Must an Illinois trucking company withhold Illinois income tax from a nonresident interstate driver who is dispatched from Illinois but drives loads outside the state?

Plain-English summary

An accounting firm asked the Illinois Department of Revenue whether interstate trucking companies must withhold Illinois income tax from nonresident drivers. The example given: an Illinois-based trucking company employs a driver who lives in Arizona, is dispatched from Illinois, but performs the actual driving service across state lines, with loads usually originating and ending near the driver's Arizona home town. The driver's accountant argued no Illinois withholding should apply because the driver's only tie to Illinois is being dispatched from there.

The Department responded with a General Information Letter (GIL) rather than a binding ruling, since a GIL merely points to the relevant regulations and is not a statement of Department policy. It explained that compensation paid to a nonresident is "paid in Illinois" — and therefore subject to Illinois withholding — only if it meets the test in 86 Ill. Adm. Code 100.3120(a)(1) and IITA Section 304(a)(2)(B). Because a truck driver's service is not "localized" in any one state, the relevant test is part (C): if some of the service is performed in Illinois, withholding turns on where the service is "directed or controlled." If that base of operations/control is in Illinois, the compensation is paid in Illinois and withholding is required. If the service is directed or controlled from a state other than Illinois (and the driver isn't an Illinois resident), no Illinois withholding applies.

Critically, the Department did not simply say dispatch-from-Illinois automatically means withholding is required, nor did it adopt the driver's accountant's position that dispatch is irrelevant. It framed the answer around the "directed or controlled" test and left the ultimate factual determination — whether this particular driver's service is directed or controlled from Illinois or from elsewhere — to the taxpayer to apply to its own facts. The letter also flagged (but did not resolve) the "certain trucking companies" exception tied to Surface Transportation Board jurisdiction that the requester had specifically asked about; the ruling did not address that exception at all.

What this means for you

Interstate trucking companies

If you are an Illinois-based trucking company with nonresident drivers who cross state lines, don't assume dispatch location alone answers the withholding question. Under IITA Section 304(a)(2)(B) and 86 Ill. Adm. Code 100.3120(a)(1), withholding turns on whether the driver's service is "directed or controlled" from Illinois — which may or may not be the same thing as where the driver is dispatched from, depending on your operations. You should analyze each driver's base of operations and who actually directs/controls their work.

Payroll and accounting professionals

The test the Department pointed to mirrors the "employment" test under the Illinois Unemployment Compensation Act (820 ILCS 405), so if you've already worked through unemployment-insurance localization questions for a driver, that analysis is a useful starting point for Illinois income tax withholding too. Note that this GIL did not address the Surface Transportation Board jurisdiction exception the requester specifically asked about — that question remains open.

Taxpayers wanting certainty

Because a GIL is not binding on the Department, if you need a definitive answer for your specific facts, the letter itself notes you can request a binding Private Letter Ruling by submitting the information required under 86 Ill. Adm. Code 1200.110(b) (items 1 through 8), provided you are not currently under audit.

Common questions

Q: Does dispatching a driver from Illinois automatically require Illinois withholding?
A: Not automatically. The Department's test looks at where the driver's service is "directed or controlled," not simply where dispatch occurs. If that base of operations/control is in Illinois, withholding is required; if it is in another state, it is not (unless the driver is an Illinois resident).

Q: What if the driver's service isn't localized in any single state?
A: That's the scenario addressed here. Under 86 Ill. Adm. Code 100.3120(a)(1) subparagraph (C), if some service is performed in Illinois and the base of operations, or the place from which service is directed or controlled, is in Illinois, the compensation is paid in Illinois.

Q: Did the Department answer whether the Surface Transportation Board exception applies to this trucking company?
A: No. The requester specifically asked whether "certain trucking companies" under STB jurisdiction fall outside the withholding rules, but the GIL did not address or resolve that question.

Q: Can this letter be relied on as binding guidance?
A: No. It is a General Information Letter issued under 86 Ill. Adm. Code 1200.120(b) and (c), explicitly not a statement of Department policy and not binding on the Department. A taxpayer wanting binding guidance must request a Private Letter Ruling under 86 Ill. Adm. Code 1200.110(b).

Citations and references

• 86 Ill. Adm. Code 1200.120(b), (c) (nature and non-binding effect of GILs)
• 86 Ill. Adm. Code 100.3120(a)(1) (test for compensation "paid in this State")
• 35 ILCS 5/302(a) (IITA Section 302(a) — allocation of nonresident compensation)
• 35 ILCS 5/202 (IITA Section 202 — net income computation)
• 35 ILCS 5/701 (IITA Section 701 — withholding requirement)
• 86 Ill. Adm. Code 100.7000, 100.7010, 100.7020 (withholding regulations)
• 35 ILCS 5/304(a)(2)(B) (IITA Section 304(a)(2)(B) — localization/direction-and-control test)
• 820 ILCS 405 (Illinois Unemployment Compensation Act, analogous "employment" test)
• 86 Ill. Adm. Code 1200.110(b) (procedure for requesting a binding Private Letter Ruling)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2018.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2018/it-18-0002-gil.pdf

Original ruling text

IT 18-0002-GIL

(09/17/2018)

COMPENSATION PAID IN ILLINOIS

Place where service is directed or controlled. (This is a GIL).

September 17, 2018
Re: withholding by interstate trucking companies
Dear Xxxxx:
This is in response to your letter dated July 16, 2018, in which you request information regarding
withholding by interstate trucking companies. The nature of your request and the information you have
provided require that we respond with a General Information Letter, which 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 found on the Department's web site at
www.tax.illinois.gov.
Your letter states as follows:
We would like to request a General Information Letter for a Withholding issue which many
of our clients face. We work with interstate trucking companies who transport goods
across state lines. They[sic] hire W2 workers from all over the United States. Below is the
example of the issue we face and the reason for the request.
Our client is an Illinois company that hires a driver that lives in Arizona, Driver performs
the service across interstate lines, and his loads usually originate near his home town
and he returns back to his home town. His only contact with Illinois is that he is being
dispatched from this state. The accountant for the driver claims that there should be no
Illinois deduction, since the driver has nothing to do with Illinois. He effectively earns his
income across state line and should therefore pay only to the state he lives in. We have
provided Publication 130 as explanation. However, the confusion comes from the limited
exception for employers that fall under Surface Transportation Board jurisdiction. It
specifically lists that certain trucking companies fall under this exception, but it fails to
define what is meant by “certain trucking companies.” Do interstate trucking companies
fall under the exception, and should the company withhold Illinois taxes for interstate
drivers, or are they exempt under the STB jurisdiction?
Please, let us know if you need any further details on this matter, and what is the proper
information we should provide to our clients.
RULING
Department Regulation 100.3120(a)(1) provides as follows:
In order for items of compensation paid to an individual who is a nonresident of Illinois at
the time of payment to be allocated to Illinois, such compensation must constitute
"compensation paid in this State". If the test is met, then all items of such compensation,
and all items of deduction directly allocable thereto, are allocated to Illinois under IITA
Section 302(a) (except items allocated under IITA Section 301(b)(2), as to which see
subsection (c) below). Compensation paid to a nonresident, which is allocated to Illinois

IT 18-0002-GIL
Page 2
, enters into the computation of such individual's net income under IITA Section 202 and
is generally subject to withholding under IITA Section 701 (see Sections 100.7000,
100.7010 and 100.7020). The tests for determining whether compensation is paid in
Illinois appear in IITA Section 304(a)(2)(B) and are substantially the same as those used
to define "employment" in the Illinois Unemployment Compensation Act [820 ILCS 405]
(and similar unemployment compensation acts of other states). Compensation is paid in
Illinois if:
A) The individual's service is localized in Illinois because it is performed entirely within
Illinois;
B) The individual's service is localized in Illinois although it is performed both within and
without Illinois, because the service performed without Illinois is incidental to the
individual's service performed within Illinois; or
C) The individual's service is not localized in any state but some of the service is
performed within Illinois and either:
i) the base of operations, or if there is no base of operations, the place from which
the service is directed or controlled is within Illinois, or
ii) 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 Illinois.
Based on your description, subparagraph (C) would apply. If some of the service is performed in Illinois,
and that service is directed or controlled from Illinois, then the compensation is considered paid in
Illinois, and Illinois withholding would be required. If, however, the service is not directed or controlled
from any state where a portion of the service is provided, then the compensation is not paid in Illinois
unless the employee is an Illinois resident.
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 (312) 814-1722.
Sincerely,

Brian E. Fliflet
Deputy General Counsel, Income Tax