United States

Illinois: Taxpayer must include “Throwback Sales” in Sales Factor Despite Change in Alternative Apportionment Statute

Nov 23, 2015
From KPMG TaxWatch

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Recently, the Illinois Independent Tax Tribunal considered whether 2013 amendments to Illinois’ alternative apportionment statute affected when receipts must be thrown back to Illinois. The taxpayer at issue was an international manufacturer of specialty phosphates used in food, pharmaceutical, and industrial markets. From its distribution center in Illinois, the taxpayer shipped product to 41 other states and various other countries. The Illinois Department of Revenue audited the taxpayer for the 2009 and 2010 tax years and determined that the taxpayer failed to include throwback sales in its sales factor numerator. As such, the Department assessed additional tax. The taxpayer protested the assessment, arguing that it was not required to include “throwback sales” in its sales factor numerator because of an amendment to Illinois’ alternative apportionment statute.

In 2013, the Illinois legislature amended the state’s so-called alternative apportionment statute retroactive to the 2008 tax year. Prior to the amendment, alternative apportionment was available if the statutory apportionment formula did not fairly represent “the extent of [a taxpayer’s] business activity” in Illinois. After the amendment, the focus changed from a taxpayer’s business activity to the taxpayer’s “market for . . . goods, services, or other sources of business income.” The taxpayer argued that this amendment could not be reconciled with the statute requiring inclusion of throwback sales, as including throwback sales would artificially inflate the Illinois market.

The Tribunal rejected this interpretation of the amendment. Instead, it determined that the amendment to the state’s alternative apportionment statute was clearly made to reflect that Illinois had moved to market-based sourcing for sales of intangible property and services. The Tribunal noted that the throwback statute, which addresses sales of tangible personal property, remained unchanged after the amendment. Although the taxpayer argued that the revised alternative apportionment provision could not be harmonized with the throwback provision, the Tribunal disagreed. The Tribunal found that a taxpayers “market” for sourcing purposes specifically included throwback sales (i.e., sales of tangible personal property originating in Illinois that are destined for a state where the taxpayer is not subject to tax).

The taxpayer next essentially argued the burden should shift to the Department each time it wished to require inclusion of throwback sales in a taxpayer’s sales factor numerator. Specifically, in the taxpayer’s view, the Department must prove that including throwback sales reflects the Illinois market for the taxpayer's goods before it can require such sales to be included in the sales factor numerator. The Tribunal again rejected this position, observing that the inclusion of throwback sales is automatic under the normal apportionment rules. If a taxpayer wishes to request alternative apportionment as a result of throwback sales it bears the burden of proving that including such sales distorts its income attributed to Illinois. Finally, the taxpayer argued that it should be entitled to alternative apportionment relief because the retroactive change to the alternative apportionment statute made it impossible for the taxpayer to have requested relief at the time it filed its original returns. Again, the Tribunal was unpersuaded, noting that despite the amendment the taxpayer could have petitioned for alternative apportionment. In addition, the Tribunal concluded that the taxpayer failed to establish why including the throwback sales, which are considered sales attributable to Illinois, “grossly distorted” its Illinois market. For more information on Innophos Holdings, Inc. v. Illinois Department of Revenue, please contact Brian Kuler at 312-665-5110.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.