This issue addresses: Market Based Sourcing of Receipts, the recent Illinois ruling of Shared Imaging, LLC v. Brian Hamer et al, 2017 IL App (1st) 152817, and areas of interest regarding Illinois’ recent tax increases/changes.
I. Apportionment and Market Based Sourcing of Sales of Receipts from Services – Confusing, But An Opportunity to Plan!
Determining nexus is now difficult enough with the shift from physical presence considerations to those involving economic nexus, such as factor presence. After a nexus determination is made, another analysis begins for the business that operates in multiple states. Such operations require a business to apportion income among those states.
When sales emanate from services as opposed to from tangible personal property, an ever growing number of states have moved away from cost of performance to source sales of services to a state and now use what is referred to as market based sourcing.
While an oversimplification, think about cost of performance as meaning where the services are performed (an attorney in a cost of performance state, practices law in that state – a sale would be sourced to that state despite where the customer is located). Market based sourcing looks not to where the actions that constitute the work are performed, but instead looks to the market into which the services are received or delivered or where the benefit is derived or where a customer is present (there are a myriad of terms/concepts that can be used here) – (in a market based sourcing state, while an attorney works in that state – state x, his firm’s clients are located in state Y, so sales are received in state Y).
To increase the complexity, while multiple states now use some form of market based sourcing, definitions and applications of the concept are not uniform and vary from state to state. Also consider that depending upon your business model, sourcing rules can vary from industry to industry. Finally beware that because of the varying application of rules, sales of services may be sourced to one, multiple or no states.
For example, let’s say that your business is present in a cost of performance state where all of the work is performed but sells services to a client in a market based state. There may be a nexus issue with the market based state asserting the power to tax, assume that is negated by the fact that that state applies factor presence. The result – each state would assert a claim to 100% of the sales. Yes, double taxation is possible which is why planning is extremely important when dealing with these issue.
Again, while there are numerous factors to consider, and the above is meant as only a general informational alert about the concepts discussed, we would be happy to discuss how these concepts may apply to your business.
II. Shared Imaging, LLC v. Brian Hamer et al, 2017 IL App (1st) 152817 – Guidance from Illinois courts regarding the temporary storage exemption.
A recent ruling by the Illinois Appellate Court provides some guidance on Illinois’ temporary storage use tax exemption in the matter of Shared Imaging, LLC v. Brian Hamer et al, 2017 IL App (1st) 152817. If tangible personal property is determined to meet the criteria of this exemption, then use tax does not apply to such purchases.
On appeal, taxpayer argued that certain of its units were not subject to the use tax, because they were subject to the temporary storage exemption under the Act (35 ILCS 105/3-55(e) (West 2008)), and certain other units were not subject to the use tax, because they were subject to the expanded temporary storage exemption under the Act (35 ILCS 105/3-55(j) (West 2008)).
Under Illinois law, “The temporary storage, in this State, of tangible personal property that is acquired outside this State and that, after being brought into this State and stored here temporarily, is used solely outside this State or is physically attached to or incorporated into other tangible personal property that is used solely outside this State, or is altered by converting, fabricating, manufacturing, printing, processing, or shaping, and, as altered, is used solely outside this State.” 35 ILCS 105/3-55(e).
The court noted that the property was purchased outside of Illinois and thus satisfied the initial requirement of the exemption. Regarding the second prong of the test, the court declined to set a bright line regarding a time frame that would satisfy the exemption but did note that taxpayer’s storage for no more than 47 days did qualify for the exemption. However, regarding the third criteria of the exemption, the court determined that taxpayer while initially using the units outside of Illinois allowed them to return for storage in Illinois prior to their being shipped outside of the state again.
The court ultimately denied the exemption noting that return of the property to Illinois after its initial storage in Illinois.
The court also denied the claim for the extended temporary storage exemption as the exemption requires taxpayers to receive a permit, something the taxpayer in this matter did not do until after the units at issued were purchased. The court also addressed some of the legal arguments which aren’t relevant for discussion of the exemption issue.
Conclusion: The case provides guidance as follows: While it did not set a bright line test, it appears under current law that the property can be stored for up to 47 days and still receive the exemption. Likewise, the property cannot return to Illinois for storage after it is put in service. As always, we would be happy to answer any questions or discuss how this case may impact your business.
III. Illinois Tax Increase Highlights Highlights from the Illinois Department of Revenue’s Informational Bulletin - Illinois Income Tax and Sales Tax Changes from P.A.100-0022 (FY 2018-01)
The following is quoted directly from the Informational Bulletin:
“Illinois Property Tax Credit For tax years beginning on or after January 1, 2017, the Illinois Property Tax Credit is not allowed if the taxpayer’s adjusted gross income for the taxable year exceeds $500,000 for returns with a federal filing status of married filing jointly, or $250,000 for all other returns
Instructional Materials and Supplies Credit (New) For tax years beginning on or after January 1, 2017, a credit is allowed equal to the amount paid during the taxable year for instructional materials and supplies with respect to classroom-based instruction in a qualified school, or $250, whichever is less, provided that the taxpayer is a teacher, instructor, counselor, principal, or aide in a qualified school for at least 900 hours during a school year. The credit may not be carried back and may not reduce the tax liability to less than zero. Any excess credit may be carried forward and applied to tax liabilities for five years following the excess credit year.
Domestic Production Activities Deduction For tax years ending on or after December 31, 2017, the Domestic Production Activities Deduction allowed under Section 199 of the Internal Revenue Code must be added back to the adjusted gross income (for individuals) or taxable income (for all other taxpayers).
Research and Development Credit The Research and Development Credit has been reinstated and is retroactive for the 2016 tax year. The department will provide updated forms and instructions in order to claim any credit that was not previously allowed
Unitary Businesses For tax years ending on or after December 31, 2017, the noncombination rule is eliminated. Unitary business groups will no longer exclude members which are ordinarily required to apportion business income under different subsections of Section 304. A change to the definition of “United States” will now require unitary businesses to include members Informational Bulletin - Illinois Income Tax and Sales Tax Changes from P.A.100-0022 FY 2018-01 2 operating in any area over which the U.S. has asserted jurisdiction or claimed exclusive rights with respect to the exploration for or exploitation of natural resources (i.e., the outercontinental shelf). This does not include members operating in any territory or possession of the United States.”