On March 1, 2013, the Illinois Department of Revenue (IDOR) held, in a Private Letter Ruling (PLR), that a company could treat the sale of a segment of its business as an occasional sale, allowing it to be excluded from the company’s sales factor. Typically, a company conducting business in multiple states must determine the amount of business income that is apportionable to Illinois by comparing its sales in Illinois to sales everywhere. However, the IDOR found that the gain received from the sale of the assets of a segment of business does not have to be included in that apportionment calculation since it found such a sale to be “incidental or occasional” after considering several factors, such as the fact that the company had never before had a sale of this kind.
The executive offices of the company seeking the PLR (Company) are located in Illinois. The Company formerly operated two business segments. One segment involved improving the reliability of call recording, and applying human behavioral modeling to optimize the performance of call centers. The second segment (Segment Two) focused on helping clients transition their contact centers to a single network infrastructure, as opposed to the traditional separate voice and data network structure. Segment Two was acquired by another company via an acquisition agreement where substantially all of the assets of Segment Two were sold, including the registered trademark and trade name. This was the only such sale of assets in the Company’s history.
Illinois Department of Revenue holding and implications
Illinois law provides that “business income” is defined as all income that may be treated as apportionable under the U.S. Constitution, excluding compensation. 35 Ill. Comp. Stat. § 5/1501(a)(1) (2013). Generally, a company generating income from doing business in Illinois and other states is required to apportion its income to Illinois by the single sales factor method. The single sales factor method is calculated by multiplying income by “a fraction, the numerator of which is the total sales of the [company] in this State during the taxable year, and the denominator of which is the total sales of the [company] everywhere during the taxable year.” 35 Ill. Comp. Stat. §§ 5/1501(a) & (a)(3) (2013). The fraction described in the preceding sentence is known as the single sales factor. However, Illinois law provides that if this single sales factor method does not fairly reflect the actual amount of business activity of that company in Illinois, then the company may be permitted to use an alternative apportionment methodology. 35 Ill. Comp. Stat. § 5/304(f) (2013).
Regulations promulgated by the IDOR provide alternative apportionment methodologies. One such alternative arises “where gross receipts arise from an incidental or occasional sale of assets used in the regular course of a person’s trade of business.” 86 Ill. Adm. Code § 100.3380 (2013). If such incidental or occasional sale occurs, those gross receipts shall be excluded from the sales factor.
The PLR ultimately held that gain from the sale of the business segment will be included in the Company’s income. However, the gross receipts (i.e., the total purchase price) from the sale would be excluded from the numerator and denominator of the single sales factor. Exclusion of such gross receipts from the single sales factor would effectively decrease a multistate company’s overall Illinois tax liability, all other aspects being equal.
This outcome is dependent on the ability of the Illinois taxpayer to choose to treat all income, except compensation, as business income. Illinois is one of a small faction of states that allows for taxpayers to make such an election. In the event the taxpayer could not make this election, the sale of the business segment assets could be considered nonbusiness income entirely allocated to Illinois, potentially increasing the taxpayer’s overall income tax liability. To evaluate the effect of this PLR on your company, a key consideration is whether the type of transaction can truly be considered “occasional or incidental.” The outcome is largely dependent on whether such a transaction has occurred before in the taxpayer’s history. And there was no indication in the PLR that limited sales of this type in a company’s history would necessarily prevent similar treatment.
Click here to read the text of Illinois Department of Revenue Private Letter Ruling IT 13-00001-PLR, March 1, 2013 (released April 2013).