Does shipping goods into Illinois to a third-party vendor for remanufacturing, without storing goods there, create Illinois corporate income tax nexus under Public Law 86-272?

Plain-English summary

A Pennsylvania auto-parts company asked Illinois to rule that it had no nexus for Illinois Corporate Income Tax because its only Illinois connection was an independent third-party vendor that remanufactured the company's used automotive parts (anti-lock brake modules, window switch modules, and similar items) before shipping them back to the company in Pennsylvania. The company argued that under Public Law 86-272 (the federal law that shields an out-of-state business from a state's net income tax if its only in-state activity is soliciting orders that are approved and filled from outside the state), it should not owe Illinois income tax.

The Department of Revenue declined to issue a nexus determination at all. It explained that whether a taxpayer has nexus with Illinois is "extremely fact-specific," and as a matter of long-standing practice it does not rule on nexus questions through this kind of letter — it pointed to a string of prior General Information Letters going back to 2003 making the same point. Because the taxpayer's letter didn't provide the detail needed for a binding Private Letter Ruling, the Department treated it as a request for a non-binding General Information Letter (GIL) instead.

That said, the Department did not leave the taxpayer empty-handed. It walked through the applicable law — Public Law 86-272, the Due Process and Commerce Clauses, Illinois's own nexus regulations, and a prior GIL and court decision involving similar third-party arrangements — and then applied that law to the facts as described. Its conclusion: shipping goods into Illinois for remanufacturing and having employees occasionally visit the vendor to check on quality are "not those described under P.L. 86-272," so "unless these activities are de minimus, it appears that the taxpayer would not be protected from taxation in Illinois under Public Law 86-272." In other words, on the facts presented, the Department signaled the company likely would have Illinois nexus — the opposite of the ruling the company had requested — even though it stopped short of issuing that as a formal, binding conclusion.

What this means for you

Out-of-state manufacturers using Illinois subcontractors

If your only Illinois connection is a third-party vendor performing services on goods you own — remanufacturing, retrofitting, or similar processing — don't assume Public Law 86-272 automatically protects you. This letter distinguishes "repairs or maintenance/service to property sold or to be sold" (an unprotected activity under Illinois's regulations) from other kinds of processing, but ultimately still suggests that arrangement, plus periodic employee visits, likely creates nexus unless the activity is truly de minimis.

Businesses seeking certainty on nexus

Don't expect Illinois to answer "do I have nexus?" through a General Information Letter or even most Private Letter Ruling requests on this topic — the Department has consistently refused to make fact-specific nexus determinations this way going back to at least 2003. If you need a binding answer, the letter points to the formal Private Letter Ruling process under 86 Ill. Adm. Code 1200.110, which requires submitting detailed information under items 1 through 8 of that section, and is only available if you are not under audit.

Accountants and tax professionals

The letter is a useful map of what Illinois considers protected vs. unprotected activity: maintaining a stock of goods in-state or having an independent contractor store goods in Illinois destroys P.L. 86-272 protection, while an independent contractor merely soliciting or making sales, or handling shipment/delivery, does not. It also cites a prior GIL involving hockey-jersey embellishment and the Honeywell International Illinois Appellate Court decision on physical possession — both useful analogies for similar processing/drop-ship fact patterns.

Companies with de minimis Illinois contacts

The Department's own language leaves an opening: it says the activities "are not those described under P.L. 86-272," and that the taxpayer would likely not be protected "unless these activities are de minimus." That qualifier matters — a very limited or occasional version of this arrangement could come out differently, but this letter does not say where that line is.

Common questions

Q: Did Illinois rule that this company has nexus?
A: Not formally. The Department expressly said it does not issue rulings on whether a taxpayer has nexus because the question is too fact-specific. But its general analysis of the facts presented indicated the company's activities go beyond what Public Law 86-272 protects, "unless these activities are de minimus."

Q: Why didn't Illinois grant the private letter ruling the company asked for?
A: The company requested a binding Private Letter Ruling, but "the nature of your letter and the information provided" led the Department to respond with a non-binding General Information Letter instead. GILs are issued under 86 Ill. Adm. Code 1200.120(b) and (c) and are not a statement of Department policy.

Q: Does having a third party store my goods in Illinois affect the analysis?
A: Yes, significantly. The letter is clear that if an independent contractor maintains a stock of goods in Illinois — under consignment or any other arrangement — that removes P.L. 86-272 protection. In the company's arrangement here, the vendor did not store the parts before or after remanufacturing, which the Department treated as one point in the company's favor even while ultimately suggesting nexus was still likely.

Q: What did the Department mean by citing the Honeywell International case?
A: That case addressed a different tax (Service Occupation Tax) but stood for the idea that a customer's approval or inspection of work performed on their property doesn't itself count as "delivery and receipt of physical possession" in the state where the work happened, if the customer never actually exercises dominion and control there. The Department used it to explain why the company's employees inspecting the remanufactured parts in Illinois doesn't, by itself, change the nexus analysis.

Q: Can I rely on this letter for my own similar situation?
A: No. It is a General Information Letter — by its own terms not binding on the Department and not a statement of Department policy. It illustrates the Department's reasoning but doesn't guarantee the same result for different facts, and even the taxpayer here didn't get the binding ruling it asked for.

Citations and references

• Public Law 86-272 / 15 U.S.C. § 381 (federal law barring state net income tax where in-state activity is limited to solicitation of orders)
• 86 Ill. Adm. Code 1200.120(b) and (c) (GILs are general information only, not binding Department policy)
• 86 Ill. Adm. Code 1200.110 (procedure for requesting a binding Private Letter Ruling)
• Ill. Admin. Code Section 100.9720 (Illinois nexus regulations)
• Ill. Admin. Code Section 100.9700(c)(1) (Illinois regulation implementing Public Law 86-272)
• Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (Due Process and Commerce Clause nexus standards, cited by the Department)

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-17-0010-gil.pdf

Original ruling text

IT 17-0010-GIL 10/02/2017

Public Law 86-272 Nexus

Determination of Nexus is Fact-Specific. (This is a GIL)

October 2, 2017

Re:

Illinois income tax

Dear Xxxxx:
This is in response to your letter dated July 19, 2017, in which you requested a private letter
ruling. The nature of your letter and the information 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 from the Department’s web site at
www.tax.illinois.gov.
Your letter states as follows:
The purpose of this letter is to request a private letter ruling from the Illinois Department
of Revenue (“Department”), pursuant to Section 1200.110 of Title 2 of the Illinois
Administrative Code, confirming whether COMPANY. (“Taxpayer” or “Company”) has
nexus with the State of Illinois for purposes of Illinois Corporate Income Tax. For the
reasons stated below, we seek the conclusion that the Taxpayer does not have nexus
with Illinois due to the fact that its only connection with the state is the presence of a
third-party vendor who remanufactures Company-owned goods in Illinois before
returning them to the Company.
I. Statement of Facts
Taxpayer, headquartered in Pennsylvania, is a supplier of original equipment dealer
automotive and heavy duty replacement parts. The Company has no property or
employees located in Illinois that would otherwise create nexus with the state for
Corporate Income Tax purposes. The Company contracts with a third party
remanufacturing vendor based in Illinois. Pursuant to the arrangement, the Company
will purchase used anti-lock brake modules, window switch modules and other
automotive parts from various sources and ship them to the Illinois vendor for
remanufacturing. Any inventory located within the State is awaiting rebuild by the
vendor and the company retains title to this inventory throughout the entirety of the
remanufacturing process.
After remanufacturing is completed, the vendor will return the finished parts to the
Company in Pennsylvania. The vendor will ship the remanufactured parts back to the
Company as soon as reasonably practicable. All customer orders are fulfilled from a
Company location outside of Illinois. Under no circumstances are any of the Company’s

IT 17-0010-GIL
PAGE 2
automotive parts sold directly to customers by the vendor. This is a continuously
repeated process. Additionally, Company employees will infrequently visit the vendor to
discuss the quality of the product and the progression of the remanufacturing efforts.
II. Issue Statement
Whether nexus is created for Illinois Corporate Income Tax purposes if a third party
vendor remanufactures Company-owned automotive parts and returns them to the
Company after remanufacturing is completed?
III. Analysis
Statement of Law
Illinois imposes a tax measured by net income (“Corporate Income Tax”) on both
domestic and nonresident corporations for the privilege of earning or receiving income
in the state. Corporations doing business in Illinois are also subject to the Replacement
Income Tax, which replaced the state’s personal property tax. Nonresident corporations
are subject to both the Corporate Income Tax and the Replacement Income Tax if their
business activity has sufficient nexus with Illinois.
The Due Process and Commerce Clauses of the United States Constitution limit the
power of states to subject out-of-state companies to their taxing jurisdiction. The Due
Process Clause requires that there exist some minimum connection between a state
and the person, property, or transaction it seeks to tax. Similarly, the Commerce Clause
requires that the tax be applied to an activity having substantial nexus with the taxing
state. Whether a company is liable for Illinois Corporate Income Tax depends on
whether there is sufficient nexus between Illinois and the company’s business.
Public Law 86-272 (“P.L. 86-272”), the federal Interstate Income Law, bars state income
taxation of interstate businesses whose only contact or nexus with the taxing state is the
maintenance in the state of salespersons or independent contractors who solicit orders
for out-of-state approval and fulfillment. If a nonresident corporation’s activities in Illinois
exceed “mere solicitation,” it is subject to Illinois income tax. Whether a nonresident
corporation’s business activity exceeds “mere solicitation” depends on the facts and
circumstances of each particular case.
In accordance with federal statutes regulating interstate commerce, United States
constitutional jurisprudence and Illinois law, Illinois has adopted regulations listing
certain activities qualifying as protected activities under P.L. 86-272, thereby
constituting insufficient nexus with Illinois. Similarly, the regulations provide a listing of
activities unprotected under P.L. 86-272, thereby subjecting a taxpayer to corporate
income tax. Unprotected activities include the following:
● Making repairs or providing maintenance or service to property sold or to be sold;
● Owning, leasing or maintaining a stock of goods in-state.
Illinois regulations further provide that independent contractors may engage in certain
limited activities in Illinois on behalf of nonresident taxpayers without the loss of
immunity from taxation. Such activities include soliciting sales, making sales or

IT 17-0010-GIL
PAGE 3
maintaining an office. Maintenance of a stock of goods in Illinois by an independent
contractor under consignment or any other type of arrangement with the nonresident
corporation, will remove the nonresident corporation’s protection from taxation under
P.L. 86-272.
The Illinois Department of Revenue (“Department”) has issued various general
information letters interpreting nexus standards in Illinois. One information letter
considered the activities of a Connecticut operation (“AAA”) selling hockey jerseys at
retail through an internet site. AAA did not have any other property or employees
located in Illinois. An Illinois-based business (“BBB”) performed embellishment services,
including stitching of letters and numbers, on the jerseys on behalf of AAA prior to the
jerseys being shipped to the end customer. The taxpayer provided a number of
scenarios to the Department and requested a ruling on whether each activity would
create nexus for the taxpayer. The Department concluded that nexus would be created
if BBB stored the jerseys until AAA received an order for the jersey, at which time BBB
performed its alterations and dropped shipped the jerseys to the end customer on
behalf of AAA. The Department reasoned that AAA was no longer protected under P.L.
86-272 when BBB, an independent contractor, stored goods in Illinois for AAA.
However, the Department concluded that insufficient nexus would exist if AAA, upon
receiving an order for a jersey, shipped its jerseys to BBB for alterations and
subsequent drop shipment to the end customer. Similarly, insufficient nexus existed
where BBB returned the jerseys to AAA for shipment upon completion of the alterations.
The Department determined that using an independent contractor for shipment or
delivery purposes allowed AAA to continue its protection under P.L. 86-272.
In Honeywell International, Inc. v. Illinois Department of Revenue, the Fifth Division of
the Illinois Appellate Court’s First District issued an instructive decision regarding the
delivery and receipt of physical possession of property in Illinois. In this Service
Occupation Tax case, an aerospace service company was not subject to tax on aircraft
parts sold to out-of-state customers in conjunction with servicing the customer aircraft in
Illinois because the taxpayer delivered and the customers received physical possession
of the aircraft and installed parts outside Illinois. The vendor retrofitted the customers’
aircraft, which involved the removal of the original engines on the aircraft and the sale
and installation of new engines and other aircraft parts. After servicing was completed,
the customers visited the vendor location to inspect and accept the installation of the
aircraft parts on the customer-owned airplanes. After the inspections, the aircraft were
flown by the taxpayer’s personnel to out-of-state delivery locations where the customer
signed a final acceptance and delivery statement. The court found that neither the
taxpayer’s installation of the aircraft parts nor the customer approval of the installation
constituted the delivery and receipt of physical possession of the parts in Illinois
because neither act gave the customer the ability to exercise dominion and control over
the parts.
Analysis of Law
The Company has negotiated an arrangement with an Illinois-based third party vendor
whereby it ships used automotive parts to the vendor, who remanufactures the

IT 17-0010-GIL
PAGE 4
automotive parts for retail sale. After remanufacture is completed, the vendor
immediately returns the remanufactured automotive parts to the Company, who
subsequently stores the parts in Pennsylvania until an order is placed and fulfilled for
shipment to customers. As noted above, Illinois regulations provide that making repairs
or providing maintenance or service to property is considered an unprotected activity
under P.L. 86-272. However, the third party vendor is providing a different service, the
remanufacturing of automotive parts, an activity not specifically listed as unprotected
under Illinois regulations. Further, the remanufacturing activities of the third party vendor
performing services for the Company should not be attributed to the Company. For
these reasons, the vendor’s activities in Illinois do not create Illinois nexus for the
Company.
In the general information letter described above, the Department determined that an
out-of-state business did not have nexus with Illinois where it shipped hockey jerseys to
a subcontractor, which proceeded to perform stitching of letters and numbers on the
jerseys before either shipping the jerseys to the customer or back to the taxpayer. As
long as the subcontractor did not store the jerseys in Illinois before or after an order was
placed, the taxpayer did not have nexus with Illinois. If considered an independent
contractor, the Company’s arrangement with the third-party vendor does not create
nexus with Illinois because the vendor does not store or maintain goods in Illinois on
behalf of the Company, nor is the vendor engaged in any otherwise unprotected
activities under P.L. 86-272 and Illinois regulations.
Finally, similar to the taxpayer in Honeywell International, the Company never receives
physical possession of the remanufactured automotive parts in Illinois. Rather, the
vendor ships the remanufactured parts to the Company outside of Illinois, where they
await fulfillment of customer orders. Although the Company may retain title to the
property during the remanufacturing process, it lacks dominion and control over the
property during this time, as illustrated in the Honeywell case. The fact that Company
employees occasionally visit the vendor’s location to inspect the remanufactured
property merely relates to the location at which the vendor’s services are provided. The
only significance of the Illinois location is that the vendor performs its remanufacturing
services on Company-owned products in Illinois. However, the Company does not hold
or store property at this location, and the vendor never directly sells the parts to the
Company’s customers. Thus nexus is not created under such circumstances.
Based on the above analysis, so long as the vendor does not store the automotive parts
in Illinois before or after the remanufacturing process, such arrangement does not
subject the Company to Illinois Corporate Income Tax.
Conclusion
For the reasons stated above, we request that the Department conclude that the
activities of the Illinois-based third party vendor on behalf of the Taxpayer do not create
nexus with Illinois for Corporate Net Income Tax purposes. The vendor does not store
or maintain Company-owned goods in Illinois, nor does it engage in any unprotected
activities under P.L. 86-272. Further, the activities of the vendor are not properly

IT 17-0010-GIL
PAGE 5
attributed to the Company, whose employees and property are located outside of
Illinois.
In support of this request, we hereby enclose an executed Form IL-2848, Power of
Attorney, confirming our appointment as Taxpayer’s representative.
We respectfully request a private letter ruling from the Department regarding this matter.
Should you disagree with this opinion, please contact me to discuss this opinion prior to
issuing a ruling. If you have any further questions or require any additional information,
please do not hesitate to contact me.

RULING
The determination 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. See IT-03-0010-GIL (March 14, 2003); IT-03-114-GIL (April 14, 2003): IT-03-0017GIL (May 12, 2003): IT-05-0025-GIL (May 19, 2005); IT-07-0036-GIL (November 9, 2007); IT08-0020-GIL (July 3, 2008); and IT-13-0013-GIL (November 4, 2013). 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)) The Commerce Clause requires that a
state’s tax be applied only to activities with a substantial nexus to the taxing state. (Id.) In the
case of foreign corporations, Illinois may assert nexus to tax unless the corporation falls under
the protection conferred by 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.
Department Regulations Section 100.9700(c)(1) states:
Public Law 86-272. In 1959, Congress enacted PL 86-272 (15 USC 381-384), which
prohibits states and their political subdivisions from imposing a net income tax on
nonresident taxpayers who operate primarily in interstate commerce and whose activity
within a state is limited. PL 86-272 provides in pertinent part:
(A) No state or political subdivision thereof shall have the power to impose . . . a net
income tax on the income derived within such state by any person from interstate
commerce if the only business activities within such state by or on behalf of such person
during such taxable year are either, or both of the following:

IT 17-0010-GIL
PAGE 6
(i) the solicitation of orders by such person, or his representative, in such state
for sales of tangible personal property, which orders are sent outside the state for
approval or rejection, and, if approved, are filled by shipment or delivery from a
point outside the state;
(ii) and the solicitation of orders by such person, or his representative, in such
state in the name of or for the benefit of a prospective customer of such person, if
orders by such customer to such person to enable such customer to fill orders
resulting from such solicitation are orders described in subsection (c)(1)(A)(i).
(C) For the purposes of subsection (c)(1)(A) of this Section, a person shall not be
considered to have engaged in business activities within a state during any taxable year
merely by reason of sales in such state, or the solicitation of orders for sales in such
state, of tangible personal property on behalf of such person by one or more
independent contractors whose activities on behalf of such person in such state consist
solely of making sales, or soliciting orders for sales, of tangible personal property.
Your letter indicates that the taxpayer ships property into Illinois for purposes of remanufacture
by a third-party manufacturer, who then returns the property to the taxpayer’s out-of-state
facility where the property remains awaiting sale to customers. In addition, you indicate that
taxpayer’s employees infrequently visit the third-party manufacturer in Illinois for purposes of
discussing product quality and the progression of remanufacturing efforts. These activities are
not those described under P.L. 86-272. Therefore, unless these activities are de minimus, it
appears that the taxpayer would not be protected from taxation in Illinois under Public Law 86272.
As stated above, this is a general information letter 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 are not under audit and you wish to obtain a binding Private Letter Ruling
regarding your factual situation, please submit all of the information set out in items 1 through
8 of Section 1200.110(b). If you have any further questions regarding this letter, you may
contact me at (217) 782-2844.

Sincerely,

Brian L. Stocker
Associate Counsel (Income Tax)