Did using hosted servers in Illinois create sales-tax nexus for an out-of-state institution that owned no hardware there?

Plain-English summary

An out-of-state financial-market institution purchased data-hosting services for email, storage, printing, and business applications. It owned or licensed some software but did not own the provider's computer hardware and asked whether the arrangement created Illinois nexus.

IDOR did not decide. It said nexus determinations required extensive facts often best gathered by an auditor.

Under the historical 2014 framework described, an Illinois retailer accepted purchase orders in Illinois or maintained Illinois inventory used to fill Illinois orders. A retailer maintaining a place of business in Illinois had Use Tax registration and collection duties.

The letter applied the then-stated physical-presence framework. Physical presence was not limited to an office; an agent or representative could establish it, and repetitive delivery and installation by a vendor could trigger Use Tax collection responsibility.

The letter also described a provision covering certain contracts with an Illinois person selling a substantially similar product line under a substantially similar name when the out-of-state retailer paid commission or other consideration and Illinois receipts under all such contracts exceeded $10,000 during the preceding four quarters.

What this means for you

This is historical 2014 nexus guidance, not a current-law conclusion. Even under that framework, ownership of hosted hardware was not the only potentially relevant fact, and IDOR refused to decide the actual arrangement without a fuller investigation.

Common questions

Did IDOR decide that hosted data created nexus? No.

Was physical presence limited to an office? No, under the framework described.

Could an Illinois representative matter? Yes.

Citations and references

• 86 Ill. Adm. Code 150.201(i) and 150.801.
• 35 ILCS 105/2(1.2).
• Quill Corp. v. North Dakota, 112 S. Ct. 1904 (1992).
• Brown's Furniture, Inc. v. Zehnder, 171 Ill. 2d 410 (1996).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2014.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2014/st-14-0025.pdf

Original ruling text

ST 14-0025-GIL 04/24/2014 NEXUS
This letter discusses nexus. See Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992). (This is a GIL.)
April 24, 2014

Dear Xxxx:
This letter is in response to your letter dated January 24, 2014, in which you request
information. 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. Adm. 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. Adm. Code 1200.120. You may access our website
at www.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. In your letter you have stated and made inquiry as follows:
The purpose of this letter is to seek an advisory opinion with respect to certain tax
questions related to business transacted in the State of Illinois by the CORPORATION.
The CORPORATION is an institution within the ORGANIZATION (the
“ORGANIZATION”) which also consists of BANKS and LENDERS throughout the
United States. The CORPORATION is headquartered in CITY, STATE and the
CORPORATION’S primary function is to issue, market and handle SECURITIES on
behalf of the BANKS.
In 2013, the CORPORATION purchased data hosting services through a commercial
provider, COMPANY. The CORPORATION does not own any of the computer
hardware operating in the COMPANY facility. However, the CORPORATION does own
or license some of the software used to manage its proprietary information on the
COMPANY servers. Services hosted on this equipment include e-mail, electronic file
and data storage, print services and other business software applications.
With respect to the facts as set forth above, the CORPORATION is seeking guidance
with respect to our potential tax liabilities in the State of Illinois. Specifically, does the
activity described create a “nexus” in the State of Illinois which would bring about a tax
liability for the CORPORATION? If so, can you advise as to what tax filing would be
required?
Thank you in advance for your assistance with these questions.
additional information, I can be reached at (xxx) xxx-xxxx.
DEPARTMENT’S RESPONSE:

Should you need

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April 24, 2014

We cannot determine the exact nature of your activities within Illinois based on the limited
information contained in your letter. Further, in the context of a Private Letter Ruling or a General
Information Letter, the Department is unable to make nexus determinations because the amount of
information required to make that determination is often best gathered by an auditor. The following
information outlines the principles of nexus. We hope it is helpful to you in determining whether you
are responsible to pay tax in Illinois.
An “Illinois Retailer” is one who either accepts purchase orders in the State of Illinois or
maintains an inventory in Illinois and fills Illinois orders from that inventory. The Illinois Retailer is then
liable for Retailers' Occupation Tax on gross receipts from sales and must collect the corresponding
Use Tax incurred by the purchasers.
Another type of retailer is the retailer maintaining a place of business in Illinois. The definition
of a “retailer maintaining a place of business in Illinois” is described in 86 Ill. Adm. Code 150.201(i).
This type of retailer is required to register with the State as an Illinois Use Tax collector. See 86 Ill.
Adm. Code 150.801. The retailer must collect and remit Use Tax to the State on behalf of the
retailer’s Illinois customers even though the retailer does not incur any Retailers' Occupation Tax
liability.
The United States Supreme Court in Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992), set
forth the current guidelines for determining what nexus requirements must be met before a person is
properly subject to a state's tax laws. The Supreme Court has set out a 2-prong test for nexus. The
first prong is whether the Due Process Clause is satisfied. Due process will be satisfied if the person
or entity purposely avails itself or himself of the benefits of an economic market in a forum state. Quill
at 1910. The second prong of the Supreme Court's nexus test requires that, if due process
requirements have been satisfied, the person or entity must have physical presence in the forum
state to satisfy the Commerce Clause.
A physical presence is not limited to an office or other physical building. Under Illinois law, it
also includes the presence of any agent or representative of the seller. The representative need not
be a sales representative. Any type of physical presence in the State of Illinois, including the vendor’s
delivery and installation of his product on a repetitive basis, will trigger Use Tax collection
responsibilities. Please refer to Brown’s Furniture, Inc. v. Zehnder, 171 Ill.2d 410, (1996).
The final type of retailer is the out-of-State retailer that does not have sufficient nexus with
Illinois to be required to submit to Illinois tax laws. A retailer in this situation does not incur Retailers’
Occupation Tax on sales into Illinois and is not required to collect Use Tax on behalf of its Illinois
customers. However, the retailer’s Illinois customers will still incur Use Tax liability on the purchase of
the goods and have a duty to self-assess and remit their Use Tax liability directly to the State. Many
retailers that do not have nexus with the State have chosen to voluntarily register as Use Tax
collectors as a courtesy to their Illinois customers so that those customers are not required to file
returns concerning the transactions with those retailers.
Beginning July 1, 2011, the definition of a “retailer maintaining a place of business” was
amended to include additional types of retailers. A retailer maintaining a place of business also
includes a retailer having a contract with a person located in this State under which:

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April 24, 2014

A. The retailer sells the same or substantially similar line of products as the person located in
this State and does so using an identical or substantially similar name, trade name, or
trademark as the person located in this State; and
B. The retailer provides a commission or other consideration to the person located in this
State based upon the sale of tangible personal property by the retailer. See 35 ILCS
105/2(1.2).
These provisions only apply if the cumulative gross receipts from sales of tangible personal
property by the retailer to customers in this State under all such contracts exceed $10,000 during the
preceding 4 quarterly periods. Please note that in Performance Mktg. Ass'n, Inc. v. Hamer, 998 N.E.
2d 54 (2013) the Illinois Supreme Court struck down 35 ILCS 105/2(1.1) and 35 ILCS 110/2(1.1), a
“click-thru nexus provision” enacted in 2011, but the above referenced provisions in 35 ILCS
105/2(1.2) remain good law.
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,

Cara Bishop
Associate Counsel
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