State & local tax alert: Amendments to Illinois income tax regulations

The Illinois Department of Revenue (“Department”) recently made changes to certain sales factor and alternative apportionment provisions through amending 86 Ill. Adm. Code sections 100.3370, 100.3380, 100.3390. The significant tax changes to these regulations are outlined below.

Sales factor

86 Ill. Adm. Code 100.3380

• The “Double throwback” rule is eliminated for tax years ending on or after Dec. 31, 2008. Double throwback required receipts from the sales of goods to be included in the Illinois sales factor numerator if the taxpayer met the following requirements:
  • Taxpayer is not taxable in the ship to and ship from state or country;  
  • Taxpayer’s Illinois activities associated with the sale go beyond solicitation, such as the case where the order is approved in Illinois
  
  Since the amendment is retroactive, refund claims are available for years open under the statute of limitations. Illinois’ statute of limitations is generally three years from the due date, including extensions.
• The Department clarified its general position that occasional sales of intangible assets used in a taxpayer’s regular course of business should be excluded from the sales factor denominator and numerator. For example, the occasional sale of stock in a subsidiary should not be included in the sales factor.
  
  This amendment attempted to remove ambiguity as to whether net gains from an occasional sale of intangible assets should be included in the sales factor. Note that the term occasional is not defined in any Illinois statutes or regulations.

86 Ill. Adm. Code 100.3370

• The Illinois sales factor excludes receipts from the licensing and sale of a patent, copyright, trademark, or similar item of intangible personal property, unless these receipts comprise more than 50 percent of the taxpayer’s total gross receipts during the tax year and each of the two immediately preceding tax years.
  
  An amendment provides that these types of receipts include amounts received as damages or settlements from claims of infringement. It also clarifies that receipts from copyrights excludes receipts from broadcasters. The regulation also provides additional guidance, such as sourcing rules and definitions for patent, copyright, trademark, and similar items of intangible personal property.
• For tax years ending after July 15, 2009, electricity sales are sourced in the same manner as tangible personal property.
• The regulation provides sourcing guidance for various activities such as services, leasing, and intangible assets. The regulation includes a number of examples for certain types of receipts.

Alternative apportionment petitions

86 Ill. Adm. Code 100.3390

• The Department made changes to the regulation for petitioning for alternative apportionment. In the case of amended returns, the explanation section of the amended return should state that the amended return includes a petition for alternative apportionment that should be referred to the Legal Services Bureau/Income Tax. Further, an amended return filed as a petition for alternative apportionment is required to be separately filed with the Legal Services Bureau/Income tax in addition to filing with the Department.
• The regulation adds that alternative apportionment may not be raised in a petition to the Independent Tax Tribunal regarding a notice of deficiency, unless:  
  • The taxpayer requested in writing that the auditor allow the use of alternative apportionment and the request was denied.
  • The auditor disallowed an alternative method of apportionment used by the taxpayer on its return.  
• The regulation allows taxpayers to petition the Informal Conference Board in the event an auditor disallows the use of an alternative apportionment formula.