My out-of-state company has no offices or employees in Illinois, but we own inventory that sits in an Illinois contract packager's warehouse before being shipped to customers nationwide -- does that create Illinois income tax nexus?

Plain-English summary

An out-of-state S-corporation with only one location -- a sales office outside Illinois, staffed entirely by employees physically working there -- asked whether hiring an Illinois contract packager created Illinois income tax nexus. The packager bottled, boxed, and shipped the company's products nationwide (a small share went to Illinois customers, all wholesale). Critically, raw materials and finished goods were owned by the out-of-state company while sitting at the Illinois packager's facility, simply for the packager's convenience, before being shipped out by common carrier.

The Department won't rule on nexus itself. Whether a specific taxpayer has nexus is "extremely fact specific," and the Department doesn't issue letter rulings resolving it -- that determination can only be made in an audit, where an auditor has access to all the facts. Instead, the Department laid out the general legal framework.

The framework. Illinois taxes corporations on income earned in or as a resident of the state (35 ILCS 5/201), but the federal Due Process and Commerce Clauses require some minimum connection and a substantial nexus before a state can tax an out-of-state corporation (citing Quill Corp. v. North Dakota). Separately, federal Public Law 86-272 shields a nondomiciliary corporation from a state's net income tax entirely if its ONLY in-state activity is soliciting sales of tangible personal property. Illinois construes that protection narrowly: any activity beyond mere solicitation that is more than "de minimis" (a merely trivial additional connection) forfeits the shield and creates nexus, subjecting the corporation to Illinois tax apportioned under 35 ILCS 5/304.

Applying it to these facts. The Department noted -- without issuing a formal ruling -- that a corporation retaining ownership of merchandise sitting in an Illinois warehouse before being shipped out by a contract packager "may be considered more than de minimis" activity, creating physical presence for Illinois income tax purposes. Regularly conducted, systematic, or policy-driven activities are generally not treated as trivial.

If nexus exists, filing follows. A nonresident corporation must file an Illinois return if it's actually liable for Illinois tax, or (separately) if it's qualified to do business in Illinois and required to file a federal return, regardless of actual Illinois liability. Illinois eliminated the traditional composite return for pass-through entities for tax years ending on or after December 31, 2014; pass-throughs now withhold Illinois tax on behalf of nonresident partners/shareholders and report that withholding on their own return.

What this means for you

Out-of-state businesses using an Illinois fulfillment or contract-packaging vendor

Owning inventory that physically sits in Illinois -- even at a vendor's facility, for the vendor's convenience, and even if you have no employees or property of your own in the state -- is a real nexus risk factor. The federal solicitation-only safe harbor (PL 86-272) does not protect activities like maintaining owned stock in a state warehouse.

Businesses relying on PL 86-272 for protection

Illinois construes the "mere solicitation" safe harbor narrowly, and almost any additional, non-trivial activity forfeits it. Don't assume that minimal shipping volume or an absence of local staff is enough on its own -- the Department looks at the totality of your in-state footprint, including third-party arrangements done on your behalf.

Accountants and tax professionals

This GIL is a useful illustration of the Department's nexus-by-audit-only posture: it will describe the applicable legal standard (Due Process/Commerce Clause minimums, PL 86-272, the de minimis test in 86 Ill. Adm. Code 100.9720) but won't commit to a final nexus conclusion in a letter ruling. Plan client engagements assuming a real audit risk rather than treating an informal GIL discussion as a safe harbor determination.

Common questions

Q: Will the Illinois Department of Revenue issue a binding ruling on whether my company has nexus?
A: No -- nexus determinations are considered too fact-specific for a letter ruling and are made only in the context of an audit.

Q: Does hiring a third-party contract packager in Illinois by itself create nexus?
A: Not automatically, but owning inventory that physically sits in Illinois (even at the packager's facility) is a real risk factor that can exceed the federal mere-solicitation safe harbor.

Q: What is Public Law 86-272, and what does it protect?
A: It's a federal law shielding an out-of-state corporation from a state's net income tax if its only activity in that state is soliciting sales of tangible personal property. Illinois interprets this protection narrowly.

Q: What happens if my company does have Illinois nexus?
A: You generally must file an Illinois income tax return, apportioning your business income under 35 ILCS 5/304; if you operate as a pass-through entity, you must withhold Illinois tax on behalf of nonresident partners/shareholders instead of filing a composite return.

Citations and references

Statutes and regulations:

• 35 ILCS 5/201(a), (c) (Illinois income tax and personal property tax replacement income tax)
• 35 ILCS 5/Article 3; 35 ILCS 5/304 (allocation, apportionment, and the sales factor)
• 35 ILCS 5/502(a) (return filing requirement for nonresidents/qualified corporations)
• 86 Ill. Adm. Code 100.9720 (nexus; PL 86-272 solicitation protection; de minimis test)
• 86 Ill. Adm. Code 100.7035 (pass-through withholding, post-2014)
• Public Law 86-272 (15 U.S.C. § 381)
• Quill Corp. v. North Dakota, 504 U.S. 298 (1992)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2026.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2026/it26-0001-gil.pdf

Original ruling text

IT 26-0001

03/16/2026

NEXUS

Nexus issues are not generally suitable for resolution by letter ruling. A
corporation’s activities in Illinois beyond solicitation that are more than de minimus
will establish nexus with Illinois. (This is a GIL.)
March 16, 2026
NAME
ADDRESS
EMAIL
Re: Illinois Income Tax – Nexus
Dear NAME:
This letter is in response to your email dated March 3, 2026, in which you requested
information regarding income tax nexus under Illinois law for the hiring of a contract
packager in Illinois by a STATEcompany. The Department issues two types of letter rulings.
Private Letter Rulings (“PLRs”) are issued by the Department in response to specific
taxpayer inquiries concerning the application of a tax statute or rule to a particular fact
situation. A PLR is binding on the Department, but only as to the taxpayer who is the subject
of the request for ruling and only to the extent the facts recited in the PLR are correct and
complete. Persons seeking PLRs must comply with the procedures for PLRs found in the
Department’s regulations at 2 Ill. Admin. Code 1200.110. The purpose of a General
Information Letter (“GIL”) is to direct taxpayers to Department regulations or other sources
of information regarding the topic about which they have inquired. A GIL is not a statement
of Department policy and is not binding on the Department. See 2 Ill. Admin. Code
1200.120(b) and (c). You may access our website at https://tax.illinois.gov/ to review
regulations, letter rulings, and other types of information relevant to your inquiry.
The nature of your inquiry and the information you have provided require that we respond
with a GIL.
INQUIRY:
I was referred to this legal department by an employee in the Illinois
Department of Revenue (see email trail below). I was looking for an opinion on
what the following requirements would be in Illinois for a STATE company that
hired a contract packager from Illinois.
The facts are as follows: My client is a STATE S-corporation which has only one
location, which is a sales office in STATE and all employees are physically

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March 16, 2026
located and working in STATE. They hired a contract packager in Illinois who
would bottle, box, and ship their products throughout the USA. There are
minimal shipments to customers in Illinois, all of which would be wholesale
(no retail customers). All shipments use common carriers. Some raw
materials are purchased and owned by the STATE company before it is used
by the contract packager and finished goods may also sit on the floor and are
owned by STATE company before being shipped by the contract packager
from the facility in Illinois. The inventory is only in Illinois for the convenience
of the contract packager whose plant is in Illinois. Would this situation create
income tax nexus in Illinois requiring the company to file a S-corporation
income tax return?
I also answered the seven questions in the email trail below sent by the
Department of Revenue.

1. Will the business maintain sites in Illinois? No
2. Does the business own real estate or real property in Illinois? No
3. Does the business own any stock of merchandise located in a
   warehouse in Illinois? Yes
4. Do the employees make purchases or perform services (installation,
   assembly, repairs, etc.) in Illinois? No
5. Is the business merchandise filled by a distributor (non-employee) in
   Illinois? Yes – an Illinois contract packager mixes and bottles product
   for shipment
6. Do the employees of the business enter Illinois with the authority to
   accept orders for merchandise? No
7. Does the business sell merchandise from a mobile store in Illinois (i.e.
   truck or van)? No
   The filing deadline is approaching and if a composite return is required, we will
   file. I appreciate any assistance you can provide.
   Please let me know if you need any additional information or have any
   questions.
   DEPARTMENT’S RESPONSE:
   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 particular
   taxpayer has nexus with the State. Such a determination can only be made in the context of
   an audit where a Department auditor has access to all relevant facts and information. For
   information regarding nexus, see 86 Ill. Adm. Code 100.9720 (accessible from the

NAME
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March 16, 2026
Department’s website). However, the following general information regarding nexus with
Illinois for income tax purposes may be provided.
Section 201(a) of the IITA Illinois Income Tax Act (“IITA”, 35 ILCS 5/101 et seq.) imposes a
tax measured by net income on corporations on the privilege of earning or receiving
income in or as a resident of Illinois. In addition, Section 201(c) of the IITA imposes a
second tax (the personal property tax replacement income tax) measured by net income
on corporations on the privilege of earning or receiving income in or as a resident of Illinois.
The United States Constitution limits the power of states to subject foreign corporations
and other nonresidents to income tax. The Due Process Clause requires that there exists
some minimum connection between a state and the person, property, or transaction the
state seeks to tax. (Quill Corp. v. N. Dakota, 504 U.S. 298 (1992)) Similarly, the Commerce
Clause requires that a state’s tax be applied only to activities with a substantial nexus to
the taxing state. (Id.) In addition, in the case of foreign corporations, Illinois may not assert
jurisdiction to tax where a corporation falls under the protection provided by Public Law
86-272 (15 U.S.C. § 381). Public Law 86-272 precludes any state from subjecting a
nondomiciliary corporation to a net income tax where such corporation’s only activities
within the state for the taxable year consist of solicitation activities for sales of tangible
personal property. Where any part of a foreign corporation’s income is allocable to Illinois
in accordance with the provisions of Article 3 of the Illinois Income Tax Act (35 ILCS
5/Article 3), Illinois can demonstrate the connection or nexus necessary to subject a
foreign corporation to tax. Therefore, unless protected by the United States Constitution or
federal statute, a foreign corporation is liable for Illinois income tax where any portion of its
income is allocated to Illinois.
86 Ill. Adm. Code Section 100.9720(c)(2)(A) provides:
If a nonresident taxpayer’s activities exceed “mere solicitation” as set forth in
subsection (a) of PL 86-272 (subsection (c)(1)(A) of this Section), it obtains no
immunity under that federal statute. The taxpayer is subject to Illinois income tax
and personal property tax replacement income tax for the entire taxable year and its
business income is apportioned under IITA Section 304. Whether a nonresident
taxpayer’s conduct exceeds “mere solicitation” depends upon the facts in each
particular case.
Specific activities that go beyond “mere solicitation” and are unprotected by Public Law
86-272 are listed within 86 Ill. Adm. Code Section 100.9720(c)(4). Additionally, 86 Ill. Adm.
Code Section 100.9720(c)(5) lists specific activities that are considered to be protected
activities in Illinois. As provided in 86 Ill. Adm. Code Section 100.9720(c)(3)(B), the
inclusion of an activity on the listing of “protected activities” is neither a declaration nor an

NAME
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March 16, 2026
admission by this State that the activity must be afforded protection under Public Law 86272.
Illinois construes the protection of Public Law 86-272 very narrowly. Almost any activity
exceeding the parameters of that statute will cause the protection to be forfeited. An outof-state corporation can lose the immunity provided by Public Law 86-272 where its
activities within the state exceed the mere solicitation standard of the law.
A corporation’s activities in Illinois beyond solicitation that are more than de minimus will
establish nexus with Illinois. De minimus activities, as outlined in 86 Ill. Adm. Code
Section 100.9720(c)(2)(D), are those activities that when taken together, establish only a
trivial additional connection with this State. Activities that are regularly conducted within
Illinois on a regular or systematic basis or pursuant to a company policy are normally not
considered to be trivial. An unprotected activity that would not be de minimus if it were the
only business activity of the taxpayer conducted in this State will not be de minimus merely
because the taxpayer also conducts a substantial amount of protected activities within
this State, nor will an unprotected activity that would be de minimus if conducted in
conjunction with a substantial amount of protected activities fail to be de minimus merely
because no protected activities are conducted in this State.
According to the facts presented in your email, the STATE corporation retains ownership of
a stock of merchandise located in an Illinois warehouse before being shipped from the
facility by the contract packager. Assuming these facts to be true and without additional
support or clarification, this activity may be considered more than de minimus to create
physical presence in Illinois for income tax purposes.
Pursuant to IITA Section 502(a), an Illinois income tax return is required to be filed by a
nonresident in two situations: when a taxpayer is liable for Illinois income tax (Section
502(a)(1)) or, 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 (Section 502(a)(2)). A nonresident is liable for Illinois income
tax under IITA Section 201 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 IITA Section 203, which is allocated or apportioned to Illinois under the
provisions of Article 3 of the IITA, less certain deductions. Under IITA Section 203, base
income is generally determined by starting with the taxpayer’s federal taxable income
(adjusted gross income in the case of an individual) and adjusting that amount by certain
statutorily prescribed addition and subtraction modifications. Base income must then be
classified as between nonbusiness income and business income, and allocated or
apportioned to Illinois, respectively, according to the rules set forth in Article 3 of the IITA.

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March 16, 2026
Illinois eliminated the traditional composite return for pass-through entities, effective for
tax years ending on or after December 31, 2014. Pass-through entities are now required to
withhold Illinois income tax on behalf of nonresident partners or shareholders and report
that withholding on its own Illinois income tax return. Additional information on passthrough withholding may be found in 86 Ill. Adm. Code Section 100.7035, and in the
instructions to the 2025 Form IL-1120-ST, Small Business Corporation Replacement Tax
Return, located on the Department’s website.
As stated above, this is a General Information Letter. A General Information Letter does not
constitute a statement of Department policy that applies, interprets or prescribes the tax
laws, and it is not binding on the Department. If you require additional information, please
visit the Department’s website at https://tax.illinois.gov/ or contact the Department’s
Taxpayer Assistance Division at 800-732-8866.
Sincerely,
Jennifer Uhles
Jennifer Uhles
Associate Counsel (Income Tax)
JU:se

Printed by the authority of the state of Illinois.
Electronic Only – One Copy
Issued 03/16/2026; Redacted 04/24/2026