Does an out-of-state manufacturer create Illinois corporation income tax nexus just by having its leased rail cars pass through, wait in, or sit empty in Illinois while delivering goods?

Plain-English summary

An out-of-state C corporation that manufactures coated sand asked the Illinois Department of Revenue for a private letter ruling on whether its use of leased rail cars created Illinois corporation income tax nexus. The company shipped sand outside its home state by leased rail car to transload sites for unloading, and because of rail availability, the leased cars sometimes sat in Illinois already filled with sand waiting to be unloaded, or sat empty in storage. The company had filed an Illinois corporation income tax return, was then audited by its home state, and the home state argued that leased rail car use alone did not create nexus anywhere beyond what Public Law 86-272 already permits — so the home state applied its throwback rules to shift more sales into its own apportionment formula, treating those Illinois sales as if they belonged to the home state instead.

Because the request asked the Department to decide whether nexus existed on these facts, and nexus determinations are inherently fact-specific, the Department could not issue a binding Private Letter Ruling (PLR) on that question. It responded instead with a General Information Letter (GIL), directing the taxpayer to Illinois's nexus regulation, 86 Ill. Adm. Code 100.9720, and to general constitutional and statutory background rather than a yes-or-no answer.

The GIL explains that the Due Process Clause requires some minimum connection between a state and the person, property, or transaction it seeks to tax, and the Commerce Clause requires that a state's tax apply only to activities with a substantial nexus to that state, citing Quill Corp. v. North Dakota. Separately, Public Law 86-272 (15 U.S.C. § 381) bars a state from taxing the net income of an out-of-state corporation whose only in-state activity is solicitation of orders for sales of tangible personal property. Illinois's own regulation, 100.9720(c)(5)(N), lists "shipping or delivering goods into this State by means of vehicles or other modes of transportation owned or leased by the nonresident taxpayer or by means of private carrier, whether by motor vehicle, rail, water, air or other carrier" as a protected activity that does not, by itself, cause loss of P.L. 86-272 immunity.

The Department went on to flag the one fact in the letter that gave it pause: the storage of empty delivery vehicles within Illinois. The regulation's de minimis test in 100.9720(c)(2)(D) asks whether unprotected activities, taken together, create only a trivial additional connection with Illinois, measured both qualitatively and quantitatively and looking at the taxpayer's activity as a whole. The Department stated that although shipping and delivering by leased rail car is protected, storing empty rail cars in Illinois while they wait to be used "may cause a taxpayer to lose immunity under P.L. 86-272" — without providing a definitive answer, because the letter did not give the Department enough facts to make that call.

What this means for you

Shipping by leased or owned carrier is generally safe

If your only Illinois-related activity is shipping or delivering tangible personal property into Illinois using vehicles (including rail cars) that your company owns or leases, or using a private carrier, that activity alone is listed as protected under 86 Ill. Adm. Code 100.9720(c)(5)(N) and coordinating that shipment or delivery without additional consideration is also protected under 100.9720(c)(5)(H). Neither activity, standing alone, should cause you to lose Public Law 86-272 immunity from Illinois income tax.

Storing equipment or empty vehicles in Illinois is a risk factor

The Department specifically called out that letting empty delivery vehicles sit in Illinois — as opposed to simply passing through while making a delivery — is not clearly protected. Under the de minimis test in 100.9720(c)(2)(D), whether this crosses the line depends on how regularly and systematically it happens and how it fits into your company's overall pattern of activity in the state, not just how it looks in isolation. If your operations involve rail cars, trucks, or other equipment idling or being stored in Illinois for any meaningful length of time, that is a fact pattern worth reviewing carefully with a tax professional, ideally before an audit forces the question.

Do not expect the Department to pre-clear a nexus question by letter ruling

This GIL makes clear that Illinois will not issue a binding ruling on whether a specific taxpayer has nexus in the state — that determination is "extremely fact-specific" and reserved for actual examination of the facts, typically in an audit or return review. If you need certainty, the practical path is to apply the regulation's protected/unprotected activity lists and the de minimis test yourself (or with an advisor) to your specific fact pattern, and to keep documentation of exactly what activities occur in Illinois and how often.

Common questions

Does having leased rail cars pass through or wait in Illinois while filled with goods, by itself, create Illinois income tax nexus?
Not according to this GIL. Regulation 100.9720(c)(5)(N) protects shipping or delivering goods into Illinois by vehicles the taxpayer owns or leases, including by rail, so that activity alone should not cause loss of Public Law 86-272 immunity.

Does storing empty rail cars in Illinois definitely create nexus?
The Department did not say it definitely does, but it flagged this as a potential problem: "the storage of empty delivery vehicles within Illinois may cause a taxpayer to lose immunity under P.L. 86-272." The answer depends on the de minimis analysis in 100.9720(c)(2)(D), which looks at the taxpayer's full pattern of activity in Illinois.

Why didn't Illinois just answer whether this taxpayer has nexus?
The taxpayer requested a binding Private Letter Ruling, but the Department explained that nexus questions are "extremely fact-specific" and that it does not issue rulings on whether a taxpayer has nexus with the state. Because of the nature of the request, the Department responded with a non-binding General Information Letter instead, providing general legal background rather than a taxpayer-specific determination.

Can this taxpayer still get a real ruling on nexus from Illinois?
Not on the nexus question itself — the Department does not rule on that issue no matter how the request is framed. The letter does note that a taxpayer seeking a binding PLR on other issues must submit a request that conforms to 2 Ill. Adm. Code § 1200.110(b) and cannot request one anonymously.

Citations and references

• 2 Ill. Adm. Code § 1200.120(b) and (c) — defines General Information Letters (GILs) as non-binding general information, not a statement of Department policy.
• 2 Ill. Adm. Code § 1200.110(b) — governs requests for Private Letter Rulings (PLRs), which cannot be issued anonymously.
• 86 Ill. Adm. Code 100.9720 — Illinois's nexus regulation, covering Public Law 86-272 protections and exceptions for corporation income tax purposes.
• 86 Ill. Adm. Code 100.9720(c)(2)(A) — activities exceeding "mere solicitation" subject a nonresident taxpayer to Illinois income tax and PPRT, apportioned under IITA Section 304.
• 86 Ill. Adm. Code 100.9720(c)(2)(D) — the de minimis test for whether unprotected activities create only a trivial additional connection with Illinois.
• 86 Ill. Adm. Code 100.9720(c)(4)(S) — catch-all listing activities beyond "mere solicitation" that are not on the protected list and not entirely ancillary to orders.
• 86 Ill. Adm. Code 100.9720(c)(5)(H) — protects coordinating shipment or delivery, and providing related information, without additional consideration.
• 86 Ill. Adm. Code 100.9720(c)(5)(N) — protects shipping or delivering goods into Illinois by owned or leased vehicles (including rail) or private carrier.
• 35 ILCS 5/304 (Illinois Income Tax Act, Section 304) — apportionment of business income for taxpayers subject to Illinois tax.
• 15 U.S.C. § 381 (Public Law 86-272) — federal law precluding state net income tax on out-of-state corporations whose only in-state activity is solicitation of orders for tangible personal property sales.
• Quill Corp. v. North Dakota, 504 U.S. 298 (1992) — cited for the Due Process and Commerce Clause "minimum connection" and "substantial nexus" standards.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2015/it-15-0015-gil.pdf

Original ruling text

IT 15-0015-GIL 10/29/2015 NEXUS
Nexus issues are not generally suitable for resolution by letter ruling.

October 29, 2015

Re:

Illinois income tax

Dear Xxxxx:
This is in response to your letter dated September 11, 2015 in which you request a private letter ruling.
Department of Revenue (“Department”) regulations require that the Department issue only two types
of letter rulings, Private Letter Rulings (“PLRs”) and General Information Letters (“GILs”). PLRs are
issued by the Department in response to specific taxpayer inquiries concerning the application of a tax
statute or rule to a particular fact situation. A PLR is binding against the Department, but only as to the
taxpayer who is the subject of the request for ruling and only to the extent the facts recited in the PLR
are correct and complete. A PLR will not be issued for an anonymous or unidentified taxpayer. 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). The nature of your request and the
information provided requires that we respond with a GIL.
Your letter states as follows:
I am writing on behalf of my client who prefers to remain anonymous at this time. If a private
letter ruling is not available on an anonymous basis, the client would like the most formal
response available from your state.
Facts:
The client is a STATE domiciled C corporation in the business of manufacturing coated sand.
The sand is delivered outside of STATE via leased rail car. The rail cars deliver the sand to a
transload site for unloading. Based on the rail availability, the leased rail cars are in your state
filled with sand waiting to be unloaded or stored on the rail empty.
Issue:
The client filed a corporation income tax return in your state. The client has been audited by the
state of STATE for corporation income tax purposes. The issue in question is whether the client’s
use of leased rail cars creates nexus outside STATE and in particular in your state. STATE
claims under STATE nexus rules that if the only activity in a state is the use of leased rail cars
that nexus is not created. They believe no activity beyond Public Law 86-272 has occurred.
Accordingly, STATE is using their sales throwback rules to increase the STATE apportionment
to include sales to your state previously reported to your state.
Questions:

1. Based on the facts presented, does the client have corporation income tax nexus in
   your state?

2. Based on the facts presented, what are the chances the client would
receive
a
refund of taxes paid to your state if a timely amended return was
filed based on no nexus
existing in your state?
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 website). 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.
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.
Regulations Section 100.9720(c)(4) 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 are the following:
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.
Regulations Section 100.9720(c)(5) contains a list of protected activities, including the following:
H) Coordinating shipment or delivery without payment or other consideration
and providing information relating to shipment or delivery either prior or
subsequent to the placement of an order.
N) Shipping or delivering goods into this State by means of vehicles or other
modes of transportation owned or leased by the nonresident taxpayer or
by means of private carrier, whether by motor vehicle, rail, water, air or
other carrier and irrespective of whether a shipment or delivery fee or
other charge is imposed, directly or indirectly, upon the purchaser.
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 indicated above, Regulations Section 100.9720(c)(5)(N) provides that shipping or delivering tangible
personal property into the state by means of leased rail car does not cause a taxpayer otherwise
protected under P.L. 86-272 to lose the immunity afforded under the federal law. However, although
the Department will not issue a ruling with respect to nexus, and your letter does not provide sufficient
information to make such a determination, the storage of empty delivery vehicles within Illinois may
cause a taxpayer to lose immunity under P.L. 86-272.
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)