What does Illinois Private Letter Ruling IT 19-0001-PLR conclude about Sales Factor?

Plain-English summary

This Illinois Private Letter Ruling addresses how an investment advisor should source its advisory fee income for purposes of the Illinois corporate income tax sales factor. The taxpayer, an Illinois-based investment advisor organized as a C corporation, earns most of its revenue from managing investment funds that are Delaware Statutory Trusts (generally Regulated Investment Companies, or RICs). The funds themselves have no fixed assets, employees, or physical presence anywhere; their books and records are kept, and their bills are paid, by a custodian located out of state (referred to in the ruling only as "STATE").

Historically, in states with market-based sourcing rules, the taxpayer had looked through the funds to the funds' individual shareholders and sourced revenue based on where those shareholders lived, using census-type data since actual shareholder addresses are often unavailable (many investors hold shares through intermediaries with omnibus accounts). After Illinois adopted revised market-based sourcing regulations effective August 3, 2017 -- specifically 86 Ill. Admin. Code 100.3370(c)(6)(D)(iii), including new "Example 5" -- the taxpayer asked the Department to confirm that its advisory fees should instead be sourced to the office of the fund to which the services are billed.

The Department agreed. It explained that Example 5 splits investment fund services into two categories: (1) services provided separately to investors (such as investor communications and statements), which are sourced to investors' locations, and (2) services not directly connected to services provided separately to investors -- including brokerage and investment advisory services -- which are NOT sourced to investors' locations. Because the taxpayer's advisory services fell into the second category, the Department applied the general statutory "waterfall" for sourcing service receipts under 35 ILCS 5/304(a)(3)(C-5)(iv): first to a customer's fixed place of business, then to the customer's ordering office, and finally to the customer's billing office. Since the funds have no fixed place of business and no determinable ordering office, the Department ruled the services are deemed received -- and the receipts sourced -- at the custodian's billing office out of state.

What this means for you

Investment advisors and fund sponsors

If you provide advisory, brokerage, or similar services to investment funds (rather than services provided separately to the funds' individual investors), this ruling illustrates that such receipts are not automatically sourced to Illinois merely because some investors reside here. Under the Department's reasoning, they instead follow the statutory waterfall -- fixed place of business, then ordering office, then billing office of the fund/customer itself, which for many funds means the location of a third-party custodian or administrator.

Accountants and tax professionals preparing IL sales factor computations

Distinguish carefully between services "directly connected to or in support of" services received separately by investors (sourced to investor locations under Example 5) and services that are not (sourced under the general fixed-place-of-business/ordering-office/billing-office waterfall). Confirm whether your client's fund customers have a determinable "fixed place of business" under 35 ILCS 5/1501(a)(9.5) and 26 CFR 1.864-7 before assuming a billing-office fallback applies.

Business owners restructuring service arrangements with funds

Because this is a Private Letter Ruling, it only binds the Department as to the specific taxpayer and facts described here. If your business has a similar fact pattern -- advisory services to funds with no fixed presence, serviced by an out-of-state custodian -- you may find the reasoning persuasive, but you cannot rely on this letter directly; consider requesting your own PLR or consulting a tax professional.

Common questions

Q: Where does Illinois source fees an investment advisor earns from managing investment funds?
A: Per this ruling, if the advisory services are not directly connected to services provided separately to the funds' investors, the receipts are sourced under the general waterfall in 35 ILCS 5/304(a)(3)(C-5)(iv): to the fund's fixed place of business, if any; if none, to the fund's ordering office; if that can't be determined, to the fund's billing office.

Q: Why didn't the Department source the receipts to where the funds' individual investors live?
A: Because 86 Ill. Admin. Code 100.3370(c)(6)(D)(iii) Example 5 sources investment fund services to investors' locations only when those services are directly connected to or in support of services provided separately to investors (like investor communications). The Department found the taxpayer's investment advisory services did not fall into that category.

Q: What made the custodian's location the answer here rather than Illinois or wherever the fund's trustees meet?
A: The funds had no fixed place of business (no tangible assets, payroll, or physical presence), and their ordering office could not be determined from the taxpayer's books and records. That pushed the analysis to the final tier of the waterfall -- the office to which services are billed -- which the ruling found was the custodian's location, described only as "STATE" in the redacted text.

Q: Can another Illinois taxpayer rely on this ruling for their own sales factor position?
A: No. This is a Private Letter Ruling issued under 2 Ill. Adm. Code 1200.110, and by its own terms it binds the Department only with respect to the specific taxpayer who requested it, and only to the extent the facts as presented were correct and complete. Any other taxpayer, even with very similar facts, cannot rely on this letter and would need to request its own PLR or consult a tax professional.

Citations and references

Statutes and regulations:

• 35 ILCS 5/304(a)(3)(A) (definition of the sales factor)
• 35 ILCS 5/304(a)(3)(C-5)(iv) (market-based sourcing waterfall: fixed place of business, then ordering office, then billing office)
• 35 ILCS 5/1501(a)(9.5) (definition of "fixed place of business," incorporating IRC Section 864)
• 86 Ill. Admin. Code 100.3370(c)(6)(D)(iii), including Example 5 (sourcing of investment fund services to investors vs. not)
• 86 Ill. Admin. Code 100.3370(c)(6)(D)(iv) (rule for when the state of receipt is "not readily determinable")
• 2 Ill. Adm. Code 1200.110 (private letter ruling request and binding-effect procedure)
• 26 CFR 1.864-7 (federal "fixed place of business" regulations)
• 26 USC 267(b) (related-person standard used to assess whether the ordering office is determinable from the taxpayer's books and records)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2019.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2019/it19-0001-plr.pdf

Original ruling text

IT 19-0001-PLR 08/14/2019 SALES FACTOR
Gross Receipts from Investment Advisory Services are Sourced to Billing Address
of Customer

August 14, 2019

Re:

Request for Private Letter Ruling
COMPANY
FEIN: ###

Dear Xxxx:
This is in response to your letter dated February 28, 2019 in which you request a
Private Letter Ruling on behalf of TAXPAYER. Review of your request for a Private
Letter Ruling indicates that all information described in paragraphs 1 through 8 of
subsection (b) of 2 Ill. Adm. Code 1200.110 is contained in your request. This Private
Letter Ruling will bind the Department only with respect to TAXPAYER Issuance of this
ruling is conditioned upon the understanding that TAXPAYER. and/or any related
taxpayer(s) is not currently under audit or involved in litigation concerning the issues
that are the subject of this ruling request.
The facts and analysis as you have presented states as follows:
We are writing to request a Private Letter Ruling under 2 Ill. Admin. Code §
1200.110, on behalf of our client, TAXPAYER. (hereinafter “Taxpayer”), in
relation to its Illinois Corporation Income and Replacement Tax Return sales
factor computation. Taxpayer requests your ruling with respect to the sourcing of
receipts received from advisory services performed on behalf of investment funds
under the newly amended (effective August 3, 2017) sales factor regulations
(specifically 86 Ill. Admin. Code §100.3370(6)(D)(iii)). Taxpayer respectfully
requests permission to source receipts received from advisory services
performed on behalf of investment funds to the office of the fund to which the
services are billed.
Taxpayer is not currently under audit and does not have litigation pending with
the Illinois Department of Revenue (“Department”). Further, the issue addressed
in this Private Letter Ruling is not an issue being examined as part of a
Department audit or pending litigation.
Facts
Taxpayer is an investment advisor located in Illinois and is designated as a C
Corporation for both Illinois and federal tax purposes. Taxpayer earns the

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majority of its revenue for services it performs as the investment advisor for
investment funds, which are Delaware Statutory Trusts. Taxpayer does not have
an ownership interest in the investment funds, other than an investment in shares
of certain mutual funds, in the same way that unaffiliated investors own shares of
the funds. Taxpayer “sponsors” the funds, by setting up the funds, soliciting
investors, and managing the funds. The investment funds (generally Regulated
Investment Companies or “RICs) pay Management Fees. Transfer Agent Fees
and 12b-1 fees to the Taxpayer. Historically, in states with market based
sourcing or special industry-specific rules for mutual fund service providers, the
Taxpayer uses the location of the underlying shareholders of the RICs to
apportion income to each state. Since a large portion of the investing public
invests in RICs through independent financial advisors (intermediaries with
omnibus accounts), the individual underlying shareholder information is difficult, if
not impossible, to obtain, and what information is obtained may not accurately
reflect where the shareholders actually live. As such, the Taxpayer has
concluded that using census information in order to source the service revenue
provides a reasonable reflection of where the ultimate benefit of the services are
received.
The investment funds have no fixed assets, physical presence or employees. As
such, the funds do not have a physical presence in any state. The investment
funds’ trustees (“Trustees”) are elected by the shareholders of the investment
funds. Services provided to the investment funds are approved by the Board of
Trustees, who do not maintain an office and as such have no physical presence.
The Trustees meet several times throughout the year at various locations in the
United States. The meetings are both telephonic and in-person. Of the at least
four annual in-person meetings per year, typically one is held in the state of
Illinois. The individual Trustees reside in various states. The books and records
are maintained, and fund assets are held by a custodian located in STATE.
Taxpayer’s address is used for tax return filing purposes. The Taxpayer sends its
bills electronically to the custodian located in STATE, and the custodian transfers
money from the funds to the Taxpayer.
Conclusion of the taxpayer
For the reasons stated below, Taxpayer respectfully requests the following ruling:
Taxpayer should source receipts related to advisory services performed
on behalf of investment funds to the office of the fund to which the
services are billed for purposes of computing its Illinois sales factor
numerator.
Analysis

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A tax is imposed on the net income of every individual, corporation, trust, and
estate. In the case of a corporation, the tax is imposed on the base income which
is allocated or apportioned to Illinois. Illinois apportioned income is determined by
multiplying the taxpayer’s base income by a ratio of sales sourced to Illinois over
total sales everywhere. At issue in this request is the sourcing rules for the sales
of advisory services performed on behalf of investment funds.
Sales of service are sourced to Illinois using a tiered market-based “waterfall”
methodology.
Sales of services are in this State if the services are received in this State.
For the purposes of this section, gross receipts from the performance of
services provided to a corporation, partnership, or trust may only be
attributed to a state where that corporation, partnership or trust has a fixed
place of business. If the state where the services are received is not
readily determinable or is a state where the corporation, partnership, or
trust receiving the service does not have a fixed place of business the
services shall be deemed to be received at the location of the office of the
customer from which the services were ordered in the regular course of
the customer’s trade or business. If the ordering office cannot be
determined, the services shall be deemed to be received at the office of
the customer which the services are billed. 35 ILCS §5/304(a)(3)(C-5)(iv)
The term “fixed place of business” has the same meaning as that term is given in
Section 864 of the Internal Revenue Code and the related Treasury regulations.
(See 35 ILCS §5/1501(a)(9.5).)
A) As a general rule, a fixed place of business is a fixed facility, that is, a place,
site, structure or other similar facility through which the taxpayer engages in a
trade or business. (See 26 CFR 1.864-7(b)(1).)
B) A taxpayer is not considered to have a fixed place of business merely
because the taxpayer uses another person’s fixed place of business, whether or
not the other person and the taxpayer are related persons, through which to
transact a trade or business, if the trade or business activities of the taxpayer in
that fixed place of business are relatively sporadic or infrequent, taking into
account the overall needs and conduct of that trade or business. (See 26 CFR
1.864-7(b)(2).)
C) A fixed place of business of an agent of the taxpayer who is not an
independent agent is not a fixed place of business of the taxpayer unless the
agent has the authority to negotiate and conclude contracts in the name of the
taxpayer, and regularly exercises that authority. (See 26 CFR 1.864-7(d)(1)(i).)

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D) A fixed place of business of an independent agent of the taxpayer shall not be
treated as the office or other fixed place of business of the taxpayer, irrespective
of whether the agent has authority to negotiate and conclude contracts in the
name of the principal and regularly exercises that authority.
E) For purposes of this subsection (b)(1), “independent agent” means a general
commission agent, broker or other agent of an independent status acting in the
ordinary course of his or her business in that capacity.
Here, the funds have no tangible property, payroll or physical presence
anywhere. Furthermore, both Illinois and federal law hold that the office of an
agent operating independently and in the ordinary course of its business shall not
be attributed to the principal irrespective of whether the agent has authority to
negotiate and conclude contracts in the name of the principal, and regularly
exercises that authority. Taxpayer is retained as an investment advisor in its
ordinary course of business for multiple investment funds owned by shareholders
across the country. Taxpayer is in the business of providing investment advice
and managing the funds for the benefit of each fund’s shareholders. Taxpayer
does not “own” the funds as in a subsidiary relationship, in fact the funds are a
client of the taxpayer. The custodian is in the business of performing back office
functions for the investment funds and handles the custody of the assets, money
movements, and accounting of the investment funds. The custodian operates in
its ordinary course of business and performs similar services for thousands of
investment funds as an independent agent. As such, the investment funds should
not be deemed to have a fixed place of business under Illinois law.
Under 35 ILCS § 5-304(a)(3)(C-5)(iv), Taxpayer has historically taken the
position that the benefit of the investment services are received by the
investment funds’ ultimate owners.
On August 3rd, 2017, the Department adopted revised sourcing regulations.
Relevant to Taxpayer and the stimulus for this private letter ruling request, the
adopted regulations added the following example:
Example 5. Services performed by an investment fund on behalf of an investor
are received in this State if the investor resides in this State (in the case of an
individual) or has its ordering or billing address in this State (for other investors).
In the case of services provided by Taxpayer to or on behalf of the investment
fund that are directly connected with services provided separately to the
investors, such as preparation of communications and statements to investors,
and allocations of earnings and distributions to investors, the service is also
received in this State to the extent the investors reside (or have their ordering or
billing address) in this State. Accordingly, receipts of Taxpayer for these services
are allocated to this State on the basis of the ratio of: the average of the
outstanding shares in the fund owned by shareholders, partners or other
investors residing (or having their ordering or billing address) within this State at

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the beginning and end of each taxable year of the taxpayer; and the average of
the total number of outstanding shares in the fund at the beginning and end of
each year. Residence or ordering or billing address of the shareholder, partner,
or other investor is determined by the mailing address in the records of the
investment fund or the taxpayer. Services provided to an investment fund that
are not directly connected to or in support of services provided separately to
investors, such as brokerage services or investment advising, are not received
by the customer at the location of its investors. 86 Ill. Admin. Code
§100.3370(6)(D)(3).
The quoted language above divides investment fund services into two
categories. The first category is comprised of services provided separately to
investors. This first category is sourced to the location of the investors. The
second category is comprised of services not directly provided separately to the
investors. This second category is not sourced to the location of the investors
and expressly includes investment advisory services. Because the majority of
Taxpayer’s services fall into the second category, under the amended
regulations, these services should not be sourced to the location of the investors.
Illinois law states that gross receipts from the performance of services provided
to a corporation, partnership, or trust may only be attributed to a state where that
corporation, partnership, or trust has a fixed place of business. When the
corporation, partnership, or trust has no fixed place of business, Taxpayer would
apply the statutorily-provided tiered methodology for sourcing to where the
services are received that has a fixed place of business, ordering office, or billing
office of the investment funds. Here, the state where the services are received is
not readily determinable, thus the services shall be deemed to be received at the
location of the office of the customer from which the services were ordered in the
regular course of the customer’s trade or business. If the ordering office cannot
be determined, the services shall be deemed to be received at the office of the
customer which the services are billed. The investment funds do not have an
ordering office. Because the location of an ordering office cannot be determined,
the services would ultimately be sourced to the office of the customer which the
services are billed. Considering that the investments of the funds are held by the
custodian and the books and records of the investment funds are maintained by
the custodian in STATE, and all bills of the investment funds are serviced by the
custodian in STATE, it appears the billing office is located in STATE. As such, by
following the Department’s adopted revised sourcing regulations and applying
the statutorily-provided tiered methodology for sourcing to where the services are
received, the Taxpayer ultimately will source 100% of their advisory services to
the location of the custodian’s billing office, which is in STATE.
Summary

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The revised regulations adopted on August 3rd, 2017, state that services
provided to an investment fund that are not directly connected to or provided
separately to investors should not be sourced to the state in which the ultimate
investor resides. Taxpayer has historically sourced a portion of their investment
advisory services to Illinois by looking through to the ultimate investor and is
seeking confirmation to begin using the location of the office of the customer
which the services are billed to source the investment advisory services going
forward.
Statement of Authorities Contrary to the Taxpayer’s View
Neither the Taxpayer nor the Taxpayer’s representatives are aware of any
contrary rulings, cases, statutes or regulations to the position requested in this
letter.

RULING
Section 304(a)(3)(A) of the Illinois Income Tax Act (“IITA” ; 35 ILCS 5/304(a)(3)(A))
defines the sales factor for taxpayers other than insurance companies, financial
organizations, federally regulated exchanges, and transportation companies, as follows:
The sales factor is a fraction, the numerator of which is the total sales of the
person in this State during the taxable year, and the denominator of which is the
total sales of the person everywhere during the taxable year.
IITA Section 304(a)(3)(C-5) provides, in part, for taxable years ending on or after
December 31, 2008, sales, other than sales governed by paragraphs (B), (B-1), (B-2),
(B-5) and (B-7), are in this State if any of the following criteria are met:
…
(iv) Sales of services are in this State if the services are received in this State.
For the purposes of this section, gross receipts from the performance of services
provided to a corporation, partnership, or trust may only be attributed to a state
where that corporation, partnership, or trust has a fixed place of business. If the
state where the services are received is not readily determinable or is a state
where the corporation, partnership, or trust receiving the service does not have a
fixed place of business, the services shall be deemed to be received at the
location of the office of the customer from which the services were ordered in the
regular course of the customer’s trade or business. If the ordering office cannot
be determined, the services shall be deemed to be received at the office of the
customer to which the services are billed. If the taxpayer is not taxable in the
state in which the services are received, the sale must be excluded from both the
numerator and the denominator of the sales factor. The Department shall adopt

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rules prescribing where specific types of services are received, including, but not
limited to, publishing, and utility service.
Department Regulations Section 100.3370(c)(6)(D)(iii) provides that services received
in Illinois include, but are not limited to:
Services performed by a taxpayer that are directly connected to or in support of
services received in this State are also services received in this State.
This rule is illustrated in Example 5 of the regulation, which provides:
Example 5. Services performed by an investment fund on behalf of an investor
are received in this State if the investor resides in this State (in the case of an
individual) or has its ordering or billing address in this State (for other investors).
In the case of services provided by Taxpayer to or on behalf of the investment
fund that are directly connected with services provided separately to the
investors, such as preparation of communications and statements to investors,
and allocations of earnings and distributions to investors, the service is also
received in this State to the extent the investors reside (or have their ordering or
billing address) in this State. Accordingly, receipts of Taxpayer for these services
are allocated to this State on the basis of the ratio of: the average of the
outstanding shares in the fund owned by shareholders, partners or other
investors residing (or having their ordering or billing address) within this State at
the beginning and end of each taxable year of the taxpayer; and the average of
the total number of outstanding shares in the fund at the beginning and end of
each year. Residence or ordering or billing address of the shareholder, partner or
other investor is determined by the mailing address in the records of the
investment fund of the taxpayer. Services provided to an investment fund that are
not directly connected to or in support of services provided separately to
investors, such as brokerage services or investment advising, are not received
by the customer at the location of its investors.
In addition, Department Regulations Section 100.3370(c)(6)(D)(iv) provides the
following special rule:
Under IITA Section 304(a)(3)(C-5)(iv), if the state where the services are
received is not readily determinable, the services shall be deemed to be received
at the location of the office of the customer from which the services were ordered
in the regular course of the customer’s trade or business, or, if the ordering office
cannot be determined, at the office of the customer to which the services are
billed. If the service is provided to an individual who provides a residential
address as the place from which the services are ordered or to which the
services are billed, rather than an office address, the residential address shall be
used. For purposes of this provision, the state where services are received is not
readily determinable if the facts necessary to make the determination are not

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contained in the books and records of the taxpayer or any person related to the
taxpayer within the meaning of 26 USC 267(b) or if the available facts would
allow reasonable persons to reach different determinations of the state in which
the services were received.
Your letter indicates that the receipts which are the subject of this ruling request consist
of revenues for services the Taxpayer performs as investment advisor to investment
funds. Under Department Regulations Section 100.3370(c)(6)(D)(iii)(Example 5), these
services are not received by the Taxpayer’s customer, the investment fund, at the
location of its investors. Moreover, none of the rules in Section 100.3370(c)(6)(D)(iii)
applies to determine where the Taxpayer’s investment advisory services are received.
Your letter indicates that Taxpayer’s customers do not own any physical assets, nor do
they have employees. The activities of the funds are controlled by boards of trustees,
which meet several times throughout the year (sometimes remotely) at various locations
in the United States, including Illinois. In addition, your letter indicates that the books
and records of the funds, as well as custody of all funds’ assets, are maintained by a
custodian located in Massachusetts. Based on these facts, reasonable persons may
disagree as to the state in which the Taxpayer’s investment advisory services are
received. Accordingly, under Regulations Section 100.3370(c)(6)(D)(iv), the Taxpayer’s
services shall be deemed to be received at the location of the office of the customer
from which the services were ordered in the regular course of the customer’s trade or
business, or, if the ordering office cannot be determined, at the office of the customer to
which the services are billed. Note that for purposes of determining the ordering office of
the customer, the ordering office is not determinable if the facts necessary to make that
determination are not contained in the books and records of the Taxpayer or any person
related to the Taxpayer within the meaning of 26 USC 267(b). In this case, your letter
represents that the ordering office cannot be determined. Accordingly, the Taxpayer’s
investment advisory services shall be deemed to be received at the office of the
customer to which the services are billed.
This ruling shall bind the Department as provided herein. The facts upon which this ruling
is based are subject to review by the Department during the course of any audit,
investigation or hearing and this ruling shall bind the Department only if the material facts
as recited and incorporated in this ruling are correct and complete. This ruling shall bind
the Department for all taxable years, except as limited pursuant to 2 Ill. Adm. Code
1200.110(d) and (e). This ruling will cease to bind the Department if there is a pertinent
change in statutory law, case law, rules or in the material facts recited in this ruling.
Sincerely,

Brian L. Stocker
Chairman, PLR Committee (Income Tax)