Is a nonresident employee's compensation taxable by Illinois when she travels through a multi-state territory for an Illinois-based employer but her base of operations (her home) is in another state?

Plain-English summary

A nonresident employee who lives outside Illinois but works for an Illinois-based firm asked the Illinois Department of Revenue whether her wages were subject to Illinois income tax. Her job title required her to travel 3-4 days a week through a multi-state geographic sales territory meeting with financial advisors, and she worked from a home office in her home state. She also traveled to her employer's Illinois office for meetings about 6 to 10 days per year. She wanted to know whether those Illinois office days would make some or all of her compensation taxable by Illinois.

The Department explained that under Section 304(a)(2)(B) of the Illinois Income Tax Act (35 ILCS 5/304(a)(2)(B)), compensation is paid in Illinois if the employee's service is performed entirely in Illinois, if out-of-state service is merely "incidental" to Illinois service, or if some service is performed in Illinois and the employee's "base of operations" is in Illinois. Under the Department's regulations, the first step is to determine whether the employee's services are "localized" in one state; if they are localized in another state, none of the compensation is allocated to Illinois. If the services are not localized in any state, the analysis instead turns on where the employee's base of operations is located.

Applying these rules to the facts presented, the Department found that the employee's services were not localized in any single state because she regularly traveled across a multi-state territory rather than working primarily from one place, and her occasional Illinois office visits were not enough to change that. Because her base of operations was her home in her home state (not Illinois), the compensation rules directed all of her wages away from Illinois. The Department concluded that none of her compensation is allocated to Illinois.

This letter is a General Information Letter (GIL), meaning it applies general legal principles to facts the taxpayer described without conducting further factual investigation. It is not a statement of Department policy and does not bind the Department in future cases, even involving the same taxpayer.

What this means for you

If you are a traveling nonresident employee

If you work for an Illinois employer but spend most of your working time traveling through a territory outside Illinois, and your home office (not an Illinois location) is your "base of operations," a limited number of days spent at meetings in Illinois will not, by itself, make your compensation taxable by Illinois. What matters most is where your services are "localized" and where your base of operations sits, not simply how many days you happen to spend in Illinois.

If you are an Illinois employer with traveling or remote sales staff

When determining whether to withhold Illinois income tax from an employee's wages, look at the full pattern of the employee's work: is the employee's service localized in one state, and if not, where is the employee's base of operations? Occasional visits to your Illinois office for meetings do not automatically convert an employee's compensation into Illinois-source income if the employee's base of operations and day-to-day services are centered elsewhere.

Limits of this guidance

This is a GIL, not a Private Letter Ruling (PLR). It reflects the Department's general reading of the statute and regulations applied to the specific facts described, but it is not binding on the Department and cannot be relied on as precedent for a different taxpayer or a different fact pattern. Any taxpayer wanting a binding determination on their own facts must request a PLR under 2 Ill. Adm. Code 1200.110(b).

Common questions

Does traveling to my employer's Illinois office a few times a year make my wages taxable in Illinois?
Not necessarily. In this ruling, an employee who visited her employer's Illinois office 6 to 10 days per year still had none of her compensation allocated to Illinois, because her base of operations was her home in another state and her services were not localized in any one state.

What is a "base of operations" for purposes of this rule?
Per 86 Ill. Adm. Code 100.7010(d)(2), it is the place or fixed center from which the individual works -- which can be a home office, a place specified in an employment contract for receiving directions, or, absent other controlling factors, the place where business mail, supplies, and records are kept.

What happens if an employee's services ARE localized in Illinois?
Under 86 Ill. Adm. Code 100.7010(c)(1), if compensation is paid in Illinois because the service is localized in Illinois under Section 304(a)(2)(B)(i) or (ii), the base-of-operations test in (iii) is not even considered -- the compensation is simply allocated to Illinois.

Can I rely on this letter for my own tax situation?
No. This is a General Information Letter (GIL), which provides general information but is not a statement of Department policy and is not binding on the Department. A binding determination requires a Private Letter Ruling (PLR) request under 2 Ill. Adm. Code 1200.110(b).

Citations and references

• 35 ILCS 5/304(a)(2)(B) -- Illinois Income Tax Act rule for when compensation is "paid in" Illinois
• 86 Ill. Adm. Code 100.7010(a)(3) -- localization rules intended to assign compensation to only one state
• 86 Ill. Adm. Code 100.7010(c)(1) -- base-of-operations factors not considered once service is localized in Illinois
• 86 Ill. Adm. Code 100.7010(c)(2) -- definition of "incidental" service
• 86 Ill. Adm. Code 100.7010(c)(3) -- time spent in a state is not decisive of "incidental" status
• 86 Ill. Adm. Code 100.7010(d)(1) -- localization test inapplicable where service is not incidental; base-of-operations controls
• 86 Ill. Adm. Code 100.7010(d)(2) -- definition of "base of operations"
• 86 Ill. Adm. Code 1200.120(b) and (c) -- General Information Letters are general, non-binding guidance
• 2 Ill. Adm. Code 1200.110(b) -- procedure for requesting a binding Private Letter Ruling (PLR)

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-15-0016-gil.pdf

Original ruling text

IT 15-0016-GIL 10/29/2015

COMPENSATION

Compensation of an employee who performs significant services within and without the
State, and whose base of operations is in another state in which services are performed,
is allocated to the state in which the base of operations is located.

October 29, 2015

Re:

Illinois Income Tax

Dear Xxxxx:
This is in response to your letter dated October 8, 2015 in which you request information
regarding the taxation of certain compensation. The nature of your request and the information
you have provided require 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 86 Ill. Adm. Code 1200.120(b) and (c), which may be accessed
at www.revenue.state.il.us.
In your letter you have stated the following:
I am writing for clarification of Illinois tax law regarding wages taxed in Illinois earned by
a non-resident taxpayer.
Taxpayer lives and works in STATE and is employed by a Firm located in Illinois. The
taxpayer’s base of operations is her home. She is the TITLE. In this role she is responsible
for developing sales from financial advisors in the GEOGRAPHIC area of the country. On
a weekly basis, she typically spends 3-4 days traveling in the territory meeting with
advisors to educate them on how to best position their client’s portfolios using the Firm’s
mutual funds and separately managed accounts.
Based on these facts, I would assume that her wages are not considered compensation
paid in IL according to IITA Section 304(a)(2)(B) since the services performed for the Firm
are done entirely outside of IL.
However, she does attend meetings in her employer’s office in IL, about 6 to 10 days per
year. Do these days constitute services performed in IL? Will these days be subject to IL
tax? Will these days cause all of her compensation to be considered compensation paid
in IL?

RULING

Section 304(a)(2)(B) of the Illinois Income Tax Act (“IITA” ; 35 ILCS 5/304(a)(2)(B)) states:
Compensation is paid in this State if:
(i) The individual’s service is performed entirely within this State;
(ii) The individual’s service is performed both within and without this State, but the service
performed without this State is incidental to the individual’s service performed within this
State; or
(iii) Some of the service is performed within this State and either the base of operations,
or if there is no base of operations, the place from which the service is directed or
controlled, is within this State, or the base of operations or the place from which the
service is directed or controlled is not in any state in which some part of the service is
performed, but the individual’s residence is in this State.
In applying IITA Section 304(a)(2)(B), Department Regulations § 100.7010(a)(3) (86 Ill. Adm.
Code 100.7010(a)(3)) states that the rules set forth therein “are to be applied in such manner
that, if they were in effect in other states, an item of compensation would constitute
‘compensation paid in’ only one state. Thus, if an item would, under these rules, constitute
compensation paid in a state other than Illinois because the individual’s service was localized in
such other state under the tests of [section 304(a)(2)(B)], it could not also be compensation paid
in Illinois.” In addition, Department Regulations § 100.7010(c)(1) states that if compensation is
paid in Illinois because the service is localized in Illinois under either Section 304(a)(2)(B)(i) or
(ii), the factors set forth in Section 304(a)(2)(B)(iii) are not considered. Therefore, in order to
determine whether compensation of a nonresident employee is taxable in Illinois, it must first be
determined whether the employee’s services are localized in Illinois or another state. Where the
services are localized in Illinois the compensation is allocated to Illinois, and where the services
are localized in another state the compensation is not allocated to Illinois. If, on the other hand,
the employee’s services are not localized in any state under the tests set forth in Section
304(a)(2)(B)(i) or (ii), then whether or not the compensation is taxable in Illinois depends upon
the location of the employee’s base of operations or the place from which the employee is
directed or controlled as set forth under Section 304(a)(2)(B)(iii).
In this case, the facts set forth in your letter suggest that the employee’s services are not
localized in any state. You letter indicates that the employee is the manager of the
GEOGRAPHIC territory of the United States and typically spends 3-4 days each week traveling
that territory. In addition, the employee spends 6-10 days of each year at meetings at her
employer’s office in Illinois. Department Regulations § 100.7010(c)(2) states that for purposes
of determining whether services performed in one state are incidental to services performed in
another, the term “incidental” refers to any service which is necessary to or supportive of the
primary service performed by the employee or which is temporary or transitory in nature or
consists of isolated transactions. In addition, Regulations § 100.7010(c)(3) states that the
amount of time spent or the amount of services performed in a state is not decisive in itself of
the question whether services in a state are incidental to services in another state.

Department Regulations § 100.7010(d)(1) states:
The localization tests are not applicable where an individual’s employment normally or
continually includes service within this State and also services without the State which
are not “incidental” to the services performed within this State. In such case, if the
individual’s base of operations is within this State, his entire compensation will be
[taxable], but if his base of operations is without this State, none of his compensation will
be [taxable].
Regarding an employee’s base of operations, Regulations § 100.7010(d)(2) states:
The term “base of operations” refers to the place or fixed center from which the individual
works. An individual’s base of operations may be his business office (which may be
maintained in his home), or his contract of employment may specify a place at which the
employee is to receive his directions and instructions. In the absence of more controlling
factors, an individual’s base of operations may be the place to which he has his business
mail, supplies, and equipment sent or the place where he maintains his business records.
In this case, you have indicated that the employee’s base of operations is her home in STATE.
Therefore, none of the employee’s compensation is allocated to Illinois.
As stated above, this is a GIL which 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)