois servers.

The GIL classified online counseling as a service, sourced under Section 304(a)(3)(C-5)(iv) based on where the service was received. It classified eBook receipts under the intangible-property rule in Section 304(a)(3)(C-5)(iii). It classified audio and DVD course sales under Section 304(a)(3)(B), which sourced tangible property primarily by delivery destination.

IDOR refused to decide whether the shopping-cart provider's Illinois servers created nexus because nexus was fact-specific. The Sales Tax Division was to respond separately on sales tax.

What this means for you

Inventory each digital and physical offering before building the sales factor. “Online revenue” is not one category: live services, downloadable intangibles, and shipped goods can follow different sourcing rules.

Common questions

Q: Did shopping-cart servers in Illinois automatically establish nexus?
A: The GIL did not decide.

Q: Were eBooks treated like shipped DVDs?
A: No.

Q: Did the letter decide sales tax?
A: No. That issue was referred for a separate response.

Citations and references

• 35 ILCS 5/304(a)(3)(B) — tangible-personal-property sales
• 35 ILCS 5/304(a)(3)(C-5)(iii) — intangible-property income
• 35 ILCS 5/304(a)(3)(C-5)(iv) — service-receipt sourcing
• 35 ILCS 5/502(a) — income-tax filing requirement
• 15 U.S.C. § 381 — Public Law 86-272
• 86 Ill. Adm. Code 100.9720 — nexus regulation

Subject

Apportionment – Sales Factor

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2013.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2013/it-13-0013.pdf

Original ruling text

IT 13-0013-GIL 11/4/2013 Apportionment – Sales Factor
General explanation of the application of IITA Section 304(a)(3)(B) and (C-5).
November 4, 2013

Re:

Illinois income tax

Dear Xxxx:
This is in response to your letter dated September 27, 2013 in which you request a letter ruling. The
information provided below relates only to the income tax issues raised by your request. We have
forwarded a copy of your request to the Sales Tax Division for a separate response addressing the
sales tax issues. The nature of your request and the information provided requires that we respond
with a General Information Letter (GIL). A GIL 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).

Your letter states as follows:
I am writing this letter to obtain a formal ruling on whether my client’s business activity, as
described below, would present sufficient nexus for which our client would then have sales tax
and/or income tax reporting requirements in the state of Illinois.
My client is a STATE 1 resident who will be conducting internet-based business activities from
his business location in CITY, STATE 1. The kinds of services and products that will be offered
on my client’s website would be the on-line sale of individual and group counseling services,
teleseminars and virtual retreats, as well as of individual membership privileges, eBooks, audio
and DVD courses. (Please note that the sale of memberships, and audio and DVD courses will
not be offered at the outset of the internet business activities. These are items that will most
likely not be offered to the public until some time next year, after evaluating the success of the
internet-based business activity.) Again, all of this business activity would be conducted from
his business that is physically located in the STATE 1.
My client would be contracting with a web site hosting company (by the name of ABC
COMPANY) that has internet servers that are physically located in the state of STATE 2.
My client will also be contracting with a company (by the name of XYZ COMPANY) that will be
handling the on-line shopping cart process (i.e. the processing of on-line purchase transactions
made by customers of the website), and this company’s internet servers are physically located
in the state of Illinois.
My concern is that my client may be subject to sales tax registration and reporting in the state
of Illinois due to the fact that the company handling the online shopping cart transactions has
internet servers that are physically located in your state.
Please advise as to whether this set of facts and circumstances constitutes sufficient nexus for
which my client would be required to collect and remit your state’s sales tax for taxable sales
that are made to customers who reside within the state of Illinois.

RULING
The determination as to whether a taxpayer has nexus with Illinois is extremely fact-specific.
Therefore, the Department does not issue rulings regarding whether a taxpayer has nexus with the
State. For information regarding nexus, see Department of Revenue Regulations Section 100.9720
(accessible from the Department’s web site). In addition, the following general information may be
provided.
The United States Constitution restricts a state’s power to subject to income tax foreign corporations
and other nonresidents. The Due Process Clause requires that there exist some minimum connection
between a state and the person, property, or transaction the state seeks to tax. (Quill Corp. v. N.
Dakota, 504 U.S. 298 (1992)) Similarly, the Commerce Clause requires that a state’s tax be applied
only to activities with a substantial nexus to the taxing state. (Id.) In addition, Illinois may not assert
jurisdiction to tax where a corporation falls under the protection provided under Public Law 86-272.
(15 U.S.C. § 381) 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.
Section 502(a) of the Illinois Income Tax Act (“IITA”; 35 ILCS 5/502(a)) sets forth the requirements for
filing Illinois income tax returns. That section states in pertinent part as follows:
(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
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.
Under Article 3 of the IITA, business income is apportioned to Illinois based on an apportionment ratio
in which the numerator is the amount of the taxpayer’s sales in Illinois and the denominator is the
amount of the taxpayer’s sales everywhere. IITA Section 304(a)(3)(B) allocates sales of tangible
personal property to the numerator of the apportionment formula:
Sales of tangible personal property are in this State if:
(i)
The property is delivered or shipped to a purchaser, other than the United States
government, within this State regardless of the f.o.b. point or other conditions of the
sale; or
(ii)
The property is shipped from an office, store, warehouse, factory or other place of
storage in this State and either the purchaser is the United States government or the

person is not taxable in the state of the purchaser; provided, however, that premises
owned or leased by a person who has independently contracted with the seller for the
printing of newspapers, periodicals or books shall not be deemed to be an office, store,
warehouse, factory or other place of storage for purposes of this Section. Sales of
tangible personal property are not in this State if the seller and purchaser would be
members of the same unitary business group but for the fact that either the seller or
purchaser is a person with 80% or more of total business activity outside of the United
States and the property is purchased for resale.
IITA Section 304(a)(3)(C-5)(iii) allocates income from intangible property (other than patents,
copyrights, trademarks, and similar items) to the numerator of the apportionment formula:
In the case of interest, net gains (but not less than zero) and other items of income from
intangible personal property, the sale is in this State if:
(a) in the case of a taxpayer who is a dealer in the item of intangible personal property within
the meaning of Section 475 of the Internal Revenue Code, the income or gain is received
from a customer in this State. For purposes of this subparagraph, a customer is in this
State if the customer is an individual, trust or estate who is a resident of this State and, for
all other customers, if the customer’s commercial domicile is in this State. Unless the dealer
has actual knowledge of the residence or commercial domicile of a customer during the
taxable year, the customer shall be deemed to be a customer in this State if the billing
address of the customer, as shown in the records of the dealer, is in this State; or
(b) in all other cases, if the income-producing activity of the taxpayer is performed in this State
or, if the income-producing activity of the taxpayer is performed both within and without this
State; if a greater proportion of the income-producing activity of the taxpayer is performed
within this State than in any other state, based on performance costs.

IITA Section 304(a)(3)(C-5)(iv) allocates sales of services to numerator of the apportionment formula:
Sales of services are in this State if the services are received in this State. For the purposes of
this section, gross receipts from the performance of 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. If the state where the services are received is not readily
determinable or is a state where the corporation, partnership, or trust receiving the service
does not have a fixed place of business, the services shall be deemed to be received at the
office of the customer from which the services were ordered in the regular course of the
customer’s trade or business. If the ordering office cannot be determined, the services shall be
deemed to be received at the office of the customer to which the services are billed. If the
taxpayer is not taxable in the state in which the services are received, the sale must be
excluded from both the numerator and denominator of the sales factor. The Department shall
adopt rules prescribing where specific types of service are received, including, but not limited
to publishing, and utility service.
In this case, based on the information contained in your letter, gross receipts from the sale of on-line
counseling services would be sourced under IITA Section 304(a)(3)(C-5)(iv), gross receipts from the
sale of eBooks would be sourced under IITA Section 304(a)(3)(C-5)(iii), and gross receipts from the
sale of audio and DVD courses would be sourced under IITA Section 304(a)(3)(B).

As stated above, this is a GIL. 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. If you wish to obtain a PLR which
will bind the Department, please submit a request conforming to the requirements of 2 Ill. Adm. Code
§ 1200.110(b).

Sincerely,

Brian L. Stocker
Associate Counsel (Income Tax)