94TH GENERAL ASSEMBLY
State of Illinois
2005 and 2006
SB2122

 

Introduced 5/30/2005, by Sen. Martin A. Sandoval

 

SYNOPSIS AS INTRODUCED:
 
35 ILCS 5/304   from Ch. 120, par. 3-304

    Amends the Illinois Income Tax Act. With respect to the apportionment of business income for persons other than residents, provides that for tax years ending on or after December 31, 2005 the income shall be apportioned using the property factor, payroll factor, and sales factor. Effective immediately.


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FISCAL NOTE ACT MAY APPLY

 

 

A BILL FOR

 

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1     AN ACT concerning revenue.
 
2     Be it enacted by the People of the State of Illinois,
3 represented in the General Assembly:
 
4     Section 5. The Illinois Income Tax Act is amended by
5 changing Section 304 as follows:
 
6     (35 ILCS 5/304)  (from Ch. 120, par. 3-304)
7     Sec. 304. Business income of persons other than residents.
8     (a) In general. The business income of a person other than
9 a resident shall be allocated to this State if such person's
10 business income is derived solely from this State. If a person
11 other than a resident derives business income from this State
12 and one or more other states, then, for tax years ending on or
13 before December 30, 1998, for taxable years ending on or after
14 December 31, 2005, and except as otherwise provided by this
15 Section, such person's business income shall be apportioned to
16 this State by multiplying the income by a fraction, the
17 numerator of which is the sum of the property factor (if any),
18 the payroll factor (if any) and 200% of the sales factor (if
19 any), and the denominator of which is 4 reduced by the number
20 of factors other than the sales factor which have a denominator
21 of zero and by an additional 2 if the sales factor has a
22 denominator of zero. For tax years ending on or after December
23 31, 1998, and except as otherwise provided by this Section,
24 persons other than residents who derive business income from
25 this State and one or more other states shall compute their
26 apportionment factor by weighting their property, payroll, and
27 sales factors as provided in subsection (h) of this Section.
28     (1) Property factor.
29         (A) The property factor is a fraction, the numerator of
30     which is the average value of the person's real and
31     tangible personal property owned or rented and used in the
32     trade or business in this State during the taxable year and

 

 

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1     the denominator of which is the average value of all the
2     person's real and tangible personal property owned or
3     rented and used in the trade or business during the taxable
4     year.
5         (B) Property owned by the person is valued at its
6     original cost. Property rented by the person is valued at 8
7     times the net annual rental rate. Net annual rental rate is
8     the annual rental rate paid by the person less any annual
9     rental rate received by the person from sub-rentals.
10         (C) The average value of property shall be determined
11     by averaging the values at the beginning and ending of the
12     taxable year but the Director may require the averaging of
13     monthly values during the taxable year if reasonably
14     required to reflect properly the average value of the
15     person's property.
16     (2) Payroll factor.
17         (A) The payroll factor is a fraction, the numerator of
18     which is the total amount paid in this State during the
19     taxable year by the person for compensation, and the
20     denominator of which is the total compensation paid
21     everywhere during the taxable year.
22         (B) Compensation is paid in this State if:
23             (i) The individual's service is performed entirely
24         within this State;
25             (ii) The individual's service is performed both
26         within and without this State, but the service
27         performed without this State is incidental to the
28         individual's service performed within this State; or
29             (iii) Some of the service is performed within this
30         State and either the base of operations, or if there is
31         no base of operations, the place from which the service
32         is directed or controlled is within this State, or the
33         base of operations or the place from which the service
34         is directed or controlled is not in any state in which
35         some part of the service is performed, but the
36         individual's residence is in this State.

 

 

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1         Beginning with taxable years ending on or after
2     December 31, 1992, for residents of states that impose a
3     comparable tax liability on residents of this State, for
4     purposes of item (i) of this paragraph (B), in the case of
5     persons who perform personal services under personal
6     service contracts for sports performances, services by
7     that person at a sporting event taking place in Illinois
8     shall be deemed to be a performance entirely within this
9     State.
10     (3) Sales factor.
11         (A) The sales factor is a fraction, the numerator of
12     which is the total sales of the person in this State during
13     the taxable year, and the denominator of which is the total
14     sales of the person everywhere during the taxable year.
15         (B) Sales of tangible personal property are in this
16     State if:
17             (i) The property is delivered or shipped to a
18         purchaser, other than the United States government,
19         within this State regardless of the f. o. b. point or
20         other conditions of the sale; or
21             (ii) The property is shipped from an office, store,
22         warehouse, factory or other place of storage in this
23         State and either the purchaser is the United States
24         government or the person is not taxable in the state of
25         the purchaser; provided, however, that premises owned
26         or leased by a person who has independently contracted
27         with the seller for the printing of newspapers,
28         periodicals or books shall not be deemed to be an
29         office, store, warehouse, factory or other place of
30         storage for purposes of this Section. Sales of tangible
31         personal property are not in this State if the seller
32         and purchaser would be members of the same unitary
33         business group but for the fact that either the seller
34         or purchaser is a person with 80% or more of total
35         business activity outside of the United States and the
36         property is purchased for resale.

 

 

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1         (B-1) Patents, copyrights, trademarks, and similar
2     items of intangible personal property.
3             (i) Gross receipts from the licensing, sale, or
4         other disposition of a patent, copyright, trademark,
5         or similar item of intangible personal property are in
6         this State to the extent the item is utilized in this
7         State during the year the gross receipts are included
8         in gross income.
9             (ii) Place of utilization.
10                 (I) A patent is utilized in a state to the
11             extent that it is employed in production,
12             fabrication, manufacturing, or other processing in
13             the state or to the extent that a patented product
14             is produced in the state. If a patent is utilized
15             in more than one state, the extent to which it is
16             utilized in any one state shall be a fraction equal
17             to the gross receipts of the licensee or purchaser
18             from sales or leases of items produced,
19             fabricated, manufactured, or processed within that
20             state using the patent and of patented items
21             produced within that state, divided by the total of
22             such gross receipts for all states in which the
23             patent is utilized.
24                 (II) A copyright is utilized in a state to the
25             extent that printing or other publication
26             originates in the state. If a copyright is utilized
27             in more than one state, the extent to which it is
28             utilized in any one state shall be a fraction equal
29             to the gross receipts from sales or licenses of
30             materials printed or published in that state
31             divided by the total of such gross receipts for all
32             states in which the copyright is utilized.
33                 (III) Trademarks and other items of intangible
34             personal property governed by this paragraph (B-1)
35             are utilized in the state in which the commercial
36             domicile of the licensee or purchaser is located.

 

 

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1             (iii) If the state of utilization of an item of
2         property governed by this paragraph (B-1) cannot be
3         determined from the taxpayer's books and records or
4         from the books and records of any person related to the
5         taxpayer within the meaning of Section 267(b) of the
6         Internal Revenue Code, 26 U.S.C. 267, the gross
7         receipts attributable to that item shall be excluded
8         from both the numerator and the denominator of the
9         sales factor.
10         (B-2) Gross receipts from the license, sale, or other
11     disposition of patents, copyrights, trademarks, and
12     similar items of intangible personal property may be
13     included in the numerator or denominator of the sales
14     factor only if gross receipts from licenses, sales, or
15     other disposition of such items comprise more than 50% of
16     the taxpayer's total gross receipts included in gross
17     income during the tax year and during each of the 2
18     immediately preceding tax years; provided that, when a
19     taxpayer is a member of a unitary business group, such
20     determination shall be made on the basis of the gross
21     receipts of the entire unitary business group.
22         (C) Sales, other than sales governed by paragraphs (B)
23     and (B-1), are in this State if:
24             (i) The income-producing activity is performed in
25         this State; or
26             (ii) The income-producing activity is performed
27         both within and without this State and a greater
28         proportion of the income-producing activity is
29         performed within this State than without this State,
30         based on performance costs.
31         (D) For taxable years ending on or after December 31,
32     1995, the following items of income shall not be included
33     in the numerator or denominator of the sales factor:
34     dividends; amounts included under Section 78 of the
35     Internal Revenue Code; and Subpart F income as defined in
36     Section 952 of the Internal Revenue Code. No inference

 

 

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1     shall be drawn from the enactment of this paragraph (D) in
2     construing this Section for taxable years ending before
3     December 31, 1995.
4         (E) Paragraphs (B-1) and (B-2) shall apply to tax years
5     ending on or after December 31, 1999, provided that a
6     taxpayer may elect to apply the provisions of these
7     paragraphs to prior tax years. Such election shall be made
8     in the form and manner prescribed by the Department, shall
9     be irrevocable, and shall apply to all tax years; provided
10     that, if a taxpayer's Illinois income tax liability for any
11     tax year, as assessed under Section 903 prior to January 1,
12     1999, was computed in a manner contrary to the provisions
13     of paragraphs (B-1) or (B-2), no refund shall be payable to
14     the taxpayer for that tax year to the extent such refund is
15     the result of applying the provisions of paragraph (B-1) or
16     (B-2) retroactively. In the case of a unitary business
17     group, such election shall apply to all members of such
18     group for every tax year such group is in existence, but
19     shall not apply to any taxpayer for any period during which
20     that taxpayer is not a member of such group.
21     (b) Insurance companies.
22         (1) In general. Except as otherwise provided by
23     paragraph (2), business income of an insurance company for
24     a taxable year shall be apportioned to this State by
25     multiplying such income by a fraction, the numerator of
26     which is the direct premiums written for insurance upon
27     property or risk in this State, and the denominator of
28     which is the direct premiums written for insurance upon
29     property or risk everywhere. For purposes of this
30     subsection, the term "direct premiums written" means the
31     total amount of direct premiums written, assessments and
32     annuity considerations as reported for the taxable year on
33     the annual statement filed by the company with the Illinois
34     Director of Insurance in the form approved by the National
35     Convention of Insurance Commissioners or such other form as
36     may be prescribed in lieu thereof.

 

 

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1         (2) Reinsurance. If the principal source of premiums
2     written by an insurance company consists of premiums for
3     reinsurance accepted by it, the business income of such
4     company shall be apportioned to this State by multiplying
5     such income by a fraction, the numerator of which is the
6     sum of (i) direct premiums written for insurance upon
7     property or risk in this State, plus (ii) premiums written
8     for reinsurance accepted in respect of property or risk in
9     this State, and the denominator of which is the sum of
10     (iii) direct premiums written for insurance upon property
11     or risk everywhere, plus (iv) premiums written for
12     reinsurance accepted in respect of property or risk
13     everywhere. For purposes of this paragraph, premiums
14     written for reinsurance accepted in respect of property or
15     risk in this State, whether or not otherwise determinable,
16     may, at the election of the company, be determined on the
17     basis of the proportion which premiums written for
18     reinsurance accepted from companies commercially domiciled
19     in Illinois bears to premiums written for reinsurance
20     accepted from all sources, or, alternatively, in the
21     proportion which the sum of the direct premiums written for
22     insurance upon property or risk in this State by each
23     ceding company from which reinsurance is accepted bears to
24     the sum of the total direct premiums written by each such
25     ceding company for the taxable year.
26     (c) Financial organizations.
27         (1) In general. Business income of a financial
28     organization shall be apportioned to this State by
29     multiplying such income by a fraction, the numerator of
30     which is its business income from sources within this
31     State, and the denominator of which is its business income
32     from all sources. For the purposes of this subsection, the
33     business income of a financial organization from sources
34     within this State is the sum of the amounts referred to in
35     subparagraphs (A) through (E) following, but excluding the
36     adjusted income of an international banking facility as

 

 

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1     determined in paragraph (2):
2             (A) Fees, commissions or other compensation for
3         financial services rendered within this State;
4             (B) Gross profits from trading in stocks, bonds or
5         other securities managed within this State;
6             (C) Dividends, and interest from Illinois
7         customers, which are received within this State;
8             (D) Interest charged to customers at places of
9         business maintained within this State for carrying
10         debit balances of margin accounts, without deduction
11         of any costs incurred in carrying such accounts; and
12             (E) Any other gross income resulting from the
13         operation as a financial organization within this
14         State. In computing the amounts referred to in
15         paragraphs (A) through (E) of this subsection, any
16         amount received by a member of an affiliated group
17         (determined under Section 1504(a) of the Internal
18         Revenue Code but without reference to whether any such
19         corporation is an "includible corporation" under
20         Section 1504(b) of the Internal Revenue Code) from
21         another member of such group shall be included only to
22         the extent such amount exceeds expenses of the
23         recipient directly related thereto.
24         (2) International Banking Facility.
25             (A) Adjusted Income. The adjusted income of an
26         international banking facility is its income reduced
27         by the amount of the floor amount.
28             (B) Floor Amount. The floor amount shall be the
29         amount, if any, determined by multiplying the income of
30         the international banking facility by a fraction, not
31         greater than one, which is determined as follows:
32                 (i) The numerator shall be:
33                 The average aggregate, determined on a
34             quarterly basis, of the financial organization's
35             loans to banks in foreign countries, to foreign
36             domiciled borrowers (except where secured

 

 

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1             primarily by real estate) and to foreign
2             governments and other foreign official
3             institutions, as reported for its branches,
4             agencies and offices within the state on its
5             "Consolidated Report of Condition", Schedule A,
6             Lines 2.c., 5.b., and 7.a., which was filed with
7             the Federal Deposit Insurance Corporation and
8             other regulatory authorities, for the year 1980,
9             minus
10                 The average aggregate, determined on a
11             quarterly basis, of such loans (other than loans of
12             an international banking facility), as reported by
13             the financial institution for its branches,
14             agencies and offices within the state, on the
15             corresponding Schedule and lines of the
16             Consolidated Report of Condition for the current
17             taxable year, provided, however, that in no case
18             shall the amount determined in this clause (the
19             subtrahend) exceed the amount determined in the
20             preceding clause (the minuend); and
21                 (ii) the denominator shall be the average
22             aggregate, determined on a quarterly basis, of the
23             international banking facility's loans to banks in
24             foreign countries, to foreign domiciled borrowers
25             (except where secured primarily by real estate)
26             and to foreign governments and other foreign
27             official institutions, which were recorded in its
28             financial accounts for the current taxable year.
29             (C) Change to Consolidated Report of Condition and
30         in Qualification. In the event the Consolidated Report
31         of Condition which is filed with the Federal Deposit
32         Insurance Corporation and other regulatory authorities
33         is altered so that the information required for
34         determining the floor amount is not found on Schedule
35         A, lines 2.c., 5.b. and 7.a., the financial institution
36         shall notify the Department and the Department may, by

 

 

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1         regulations or otherwise, prescribe or authorize the
2         use of an alternative source for such information. The
3         financial institution shall also notify the Department
4         should its international banking facility fail to
5         qualify as such, in whole or in part, or should there
6         be any amendment or change to the Consolidated Report
7         of Condition, as originally filed, to the extent such
8         amendment or change alters the information used in
9         determining the floor amount.
10     (d) Transportation services. Business income derived from
11 furnishing transportation services shall be apportioned to
12 this State in accordance with paragraphs (1) and (2):
13         (1) Such business income (other than that derived from
14     transportation by pipeline) shall be apportioned to this
15     State by multiplying such income by a fraction, the
16     numerator of which is the revenue miles of the person in
17     this State, and the denominator of which is the revenue
18     miles of the person everywhere. For purposes of this
19     paragraph, a revenue mile is the transportation of 1
20     passenger or 1 net ton of freight the distance of 1 mile
21     for a consideration. Where a person is engaged in the
22     transportation of both passengers and freight, the
23     fraction above referred to shall be determined by means of
24     an average of the passenger revenue mile fraction and the
25     freight revenue mile fraction, weighted to reflect the
26     person's
27             (A) relative railway operating income from total
28         passenger and total freight service, as reported to the
29         Interstate Commerce Commission, in the case of
30         transportation by railroad, and
31             (B) relative gross receipts from passenger and
32         freight transportation, in case of transportation
33         other than by railroad.
34         (2) Such business income derived from transportation
35     by pipeline shall be apportioned to this State by
36     multiplying such income by a fraction, the numerator of

 

 

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1     which is the revenue miles of the person in this State, and
2     the denominator of which is the revenue miles of the person
3     everywhere. For the purposes of this paragraph, a revenue
4     mile is the transportation by pipeline of 1 barrel of oil,
5     1,000 cubic feet of gas, or of any specified quantity of
6     any other substance, the distance of 1 mile for a
7     consideration.
8     (e) Combined apportionment. Where 2 or more persons are
9 engaged in a unitary business as described in subsection
10 (a)(27) of Section 1501, a part of which is conducted in this
11 State by one or more members of the group, the business income
12 attributable to this State by any such member or members shall
13 be apportioned by means of the combined apportionment method.
14     (f) Alternative allocation. If the allocation and
15 apportionment provisions of subsections (a) through (e) and of
16 subsection (h) do not fairly represent the extent of a person's
17 business activity in this State, the person may petition for,
18 or the Director may require, in respect of all or any part of
19 the person's business activity, if reasonable:
20         (1) Separate accounting;
21         (2) The exclusion of any one or more factors;
22         (3) The inclusion of one or more additional factors
23     which will fairly represent the person's business
24     activities in this State; or
25         (4) The employment of any other method to effectuate an
26     equitable allocation and apportionment of the person's
27     business income.
28     (g) Cross reference. For allocation of business income by
29 residents, see Section 301(a).
30     (h) Apportionment of income. For tax years ending on or
31 after December 31, 1998, the apportionment factor of persons
32 who apportion their business income to this State under
33 subsection (a) shall be equal to:
34         (1) for tax years ending on or after December 31, 1998
35     and before December 31, 1999, 16 2/3% of the property
36     factor plus 16 2/3% of the payroll factor plus 66 2/3% of

 

 

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1     the sales factor;
2         (2) for tax years ending on or after December 31, 1999
3     and before December 31, 2000, 8 1/3% of the property factor
4     plus 8 1/3% of the payroll factor plus 83 1/3% of the sales
5     factor;
6         (3) for tax years ending on or after December 31, 2000,
7     the sales factor; .
8         (4) for tax years ending on or after December 31, 2005,
9     as provided in subsection (a).
10 If, in any tax year ending on or after December 31, 1998 and
11 before December 31, 2000, the denominator of the payroll,
12 property, or sales factor is zero, the apportionment factor
13 computed in paragraph (1) or (2) of this subsection for that
14 year shall be divided by an amount equal to 100% minus the
15 percentage weight given to each factor whose denominator is
16 equal to zero.
17 (Source: P.A. 90-562, eff. 12-16-97; 90-613, eff. 7-9-98;
18 91-541, eff. 8-13-99.)
 
19     Section 99. Effective date. This Act takes effect upon
20 becoming law.