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Illinois Corporate Income Tax: Alternative Apportionment

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Like most states, Illinois statutes and regulations permit taxpayers and the Director of the Department of Revenue to obtain alternative apportionment of Illinois base income. Although case law is relatively scant, alternative apportionment remains an important means of reaching a fair income tax liability in the State. And with the State’s amorphous treatment of market based sourcing, alternative apportionment is likely to become an increasingly important tool, particularly in resolving controversies.

As previously discussed, Illinois transitioned to a market based sourcing paradigm for sales of services and intangibles beginning on taxable years ending on or after December 31, 2008. As a result of this change, Illinois amended its statute entitling taxpayers to petition for alternative apportionment. To the extent the statutory methods for apportionment do not “fairly represent the market for the person’s goods, services, or other sources of business income, the person may petition for” a number of methods of alternative apportionment. These methods include (1) separate accounting, (2) the exclusion of any one or more factors, (3) the inclusion of one or more additional factors, or (4) any other equitable method.[1] Although a taxpayer must petition for such alternative treatment, the statute states that the Director may require such treatment without a petition.

Obtaining Alternative Apportionment

Taxpayers should always keep in mind that there are effectively two means of obtaining alternative apportionment. First, Illinois provides a means of obtaining alternative apportionment simply where the statutory method does not fairly represent the person’s market in the State. This route requires taxpayers to follow the statutory and regulatory methods for obtaining alternative apportionment. However, where a statutory method reaches an unconstitutional result by “grossly distorting” the manner in which income is earned in the state, Illinois statutes and regulations are somewhat irrelevant. To the extent Illinois’ apportionment of a taxpayer’s income reaches an unconstitutional result, a taxpayer is entitled to alternative apportionment notwithstanding the State’s procedures for obtaining such treatment.

Illinois Petitions for Alternative Apportionment

Illinois’ regulations regarding alternative apportionment state that the regulations are the “exclusive means by which a taxpayer may petition for an alternative apportionment formula.”[2] In order to obtain such treatment, a petition for alternative apportionment must be clearly labeled as a “Petition for Alternative Allocation or Apportionment” and must contain sufficient facts demonstrating the propriety of the alternative treatment. The regulation requires that proactive petitions must be filed 120 days prior to the due date of the tax return for which permission to deviate from the statutory method is sought. A petition will also be considered timely filed if it is provided as an attachment to a return amending an original return which was filed using the statutory method.  Taxpayers may also raise alternative apportionment as part of a protest in Illinois Circuit Court or the Illinois Independent Tax Tribunal.[3]

Upon receipt of an alternative apportionment petition, the Director will issue a ruling letter either accepting or rejecting the petition.  In some instances, the Director may partially accept the alternative apportionment petition. This typically involves the Director agreeing that the statutory method does not fairly reflect the taxpayer’s market in the State, but disagrees that the taxpayer’s proposed alternative is acceptable. In that case, the taxpayer may submit a modified alternative proposal or protest the Director’s partial acceptance. If the taxpayer’s petition is denied, it may either file an administrative hearing protest or file a petition with the Illinois Tax Tribunal solely on the issue of alternative apportionment.

It is fairly atypical for taxpayers to file alternative apportionment petitions with the Director and to challenge the Director’s denial at administrative hearings. It is much more common for taxpayers to raise alternative apportionment as a defense to a contested audit issue at the Circuit Court or Illinois Tax Tribunal. To that end, the regulations state that alternative apportionment may not be raised in protest, court filing, or petition with the Illinois Tax Tribunal unless the taxpayer has requested in writing that the auditor allow the use of alternative apportionment or the audit disallows an alternative method used on the taxpayer’s returns.

Fairly often, the statutory method of apportionment will be unclear; exactly where a service is received can often be difficult to gauge. As a result, taxpayers and auditors may often disagree on what the statutory method of apportionment requires. However, once the Department issues a notice of deficiency, the notice is entitled to a presumption of correctness.[4] On appeal, whether in Circuit Court or the Illinois Tax Tribunal, a taxpayer will then have two means of protesting the Department’s assessment of tax. First, the taxpayer is entitled to argue that the Department’s apportionment method conflicts with the requirements of the statute, and that its original returns reflect the statutory method. Second, the taxpayer may argue that in the alternative, even if the Department’s assessment does reflect the statutory method, the taxpayers is nonetheless entitled to alternatively apportion its income in the manner reflected on its original return.

Burdens for Obtaining Alternative Apportionment

The Department has explained that alternative apportionment may not be invoked by either party merely because the alternative method reaches a different apportionment percentage than the required statutory formula.[5] The party invoking alternative apportionment bears the burden of demonstrating by “clear and convincing evidence that the statutory formula results in the taxation of extraterritorial values or operates unreasonably and arbitrarily in attributing to Illinois a percentage of income that is out of all proportion to the taxpayer’s market for the taxpayer’s goods, services or other sources of business income in the State. The party invoking alternative apportionment must also provide evidence that its proposed alternative method fairly and accurately apportions income to Illinois based upon the taxpayer’s market in the State.

Illinois’ Standard for Obtaining Alternative Apportionment

Generally speaking, whether a statutory method “grossly distorts” a taxpayer’s income earned in a state reflects whether an apportionment methodology is constitutional in a particular case.[6] In some cases, however, Illinois courts have interpreted Illinois’ regulation to require that the statutory method lead to a “grossly distorted” result in order for a taxpayer to be entitled to alternative apportionment.[7] In other cases, Illinois courts have stated that “there is no requirement the formula applied must lead to a grossly distorted result. The party seeking to utilize an alternative apportionment method must only show the formula’s application would result in the taxation of extraterritorial values.”[8]

The Illinois Department of Revenue’s regulation and previous guidance reflects that a taxpayer need not show that the statutory apportionment method grossly distorts how a business earns its income. Instead, the Department has explained that relief is proper “where the income allocated to the State by the otherwise applicable statutory formula is unfairly disproportionate to the business activity conducted in the State.”[9] In one General Information Letter, the Department explained that there is nothing inherently unfair in sourcing gross receipts from the sale of a partnership interest based on the activities of the partner in managing its investment in the partnership rather than the partnership’s apportionment factors itself. While following the partnership’s apportionment factors might also “produce a fair and rational allocation of income[,]” using the activities of the partner nonetheless also fairly reflected the business activity fairly attributable to Illinois.[10]

The Illinois Supreme Court has rarely addressed the circumstances under which an Illinois taxpayer is entitled to alternative apportionment. In addressing a previous iteration of the Illinois alternative apportionment statute, the court stated that “there is a clearly demonstrated legislative intent to allocate and apportion the business income from the multistate operations of a corporation with those other States having jurisdiction to tax such income in such manner that there is neither overlap nor gap in taxing all of such income derived from the multistate business.”[11] In GTE, the Illinois Supreme Court permitted the Department to include drop shipment sales in the numerator of the taxpayers Illinois apportionment factor where the taxpayer was not subject to tax in either the state where the sale originated or was ultimately shipped.[12] Although the Department and taxpayers bear the same burden in obtaining alternative apportionment, the Illinois Supreme Court never required the Department to demonstrate that the failure to include the double throw-back sales in the Illinois apportionment factor numerator “grossly distorted” the taxpayer’s income earned in the State.


Illinois’ case law is relatively undeveloped regarding alternative apportionment. However, as the State calibrates its approach to market based sourcing, the need for alternative apportionment for multistate taxpayers is likely to increase. While taxpayers should consider whether petitioning for alternative apportionment is in their best interest in order to accurately reflect their market in the State, they should also keep in mind that alternative apportionment is a crucial tool in resolving controversies with the State.

Please reach out to our SALT team with any questions.

[1] 35 ILCS 5/304(f).

[2] 86 Ill. Admin. Code 100.3390(b).

[3] 86 Ill. Admin. Code 100.3390(e).

[4] 35 ILCS 5/904(a) (“The findings of the Department under this subsection shall be prima facie correct and shall be prima facie evidence of the correctness of the amount of tax and penalties due.”).

[5] 86 Ill. Admin. Code 100.3390(c).

[6] See, for instance, Norfolk and Western Railway Company v. Missouri State Tax Comm’n, 390 U.S. 317 (1968).

[7] See AT&T Teleholdings v. Dep’t of Rev., 365 Ill. Dec. 349 (Ill. App. 1st 2012); Lakehead Pipeline Company, Inc. v. Dep’t of Rev., 139 Ill. Dec. 872 (Ill. App. 1st 1989).

[8] Wabash Railroad Co. v. Dep’t of Rev., 92 L 51150 (Ill. Cir. Ct. 1995).

[9] IT 11-0010-GIL (6/20/2011).

[10] Id.

[11] GTE Automatic Electric, Inc. v. Allphin, 68 Ill. 2d 326 (1977).

[12] GTE involved the State’s “double throw-back” rule, which has since been repealed.  For a discussion of Illinois throw-back and double throw-back, see our previous post here.


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