Does a company create Illinois sales-tax nexus by having a resident employee, using independent-contractor transcriptionists who work from home, and occasionally sending employees onsite to customer locations?

Plain-English summary

A representative wrote to the Illinois Department of Revenue on behalf of a client asking whether three specific activities created Illinois sales-tax (and corporate income-tax) nexus in prior years: (1) a resident employee working in Illinois from December 21, 2012 until July 31, 2015; (2) independent-contractor medical transcriptionists who have worked from home in Illinois since August 1, 2010, using their own equipment, setting their own hours, and not soliciting sales or marketing the client's products; and (3) employees who occasionally visit customer locations onsite as part of the sales process or for implementation and training. The inquiry was made in connection with the client's consideration of a voluntary disclosure agreement with Illinois.

The Department responded that nexus determinations are "very fact specific" and cannot be addressed in a General Information Letter, and are instead best made by auditors who can conduct a fact-intensive investigation. Because of that, this letter does not tell the requester whether nexus existed on these particular facts. Instead, it lays out the general legal framework for how Illinois analyzes retailer nexus for Retailers' Occupation Tax and Use Tax purposes.

The Department explained that an "Illinois Retailer" (one who makes sales of tangible personal property in Illinois) owes Retailers' Occupation Tax, while a "retailer maintaining a place of business in Illinois" must collect and remit Use Tax from Illinois customers. It described the U.S. Supreme Court's two-prong nexus test from Quill Corp. v. North Dakota: due process is satisfied if a business purposely avails itself of an economic market in the state, and the Commerce Clause additionally requires physical presence — which under Illinois law (citing Brown's Furniture, Inc. v. Zehnder) includes the presence of any agent or representative of the seller, not limited to a sales representative or an office. The letter also summarized the post-2011 "click-through" contractual nexus provisions (35 ILCS 105/2(1.1) and 105/2(1.2)), including the $10,000 cumulative gross-receipts threshold and how those provisions were amended after being struck down in Performance Mktg. Ass'n, Inc. v. Hamer.

Finally, the letter distinguished sales-of-service transactions, which are not subject to Retailers' Occupation Tax or Use Tax as such; instead, servicemen who transfer tangible personal property incident to a service may owe Service Occupation Tax or Use Tax, calculated under one of four methods described in the letter, depending on the nature of the transaction.

What this means for you

If you have any physical presence in Illinois

Under the framework described here, having any agent or representative present in Illinois — even one who isn't a traditional salesperson, such as staff visiting customer sites for implementation or training — can be treated as physical presence that helps establish nexus and trigger Use Tax collection duties, per Brown's Furniture, Inc. v. Zehnder. A resident employee working in the state is a clear example of physical presence.

If you rely on independent contractors

The letter notes that independent contractors who work from home using their own equipment, set their own hours, and do not solicit sales or market the company's products may present a different nexus picture than employees or sales agents — but the Department pointedly declined to say whether this fact pattern, by itself, creates or avoids nexus. That determination was left to an auditor's fact-intensive review, so businesses in a similar position should not assume this letter answers the question for them.

If you're considering a voluntary disclosure agreement

Because this GIL did not resolve the nexus question, a business in a similar position weighing a voluntary disclosure agreement would need either a Private Letter Ruling (which requires a specific taxpayer fact pattern and is binding, per 2 Ill. Adm. Code 1200.110) or an actual audit/VDA process to get a definitive nexus determination.

Common questions

Does having independent contractors working from home in Illinois automatically create sales-tax nexus?
This letter does not say. The Department stated that nexus determinations are too fact-specific for a General Information Letter and must be made by auditors reviewing the full facts.

Does a company have to have an office in Illinois to have nexus?
No. The letter explains that under Illinois law, physical presence for nexus purposes is not limited to an office or other physical building — it also includes the presence of any agent or representative of the seller, who need not be a sales representative.

What is the difference between a GIL and a PLR in this context?
A Private Letter Ruling (PLR) is issued for a specific taxpayer's fact situation and is binding on the Department for that taxpayer if the facts are accurate and complete, but requires following the procedures in 2 Ill. Adm. Code 1200.110. A General Information Letter (GIL), like this one, only points the taxpayer to relevant regulations and other information and is not binding on the Department, per 2 Ill. Adm. Code 1200.120.

Do sales of pure services (no transfer of property) trigger Illinois sales tax?
No. The letter states that if a transaction does not involve the transfer of any tangible personal property to the customer, it generally would not be subject to Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax.

Citations and references

• 86 Ill. Adm. Code 130.101 — Retailers' Occupation Tax Act imposition on sellers of tangible personal property
• 86 Ill. Adm. Code 150.101 — Use Tax imposed on the privilege of using tangible personal property purchased at retail
• 86 Ill. Adm. Code 150.130 — Credit against Use Tax for Retailers' Occupation Tax paid on the same sales
• 86 Ill. Adm. Code 150.201(i) — Definition of "retailer maintaining a place of business in Illinois"
• 86 Ill. Adm. Code 150.401 — Retailer collection of tax from users
• 86 Ill. Adm. Code 150.801 — Registration requirement as an Illinois Use Tax collector
• 86 Ill. Adm. Code 270.115 — Selling activities that trigger Retailers' Occupation Tax liability (post-Hartney)
• 86 Ill. Adm. Code 140.101, 140.106, 140.108, 140.109 — Service Occupation Tax Act provisions on tangible personal property transferred incident to service
• 35 ILCS 105/2(1.1); 35 ILCS 110/2(1.1) — Contractual ("click-through") nexus provisions and referral-based presumption
• 35 ILCS 105/2(1.2) — Contractual nexus based on shared branding/name and commission arrangements
• 2 Ill. Adm. Code 1200.110 — Procedures for Private Letter Rulings
• 2 Ill. Adm. Code 1200.120 — General Information Letters
• Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130
• Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992)
• Brown's Furniture, Inc. v. Zehnder, 171 Ill.2d 410 (1996)
• Performance Mktg. Ass'n, Inc. v. Hamer, 998 N.E.2d 54 (2013)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2017.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2017/st-17-0018-gil.pdf

Original ruling text

ST 17-0018-GIL 06/02/2017 NEXUS

A retailer maintaining a place of business in Illinois must collect tax from users in accordance
with the Retailers’ Occupation Tax Act and the Use Tax Act by adding the tax to the selling
price of tangible personal property, when sold for use. See 86 Ill. Adm. 150.401. (This isa
GIL.)

June 2, 2017
Dear XXXXxX:

This letter is in response to your letter dated March 21, 2017, in which you requested
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:

This is to request guidance, on behalf of a client, regarding whether or not the following
activities create nexus for Illinois sales tax and/or corporate income tax in prior years.
We are currently discussing with this client the possibility of requesting a voluntary
disclosure agreement with Illinois.

e The client had a resident employee in the state from December 21, 2012 until
July 31, 2015.

e The client has used independent contractors in the state to perform services from
August 1, 2010 and going forward. The sole role of the independent contractors
is medical transcription which is performed from home using their own equipment
and setting their own hours and/or volumes of work. Transcription services are
performed for customers in various states, including Illinois. These independent
contractors do not solicit sales nor market and advertise the client’s products and
services in any way to customers in the state.

e The client may occasionally have employees onsite at customer locations in the
state to be part of the sales process and/or for implementation and training.

Please advise us in writing, email acceptable, your determination of nexus in the state
based on the facts as presented above. If you have any questions and/or need

ST 17-0018-GIL
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additional information to make a determination, please contact us at NAME@EMAIL or

.

DEPARTMENT’S RESPONSE:

Determinations regarding nexus are very fact specific and cannot be addressed in the context
of a General Information Letter. We believe that nexus determinations are best made by auditors who
are able to conduct the fact-intensive investigation that is required to make these determinations. We
hope, however, the following information will be helpful in addressing your question.

Sales Tax

The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property to purchasers for use or consumption. See 86 Ill.
Adm. Code 130.101. In Illinois, Use Tax is imposed on the privilege of using, in this State, any kind of
tangible personal property that is purchased anywhere at retail from a retailer. See 86 Ill. Adm. Code
150.101. These taxes comprise what is commonly known as “sales” tax in Illinois. If the purchases
occur in Illinois, the purchasers must pay the Use Tax to the retailer at the time of purchase. The
retailers are then allowed to reduce the amount of Use Tax they must remit by the amount of
Retailers’ Occupation Tax liability which they are required to and do pay to the Department with
respect to the same sales. See 86 Ill. Adm. Code 150.130.

Nexus

An “Illinois Retailer” is one who makes sales of tangible personal property in Illinois. 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. Our regulations were amended in response to the
Illinois Supreme Court’s decision in Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130. The regulations
specify the selling activities that trigger Retailers’ Occupation Tax liability in Illinois. See 86 Ill. Adm.
Code 270.115.

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

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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
IIl.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.

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:

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. However, new provisions became effective January 1,
2015. The following provisions address the court’s concerns in Performance Mktg. Ass'n, Inc. v.
Hamer, 998 N.E. 2d 54 (2013).

Beginning January 1, 2015, a retailer maintaining a place of business also includes a retailer
having a contract with a person located in this State under which the person, for a commission or
other consideration based upon the sale of tangible personal property by the retailer, directly or
indirectly refers potential customers to the retailer by providing to the potential customers a
promotional code or other mechanism that allows the retailer to track purchases referred by such
persons.

Examples of mechanisms that allow the retailer to track purchases referred by such persons
include but are not limited to the use of a link on the person's Internet website, promotional codes
distributed through the person's hand-delivered or mailed material, and promotional codes distributed
by the person through radio or other broadcast media. These provisions apply only if the cumulative
gross receipts from sales of tangible personal property by the retailer to customers who are referred
to the retailer by all persons in Illinois under such contracts exceed $10,000 during the preceding 4
quarterly periods ending on the last day of March, June, September, and December. A retailer
meeting these requirements shall be presumed to be maintaining a place of business in Illinois but
may rebut this presumption by submitting proof that the referrals or other activities pursued within this
State by such persons were not sufficient to meet the nexus standards of the United States
Constitution during the preceding 4 quarterly periods. See 35 ILCS 105/2(1.1).

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Service Transactions

Retailers’ Occupation Tax and Use Tax do not apply to sales of service. Under the Service
Occupation Tax Act, businesses providing services (/.e., servicemen) are taxed on tangible personal
property transferred as an incident to sales of service. See 86 Ill. Adm. Code 140.101. The purchase
of tangible personal property that is transferred to the service customer may result in either Service
Occupation Tax liability or Use Tax liability for the servicemen depending upon his activities. See 86
Ill. Adm. Code 140.106, 140.108 and 140.109. The serviceman’s liability may be calculated in one of
four ways:

A. separately-stated selling price of tangible personal property transferred incident to
service;

B. 50% of the serviceman's entire bill;

C. Service Occupation Tax on the serviceman's cost price if the serviceman is a registered

de minimis serviceman; or

D. Use Tax on the serviceman's cost price if the serviceman is de minimis and is not
otherwise required to be registered under Section 2a of the Retailers' Occupation Tax
Act.

The Department does not consider the viewing, downloading or electronically transmitting of
video, text and other data over the internet to be the transfer of tangible personal property. However,
if a company provides services that are accompanied with the transfer of tangible personal property,
including computer software, such service transactions are generally subject to tax liability under one
of the four methods set forth above.

If a transaction does not involve the transfer of any tangible personal property to the customer,
then it generally would not be subject to Retailers’ Occupation Tax, Use Tax, Service Occupation
Tax, or Service Use Tax.

| 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,

Richard S. Wolters
Associate Counsel

ST 17-0018-GIL
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