Does having one full-time remote employee working from her home in Illinois create Illinois corporate income tax nexus for an out-of-state company with zero Illinois sales?

Plain-English summary

An out-of-state S-corporation that provides voice, data, and internet services to customers in multiple states -- but has zero customers or sales in Illinois -- asked the Illinois Department of Revenue (IDOR) a direct question: does having one full-time employee who works remotely from her home in Illinois (doing project management, database management, and customer support) create Illinois corporate income tax nexus, requiring the company to file an Illinois return even though it has no Illinois sales?

IDOR declined to answer that question directly. As it states plainly in this General Information Letter (GIL), "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." A GIL is not a statement of Department policy and is not binding on the Department -- it only points the taxpayer to the relevant law and regulations (86 Ill. Adm. Code 1200.120(b) and (c)).

That said, IDOR did explain how the filing-requirement rules would apply to the facts as described. Under IITA Section 502(a), a return is required if either (1) the taxpayer is liable for Illinois income tax, or (2) the corporation is qualified to do business in Illinois and is required to file a federal return. Because business income is apportioned to Illinois using a ratio of Illinois sales to sales everywhere, a company with zero Illinois sales has a zero numerator -- meaning zero apportioned Illinois net income and no tax liability under Section 201. IDOR noted the taxpayer's letter didn't say whether the company was registered to do business in Illinois: if it is registered and required to file a federal return, Section 502(a)(2) would still require an Illinois filing; if it isn't registered and has no Illinois tax liability, it likely does not have to file.

What this means for you

Out-of-state businesses with remote Illinois employees

Don't expect IDOR to tell you outright whether a remote employee creates nexus -- it says nexus determinations are too fact-specific for a letter ruling, and directs taxpayers instead to 86 Ill. Adm. Code 100.9720 for general nexus guidance. What you can rely on is the filing-requirement mechanics: if your company has zero Illinois sales, your Illinois apportionment numerator is zero, so you'd have zero Illinois net income and no tax liability under IITA Section 201 -- independent of whether an employee's presence technically creates nexus.

Whether you need to file a return at all

Even with no Illinois tax liability, you may still have to file. IITA Section 502(a)(2) requires a return if your corporation is registered to do business in Illinois and must file a federal income tax return -- regardless of whether you owe Illinois tax. This GIL specifically flagged that the taxpayer's letter didn't state whether the company was registered to do business in the state, so that's a threshold fact to nail down before concluding no filing is needed.

If you want a binding answer

Because a GIL isn't binding on the Department, a company that wants certainty (and isn't under audit) can request a binding Private Letter Ruling by submitting the information required under 2 Ill. Adm. Code 1200.110(b) items 1 through 8. Note, though, that this letter suggests even a PLR request specifically on "whether nexus exists" may not get answered, since IDOR treats that determination as inherently fact-specific and outside the letter-ruling process.

Common questions

Q: Does a single remote employee working from home in Illinois create income tax nexus?
A: IDOR wouldn't say. It states it does not issue rulings on whether nexus exists because the determination is "extremely fact-specific," and instead points taxpayers to 86 Ill. Adm. Code 100.9720 for general guidance on nexus.

Q: If nexus isn't determined, does the company still have to file an Illinois return?
A: Not necessarily. IDOR explained that with zero Illinois sales, the company's Illinois apportionment numerator is zero, producing zero Illinois net income and no liability under Section 201 -- so the Section 502(a)(1) filing trigger (liability for Illinois tax) wouldn't apply.

Q: Are there other reasons the company might still have to file, even with zero sales?
A: Yes. Under IITA Section 502(a)(2), a corporation that is registered to do business in Illinois and required to file a federal income tax return must also file an Illinois return, regardless of Illinois tax liability. IDOR noted the taxpayer hadn't stated whether the company was registered to do business in Illinois.

Q: Why won't IDOR just say whether nexus exists?
A: The Due Process and Commerce Clauses require some minimum connection and substantial nexus before a state can tax an out-of-state business (citing Quill Corp. v. North Dakota, 504 U.S. 298 (1992)), and IDOR treats applying that standard to specific facts as too fact-intensive for a general information letter.

Q: Can this company rely on this letter if IDOR later audits it?
A: No. This is a General Information Letter, not a statement of Department policy, and it is not binding on the Department. For a binding answer on the company's specific facts, it would need to request a Private Letter Ruling under 2 Ill. Adm. Code 1200.110(b) -- though nexus-specific determinations may still fall outside what IDOR will rule on.

Subject

Nexus

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2021.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2021/it21-0006-gil.pdf

Original ruling text

IT-21-GC-0006 8/31/2021 Nexus
Department does not issue rulings on nexus, however the taxpayer
may not be required to file an Illinois Income tax return if they do
not meet the requirements of Section 502(a) of the IITA. (This is a
GIL.)
August 31, 2021
Re: Illinois income tax
Dear NAME:
This is in response to your letter received June 5, 2020, in which you request
information regarding Illinois income tax. 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 are writing this letter on behalf of our client, BUSINESS., to request a
letter ruling regarding state nexus for corporate income tax purposes.
BUSINESS is incorporated in STATE and elects to be treated as S-Corp
for federal income tax return. This company is an independent agent and
provider of voice, data, and internet services to customers located in
multiple states, except for customers in Illinois State.
However, BUSINESS currently has a full-time employee who works
remotely out of her home office and is resident of the state of Illinois.
Below are additional information on her roles within the company.
•

•
•

•

Duties: employee is project management and data base
management for the company. She also provides customer support
including assisting with trouble tickets and orders.
Home office: employee maintain an office in her home.
Office equipment value: the company provided her a computer,
internet, and small office supplies for the total value approximate of
$3500.
Sales: the company does not have customers within the State.
Therefore, it has zero sales income from Illinois State.

Please let us know if BUSINESS. establishes income tax nexus within the
state and is required to file an annual Corporate Income Tax Return even
though the company has zero sales.

If you have any questions or need additional information, please feel free
to contact us at the address listed above.
RULING
Section 502(a) of the Illinois Income Tax Act (“IITA,” 35 ILCS 5/101 et seq.)
describes when an Illinois income tax return is required. Pursuant to Section
502(a), an Illinois income tax return is required in two situations. The first
situation is when a taxpayer is liable for Illinois income tax. IITA Section
502(a)(1). The second situation is, in the case of a corporation qualified to do
business in Illinois, when the taxpayer is required to file a federal income tax
return, regardless of whether such person is liable for Illinois income tax. IITA
Section 502(a)(2).
Section 201 of the IITA, imposes a tax measured by net income on corporations
for the privilege of earning or receiving income in this State. The Due Process
and Commerce Clauses of the Federal Constitution limit the power of States to
subject foreign corporations to tax. The Due Process Clause requires that there
exist some minimum
connection between a state and the person, property, or transaction it seeks to
tax. Quill Corp. v. North Dakota, 504 U.S. 298, 112 S. Ct. 1904 (1992).
Similarly, the Commerce Clause requires that the tax be applied to an activity
with a substantial nexus with the taxing state. Id. 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, 86 Ill. Adm. Code 100.9720, which is accessible
from the Department’s web site.
A nonresident is liable for Illinois income tax under Section 201 of the IITA if it
computes “net income” as defined under IITA Section 202. IITA Section 202
defines Illinois net income as that portion of the taxpayer’s “base income” as
defined in Section 203, which is allocated or apportioned to Illinois under the
provisions of Article 3 of the IITA, less certain deductions. Under Article 3 of the
IITA, business income is apportioned to Illinois based on an apportionment ratio
in which the numerator is the amount of the taxpayer’s sales in Illinois and the
denominator is the amount of the taxpayer’s sales everywhere.
If the taxpayer has no sales in Illinois, then their numerator would be zero
meaning that they have no business income and no net Illinois income. If a
foreign corporation has no Illinois net income under section 202, there is no
liability for tax under section 201. Therefore, the requirement to file found in
Section 502(a)(1) of the IITA would not apply. However, this does not
necessarily mean that they will not have to file a Corporate Income Tax return.

2

Your letter states that the taxpayer in question does not have customers or sales
in Illinois but is silent as to whether the taxpayer is registered to do business in
Illinois. If the taxpayer is registered to conduct business in Illinois and is required
to file a federal income tax return, then under Section 502(a)(2) of the IITA, they
would be required to file an Illinois income tax return. If the taxpayer has no
Illinois income tax liability and is not registered to business in Illinois, then they
likely are not required to file an Illinois income tax return.
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) 7822844.
Sincerely,

Michael D. Mankowski
Associate Counsel - Income Tax
cc:

Daily File
Correspondence file:

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