State of Illinois
91st General Assembly
Legislation

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91_HB3907

 
                                               LRB9111530SMdv

 1        AN ACT to amend the Illinois Income Tax Act  by  changing
 2    Section 304.

 3        Be  it  enacted  by  the People of the State of Illinois,
 4    represented in the General Assembly:

 5        Section 5.  The Illinois Income Tax  Act  is  amended  by
 6    changing Section 304 as follows:

 7        (35 ILCS 5/304) (from Ch. 120, par. 3-304)
 8        Sec.   304.   Business   income  of  persons  other  than
 9    residents.
10        (a)  In general. The business income of  a  person  other
11    than  a  resident  shall  be  allocated to this State if such
12    person's business income is derived solely from  this  State.
13    If  a  person  other  than a resident derives business income
14    from this State and one or more other states, then,  for  tax
15    years  ending  on  or before December 30, 1998, and except as
16    otherwise provided by this Section,  such  person's  business
17    income  shall be apportioned to this State by multiplying the
18    income by a fraction, the numerator of which is  the  sum  of
19    the property factor (if any), the payroll factor (if any) and
20    200%  of  the  sales  factor (if any), and the denominator of
21    which is 4 reduced by the number of factors  other  than  the
22    sales  factor  which  have  a  denominator  of zero and by an
23    additional 2 if the sales factor has a denominator  of  zero.
24    For  tax  years  ending  on  or  after December 31, 1998, and
25    except as otherwise provided by this Section,  persons  other
26    than residents who derive business income from this State and
27    one  or  more  other states shall compute their apportionment
28    factor  by  weighting  their  property,  payroll,  and  sales
29    factors as provided in subsection (h) of this Section.
30        (1)  Property factor.
31             (A)  The  property  factor  is   a   fraction,   the
 
                            -2-                LRB9111530SMdv
 1        numerator  of  which is the average value of the person's
 2        real and tangible personal property owned or  rented  and
 3        used  in  the  trade or business in this State during the
 4        taxable year and the denominator of which is the  average
 5        value  of  all  the  person's  real and tangible personal
 6        property owned  or  rented  and  used  in  the  trade  or
 7        business during the taxable year.
 8             (B)  Property  owned  by the person is valued at its
 9        original cost. Property rented by the person is valued at
10        8 times the net annual rental  rate.  Net  annual  rental
11        rate  is  the  annual rental rate paid by the person less
12        any annual  rental  rate  received  by  the  person  from
13        sub-rentals.
14             (C)  The   average   value   of  property  shall  be
15        determined by averaging the values at the  beginning  and
16        ending  of  the taxable year but the Director may require
17        the averaging of monthly values during the  taxable  year
18        if  reasonably  required  to reflect properly the average
19        value of the person's property.
20        (2)  Payroll factor.
21             (A)  The payroll factor is a fraction, the numerator
22        of which is the total amount paid in  this  State  during
23        the  taxable year by the person for compensation, and the
24        denominator of  which  is  the  total  compensation  paid
25        everywhere during the taxable year.
26             (B)  Compensation is paid in this State if:
27                  (i)  The   individual's  service  is  performed
28             entirely within this State;
29                  (ii)  The  individual's  service  is  performed
30             both within and without this State, but the  service
31             performed  without  this  State is incidental to the
32             individual's service performed within this State; or
33                  (iii)  Some of the service is performed  within
34             this  State and either the base of operations, or if
 
                            -3-                LRB9111530SMdv
 1             there is no base of operations, the place from which
 2             the service is directed or controlled is within this
 3             State, or the base of operations or the  place  from
 4             which  the  service is directed or controlled is not
 5             in any state in which some part of  the  service  is
 6             performed, but the individual's residence is in this
 7             State.
 8             Beginning  with  taxable  years  ending  on or after
 9        December 31, 1992, for residents of states that impose  a
10        comparable  tax liability on residents of this State, for
11        purposes of item (i) of this paragraph (B), in  the  case
12        of  persons  who perform personal services under personal
13        service contracts for sports  performances,  services  by
14        that  person at a sporting event taking place in Illinois
15        shall be deemed to be a performance entirely within  this
16        State.
17        (3)  Sales factor.
18             (A)  The  sales  factor is a fraction, the numerator
19        of which is the total sales of the person in  this  State
20        during  the taxable year, and the denominator of which is
21        the total sales  of  the  person  everywhere  during  the
22        taxable year.
23             (B)  Sales of tangible personal property are in this
24        State  if: (i)  the property is delivered or shipped to a
25        purchaser,  other  than  the  United  States  government,
26        within this State regardless of the f.  o.  b.  point  or
27        other  conditions  of the sale.; or (ii)  The property is
28        shipped from an  office,  store,  warehouse,  factory  or
29        other  place  of  storage  in  this  State and either the
30        purchaser is the United States government or  the  person
31        is  not  taxable in the state of the purchaser; provided,
32        however, that premises owned or leased by  a  person  who
33        has  independently  contracted  with  the  seller for the
34        printing of newspapers, periodicals or books shall not be
 
                            -4-                LRB9111530SMdv
 1        deemed to be an  office,  store,  warehouse,  factory  or
 2        other  place  of  storage  for  purposes of this Section.
 3        Sales of tangible personal property are not in this State
 4        if the seller and purchaser would be members of the  same
 5        unitary  business  group but for the fact that either the
 6        seller or purchaser is a person with 80% or more of total
 7        business activity outside of the United  States  and  the
 8        property is purchased for resale.
 9             (B-1)  Patents,  copyrights, trademarks, and similar
10        items of intangible personal property.
11                  (i)  Gross receipts from the  licensing,  sale,
12             or   other   disposition  of  a  patent,  copyright,
13             trademark, or similar item  of  intangible  personal
14             property are in this State to the extent the item is
15             utilized  in  this  State  during the year the gross
16             receipts are included in gross income.
17                  (ii)  Place of utilization.
18                       (I)  A patent is utilized in  a  state  to
19                  the  extent  that it is employed in production,
20                  fabrication, manufacturing, or other processing
21                  in the state or to the extent that  a  patented
22                  product  is produced in the state.  If a patent
23                  is utilized in more than one state, the  extent
24                  to  which it is utilized in any one state shall
25                  be a fraction equal to the  gross  receipts  of
26                  the  licensee or purchaser from sales or leases
27                  of items produced, fabricated, manufactured, or
28                  processed within that state  using  the  patent
29                  and  of  patented  items  produced  within that
30                  state, divided  by  the  total  of  such  gross
31                  receipts  for all states in which the patent is
32                  utilized.
33                       (II)  A copyright is utilized in  a  state
34                  to   the   extent   that   printing   or  other
 
                            -5-                LRB9111530SMdv
 1                  publication originates  in  the  state.   If  a
 2                  copyright  is  utilized in more than one state,
 3                  the extent to which it is utilized in  any  one
 4                  state  shall  be  a fraction equal to the gross
 5                  receipts from sales or  licenses  of  materials
 6                  printed  or  published in that state divided by
 7                  the total of such gross receipts for all states
 8                  in which the copyright is utilized.
 9                       (III)  Trademarks  and  other   items   of
10                  intangible  personal  property governed by this
11                  paragraph (B-1) are utilized in  the  state  in
12                  which  the  commercial domicile of the licensee
13                  or purchaser is located.
14                  (iii)  If the state of utilization of  an  item
15             of  property governed by this paragraph (B-1) cannot
16             be determined from the taxpayer's books and  records
17             or  from the books and records of any person related
18             to the taxpayer within the meaning of Section 267(b)
19             of the Internal Revenue Code,  26  U.S.C.  267,  the
20             gross  receipts  attributable  to that item shall be
21             excluded from both the numerator and the denominator
22             of the sales factor.
23             (B-2)  Gross receipts from  the  license,  sale,  or
24        other disposition of patents, copyrights, trademarks, and
25        similar  items  of  intangible  personal  property may be
26        included in the numerator or  denominator  of  the  sales
27        factor  only  if  gross receipts from licenses, sales, or
28        other disposition of such items comprise more than 50% of
29        the taxpayer's total gross  receipts  included  in  gross
30        income  during  the  tax  year  and  during each of the 2
31        immediately preceding tax years; provided  that,  when  a
32        taxpayer  is  a  member of a unitary business group, such
33        determination shall be made on the  basis  of  the  gross
34        receipts of the entire unitary business group.
 
                            -6-                LRB9111530SMdv
 1             (C)  Sales,  other than sales governed by paragraphs
 2        (B) and (B-1), are in this State if:
 3                  (i)  The income-producing activity is performed
 4             in this State; or
 5                  (ii)  The    income-producing    activity    is
 6             performed both within and without this State  and  a
 7             greater  proportion of the income-producing activity
 8             is performed within this  State  than  without  this
 9             State, based on performance costs.
10             (D)  For  taxable  years ending on or after December
11        31, 1995, the following items  of  income  shall  not  be
12        included  in  the  numerator  or denominator of the sales
13        factor: dividends; amounts included under Section  78  of
14        the  Internal  Revenue  Code;  and  Subpart  F  income as
15        defined in Section 952 of the Internal Revenue  Code.  No
16        inference  shall  be  drawn  from  the  enactment of this
17        paragraph (D) in  construing  this  Section  for  taxable
18        years ending before December 31, 1995.
19             (E)  Paragraphs  (B-1)  and (B-2) shall apply to tax
20        years ending on or after December 31, 1999, provided that
21        a taxpayer may elect to apply  the  provisions  of  these
22        paragraphs  to  prior  tax years.  Such election shall be
23        made in the form and manner prescribed by the Department,
24        shall be irrevocable, and shall apply to all  tax  years;
25        provided  that,  if  a  taxpayer's  Illinois  income  tax
26        liability for any tax year, as assessed under Section 903
27        prior  to  January  1,  1999,  was  computed  in a manner
28        contrary to the provisions of paragraphs (B-1) or  (B-2),
29        no  refund  shall be payable to the taxpayer for that tax
30        year to the extent such refund is the result of  applying
31        the provisions of paragraph (B-1) or (B-2) retroactively.
32        In  the  case  of a unitary business group, such election
33        shall apply to all members of such group  for  every  tax
34        year  such  group is in existence, but shall not apply to
 
                            -7-                LRB9111530SMdv
 1        any taxpayer for any period during which that taxpayer is
 2        not a member of such group.
 3        (b)  Insurance companies.
 4             (1)  In general. Except  as  otherwise  provided  by
 5        paragraph  (2),  business  income of an insurance company
 6        for a taxable year shall be apportioned to this State  by
 7        multiplying  such  income by a fraction, the numerator of
 8        which is the direct premiums written for  insurance  upon
 9        property  or  risk  in this State, and the denominator of
10        which is the direct premiums written for  insurance  upon
11        property   or  risk  everywhere.  For  purposes  of  this
12        subsection, the term "direct premiums written" means  the
13        total  amount of direct premiums written, assessments and
14        annuity considerations as reported for the  taxable  year
15        on  the  annual  statement  filed by the company with the
16        Illinois Director of Insurance in the  form  approved  by
17        the  National  Convention  of  Insurance Commissioners or
18        such other form as may be prescribed in lieu thereof.
19             (2)  Reinsurance.  If  the   principal   source   of
20        premiums  written  by  an  insurance  company consists of
21        premiums for reinsurance accepted  by  it,  the  business
22        income of such company shall be apportioned to this State
23        by  multiplying  such income by a fraction, the numerator
24        of which is the sum of (i) direct  premiums  written  for
25        insurance  upon property or risk in this State, plus (ii)
26        premiums written for reinsurance accepted in  respect  of
27        property  or  risk  in this State, and the denominator of
28        which is the sum of (iii)  direct  premiums  written  for
29        insurance  upon  property  or  risk everywhere, plus (iv)
30        premiums written for reinsurance accepted in  respect  of
31        property   or  risk  everywhere.  For  purposes  of  this
32        paragraph, premiums written for reinsurance  accepted  in
33        respect of property or risk in this State, whether or not
34        otherwise  determinable,  may,  at  the  election  of the
 
                            -8-                LRB9111530SMdv
 1        company, be determined on the  basis  of  the  proportion
 2        which  premiums  written  for  reinsurance  accepted from
 3        companies commercially domiciled  in  Illinois  bears  to
 4        premiums   written  for  reinsurance  accepted  from  all
 5        sources, or, alternatively, in the proportion  which  the
 6        sum  of  the  direct  premiums written for insurance upon
 7        property or risk in this State  by  each  ceding  company
 8        from  which  reinsurance  is accepted bears to the sum of
 9        the total direct premiums written  by  each  such  ceding
10        company for the taxable year.
11        (c)  Financial organizations.
12             (1)  In  general.  Business  income  of  a financial
13        organization  shall  be  apportioned  to  this  State  by
14        multiplying such income by a fraction, the  numerator  of
15        which  is  its  business  income from sources within this
16        State, and the  denominator  of  which  is  its  business
17        income  from  all  sources.  For  the  purposes  of  this
18        subsection,   the   business   income   of   a  financial
19        organization from sources within this State is the sum of
20        the amounts referred to in subparagraphs (A) through  (E)
21        following,  but  excluding  the  adjusted  income  of  an
22        international banking facility as determined in paragraph
23        (2):
24                  (A)  Fees,  commissions  or  other compensation
25             for financial services rendered within this State;
26                  (B)  Gross  profits  from  trading  in  stocks,
27             bonds or other securities managed within this State;
28                  (C)  Dividends,  and  interest  from   Illinois
29             customers, which are received within this State;
30                  (D)  Interest charged to customers at places of
31             business  maintained  within this State for carrying
32             debit balances of margin accounts, without deduction
33             of any costs incurred in carrying such accounts; and
34                  (E)  Any other gross income resulting from  the
 
                            -9-                LRB9111530SMdv
 1             operation  as  a  financial organization within this
 2             State. In  computing  the  amounts  referred  to  in
 3             paragraphs  (A)  through (E) of this subsection, any
 4             amount received by a member of an  affiliated  group
 5             (determined  under  Section  1504(a) of the Internal
 6             Revenue Code but without reference  to  whether  any
 7             such  corporation  is  an  "includible  corporation"
 8             under  Section 1504(b) of the Internal Revenue Code)
 9             from another member of such group shall be  included
10             only  to  the extent such amount exceeds expenses of
11             the recipient directly related thereto.
12             (2)  International Banking Facility.
13                  (A)  Adjusted Income.  The adjusted  income  of
14             an  international  banking  facility  is  its income
15             reduced by the amount of the floor amount.
16                  (B)  Floor Amount.  The floor amount  shall  be
17             the  amount,  if  any, determined by multiplying the
18             income of the international banking  facility  by  a
19             fraction,  not greater than one, which is determined
20             as follows:
21                       (i)  The numerator shall be:
22                       The average  aggregate,  determined  on  a
23                  quarterly     basis,     of    the    financial
24                  organization's  loans  to  banks   in   foreign
25                  countries,   to   foreign  domiciled  borrowers
26                  (except where secured primarily by real estate)
27                  and to foreign governments  and  other  foreign
28                  official  institutions,  as  reported  for  its
29                  branches, agencies and offices within the state
30                  on  its  "Consolidated  Report  of  Condition",
31                  Schedule  A,  Lines 2.c., 5.b., and 7.a., which
32                  was filed with the  Federal  Deposit  Insurance
33                  Corporation  and  other regulatory authorities,
34                  for the year 1980, minus
 
                            -10-               LRB9111530SMdv
 1                       The average  aggregate,  determined  on  a
 2                  quarterly  basis,  of  such  loans  (other than
 3                  loans of an international banking facility), as
 4                  reported by the financial institution  for  its
 5                  branches,   agencies  and  offices  within  the
 6                  state, on the corresponding Schedule and  lines
 7                  of the Consolidated Report of Condition for the
 8                  current  taxable  year, provided, however, that
 9                  in no case shall the amount determined in  this
10                  clause   (the  subtrahend)  exceed  the  amount
11                  determined  in  the   preceding   clause   (the
12                  minuend); and
13                       (ii)  the denominator shall be the average
14                  aggregate,  determined on a quarterly basis, of
15                  the international banking facility's  loans  to
16                  banks   in   foreign   countries,   to  foreign
17                  domiciled  borrowers  (except   where   secured
18                  primarily   by  real  estate)  and  to  foreign
19                  governments   and   other   foreign    official
20                  institutions,   which   were  recorded  in  its
21                  financial  accounts  for  the  current  taxable
22                  year.
23                  (C)  Change to Consolidated Report of Condition
24             and in Qualification.  In the event the Consolidated
25             Report of Condition which is filed with the  Federal
26             Deposit  Insurance  Corporation and other regulatory
27             authorities  is  altered  so  that  the  information
28             required for determining the  floor  amount  is  not
29             found  on Schedule A, lines 2.c., 5.b. and 7.a., the
30             financial institution shall  notify  the  Department
31             and the Department may, by regulations or otherwise,
32             prescribe  or  authorize  the  use of an alternative
33             source   for   such   information.   The   financial
34             institution shall also notify the Department  should
 
                            -11-               LRB9111530SMdv
 1             its  international  banking facility fail to qualify
 2             as such, in whole or in part, or should there be any
 3             amendment or change to the  Consolidated  Report  of
 4             Condition,  as  originally filed, to the extent such
 5             amendment or change alters the information  used  in
 6             determining the floor amount.
 7        (d)  Transportation  services.  Business  income  derived
 8    from  furnishing transportation services shall be apportioned
 9    to this State in accordance with paragraphs (1) and (2):
10             (1)  Such business income (other than  that  derived
11        from  transportation by pipeline) shall be apportioned to
12        this State by multiplying such income by a fraction,  the
13        numerator  of which is the revenue miles of the person in
14        this State, and the denominator of which is  the  revenue
15        miles  of  the  person  everywhere.  For purposes of this
16        paragraph, a revenue mile  is  the  transportation  of  1
17        passenger  or 1 net ton of freight the distance of 1 mile
18        for a consideration. Where a person  is  engaged  in  the
19        transportation   of  both  passengers  and  freight,  the
20        fraction above referred to shall be determined  by  means
21        of  an average of the passenger revenue mile fraction and
22        the freight revenue mile fraction,  weighted  to  reflect
23        the person's
24                  (A)  relative  railway  operating  income  from
25             total   passenger  and  total  freight  service,  as
26             reported to the Interstate Commerce  Commission,  in
27             the case of transportation by railroad, and
28                  (B)  relative gross receipts from passenger and
29             freight  transportation,  in  case of transportation
30             other than by railroad.
31             (2)  Such    business    income     derived     from
32        transportation  by  pipeline shall be apportioned to this
33        State by multiplying  such  income  by  a  fraction,  the
34        numerator  of which is the revenue miles of the person in
 
                            -12-               LRB9111530SMdv
 1        this State, and the denominator of which is  the  revenue
 2        miles  of the person everywhere. For the purposes of this
 3        paragraph,  a  revenue  mile  is  the  transportation  by
 4        pipeline of 1 barrel of oil, 1,000 cubic feet of gas,  or
 5        of  any  specified  quantity  of any other substance, the
 6        distance of 1 mile for a consideration.
 7        (e)  Combined apportionment.  Where 2 or more persons are
 8    engaged in a unitary  business  as  described  in  subsection
 9    (a)(27) of Section 1501, a part of which is conducted in this
10    State  by  one  or  more  members  of the group, the business
11    income attributable to this  State  by  any  such  member  or
12    members  shall  be  apportioned  by  means  of  the  combined
13    apportionment method.
14        (f)  Alternative   allocation.   If  the  allocation  and
15    apportionment provisions of subsections (a) through  (e)  and
16    of  subsection  (h)  do  not fairly represent the extent of a
17    person's business activity in  this  State,  the  person  may
18    petition  for, or the Director may require, in respect of all
19    or any part of 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
26        effectuate an equitable allocation and  apportionment  of
27        the person's business income.
28        (g)  Cross  reference.  For allocation of business income
29    by residents, see Section 301(a).
30        (h)  For tax years ending on or after December 31,  1998,
31    the  apportionment  factor  of  persons  who  apportion their
32    business income to this State under subsection (a)  shall  be
33    equal to:
34             (1)  for  tax  years ending on or after December 31,
 
                            -13-               LRB9111530SMdv
 1        1998 and  before  December  31,  1999,  16  2/3%  of  the
 2        property  factor  plus 16 2/3% of the payroll factor plus
 3        66 2/3% of the sales factor;
 4             (2)  for tax years ending on or after  December  31,
 5        1999 and before December 31, 2000, 8 1/3% of the property
 6        factor  plus 8 1/3% of the payroll factor plus 83 1/3% of
 7        the sales factor;
 8             (3)  for tax years ending on or after  December  31,
 9        2000, the sales factor.
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.

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