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Illinois: Domiciled individual found not to be a resident for state income tax purposes

Recently, an Illinois Appellate Court held that an individual was not a resident for state income tax purposes, despite the fact that the individual did not abandon his Illinois domicile (Grede v. Hammer, 2013 Ill. App. (2d) 120731-U).

Illinois Income Tax Law

The Illinois Income Tax Act (Act) only imposes state income tax on an individual if he or she earns income in Illinois or is a “resident” of Illinois. Under this Act, a “resident” is an individual who is present in the state “other than for a temporary or transitory purpose” or who is domiciled in Illinois but is absent from the state for “a temporary or transitory purpose.” The focus of this case was whether Mr. Grede was still domiciled in Illinois but absent from the state for other than a temporary or transitory purpose, making him a non-resident for Illinois state income tax purposes.

Factual background

Mr. Grede lived with his wife and two children in Illinois until 2000. In 2000, Mr. Grede accepted employment in Hong Kong. His wife and children remained in Illinois for most of the time that Mr. Grede was living in Hong Kong. Mr. Grede’s initial employment contract was for three years, but the common practice of his employer was to renew employment contracts with its senior officers. Mr. Grede received a three-year employment visa to work in Hong Kong, rented an apartment in Hong Kong, opened a bank account in Hong Kong, and obtained a Hong Kong identity card. However, he also retained his Illinois driver’s license and bank account, kept his name on the deed to the house in Illinois, utility bills relating to the house were still issued to him in Illinois, he voted in Illinois by absentee ballot, and he visited Illinois four or five times a year. As part of his employment, Mr. Grede received lucrative stock options (valued at $20 million), subject to vesting. Mr. Grede testified that he hoped his Hong Kong employment would last the entire 10-year period provided for in his options contract. However, even though his employer routinely renewed employment contracts with its senior officers, his initial three-year employment contract was not renewed. Upon the non-renewal of his employment contract, Mr. Grede formed a consulting company in Hong Kong. Mr. Grede operated the consulting company for a short period of time before deciding to return to Illinois in 2003.

Determination of non-resident status

The Appellate Court stated that a domicile is the place where the individual has his true, fixed, permanent home, and the place he intends to return to whenever he is absent. An individual can only have one domicile. Therefore, an individual loses his or her Illinois domicile if he or she moves somewhere else with the intention of establishing a new domicile and if he or she abandons any intention of returning to Illinois.

The Appellate Court determined that Mr. Grede had not abandoned his domicile in Illinois because he still had significant connections in Illinois, such as his family, a home, a driver’s license, and voting. However, the Appellate Court agreed with Mr. Grede that Illinois domicile is not dispositive of Illinois residency because the Illinois Income Tax Act and regulations indicate that a person who is domiciled in Illinois but is outside of Illinois for other than a temporary or transitory purpose, such as being employed “in a position that may last permanently or indefinitely” would qualify as a nonresident.

The Illinois Department of Tax argued that Mr. Grede’s three-year contract, his three-year employment visa and his connections to Illinois, support the conclusion that Mr. Grede was in Hong Kong for a temporary or transitory purpose, and was not employed in a position that may last permanently or indefinitely. However, the Appellate Court disagreed and found that the evidence, such as Mr. Grede’s testimony that he hoped to say in Hong Kong for the full 10-year vesting period of his lucrative stock option contract and his attempt to start a consulting firm in Hong Kong after his employment contract was not renewed, showed that Mr. Grede intended to stay in Hong Kong for an unspecified period of time. Therefore, the Appellate Court decided that Mr. Grede was not a resident for state income tax purposes during his employment in Hong Kong because he was domiciled in Illinois but absent from the state for other than a temporary or transitory purpose.

Based on an individual’s particular facts and circumstances, this case can be used as support for claiming such individual is not a resident of Illinois and is not subject to state income tax. If similar facts and circumstances exist, consideration should be given to filing amended state income tax returns and seeking a refund of taxes previously paid.

Vermont: Sales tax moratorium for remote software sales removed

Existing Vermont law (HB 528), which temporarily placed a moratorium on taxing remote software sales, is set to expire on June 30, 2013. Beginning July 1, 2013, certain remote sales of computer and similar electronic software will be subject to Vermont’s 6 percent sales tax. While many expected Vermont to permanently extend the moratorium on remote software sales, no such law was ever passed and thus, the temporary exemption will expire. The moratorium was also regulated under the Vermont Department of Taxes’ (the “Department”) Technical Bulletin 54, which has been repealed. The Department plans to issue a new Technical Bulletin providing further information about the imposition of sales tax on remote software sales. In the meantime, the Department has provided a fact sheet which provides basic guidelines that can help businesses comply with the sales tax on remote software sales until the Technical Bulletin is released.

Generally, sales of remote software subject to the sales tax will include any “prewritten software” that is available to customers on a disk, as a download, or as accessed by customers from a remote server. The “prewritten software” distinction reflects an underlying policy that a product should be taxed but not a service. Therefore, any software that is specifically custom created for one particular customer will not be subject to sales tax. The Department, recognizing that it is often difficult to determine which software is a nontaxable service versus a taxable product, provides further guidance in its fact sheet which contains specific examples of what software is taxable versus nontaxable. For example, the Department provided the following examples of software sales that may be taxable:

  • The seller provides the customer with software that operates with little or no personal intervention by the seller or the seller’s employees (other than a help desk for any problems that the customer may encounter while using the software)
  • The seller provides the customer with access to software, even if the software is never officially transferred to the customer (cloud computing)
  • The software is bundled with a non-taxable service as long as the software is the predominant value of the sale
  • The seller provides an application for a fee that is downloaded to any device including computers, smart-phones, or tablets

On the other hand, the Department provided the following examples of software sales that may not be taxable:

  • The seller provides any professional or personal services (i.e. legal, accounting, data management and data storage/backup)
  • The seller is creating custom software (unique to the customer)
  • The software is bundled with a non-taxable service and those services constitute the predominant value of the sale

Click here to see the Department’s fact sheet.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall

Susan Millradt McGlone

Jeremy J. Schirra

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.