My manufacturing company's Illinois throwback sales are inflating our single-sales-factor apportionment -- can we add property and payroll factors, or alternatively drop throwback sales, to more fairly reflect our actual Illinois activity?

Plain-English summary

A multi-segment technology and defense manufacturer -- with subsidiaries making digital-imaging sensors, test instruments, aerospace/defense electronics, and engineered systems -- petitioned Illinois for alternative apportionment across three tax years, with amended returns and a refund request already attached. Two of its subsidiaries have Illinois manufacturing facilities and payroll, generating "throwback sales" (sales of goods shipped from an Illinois facility to a state where the company isn't taxable, which Illinois's rule counts back to Illinois rather than letting them escape tax anywhere). The company argued that including these throwback sales in its single-sales-factor formula, without also counting the property and payroll that produced them, distorted its Illinois apportionment -- attributing income "out of all proportion" to its actual Illinois market, in violation of due process and the Commerce Clause. It proposed two alternative fixes: (1) an equally-weighted three-factor formula (property, payroll, and sales, including throwback), or (2) keeping the single-sales-factor formula but removing throwback sales entirely. It supported the request with detailed tables showing throwback sales substantially increasing its calculated Illinois sales factor, both company-wide and for its two Illinois-manufacturing subsidiaries individually.

The Department denied the petition on both fronts. Under IITA Section 304(f) and 86 Ill. Adm. Code 100.3390(c), a taxpayer must prove, by clear and cogent evidence, that the standard formula results in taxation of "extraterritorial values" or an out-of-proportion result -- and separately prove that its own proposed alternative would fairly and accurately apportion income instead. The regulation explicitly warns that an alternative method "may not be invoked ... merely because it reaches a different apportionment percentage than the required statutory formula."

• On the three-factor proposal: the Department found the taxpayer's showing amounted to exactly that -- demonstrating that a three-factor formula would yield a smaller, different percentage than the statutory single-sales-factor formula, without independently proving that the statutory formula's result was actually grossly distorted or out of proportion to the company's real Illinois activity.
• On removing throwback sales: the Department pointed out this proposal doesn't even address the problem the taxpayer itself identified. The taxpayer's whole argument was that throwback sales reflect real Illinois manufacturing activity (property and payroll) that the sales-only formula fails to separately credit. But throwback sales are themselves tied to that Illinois manufacturing activity -- so removing them from the numerator wouldn't fix the alleged failure to capture Illinois activity, it would make it worse by stripping out sales connected to genuine Illinois operations altogether.

The letter did not reach the taxpayer's broader constitutional or historical apportionment arguments (citing Container Corp., Hans Rees' Sons, and Complete Auto Transit) because the more basic regulatory burden -- proving actual distortion, not just a different resulting number -- was never met.

What this means for you

Manufacturers with Illinois throwback sales

Illinois's throwback rule pulls sales shipped from an Illinois facility to a non-taxable destination state back into the Illinois sales factor. If you think this overstates your Illinois presence, you need affirmative proof that the RESULT is grossly distorted (not just that a different formula produces a smaller number) -- and your proposed fix has to actually address the distortion you're claiming, not work against it.

Anyone petitioning to add or remove apportionment factors

Producing tables that show your preferred method yields a lower Illinois number is not, by itself, evidence of unconstitutional distortion. You must separately show the statutory formula taxes value with no real connection to Illinois, and that your alternative genuinely fixes that -- not just that it reaches a friendlier percentage.

Companies proposing to remove throwback sales specifically

Think carefully about whether removing throwback sales actually serves your own theory of the case. If your argument is that the standard formula under-credits genuine Illinois manufacturing activity, cutting out sales that are themselves generated by that Illinois activity may cut against your own position, as it did here.

Common questions

Q: Why did the Department deny the request to add property and payroll factors?
A: Because the taxpayer only showed that a three-factor formula would produce a smaller, different apportionment percentage -- which the regulation says isn't enough on its own. The taxpayer never separately proved the standard single-sales-factor formula produced a grossly distorted result.

Q: Why did the Department also deny the fallback proposal to remove throwback sales?
A: Because that proposal didn't address the taxpayer's own stated problem. The taxpayer argued throwback sales reflect Illinois manufacturing property and payroll not otherwise captured by the sales-only formula -- but removing those same sales would only worsen that alleged undercounting, not fix it.

Q: What must a taxpayer prove to get Illinois to grant alternative apportionment?
A: By clear and cogent evidence, that the standard statutory formula results in taxation of extraterritorial values or an out-of-proportion attribution of income to Illinois, AND that the taxpayer's specific proposed alternative fairly and accurately apportions income to Illinois instead.

Q: What are Illinois "throwback sales"?
A: Sales of tangible personal property shipped from an Illinois location to a purchaser in a state where the seller isn't taxable -- Illinois "throws back" those sales into the Illinois numerator so they don't escape taxation entirely.

Citations and references

Statutes, regulations, and cases cited:

• 35 ILCS 5/304(a), (h) (business income apportionment; single sales factor)
• 35 ILCS 5/304(f) (alternative apportionment petition)
• 35 ILCS 5/304(a)(3)(B) (throwback sales sourcing rule)
• 86 Ill. Adm. Code 100.3370(c)(1)-(2) (throwback sales)
• 86 Ill. Adm. Code 100.3390(a), (c), (e)(1) (alternative apportionment procedures, burden of proof, 120-day filing deadline)
• Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159 (1983) (cited by taxpayer)
• Hans Rees' Sons, Inc. v. North Carolina, 283 U.S. 123 (1931) (cited by taxpayer)
• Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) (cited by taxpayer)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2025.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2025/it25-0001-gil.pdf

Original ruling text

IT 25-0001-GIL

3/10/2025

ALTERNATIVE APPORTIONMENT

Petition to include property and payroll apportionment factors in sales factor
calculation cannot be granted merely because the alternative method reaches a
different apportionment percentage than the required statutory formula.
March 10, 2025
NAME
COMPANY1
ADDRESS
EMAIL
Re:

Petition for Alternative Apportionment
COMPANY2
FEIN: XX-XXXXXXX
Tax Years Ended: YEAR1, YEAR2, YEAR3

Dear :
This is in response to your October 15, 2024, petition on behalf of COMPANY2, to use an
alternative method of allocation or apportionment effective for tax years ending YEAR1,
YEAR2, and YEAR3. 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 2 Ill. Adm. Code Section 1200.120(b) and (c), which may be found on the
Department’s website at https://tax.illinois.gov/ . For the reasons discussed below, your
petition cannot be granted based on the information provided.
Your petition states as follows:
COMPANY2 (“Petitioner”) has authorized COMPANY1 to represent it before the
State of Illinois with respect to its Illinois Corporation Income and Replacement
Tax paid to the Illinois Department of Revenue (“Department”). A Power of
Attorney authorizing COMPANY1 to act on behalf of the COMPANY2 as its
representative is enclosed.
Petitioner respectfully submits the enclosed Petition for Alternative Allocation
or Apportionment (“Petition”) in accordance with Ill. Admin. Code tit.
86ILAC§100.3390. Petitioner respectfully requests an alternative apportionment
method to fairly represent the market for its goods, services, and other sources
of business income in Illinois and proposes two potential remedies to resolve.
Amended Corporation Income and Replacement Tax Returns (Form IL-1120-X)
are included in attachments.

COMPANY2
Page 2
March 10, 2025
In accordance with Ill. Admin. Code tit. 86ILAC§l00.3390, copies of the Petition
are filed with:
Illinois Department of Revenue
Post Office Box 19016
Springfield, Illinois 62794-9016

Illinois Department of Revenue
Legal Services Bureau/Income Tax
101 W. Jefferson Street
Springfield, Illinois 62702

If you have any questions regarding this filing, please contact the undersigned at
the above address or by telephone PHONE, NAME at PHONE or NAME at
PHONE.
I. INTRODUCTION AND ALTERNATIVE APPORTIONMENT REQUEST
COMPANY2 files this petition for relief from standard apportionment
provisions (“Petition”) on the basis that the statutory apportionment
provisions do not fairly represent the market for COMPANY2’s goods,
services, or other sources of business income in Illinois pursuant to Ill.
Admin. Code tit. 86, §§ 100.3380(a)(1), 100.3390, and 35ILCS5/304(f).
COMPANY2 submits this Petition to the Illinois Department of Revenue
(“Department”) for tax years ending YEAR1; YEAR2; and YEAR3. COMPANY2
reserves the right to amend and supplement this Petition.
As grounds for this Petition, COMPANY2 sets forth the following facts and
analysis of pertinent facts, judicial, statutory, and administrative authority,
and analysis. Unless otherwise specified, “35ILCS5/” refers to Illinois
Code, Chapter 35 Revenue, Illinois Income Tax Act and “86ILAC l 00”
refers to Illinois Administrative Code, Title 86 Revenue, Part l 00 Income Tax.
86 Ill. Adm. Code §100.3390(a) provides that when the standard provisions
do not fairly represent the market for the taxpayer’s goods, services, or other
sources of business income, that taxpayer may petition to use other
reasonable methods including but not limited to separate accounting, the
exclusion of any one or more of the factors, the inclusion of one or more
additional factors which fairly represent the person’s business activity in
Illinois, or the employment of any other method to effectuate an equitable
allocation and apportionment of the person’s income.
Further, 86 Ill. Adm. Code §100.3390(c) provides a departure from the required
apportionment method is allowed only when those methods do not accurately
and fairly reflect the market in Illinois. If the application of the statutory

COMPANY2
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March 10, 2025
formula will lead to a grossly distorted result in a particular case, a fair and
accurate alternative method is appropriate.
Illinois’s single-sales factor method, as applied to COMPANY2, results in the
taxation of extraterritorial values or operates unreasonably and arbitrarily in
attributing to Illinois a percentage of income that is out of all proportion to the
business transacted in Illinois or the taxpayer’s market in Illinois. According to
the U.S. Supreme Court, “the enterprise of a corporation which manufactures
and sells its manufactured product is ordinarily a unitary business and all the
factors in that enterprise are essential to the realization of profits”. 1
In COMPANY2’s case, the single-sales factor with throwback sales does not fairly
represent the market for its goods, services, and other sources of business
income in Illinois. Instead, Illinois’s single­sales factor method as applied to
COMPANY2 results in an unreasonable and arbitrary tax outcome because it
does not fairly reflect COMPANY2’s in-state business activities, as it does not
include a property or payroll representation, on which the throwback
methodology rests. As such, the standard formula does not fairly reflect
COMPANY2’s business activities or market in the state resulting in gross
distortion; therefore, COMPANY2’s income for Illinois tax purposes should be
apportioned using an alternative method.
II._FACTS
Summary of Company Operations
COMPANY2 provides enabling technologies for industrial growth markets that
require advanced technology and high reliability. These markets include
aerospace and defense, factory automation, air and water quality
environmental monitoring, electronics design and development, oceanographic
research, deepwater oil and gas exploration and production, medical imaging,
and pharmaceutical research.
COMPANY2’s products include digital imaging sensors, cameras and systems
within the visible, infrared and X-ray spectra, monitoring and control
instrumentation for marine and environmental applications, harsh environment
interconnects, electronic test and measurement equipment, aircraft
information management systems, and defense electronics and satellite
1

Hans Rees’ Sons, Inc. v. State of North Carolina ex rel. Maxwell, 283 U.S. 123 (1931).

COMPANY2
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March 10, 2025
communication subsystems. COMPANY2 also supplies engineered systems for
defense, space, environmental and energy applications.
COMPANY2 also differentiates itself from many of its direct competitors by
having a customer- and Company-sponsored applied research center that
augments its product development expertise.
COMPANY2 has four business segments, which are broadly discussed below:
1) Digital Imaging;
2) Instrumentation;
3) Aerospace and Defense Electronics; and
4) Engineered Systems
1) Digital Imaging:
The Digital Imaging segment includes high-performance sensors,
cameras, and systems, within the visible, infrared, ultraviolet and X-ray
spectra for use in industrial, scientific, government, space, defense,
security, medical and other applications. COMPANY2 also produces and
provides manufacturing services for micro electromechanical systems
(“MEMS”) and high-performance, high-reliability semiconductors
including analog-to-digital and digital-to-analog converters, as well as
unmanned aerial and ground systems. This segment also includes its
customer- and Company-sponsored applied research center.
2) Instrumentation:
The Instrumentation segment provides monitoring and control
instruments for marine, environmental, industrial, and other
applications, and electronic test and measurement equipment. This
segment also provides power and communications connectivity devices
for distributed instrumentation systems and sensor networks deployed in
mission critical, harsh environments.
3) Aerospace and Defense Electronics:
The Aerospace and Defense Electronics segment provides sophisticated
electronic components and subsystems, data acquisition and
communications components and equipment, harsh environment
interconnects, general aviation batteries and other components for a
variety of commercial and defense applications that require high
performance and high reliability. Such applications include aircraft,
radar, electronic countermeasures, weapon systems, space, wireless
and satellite communications and terminals and test equipment.
4) Engineered Systems:

COMPANY2
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March 10, 2025
The Engineered Systems segment provides innovative systems
engineering, integration and advanced technology development, and
complex manufacturing solutions for defense, space, environmental and
energy applications. This segment also designs and manufactures
electrochemical energy systems and manufactures specialty electronics
for demanding military applications. 2
In summary, COMPANY2 is a manufacturer comprising several
companies operating in four primary segments.
Summary of Illinois Operations
COMPANY2 operates multiple companies that fall within the four business
segments discussed above. Several of these companies report sales to Illinois,
including, but not limited to: SUBSIDIARIES.
Two of these companies have manufacturing facilities located in Illinois,
which produce and sell tangible personal products (“TPP”), resulting in
Illinois throwback sales reported in the sales apportionment. These two
companies are SUBSIDIARIES.
1) SUBSIDIARY serves defense, space and commercial sectors
worldwide. It offers a comprehensive portfolio of highly engineered
solutions that meet the most demanding requirements in the harshest
environments. Manufacturing both custom and off-the-shelf product
offerings, its diverse product lines meet emerging needs for key
applications for avionics, energetics, electronic warfare, missiles,
radar, satcom, space, and test and measurement. 3
SUBSIDIARY includes several divisions 4; however, only its SUBSIDIARY
division has facilities and payroll located in Illinois. Thus, all of
SUBSIDIARY’s Illinois throwback sales are made by SUBSIDIARY.
SUBSIDIARY is an industry leader in providing advanced cable
assemblies and interconnect products around the globe and has a
long and proud heritage serving domestic and overseas defense, space

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4
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2
3

COMPANY2
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March 10, 2025
and telecom markets since YEAR. 5 SUBSIDIARY is principally located
within Illinois. 6
In Illinois, SUBSIDIARY’s activities include manufacturing facilities
and employees involved in the manufacturing process. Sales are
made from these Illinois manufacturing facilities to third parties in
Illinois and elsewhere.
2) SUBSIDIARY is a leading manufacturer of advanced oscilloscopes,
protocol analyzers, and other test instruments that verify
performance, validate compliance, and debug complex electronic
systems quickly and thoroughly. SUBSIDIARY has focused on
incorporating powerful tools into innovative products that enhance
PRODUCT. Faster PRODUCT enables users to rapidly find and fix
defects in complex electronic systems, dramatically improving timeto­ market for a wide variety of applications and end markets. 7
SUBSIDIARY is comprised of different divisions. Its SUBSIDIARY division
has facilities and payroll located in Illinois. All SUBSIDIARY’s Illinois
throwback sales are made by SUBSIDIARY.
SUBSIDIARY is a market leader in PRODUCTS as well as test tools for other
digital video technologies. 8
In Illinois, SUBSIDIARY’s activities include manufacturing facilities and
employees involved in the manufacturing process. Sales are made from
these Illinois manufacturing facilities to third parties in Illinois and
elsewhere.
In summary, COMPANY’s activities and operations in Illinois are
primarily manufacturing and selling TPP, with SUBSIDIARIES being the
only entities with throwback sales to Illinois.
III. PETITION FOR ALTERNATIVE ALLOCATION OR APPORTIONMENT
The current single-sales factor operates unreasonably and arbitrarily to
apportion income to Illinois out of all proportion to COMPANY2’s market in
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7
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8
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5
6

COMPANY2
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March 10, 2025
Illinois. This results in significant gross distortion of COMPANY2’s true
economic activity and market within Illinois and results in the taxation of
extraterritorial values.
Illinois’s standard apportionment factor includes throwback sales, which
represent sales of TPP shipped from Illinois to purchasers in another
jurisdiction where the taxpayer is not taxable.
The inclusion of throwback sales within the Illinois standard apportionment
factor does not fairly represent COMPANY2’s market within Illinois as these
sales represent another market outside Illinois. The inclusion of these
throwback sales grossly distorts COMPANY2’s true market within Illinois.
The following tables summarize COMPANY2’s Combined Group’s Illinois
and Everywhere Sales, including Illinois sales with and without throwback. 9
Table 1. Tax Year Ending
Illinois Sales without
Throwback
Illinois Throwback Sales
Illinois Sales with Throwback
Everywhere Sales

YEAR1
$$$$$

YEAR2
$$$$$

YEAR3
$$$$$

$$$$$
$$$$$
$$$$$

$$$$$
$$$$$
$$$$$

$$$$$
$$$$$
$$$$$

The Sales Factor based on Illinois sales with throwback (reported
apportionment factor):
Table 2. Tax Year Ending
Illinois Sales with
Throwback
Everywhere Sales
Illinois Sales Factor

YEAR1
$$$$$

YEAR2
$$$$$

YEAR3
$$$$$

$$$$$
%%%%%

$$$$$
%%%%%

$$$$$
%%%%%

Average

%%%%
%

The Sales Factor based on Illinois sales without throwback:
Table 3. Tax Year Ending
Illinois Sales without Throwback
Everywhere Sales
Illinois Sales Factor without
TB

9

YEAR1
$$$$$
$$$$$
%%%%%

YEAR2
$$$$$
$$$$$
%%%%%%

Refer to Exhibit I for detailed breakout of Property, Payroll, and Sales per entity.

YEAR3
Average
$$$$$
$$$$$
%%%%%% %%%%%

COMPANY2
Page 8
March 10, 2025
In comparing the Sales Factor with Throwback to Without Throwback, it is clear
distortion is occurring. The table below shows the increase in sales due to
throwback:
Table 4. Tax Year Ending
Illinois Sales Factor with Throwback
Illinois Sales Factor without
Throwback
Percentage Increase in Sales due to
TB

YEAR1
%%%%%
%%%%%

YEAR2
YEAR3
%%%%% %%%%%
%%%%% %%%%%

Average
%%%%%
%%%%%

%%%%%

%%%%%

%%%%%

%%%%%

This is further exemplified by the following tables showing the difference
between COMPANY2’s in-state market (Illinois) sales versus the inclusion of
out-of-market throwback sales:
Table 5. Tax Year Ending
Illinois Throwback Sales
Illinois Sales with Throwback
Percentage of Throwback
Sales Included in Original
Illinois Sales

YEAR1
$$$$$
$$$$$

YEAR2
$$$$$
$$$$$

YEAR3
Average
$$$$$
$$$$$

%%%%%

%%%%%

%%%%% %%%%%

Illinois Sales without Throwback
$$$$$
Illinois Throwback Sales
$$$$$
Percentage of Throwback Sales
of the True Market Illinois Sales %%%%%

$$$$$
$$$$$
%%%%%

$$$$$
$$$$$
%%%%% %%%%%

One single-entity basis, the distortion is even more apparent. The following
tables summarize SUBSIDIARIES’s Illinois and Everywhere Sales, including
Illinois sales with and without throwback. 10
Table 6. Tax Year Ending:

YEAR1
SUBSIDIARY
$$$$$

Illinois Sales without
Throwback
Illinois Throwback Sales
Illinois Sales with Throwback
Illinois Sales without
Throwback
10

YEAR2

$$$$$
$$$$$
SUBSIDIARY
$$$$$

Refer to Exhibit I for detailed breakout of Property, Payroll, and Sales per entity.

YEAR3

$$$$$

$$$$$

$$$$$
$$$$$

$$$$$
$$$$$

$$$$$

$$$$$

COMPANY2
Page 9
March 10, 2025
Illinois Throwback Sales
Illinois Sales with Throwback

$$$$$
$$$$$

$$$$$
$$$$$

$$$$$
$$$$$

In comparing the Sales Factor with Throwback to Without Throwback, it is
clear distortion is occurring. The tables below show the percentage
increase in sales due to throwback:
Table 7. Tax Year Ending

YEAR3

Illinois Sales without
Throwback
Everywhere Sales
Illinois Sales Factor without TB

YEAR1
YEAR2
SUBSIDIARY
$$$$$
$$$$$
$$$$$
%%%%%

$$$$$
%%%%%

$$$$$
%%%%%

Illinois Sales with Throwback
Everywhere Sales
Illinois Sales Factor with TB

$$$$$
$$$$$
%%%%%

$$$$$
$$$$$
%%%%%

$$$$$
$$$$$
%%%%%

Illinois Sales Factor without TB
Illinois Sales Factor with TB
Percentage Increase in
Sales Factor due to
Throwback

%%%%%
%%%%%

%%%%%
%%%%%

%%%%%
%%%%%

%%%%%

%%%%%

%%%%%

Illinois Sales without
Throwback
Everywhere Sales
Illinois Sales Factor without TB

SUBSIDIARY
$$$$$

Average

$$$$$

$$$$$

$$$$$

$$$$$
%%%%%

$$$$$
%%%%%

$$$$$
%%%%%

Illinois Sales with Throwback
Everywhere Sales
Illinois Sales Factor with TB

$$$$$
$$$$$
%%%%%

$$$$$
$$$$$
%%%%%

$$$$$
$$$$$
%%%%%

Illinois Sales Factor without TB
Illinois Sales Factor with TB

%%%%%
%%%%%

%%%%%
%%%%%

%%%%%
%%%%%

Percentage Increase in
Sales
Factor due to Throwback

%%%%%

%%%%%

%%%%%

%%%%%

%%%%%

As evidenced in the tables above, COMPANY2’s throwback sales result in
distortion in its Illinois in­state market. On average, COMPANY2 as a
whole sees %%%%% increase, SUBSIDIARY %%%%% increase, and

COMPANY2
Page 10
March 10, 2025
SUBSIDIARY %%%%% increase in the sales factor due to throwback
sales.
COMPANY2 respectfully requests an alternative apportionment method to
fairly represent the market for its goods, services, and other sources of
business income in Illinois and proposes either of the following:
Remedy #1 – Three-Factor Apportionment (Equally Weighted Property,
Payroll, and Sales)
COMPANY2’s first remedy proposes the inclusion of additional factors;
specifically, property and payroll factors in apportioning business income
utilizing three equally weighted factors comprising property, payroll, and
sales (with throwback sales).
The property and payroll factors within Illinois are crucial components to
COMPANY2’s economic activities within Illinois. The property factor
measures the amount of capital located within Illinois and used to produce
income. The payroll factor provides a measure of all varied types of activities
carried on by COMPANY2’s employees to produce income. The combination
of these factors along with COMPANY2’s sales represent necessary
components to ascertain the true economic activity and market within
Illinois.
The following table summarizes COMPANY2’s Illinois and Everywhere
Property and Payroll. 11
YEAR1
$$$$$
$$$$$

YEAR2
$$$$$
$$$$$

YEAR3
$$$$$
$$$$$

Average

Illinois Property
Factor

%%%%%

%%%%%

%%%%%

%%%%%

Illinois Payroll
Everywhere Payroll
Illinois Payroll Factor

$$$$$
$$$$$
%%%%%

$$$$$
$$$$$
%%%%%

$$$$$
$$$$$
%%%%%

%%%%%

Table 8. Tax Year
Illinois Property
Everywhere Property

11

Refer to Exhibit I for detailed breakout of Property, Payroll, and Sales per entity.

COMPANY2
Page 11
March 10, 2025
Failure to include the property and payroll apportionment factors would not
reflect COMPANY2’s true market of income produced within Illinois.
The Illinois Apportionment Factor based on (Equally Weighted Property, Payroll,
and Sales):
Table 9. Tax Year Ending
Illinois Property Factor
Illinois Payroll Factor
Illinois Sales Factor with TB
Three Factor
Apportionment

YEAR1
%%%%%
%%%%%
%%%%%
%%%%%

YEAR2
%%%%%
%%%%%
%%%%%
%%%%%

YEAR3
%%%%%
%%%%%
%%%%%
%%%%%

Average
%%%%%
%%%%%
%%%%%
%%%%%

The table below shows the increase in originally reported sales factor over three
factor apportionment:
Table 10. Tax Year Ending
Illinois Three factor
Illinois Sales factor with TB
Percentage of Sales
Factor Increase over
Three Factor

YEAR1
%%%%%
%%%%%

YEAR2
%%%%%
%%%%%

YEAR3
%%%%%
%%%%%

Average
%%%%%
%%%%%

%%%%%

%%%%%

%%%%%

%%%%%

If throwback sales are included to prevent the non-taxation of sales directed to
states in which the taxpayer is not subject to tax, then property and payroll must
be factored in as these are material requirements in producing those sales. The
presence of substantial throwback sales operates as a quasi- property and
payroll factor as the throwback is dependent upon these elements;
therefore, it is reasonable to request that the property and payroll factors
also be considered in determining the share of income attributable to Illinois.
Failing to do so results in significant gross distortion of COMPANY2’s true
economic activity and market within Illinois and results in the taxation of
extraterritorial values. Therefore, the inclusion of property and payroll factors
would result in a more equitable apportionment of COMPANY2’s business
income based on its true market within Illinois.
COMPANY2 encloses Amended Corporation Income and Replacement Tax
Returns (Form IL-1120-X) and supporting schedules applying the proposed
Three-Factor Apportionment in Exhibit II.

COMPANY2
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March 10, 2025
Remedy #2 – Single-Sales Factor Formula Without Throwback Sales
Alternatively, COMPANY2 proposes the removal of throwback sales from the
standard apportionment factor in apportioning business income.
Based on the above, the inclusion of throwback sales as in-state sales
results in gross distortion of COMPANY2’s true market within Illinois and
results in the taxation of extraterritorial values. As stated above, the purpose
of throwback sales is to prevent the non-taxation of sales directed to states
in which the taxpayer is not subject to tax. But this does not give license to
apportion income out of all proportion to the activities in the state. Therefore,
the removal of throwback sales would result in a more equitable
apportionment of COMPANY2’s business income based on its true market
within Illinois.
COMPANY2 encloses Amended Corporation Income and Replacement Tax
Returns (Form IL-1120-X) and supporting schedules applying the proposed
Single-Sales Factor Formula Without Throwback Sales in Exhibit III.
IV. THE LAW
Illinois Statutory Apportionment/Distortion
Uniform Division of Income for Tax Purposes Act (“UDITPA”)
UDITPA was approved by the National Commission on Uniform Laws as a
Model Act in 1957. UPITPA Section 18 provides what equates to a pressure
valve for statutory constitutionality. This provision provided for a variation
when the statutory formula did not fairly reflect the extent of the taxpayer’s
business activity.
Although Illinois does not specifically adopt UDITPA, the State has generally
incorporated its apportionment provisions, with certain exceptions,
including the statutory shift to single-sales factor.
Illinois Standard Apportionment
Taxpayers that have taxable income from business activity both in and
outside Illinois must assign the income among the taxing states. A taxpayer

COMPANY2
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March 10, 2025
must assign business income to Illinois and other states using a standard
apportionment formula. 12
Business income is broadly defined for Illinois income tax purposes as all
income that may be treated as apportionable business income under the
U.S. Constitution. 13 COMPANY2 reported all income as business income for
tax years ending YEAR1; YEAR2; and YEAR3. Therefore, COMPANY2’s sales
are classified as business income subject to apportionment.
Corporations must use the single-sales factor apportionment formula for
business income. 14 The Illinois apportionment formula sales factor
measures the ratio of a taxpayer’s total sales in Illinois to its total sales
everywhere during the tax year. 15
Illinois follows the destination test for the sourcing of income from the sales
of TPP. Taxpayers must source sales of TPP to Illinois if the taxpayer delivers
or ships the property to a purchaser in the state. This applies to sales of TPP,
regardless of the F.O.B. (free on board) point or other conditions of sale. 16
Throwback sales are included in the apportionment factor. Sales of TPP are
apportioned to Illinois if the property is:
1) delivered or shipped to a purchaser within this State regardless of the
f.o.b. point or other conditions of sale; or
2) shipped from an office, store, warehouse, factory or other place of
storage in this State and the taxpayer is not taxable in the state of the
purchaser. 17
Illinois Alternative Apportionment
Illinois provides for a petition for an alternative apportionment method if the
standard allocation and apportionment provisions do not fairly represent the
market for the taxpayer’s goods, service, or other sources of the taxpayer’s
business income in the state. 18

35ILCS5/304; 35ILCS5/1501; 86ILAC100.3010
35ILCS5/304; 35ILCS5/150 l(a)(1); 86ILAC100.3010(a)(2).
14
35ILCS5/304(h).
15
35ILCS5/304(a)(3)(A); 86ILAC100.3370.
16
35ILCS5/304(a)(3)(B); 86ILAC100.3370(c)(1).
17
35ILCS5/304(a)(3)(B); 86ILAC100.3370(c)(1)&(2).
18
35ILCS5/304(f); 86ILAC100.3380(a); 86ILAC100.3390(a).
12
13

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An alternative apportionment method may not be invoked merely because it
reaches a different apportionment percentage than the required statutory
formula. However, if the application of the statutory formula will lead to a
grossly distorted result in a particular case, a fair and accurate alternative
method is appropriate. 19
Illinois’s alternative apportionment methods include:
1) Separate accounting;
2) The exclusion of any one or more factors;
3) The inclusion of one or more additional factors which will fairly
represent the taxpayer’s market in Illinois; or
4) The employment of any other method that will result in an
equitable allocation and apportionment of the taxpayer’s business
income. 20
The party seeking to use an alternative apportionment method carries the
burden of proof. 21 That party must show by clear and convincing evidence
that the standard apportionment formula 22 results in the taxation of
extraterritorial values or operates unreasonably and arbitrarily to apportion
income to Illinois out of all proportion to the taxpayer’s market in the state. 23
In addition, the party seeking to use an alternative apportionment formula
must go forward with the evidence and prove that the proposed alternative
apportionment method fairly and accurately apportions income to Illinois
based upon the market for the taxpayer’s goods, services, or other sources
of business income in this State. 24

86ILAC100.3390(c).
86ILAC100.3390(a)(1)-(4).
21
86ILAC100.3390(c).
22
A higher standard has been applied such that party requesting deviation must prove by “clear and cogent
evidence” that the income attributed to the State is the standard applied by the U.S. Supreme Court in Container.
(Container Corp. of America v. Franchise Tax Bd, 463 U.S. 159, 180 (1983)). In its decision, the U.S. Supreme Court
espoused three-factor formula apportionment as the “benchmark against which other apportionment formulas are
judged. All prior cases involving the evaluation of distortion relate to tax years in which the state allowed property
and payroll in the apportionment factor. Illinois’s shift to sales-only factor is reflective of the State’s interest to
reflect only the market portion of the previously described “benchmark” of apportionability. As such, the higher
evidentiary standard should not be applied in these circumstances: By its nature, the State distorts the results by
excluding from the apportionment factor property and payroll. Furthermore, the clear and convincing standard
has not been equally applied to taxpayers and the Illinois Department of Revenue alike. That is, the decisions in
these cases provide a form of agency deference that had been applied post Chevron doctrine has now been
overturned by the U.S. Supreme Court in Loper Bright Enterprises v. Raimondo, 603 U.S. (2024).
23
86ILAC100.3390(c).
24
Id..
19
20

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Apportionment Constitutional Standard
The manner in which states tax individuals and businesses is constrained by
constitutional provisions. In Complete Auto Transit, Inc. v. Brady, the U.S.
Supreme Court outlines a four-part test for determining whether a tax is
constitutional. 25 This four-part test requires that the taxpayer have
substantial nexus with the state; that the tax has a relationship to the service
provided in the state; that the tax not discriminate against interstate
commerce; and that the tax be fairly apportioned. These tests have been
further explained in subsequent case law. With regard to COMPANY2, the
last three prongs are the most relevant. The second prong looks at the
relationship between the tax and the benefits provided by the state. The Due
Process Clause of the U.S. Constitution requires that the tax be “rationally
related to ‘the values connected with the taxing State’.” 26
The third prong of the test requires that the tax not discriminate against
interstate commerce. The Constitution gives the federal government the
power to regulate commerce between the states. This has been interpreted
by the courts to mean that states are not permitted to burden interstate
commerce.
Finally, under the fourth prong, the tax must be fairly apportioned. The courts
have focused heavily on the meaning of fairly apportioned since long before
Complete Auto’s inclusion of the phrase in its test of constitutionality. The
first broad judicial discussions of a fair apportionment began in 1920 with
the tacit acknowledgement that a fair, if imperfect, methodology was
required for states “faced with the impossibility of allocating specifically the
profits earned by the processes conducted within its borders.” 27
Fair Apportionment
As early as the 1930’s, the results of an apportionment formula were
overturned for not meeting this final prong in Hans Rees’ Sons, Inc. v. North
Carolina. 28 That case established that an apportionment method is

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).
Moorman Mfg. Co v. Bair, 437 U.S. 267 (1978) (quoting Norfolk & Western R. Co. v State Tax
Comm'n, 390 U. S. 317, 390 U. S. 325).
27Underwood Typewriter Co. v. Chamberlain, (1920) 254 U.S. 113, 120-121.
28
Hans Rees’ Sons, Inc v. State of North Carolina ex rel. Maxwell, 283 U.S. 123 (1931).
25
26

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unconstitutional when it apportions income to a state “out of all appropriate
proportion to the business transacted by the appellant in that State.” 29
The U.S. Supreme Court noted that providing sufficient evidence was of key
importance, when it stated:
“Evidence which was found to be lacking in the Underwood and Bass
cases is present here. These decisions are not authority for the
conclusion that where a corporation manufactures in one State and sells
in another, the net profits of the entire transaction, as a unitary
enterprise, may be attributed, regardless of evidence, to either
State.” 30 [Emphasis Added]
In that case, the taxpayer had made painstaking efforts to demonstrate that the
profit that was being taxed resulted from activities and equipment in another
state. “The petitioner also offered evidence to the effect that the income from
the business was derived from three sources, to-wit: (1) buying profit; (2)
manufacturing profit; (3) selling profit.” 31 The Court described the results as
more than 250 percent difference from the statutory formula. 32 This
demonstration of value and profit analysis seems to be persuasive evidence to
show by clear and cogent evidence that the statutory factor results in
apportionment of income out of all proportion to the income earned in a state.
V. ANALYSIS
As mentioned above, COMPANY2 reported all income as business income
for tax years ending YEAR1; YEAR2; and YEAR3, and its sales are classified as
business income subject to apportionment.
COMPANY2 has provided sufficient documentation to demonstrate the sales
factor does not fairly reflect the market for its goods or services. The fair
reflection of income from the sale of TPP requires the inclusion of property and
payroll factors to accurately represent the market. Relying solely on a singlesales factor with throwback sales considers sales of goods to customers
but also by the nature of throwback, includes, but does not recognize the
payroll and property which is used in the origination jurisdiction to
determine throwback; nor does it recognize all the necessary economic
Id.
Id. (Referencing Bass, Ratcliff & Gretton, Ltd. v State Tax Comm’n, 266 U.S. 271 (1924)).
31
Id.
32
Id.
29
30

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activities and operations to derive sales of TPP, such as production,
manufacturing, and distribution, among others.
COMPANY2’s business activities in Illinois for SUBSIDIARIES are primarily
property relating to manufacturing facilities, payroll in the form of salaries
and wages to employees involved in the manufacturing process, and sales
to third parties both within Illinois and from throwback sales. The throwback
is determined by origin of the sales, not, the market for the sale. It is
contradictory not to include the factors (payroll and property) in an
apportionment factor which depends on both of these elements to
determine throwback.
Historically, manufacturing contributions to business activities were
traditionally reflected within the property and payroll factors. Hans Rees
Sons reminded us that items manufactured in one state (reflected in the
property factor) and sold into another (reflected in the sales factor) require
evidence of income in one business activity or the other in order to establish
unfair apportionment.
As evidenced in the tables above, the average percentage increase in sales
due to throwback is %%%%% greater than without for COMPANY2 as a
whole, %%%%% for SUBSIDIARY, and %%%%% for SUBSIDIARY. While in
Hans Rees, the Court did not establish a specific percentage as a
constitutional rule, the increased percentages above for COMPANY2 as a
whole is close to the %%%%% noted in Hans Rees and the increased for
SUBSIDIARIES vastly exceed this amount. The result is clearly shown as
distortive for COMPANY2.
It should be understood that manufacturing activities are sufficiently
qualitatively different than other types of activities, such as those from service
companies, to allow for an inquiry as to whether distortion exists in fact. In
COMPANY2’s case, that difference is enhanced, as these two divisions operate
as both manufacturers and distributors of their produced goods.
A sales-only apportionment factor with throwback sales does not
reasonably approximate the market of a manufacturing business as the
manner in which they generate income is qualitatively unique and requires
commensurate factor reflection with the business apportionment. In this
case we have shown the distortion created by including throwback sales in
the factor without including the elements creating the throwback.

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VI. CONCLUSION
Illinois law permits taxpayers to petition for the use of an alternative
apportionment when the statutory apportionment calculation does not fairly
reflect the market within the state. As illustrated above and in the attached
exhibits, the single-sales factor apportionment formula as applied to
COMPANY2 does fairly [sic] reflect the market activities as a result of their
Illinois operations.
As a result, COMPANY2 requests either (1) the inclusion of the payroll and
property factors with the sales factor in a three-factor, equally-weighted
apportionment or (2) the removal of throwback sales from the single-sales
apportionment factor to more accurately reflect how income is earned in the
business and to remedy the distortion caused by the use of the standard
apportionment method (single-sales factor with throwback). To the extent of
tax years open under the statute of limitation, COMPANY2 requests a refund
of tax determined to be overpaid with the requested remedy applied.
In summary and for the reasons outlined in its Petition, COMPANY2 requests
and should be granted the use of an alternative apportionment formula that
fairly reflects all of its economic activities and market in Illinois.
RULING
Section 304(a) of the Illinois Income Tax Act (“IITA” 35 ILCS 5/304) provides that when a
nonresident derives business income from Illinois and one or more other states, such
income shall be apportioned to Illinois by multiplying the income by the taxpayer’s
apportionment factor. For taxable years ending on and after December 31, 1998, except in
the case of an insurance company, financial organization, transportation company, or
federally regulated exchange, the apportionment factor is equal to the sales factor. IITA
Section 304(a)(3) defines the sale factor as a fraction, the numerator of which is the total
sales of the person in Illinois during the taxable year, and the denominator of which is the
total sales of the person everywhere during the taxable year.
Section 304(f) of the IITA provides:
If the allocation and apportionment provisions of subsections (a) through (e) and of
subsection (h) do not, for taxable years ending before December 31, 2008, fairly
represent the extent of a person’s business activity in this State, or, for taxable
years ending on or after December 31, 2008, fairly represent the market for the

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person’s goods, services, or other sources of business income, the person may
petition for, or the Director may, without a petition, permit or require, in respect of
all or any part of the person’s business activity, if reasonable:
(1) Separate accounting;
(2) The exclusion of any one or more factors;
(3) The inclusion of one or more additional factors which will fairly represent
the person’s business activities or market in this State; or
(4) The employment of any other method to effectuate an equitable
allocation and apportionment of the person’s business income.
Taxpayers who wish to use an alternative method of apportionment under IITA Section
304(f) are required to file a petition complying with the requirements of 86 Ill. Adm. Code
Section 100.3390. Subsection (c) of that regulation provides:
A departure from the required apportionment method is allowed only when those
methods do not accurately and fairly reflect business activity in Illinois (for taxable
years ending before December 31, 2008) or market in Illinois (for taxable years
ending on or after December 31, 2008). An alternative apportionment method may
not be invoked, either by the Director or by a taxpayer, merely because it reaches a
different apportionment percentage than the required statutory formula. However,
if the application of the statutory formula will lead to a grossly distorted result in a
particular case, a fair and accurate alternative method is appropriate. The party (the
Director or the taxpayer) seeking to utilize an alternative apportionment method has
the burden of going forward with the evidence and proving by clear and convincing
evidence that the statutory formula results in the taxation of extraterritorial values
or operates unreasonably and arbitrarily in attributing to Illinois a percentage of
income that is out of all proportion to the business transacted in this State (for
taxable years ending before December 31, 2008) or the market for the taxpayer’s
goods, services or other sources of business income in this State (for taxable years
ending on or after December 31, 2008). In addition, the party seeking to use an
alternative apportionment formula must go forward with the evidence and prove
that the proposed alternative apportionment method fairly and accurately
apportions income to Illinois based upon business activity in this State (for taxable
years ending before December 31, 2008) or the market for the taxpayer’s goods,
services or other sources of business income in this State (for taxable years ending
on or after December 31, 2008).
Your petition indicates that the single-sales factor apportionment formula as applied to
COMPANY2 does not fairly reflect the market activities as a result of their Illinois
operations. You indicate that property and payroll apportionment factors must be included
as these are material requirements in producing those sales. In addition, you indicate it is

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reasonable to request those factors to be considered in the determination of the share of
income attributable to Illinois as failing to do so would result in a significant gross
distortion of COMPANY2’s true economic activity and market within Illinois. Alternatively,
your petition proposes the removal of throwback sales from the standard apportionment
formula would result in a more equitable apportionment as the inclusion of these sales
results in gross distortion of COMPANY2’s true market within Illinois.
The facts stated in your petition are not sufficient to satisfy the burden set forth in Ill. Adm.
Code Section 100.3390(c). As indicated above, for taxable years ending on or after
December 31, 2008, alternative apportionment under IITA Section 304(f) is appropriate in
cases where the allocation and apportionment provisions under IITA Sections 304(a)
through (e) and of subsection (h) do not fairly represent the market for the taxpayer’s
goods, services, or other sources of business income. In this case, your petition does not
meet the regulatory requirement and cannot be granted at this time. Your petition merely
states that due to the statutory exclusion of the property and payroll apportionment
factors, an evenly weighted three-factor formula consisting of property, payroll, and sales
reaches a different apportionment percentage than the required statutory formula. The
petition indicates than using an evenly weighted three-factor formula is expected to result
in a smaller Illinois apportionment factor. An alternative apportionment method may not
be invoked, either by the Department or by a taxpayer, merely because it reaches a
different apportionment percentage than the required statutory formula. In addition, the
alternative proposal to exclude throwback sales does not address the first problem you
identify, which is the statutory apportionment formula’s failure to reflect the taxpayer’s
activities in Illinois. To the contrary, to the extent the throwback rule reflects the taxpayer’s
activities in Illinois, excluding throwback sales will exacerbate this problem.
Accordingly, your petition for alternative apportionment for tax years ended YEAR1; YEAR2;
and YEAR3 cannot be granted. However, if you have additional information related to this
request that was not previously submitted, you may supplement your petition and the
Department will reconsider your request. Please note that 86 Ill. Adm. Code Section
100.3390(e)(1) requires a petition to be filed at least 120 days prior to the due date
(including extensions) for the first return for which permission is sought to use the
alternative apportionment method. In addition, each Private Letter Ruling request
submitted to the Department for consideration must include certain information outlined
in 2 Ill. Adm. Code Section 1200.110.
As stated above, this is a General Information Letter. A General Information Letter does not
constitute a statement of policy that applies, interprets or prescribes the tax laws, and it is
not binding on the Department.
Sincerely,

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Jennifer Uhles
Associate Counsel (Income Tax)

JU:se