The scope of federal statutes limiting nexus for imposition of Illinois income
and replacement taxes are described in this subsection (c):
1)Public Law 86-272
. In 1959, Congress
enacted PL 86-272 (
prohibits states and their political subdivisions from imposing a net income
tax on nonresident taxpayers who operate primarily in interstate commerce and
whose activity within a state is limited. PL 86-272 provides in pertinent part:
No state or political subdivision thereof
shall have the power to impose . . . a net income tax on the income derived
within such state by any person from interstate commerce if the only business
activities within such state by or on behalf of such person during such taxable
year are either, or both of the following:
the solicitation of orders by such person, or his representative, in such state
for sales of tangible personal property, which orders are sent outside the
state for approval or rejection, and, if approved, are filled by shipment or
delivery from a point outside the state; and
ii) the solicitation of orders by such
person, or his representative, in such state in the name of or for the benefit
of a prospective customer of such person, if orders by such customer to such
person to enable such customer to fill orders resulting from such solicitation
are orders described in subsection (c)(1)(A)(i).
The provisions of subsection (c)(1)(A) of
this Section shall not apply to the imposition of a net income tax by any State
or political subdivision thereof, with respect to -
i) Any corporation which is incorporated
under the laws of such state; or
ii) any individual who, under the laws of
such state, is domiciled in, or a resident of, such state.
C) For the purposes of subsection (c)(1)(A)
of this Section, a person shall not be considered to have engaged in business
activities within a state during any taxable year merely by reason of sales in
such state, or the solicitation of orders for sales in such state, of tangible
personal property on behalf of such person by one or more independent
contractors whose activities on behalf of such person in such state consist
solely of making sales, or soliciting orders for sales, of tangible personal
For purposes of this
subsection (c)(1) -
i) The term "independent
contractor" means a commission agent, broker, or other independent contractor
who is engaged in selling, or soliciting orders for the sale of tangible
personal property for more than one principal and who holds himself out as such
in the regular course of his business activities; and
ii) the term "representative" does not
include an independent contractor.
The terms of PL 86-272 affect nexus for
taxation under the IITA according to the following principles:
A) 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
Property Being Sold
i)PL 86-272 immunizes
solicitation only for sale of tangible personal property. Efforts to sell
intangibles, such as services, franchises, patents, copyrights, trademarks and
service marks, are not protected, nor is solicitation for the leasing, renting
or licensing of tangible personal property.
ii) The sale, delivery and the solicitation
for the sale or delivery of any type of service that is not either ancillary to
solicitation, or otherwise set forth as a protected activity under subsection
(c)(5), is also not protected under PL 86-272 or this Section.
Solicitation of Orders.
Solicitation of orders means speech or conduct that explicitly or implicitly
invites an order and activity ancillary to invitations for an order.
i) To be ancillary to invitations for orders,
an activity must serve no independent business function for the seller apart
from its connection to the solicitation of orders.
ii) Activity that a seller would engage in
apart from soliciting orders shall not be considered ancillary to the
solicitation of orders.
Assignment of an activity to a salesperson does not, merely by such assignment,
make that activity ancillary to solicitation of orders.
iv) Activity that attempts to promote sales
is not ancillary, nor is activity that facilitates sales. PL 86-272 only
protects ancillary activity that facilitates the invitation of an
D) De minimus
activities are those that, when taken together, establish only a trivial
additional connection with this State. An activity regularly conducted within
this State on a regular or systematic basis or pursuant to a company policy
(whether such policy is in writing or not) shall normally not be considered
trivial. Whether an activity consists of a trivial or non-trivial additional
connection with this State is to be measured on both a qualitative and
quantitative basis. If the activity either qualitatively or quantitatively
creates a non-trivial connection with this State, then the activity exceeds the
protection of PL 86-272. The amount of unprotected activities conducted within
this State relative to the amount of protected activities conducted within this
State is not determinative of the issue of whether the unprotected activities
are de minimus. The determination of whether an unprotected activity creates a
non-trivial connection with this State is made on the basis of the taxpayer's
entire business activity, not merely its activities conducted within this
State. 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.
Listing of Specific Unprotected and
A) Subsection (c)(4)
lists specific activities that are considered to be beyond "mere solicitation"
and, therefore, unprotected by PL 86-272.
B) Subsection (c)(5) lists specific
activities that are considered by this State to be "protected activities".
Included on the list of "protected activities" are those specific activities
that are protected by PL 86-272 and those specific activities that this State,
in its discretion, deems worthy of protection. Inclusion of an activity on the
listing of "protected activities" is neither a declaration nor an admission by
this State that the activity must be afforded protection under PL
Activities. The following activities (assuming they are not de minimus) do not
constitute "mere solicitation" of orders, nor are they ancillary, nor otherwise
protected under PL 86-272. If one or more of the following activities are
conducted within this State, an otherwise protected nonresident taxpayer shall
become subject to taxation by Illinois.
Making repairs or providing maintenance or service to the property sold or to
B) Collecting current or
delinquent accounts, whether directly or by third parties, through assignment
or supervision of installation at or after shipment or delivery.
E) Conducting training courses, seminars or
lectures for personnel other than personnel involved only in solicitation of
sales of tangible personal property.
F) Providing any kind of technical assistance
or services, including, but not limited to, engineering assistance or design
service, when one of the purposes of the assistance or service is other than
the facilitation of the solicitation of orders.
G) Investigating, handling, or otherwise
assisting in resolving customer complaints, other than mediating direct
customer complaints when the sole purpose of such mediation is to ingratiate
the sales personnel with the customer.
H) Approving or accepting orders.
I) Repossessing property.
J) Securing deposits on sales.
K) Picking up or replacing damaged or
training, or supervising personnel, other than personnel involved only in
M) Maintaining a
sample or display room in excess of two weeks (14 days) at any one location
within the State during the tax year.
N) Carrying samples for sale, exchange or
distribution in any manner for consideration.
Owning, leasing, or maintaining any of the
following facilities or property in-state:
iii) Any kind of office
other than an in-home office as described as permitted under subsections
(c)(4)(Q) and (c)(5)(B).
v) Meeting place for
directors, officers, or employees.
vi) Stock of goods other than samples for
sales personnel or that are used entirely ancillary to solicitation.
vii) Telephone answering service that is
publicly attributed to the nonresident or to an employee or agent of the
nonresident in his or her representative status.
viii) Mobile stores, i.e., vehicles with
drivers who are sales personnel making sales from the vehicles.
ix) Real property or fixtures to real
property of any kind.
Consigning stock of goods or other tangible personal property to any person,
including an independent contractor, for sale.
Q) The maintenance of any office or other
place of business in this State that does not strictly qualify as an "in-home"
office as described in subsection (c)(5)(M) shall, by itself, cause the loss of
protection under PL 86-272. A telephone listing or other public listing within
the State for the nonresident or for an employee or other representative of the
nonresident in such capacity or other indication through advertising or
business literature that the nonresident or its employee or representative can
be contacted at a specific address within the State shall normally be
determined as the nonresident maintaining within this State an office or place
of business attributable to the nonresident or to its employee or
representative in a representative capacity. However, the normal distribution
and use of business cards and stationary identifying the employee's or
representative's name, address, telephone and fax numbers and affiliation with
the nonresident shall not, by itself, be considered as advertising or otherwise
publicly attributing an office to the nonresident or to its employee or other
R) Entering into
franchising or licensing agreements; selling or otherwise disposing of
franchises and licenses; or selling or otherwise transferring tangible personal
property pursuant to such franchise or license by the franchiser or licensor to
its franchisee or licensee within the State.
S) Conducting any activity that is not on the
list of "protected activities" in subsection (c)(5), and that is not entirely
ancillary to requests for orders, even if the activity helps to increase
Activities. The following in-state activities will not cause the loss of
immunity for otherwise protected sales:
Soliciting orders for sales by any type of advertising.
B) Soliciting orders for sales by an in-state
resident employee or representative of the nonresident, so long as that person
does not maintain or use any office or place of business in the State besides
an "in-home" office as described in subsection (c)(5)(M).
C) Carrying samples and promotional materials
only for display or for distribution without charge or other
D) Furnishing and
setting up display racks and advising customers on the display of the
nonresident's products without charge or other consideration.
E) Providing automobiles to sales personnel
for their use in conducting protected activities.
F) Passing orders, inquiries and complaints
on to the home office.
Missionary sales activities; i.e., the solicitation of indirect customers for
the nonresident's goods. For example, a manufacturer's solicitation of
retailers to buy the manufacturer's goods from the manufacturer's wholesale
customers would be protected if those solicitation activities are otherwise
H) Coordinating shipment or
delivery without payment or other consideration and providing information
relating to shipment or delivery either prior or subsequent to the placement of
I) Checking of customers'
inventories without charge (for re-order, but not for other purposes such as
J) Maintaining a
sample or display room for two weeks (14 days) or less at any one location
within the State during the tax year.
K) Recruiting, training or evaluating sales
personnel, including occasionally using homes, hotels or similar places for
meetings with sales personnel.
Mediating direct customer complaints when the purpose is solely for
ingratiating the sales personnel with the customer and facilitating requests
using or maintaining personal property for use in the employee's or
representative's "in-home" office located within the residence of the employee
or other representative that is not publicly attributed to the nonresident or
to the employee or other representative of the nonresident in a representative
capacity or automobile, when that use is solely limited to the conducting of
protected activities. Therefore, the use of personal property such as a
cellular telephone, facsimile machine, duplicating equipment, personal computer
and computer software, shall not, by itself, remove the protection under this
Section, so long as the use of the office is limited to:
i) soliciting and receiving orders from
ii) transmitting orders
outside the State for acceptance or rejection by the nonresident; or
iii) other activities that are protected
under PL 86-272 or this Section.
N) Shipping or delivering goods into this
State by means of vehicles or other modes of transportation owned or leased by
the nonresident taxpayer or by means of private carrier, whether by motor
vehicle, rail, water, air or other carrier and irrespective of whether a
shipment or delivery fee or other charge is imposed, directly or indirectly,
upon the purchaser.
Independent Contractors. PL 86-272 provides immunity to certain in-state
activities, if conducted by an independent contractor, that would not be
afforded if performed by the nonresident or its employees or other
provisions of subsection (c)(4), independent contractors may engage in the
following limited activities in the State without the nonresident's loss of
i) soliciting sales;
ii) making sales;
iii) maintaining an office.
B) Sales representatives who
represent a single principal are not considered to be independent contractors
and are subject to the same limitations as those provided under PL 86-272 and
C) Maintenance of a
stock of goods in the State, by the independent contractor under consignment or
any other type of arrangement with the nonresident, except for purposes of
display and solicitation, shall remove the protection.
Application of Destination State Law in
Case of Conflict.
A) When it appears that
Illinois and one or more other states that are signatories to the "Statement of
Information concerning practices of the Multistate Tax Commission and Signatory
States under PL 86-272 " have included or will include the same receipts from a
sale in their respective sales factor numerators, at the written request of the
nonresident, the states will, in good faith, confer with one another to
determine which state should be assigned the receipts. The conference shall
identify what law, regulation or written guideline, if any, has been adopted in
the state of destination with respect to the issue. The state of destination
shall be that location at which the purchaser or its designee actually receives
the property, regardless of F.O.B. (Free on Board) point or other conditions of
In determining which state
is to receive the assignment of the receipts at issue, preference shall be
given to any clearly applicable law, regulation or written guideline that has
been adopted in the state of destination. However, except in the case of the
definition of what constitutes "tangible personal property", Illinois is not
required by this Section to follow any other state's law, regulation or written
guideline should Illinois determine that to do so:
i) would conflict with Illinois laws,
regulations, or written guidelines; and
ii) would not clearly reflect the
income-producing activity of the nonresident within Illinois.
C) Notwithstanding any provision
set forth in this Section to the contrary, as between Illinois and any other
signatory state, Illinois agrees to apply the definition of "tangible personal
property" that exists in the state of destination to determine the application
of PL 86-272 and issues of throwback, if any. Should the state of destination
not have any applicable definition of tangible personal property so that it
could be reasonably determined whether the property at issue constitutes
tangible personal property, then each signatory state may treat the property in
any manner that would clearly reflect the income-producing activity of the
nonresident within that state.
Application of this Section to Foreign
A)PL 86-272 specifically applies, by
its terms, to "interstate commerce" and does not directly apply to foreign
commerce. The states are free, however, to apply the same standards set forth
in PL 86-272 to business activities in foreign commerce to ensure that foreign
and interstate commerce are treated on the same basis. Such an application also
avoids the necessity of expensive and difficult efforts in the identification
and application of the varied jurisdictional laws and rules existing in foreign
B) Illinois will apply
the provisions of PL 86-272 and of this Section to business activities
conducted in foreign commerce. Therefore, whether business activities are
conducted by a nonresident selling tangible personal property into a country
outside of the United States from a point within Illinois or by a nonresident
selling such property into Illinois from a point outside of the United States,
the principles under this Section apply equally to determine whether the sales
transactions are protected and the nonresident is immune from taxation in
either Illinois or in the foreign country, as the case might be, and whether,
if applicable, Illinois will apply its throwback provisions.
9) Application to Corporation
Incorporated in this State or to a Person Resident or Domiciled in this State.
The protection afforded by PL 86-272 and this Section does not apply to any
corporation incorporated within Illinois or to any person who is a resident of
or domiciled in Illinois.
Registration or Qualification to do Business. A business that registers or
otherwise formally qualifies to do business within Illinois does not, by that
fact alone, lose its protection under PL 86-272.
11) Loss of Protection for Conducting
Unprotected Activity During Part of a Tax Year. The protection afforded under
PL 86-272 and this Section shall be determined on a tax year by tax year basis.
Therefore, if at any time during a tax year the nonresident conducts activities
that are not protected under PL 86-272 or this Section, no income earned or
received in this State by the nonresident during any part of that tax year
shall be protected from taxation under PL 86-272 or this Section.