Section 100.3120  Allocation of Compensation Paid to Nonresidents (IITA Section 302)

a)         In general

1)         In order for items of compensation paid to an individual who is a nonresident of Illinois at the time of payment to be allocated to Illinois, such compensation must constitute "compensation paid in this State".  If the test is met, then all items of such compensation, and all items of deduction directly allocable thereto, are allocated to Illinois under IITA Section 302(a) (except items allocated under IITA Section 301(b)(2), as to which see subsection (c) below). Compensation paid to a nonresident, which is allocated to Illinois, enters into the computation of such individual's net income under IITA Section 202 and is generally subject to withholding under IITA Section 701 (see Sections 100.7000, 100.7010 and 100.7020).  The tests for determining whether compensation is paid in Illinois appear in IITA Section 304(a)(2)(B) and are substantially the same  as those used to define "employment" in the Illinois Unemployment Compensation Act [820 ILCS 405] (and similar unemployment compensation acts  of other states).  Compensation is paid in Illinois if:

A)        The individual's service is localized in Illinois because it is performed entirely within Illinois;

B)        The individual's service is localized in Illinois although it is performed both within and without  Illinois,  because the service performed without Illinois is incidental to the individual's service performed within Illinois; or

C)        The individual's service is not localized in any  state but  some  of  the  service  is performed within Illinois and either:

i)          the base  of operations, or if there is no base  of operations,  the place from which  the service  is directed  or controlled is within Illinois, or

ii)         the base  of operations  or  the  place from which  the service  is directed or controlled is not in any state in which some part  of the service is performed, but the  individual's residence  is  in Illinois.

2)         The foregoing  rules are  to be  applied in  such manner that  if they  were  in  effect  in  other states an  item of  compensation would constitute compensation "paid  in" only one state.  Thus, if an item would,  under these  rules,  constitute compensation  paid  in a  state other  than Illinois because  the  individual's  service  was localized in  such other  state under  subsection (a)(1)(B) above, it could not also be compensation paid  in Illinois.  Pursuant  to 50 USC 574,  compensation for  military or  naval service paid to a nonresident does not constitute "compensation paid  in" Illinois  even though  it meets the  tests set  forth in  subsection (a)(1) above.  For further  discussion of  these tests, see  Section 100.7010(a),  (d),  (e)  and  (f), dealing with withholding.

3)         Personal services under personal service contracts for sports performance

A)        For purposes  of subsection (a)(1)(A) above, beginning with  taxable years  ending on  or after December 31, 1992, for all persons who are members  of  professional  sports  teams that are residents of  states that impose a comparable tax  liability on all persons who are members  of  professional  sports  teams that are residents of this State...in the case  of persons  who  perform  personal services under  personal  service  contracts for sports  performance,  services  by  that person at  a sporting  event taking place in Illinois shall be deemed to be a performance entirely within  this State.  (IITA Section 304(a)(2)(B)) The amount of income constituting compensation paid in this State to  such person  shall  be  determined  by multiplying the  person's total compensation for performing  such personal  services by a fraction, the  denominator of which contains the  total  number  of  duty  days  and  the numerator of  which is  the number  of  duty days in Illinois during the taxable year.

B)        The income  of persons  who engage in sports performance in  Illinois, but do not perform personal services  under  personal  services contracts of employment, remains apportionable to  Illinois.  Such income is business  income, as  defined  by  IITA Section 1501(a)(1) and Section 100.3010(a) of this Part.  Also see  IITA Section 304(a) and Section 100.3310 of this Part.

b)         Compensation paid for past service

1)         A federal law, P.L. 104-95 (4 USC 114), which applies to amounts received after December 31, 1995, limits the power of states to impose income taxation on certain nonresident pension income.  This limitation also impacts income received by a nonresident in the form of distributions from many deferred compensation plans.  The allocation of distributions to nonresidents from deferred compensation plans which are not governed by that law and which are potentially income taxable in this State is governed by this subsection (b)(1).  Where compensation  is paid  to a nonresident for past service,  such compensation  will,  for  the purpose of determining whether and to what extent such compensation  is "paid  in" Illinois  and is allocated to  Illinois under IITA Section 302(a), be presumed  to have been earned ratably over the employee's last  5  years  of  service  with  the employer (or  any predecessor or successor of the employer or a parent or subsidiary corporation of the  employer),  in  the  absence  of  clear  and convincing evidence  that  such  compensation  is properly attributable  to a  different period  of employment or that it was not earned ratably over the appropriate period of employment. Compensation earned  in each  past year  will  be deemed  compensation  paid  in  Illinois  if  the individual's service  in such  year met the tests set forth  in subsection (a) above.  Compensation paid for past service includes amounts paid under deferred compensation agreements where the amount of compensation  is unrelated  to the  amount  of service being  currently rendered.  Amounts paid to  nonresidents under  deferred compensation agreements may  be allocated  to  Illinois  under IITA  Section  302(a)  in  accordance  with  this paragraph notwithstanding  the fact  that amounts paid to  nonresidents under  such agreements will be deemed not to be compensation paid in Illinois for purposes  of IITA Section 701 and will not be subject to withholding (see Section 100.7010(g)).

2)         The standards detailed in the previous subsection may be illustrated by the following examples:

A)        A is a  union member  employed by B corporation as a factory worker.  During the years  1965-1968,  A  was  employed  in  B's factory in  Illinois; in  1969, A  worked in B's factory  in State  X.  In  1970,  as  a result of union labor contract negotiations, A received  a lump-sum  payment of  $500  in lieu of  a retroactive  wage increase.  A is at all  times a resident of State X.  Unless A  establishes, by  clear  and  convincing evidence,  facts to  support  a  different result, $100  is deemed  to have been earned in each  of the 5 years 1965-1969.  Further, $400  is  deemed  to  have  been  earned  by service localized  in Illinois  and $100  by service localized in State X (see subsection (a) above).  Therefore, $400 is allocable to Illinois under IITA Section 302(a).

B)        The facts  are the  same as  in the previous example except  that A  is able to establish that the  $500 constituted  a wage  increase retroactive to  July 1, 1969.  In such case, no  part of the $500  is  allocable  to Illinois, since it was earned by service in 1969 localized in State X.

C)        C is  a corporate  executive.  On January 1, 1965, C  entered into  an agreement  with  D corporation  under which  he was  to  be employed by D in an executive capacity for a period of  5 years.  Under the contract C is entitled to  a stated  annual salary  and to additional compensation  of $10,000 for each year,  the  additional  compensation  to  be credited to  a bookkeeping  reserve  account and deferred, accumulated and paid in annual installments of  $5,000  on  C's  retirement beginning January  1, 1970.  In the event of C's  death prior  to exhaustion  of  the account, the  balance is  to be  paid to C's personal representative.  C  is required to render  consultative services  to  D  when called upon after December 31, 1969.  During 1970, C  is paid  $5,000 while a resident of Florida.  The $5,000 is deemed to have been earned at  the rate of $1,000 in each of the years 1965-1969,  since the  amount paid  is unrelated  to C's current consultative services.  Whether the $1,000 earned in each such year  is allocable  to  Illinois  under IITA Section  302(a) must  be determined  by applying the  tests set  forth in subsection (a) above to each such year.

c)         Exceptions to general allocation rules

1)         While "compensation"  may include items of income taken into  account  by  a  nonresident  employee under the  provisions of  26 USC  401  through 424, such  as, for example, amounts received by a beneficiary of  an employees'  trust (taxable  to the employee  under 26 USC  402,  whether  the trust is exempt or non-exempt from federal income tax), or  income resulting  from a  disqualifying disposition of  stock acquired  pursuant  to  the exercise of  a qualified stock option (taxable to the employee  under 26 USC 421(b)), such compensation is  not allocated under IITA Section 302(a).  Such compensation is allocated under the rules of  IITA Section 301(b)(2)(A), i.e., is not allocated to Illinois, whereas compensation which is allocated  pursuant to  IITA Section 302(a) is allocated to  Illinois, if  "paid in"  this State (see subsections (a) and (b) above). Consequently, a nonresident claiming that compensation  which  would  otherwise  constitute compensation  paid  in  Illinois  should  not  be allocated  to Illinois under IITA Section 301(b)(2)(A) must establish that such compensation was  properly taken  into account by such individual under the provisions of 26 USC 401 through 424.

2)         Reciprocal exemptions

In any case in which the Director has entered into an  agreement  with  the  taxing  authorities  of another state  which imposes a tax on or measured by income  to provide  that compensation  paid in such state  to residents  of  Illinois  shall  be exempt  from such  tax,  compensation  paid  in Illinois to  residents of  such state will not be allocated to Illinois.

3)         Federal Law.  Federal law affects the authority of the State of Illinois to subject certain employees of railroads, motor carriers, merchant mariners, and air carriers to Illinois income taxation, even though in the absence of specific federal provisions those employees would be subject to Illinois taxation by virtue of IITA Section 302(a).

A)        Railroad employees.  49 USCA 11502(a) provides that no part of the compensation paid by a rail carrier subject to the jurisdiction of the Interstate Commerce Commission under subchapter I of the chapter 105 of Title 49, to an employee who performs regularly assigned duties in more than one state shall be subject to the income tax laws of any state or subdivision of that state, other than the state or subdivision thereof of the employee's residence.

B)        Motor carrier employees.  49 USCA 14503(a)(1) states that no part of the compensation paid by a motor carrier subject to the jurisdiction of the Interstate Commerce Commission under subchapter I of chapter 135 of Title 49, or by a motor private carrier, to an employee who performs regularly assigned duties in 2 or more states as such an employee with respect to a motor vehicle shall be subject to the income tax laws of any state or subdivision of that state, other than the state or subdivision thereof of the employee's residence.

C)        Merchant mariner employees.  46 USCA 11108 provides that no part of the compensation paid by a merchant mariner to an employee who performs his regularly assigned duties in more than one state shall be subject to the income tax laws of any state or subdivision of that state, other than the state or subdivision of the employee's residence.

D)        Air carrier employees.  49 USCA 40116(f)(2) states that no part of the compensation paid by an air carrier to an employee who performs his regularly assigned duties as such an employee on an aircraft in more than one state shall be subject to the income tax laws of any state or subdivision thereof other than the state or subdivision thereof of such employee's residence and the state or subdivision thereof in which such employee earns more than 50% of the compensation paid by the carrier to such employee.

4)         The standards  set forth  in this  Section may be illustrated by the following examples:

A)        A is  a factory  worker  for  B  corporation which is  located in Illinois.  A resides in State X.  When A reaches retirement age, he begins receiving  a pension  from the exempt trust under B's qualified pension plan.  For federal  income  tax  purposes,  A  properly takes his  payments into  account under  the provisions of 26 USC 402(a). Accordingly, under  IITA Section 301(c)(2)(A), A's payments are not allocated to Illinois.

B)        The facts  are the  same as  in the previous example except  that B  corporation does not fund its employees' pension benefits through the creation  of a  trust or the purchase of annuities, but  pays retired  employees each year out  of corporate  funds.  For federal income tax  purposes, A  is required to take his payments  into account  under 26 USC 61(a),  rather  than  under  26  USC  401 through 424.  Accordingly, allocation of A's pension payments is governed by IITA Section 302(a) above (see subsections (a) and (b) of this Section).

C)        A is a locomotive engineer employed by Interstate railway.  Interstate operates a rail yard in East St. Louis, Illinois.  Interstate also operates out of St. Louis, Missouri, where it has a rail yard, as well as its administrative and payroll offices.  A lives in St. Louis, Missouri.  A is assigned to the East St. Louis rail yard and primarily reports to the East St. Louis rail yard of Interstate and drives locomotives for Interstate on trips that go throughout the United States.  However, on occasion, A is required to report to the St. Louis, Missouri yard of Interstate and drive locomotives on trips that originate from St. Louis, Missouri.  Pursuant to 49 USCA 111502(a), Interstate may only withhold, and A is only subject to, the Missouri personal income tax.

D)        A is an airline pilot for World-Wide Airlines.  World-Wide provides passenger and freight service to various destinations throughout the United States from Lambert Field in St. Louis, Missouri, as well as from the municipal airport in Alton, Illinois.  A lives in St. Louis, Missouri, but A reports to and flies out of the World-Wide terminal in Alton, Illinois.  A primarily flies to destinations outside of Illinois.  Less than 50% of A's compensation (as determined by flight time in Illinois versus flight time everywhere) (see 49 USCA 1512(b)) is earned within Illinois.  Therefore, by virtue of 49 USCA 1513(a), A is only subject to Missouri income taxation on his compensation from World-Wide.

E)         The facts are the same as in the previous example, except that A pilots commuter planes between Alton and Chicago, Illinois.  In this situation, A will be subject to Illinois income taxation by virtue of the fact that A earns more than 50% of his compensation within the State of Illinois.

(Source:  Amended at 25 Ill. Reg. 6687, effective May 9, 2001)