Does having remote employees or independent contractors in Illinois create income tax or sales tax nexus?

Plain-English summary

A company (through its representative) asked the Illinois Department of Revenue whether certain activities created Illinois nexus for corporate income tax and/or sales tax in prior years — the company was weighing whether to seek a voluntary disclosure agreement with the state. The facts described were: a resident employee in Illinois from December 21, 2012 to July 31, 2015; independent contractors located in Illinois performing home-based medical transcription work (using their own equipment and setting their own hours) since August 1, 2010, who did not solicit sales or market the company's products; and employees who occasionally visited Illinois customer sites to assist with sales, implementation, or training.

The Department declined to rule on whether these facts actually created nexus. It explained that nexus determinations are "extremely fact-specific," so it does not issue rulings on whether a particular taxpayer has nexus with Illinois. Because the request called for that kind of fact-specific determination, the Department treated it as a General Information Letter (GIL) rather than a binding Private Letter Ruling (PLR) — GILs only provide general information and are not a statement of Department policy.

Instead of answering the nexus question directly, the letter pointed the taxpayer to Illinois' nexus regulation, 86 Ill. Adm. Code 100.9720, and restated the general constitutional backdrop: the U.S. Constitution's Due Process Clause requires "some minimum connection" between a state and the person, property, or transaction being taxed, and the Commerce Clause requires that a state's tax apply only to activities with a "substantial nexus" to the state (citing Quill Corp. v. North Dakota, 504 U.S. 298 (1992)). The letter also noted that, generally, the physical presence of a taxpayer's employees or other representatives within a state will establish the substantial nexus needed to subject the taxpayer to that state's corporate income tax (citing Standard Pressed Steel v. Washington, Scripto, Inc. v. Carson, and Tyler Pipe Industries, Inc. v. Washington).

What this means for you

Businesses with remote employees or contractors in Illinois

This letter does not tell you whether your specific arrangement creates nexus — the Department explicitly refuses to make that call in a GIL. What it does confirm is the framework the Department will apply: physical presence of employees or representatives in Illinois is generally enough to establish substantial nexus for corporate income tax purposes, subject to constitutional Due Process and Commerce Clause limits. If you have resident employees, on-site contractors, or staff who visit the state for sales or implementation work, you should evaluate your facts against 86 Ill. Adm. Code 100.9720 rather than assume this letter clears you.

Companies using independent contractors performing services from home

The letter recites, without ruling on it, a fact pattern where independent contractors worked from home in Illinois using their own equipment and did not solicit sales or market the company's products. Because the Department did not resolve whether this creates nexus, businesses in a similar position cannot rely on this letter as authority either way — you would need your own PLR (with your complete facts) or independent legal analysis to get a binding answer.

Businesses considering a voluntary disclosure agreement (VDA)

The original request mentioned discussing a VDA with Illinois. This GIL does not resolve the underlying nexus question that would normally inform a VDA decision, so companies in this position should not treat this letter as guidance on their own exposure — it only supplies the general legal standards, not an application of those standards to specific facts.

Accountants and tax professionals

Note the procedural point buried in this letter: if your client's question turns on whether nexus exists under a particular fact pattern, expect the Department to issue a GIL (not a binding PLR) and to decline to answer the ultimate nexus question. For a binding answer, the request would need to be framed to elicit a determination the Department is willing to make, or the taxpayer would need to rely on the regulation and case law cited here to reach its own conclusion.

Common questions

Q: Did the Department decide whether this taxpayer had nexus in Illinois?
A: No. The Department stated outright that nexus determinations are "extremely fact-specific" and that it "does not issue rulings regarding whether a taxpayer has nexus with the State."

Q: What did the Department provide instead of a nexus determination?
A: General information: a pointer to its nexus regulation (86 Ill. Adm. Code 100.9720), a summary of the Due Process and Commerce Clause limits on state taxing power, and case citations on when physical presence of employees or representatives establishes substantial nexus.

Q: Why was this issued as a GIL instead of a Private Letter Ruling (PLR)?
A: Because a PLR requires the Department to apply the law to a specific, complete fact situation and issue a binding answer for that taxpayer. Since the nature of this request (a nexus determination) is something the Department does not rule on, it responded with a GIL, which is non-binding general information rather than Department policy.

Q: Does physical presence of employees always create nexus?
A: The letter says that, generally, physical presence of a taxpayer's employees or other representatives within a state "will establish the requisite connection or substantial nexus" for corporate income tax, citing Standard Pressed Steel, Scripto, Inc. v. Carson, and Tyler Pipe Industries. But this is general guidance, not an application to the specific facts described (resident employee, home-based independent contractors, occasional on-site visits) — the Department did not confirm whether nexus existed on those particular facts.

Q: Can this letter be relied on by other taxpayers?
A: No. As a GIL, it is not a statement of Department policy and is not binding on the Department at all — not even for the taxpayer who requested it, let alone anyone else.

Citations and references

Regulations:

• 2 Ill. Adm. Code 1200.120(b) and (c) (distinguishes PLRs from GILs; GILs are non-binding general information, not Department policy)
• 86 Ill. Adm. Code 100.9720(e) (Illinois' income tax nexus regulation; incorporates U.S. Constitutional jurisprudence, including Commerce Clause and Due Process Clause limits, as limitations on the state's income tax reach)

Cases cited in the letter (for context, not independently verified here):

• Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (Due Process and Commerce Clause nexus standards)
• Standard Pressed Steel v. Washington, 95 S.Ct. 706 (1975)
• Scripto, Inc. v. Carson, 80 S.Ct. 619 (1960)
• Tyler Pipe Industries, Inc. v. Washington, 107 S.Ct. 2810 (1987)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2017.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2017/it-17-0007-gil.pdf

Original ruling text

IT 17-0007-GIL

06/06/2017 NEXUS

Department Does Not Issue Rulings regarding Nexus

June 6, 2017
Re:

Illinois income tax

Dear Xxxxx:
This is in response to your letter dated March 21, 2017 in which you request guidance regarding the
application of Illinois corporate income tax. 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:
This is to request guidance, on behalf of a client, regarding whether or not the following activities
create nexus for Illinois sales tax and/or corporate income tax in prior years. We are currently
discussing with this client the possibility of requesting a voluntary disclosure agreement with
Illinois.
The client had a resident employee in the state from December 21, 2012 until July 31, 2015.
The client has used independent contractors located in the state to perform services from August
1, 2010 and going forward. The sole role of the independent contractors is medical transcription
which is performed from home using their own equipment and setting their own hours and/or
volumes for work. Transcription services are performed for customers in various states, including
Illinois. These independent contractors do not solicit sales nor market and advertise the client’s
products and services in any way to customers in the state.
The client may occasionally have employees onsite at customer locations in the state to be part
of the sales process and/or for implementation and training.
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

IT 17-0005-GIL
Page 2
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.) Department Regulations Section 100.9720(e)
states:
U.S. Constitutional Jurisprudence. If not protected by U.S. or Illinois statute, an
income-producing activity may, nonetheless, be protected from State taxation by
principles of U.S. Constitutional jurisprudence. Controlling decisions that assert
protections afforded by the Interstate Commerce Clause, the Foreign Commerce
Clause and the Due Process Clause are accepted by this State as limitations on the
reach of its income tax and personal property tax replacement income tax statutes.
However, nothing stated in this subsection (e) shall prevent Illinois from challenging taxpayer
assertions of U.S. Constitutional protection.
Generally, the physical presence within a state of a taxpayer’s employees or other representatives will
establish the requisite connection or substantial nexus with the state necessary to subject the taxpayer
to the state’s corporate income tax. See, for example, Standard Pressed Steel v. Washington, 95 S.Ct.
706 (1975); Scripto, Inc. v. Carson, 80 S.Ct. 619 (1960); and Tyler Pipe Industries, Inc. v. Washington,
107 S.Ct. 2810 (1987).
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.
Sincerely,

Brian L. Stocker
Associate Counsel (Income Tax)