Illinois issues new sales factor apportionment regulation for ...

State & Local Tax Alert
Breaking state and local tax developments from Grant Thornton LLP
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Illinois Issues New Sales Factor Apportionment Regulation for
Publishing Industry
On June 5, the Illinois Department of Revenue promulgated a new regulation addressing
the computation of the sales factor used to determine a non!resident publisher’s taxable
Illinois!sourced income. 1 The regulation discusses the sourcing of sales of (i) tangible
published materials, (ii) nontangible published materials and (iii) publishing services, and
provides definitions of relevant terms such as “published material” and “publishing
services.” The regulation applies to taxable years ending on or after December 31, 2008,
which is when Illinois adopted market!based sourcing for sales other than sales of
tangible personal property. 2
Definition of Publishing Terms
“Publication” or “Published Material”
The regulation defines the terms “publication” and “published material” as “the physical
embodiment or printed version of any thought or expression.” 3 These terms include a
play, story, article, column, or other literary, commercial, educational, artistic, or other
written or printed work. Published material may take the form of a book, newspaper,
magazine or periodical and may be contained on any property or medium, including an
electronic medium such as the Internet.
“Publishing” or “Publishing Services”
The regulation also defines the terms “publishing” and “publishing services” as “deriving
business income from publishing, selling, licensing . . . or distributing newspapers,
magazines, periodicals, trade journals or other published material.” 4 These terms do not
include the delivery of materials published by a third party or the delivery of materials by
the publisher for which a separate charge is made for the delivery.
Sales of Tangible Published Materials
An out!of!state publisher making sales of tangible published materials within Illinois is
Release date
June 20, 2012
States
Illinois
Issue/Topic
Corporate Income Tax
Contact details
Paul Bogdanski
Chicago
T 312.602.8269
E paul.bogdanski@us.gt.com
Keith Staats
Chicago
T 312.602.8629
E keith.staats@us.gt.com
Vito Kirvelaitis
Chicago
T 312.602.8186
E vito.kirvelaitis@us.gt.com
Giles Sutton
Dallas
T 704.632.6885
E giles.sutton@us.gt.com
Jamie C. Yesnowitz
Washington, DC
T 202.521.1504
E jamie.yesnowitz@us.gt.com
Chuck Jones
Chicago
T 312.602.8517
E chuck.jones@us.gt.com
Hannah Yoo
Chicago
T 312.602.8338
E hannah.yoo@us.gt.com
www.GrantThornton.com/SALT
1 ILL. ADMIN. CODE tit. 86 § 100.3373.
2 See 35 ILL. COMP. STAT. 5/304(a)(3)(C!5).
3 ILL. ADMIN. CODE tit. 86 § 100.3373(b)(2).
4 ILL. ADMIN. CODE tit. 86 § 100.3373(b)(3).
.

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required to use the standard sales factor to compute its Illinois corporate income tax
liability. 5 The numerator of the sales factor is the gross receipts attributable to Illinois,
which are derived by the publisher from transactions and activities in the regular course of
its trade or business. 6
Applying the general sales factor regulation, gross receipts from the sales of tangible
published materials are attributable to Illinois when the tangible published materials are
“delivered or shipped to a purchaser within [Illinois] regardless of the f.o.b. point or other
conditions of sale.” 7 The published materials are deemed to be delivered or shipped to a
purchaser in Illinois if the “recipient” of the materials is located in Illinois (even if the
purchaser ordered the materials from outside Illinois). 8 The published materials are also
deemed to be shipped to a purchaser in Illinois if the shipment from the publisher to the
purchaser terminates in Illinois despite the purchaser’s subsequent transfer of the materials
to another state. 9 For example, if the materials are first shipped to a purchaser’s central
warehouse in Illinois and the purchaser later reships the materials to its locations outside
Illinois, the gross receipts from the materials are sourced to Illinois.
The throwback rule contained in the general sales factor regulation also applies, pursuant
to which gross receipts from the sale of tangible published materials destined for an out!
of!state location or “the state of the purchaser,” but are not subject to tax, are “thrown
back” into Illinois for taxation. 10
In addition, the special rules relating to the standard sales factor also apply to the sale of
published materials. 11 If the sale of published materials is not subject to tax in the state of
origin outside Illinois or the state of destination, which is also outside Illinois, then the sale
is sourced to Illinois if the publisher’s activities in Illinois are not protected by Public Law
86!272. 12
Sales of Nontangible Published Materials
The gross receipts from sales of nontangible published materials containing advertising or
customer lists are attributed to Illinois using the “circulation factor” for the “publication
during the applicable tax period.” 13
The “circulation factor” is the ratio that the publisher’s in!state circulation of nontangible
published material (containing advertising) to Illinois purchasers and subscribers bears to
the same nontangible published material being circulated everywhere. 14 The geographic
location of the purchasers and subscribers is generally determined based on the publisher’s
5 ILL. ADMIN. CODE tit. 86 § 100.3373(c)(1).
6 ILL. ADMIN. CODE tit. 86 § 100.3370(c).
7 ILL. ADMIN. CODE tit. 86 § 100.3370(c)(1)(A)(i).
8 ILL. ADMIN. CODE tit. 86 § 100.3370(c)(1)(B).
9 ILL. ADMIN. CODE tit. 86 § 100.3370(c)(1)(C).
10 ILL. ADMIN. CODE tit. 86 § 100.3370(c)(1)(A)(ii).
11 See ILL. ADMIN. CODE tit. 86 § 100.3380(c).
12 Public Law 86!272, codified at 15 U.S.C. §§ 381!384, is a federal law that prohibits a state from imposing an
income tax if the only in!state activity of the out!of!state person is the solicitation of orders for sales of
tangible personal property where the orders are sent outside the state for approval or rejection and are filled by
shipment or delivery from a point outside the state.
13 ILL. ADMIN. CODE tit. 86 § 100.3373(c)(2).
14 ILL. ADMIN. CODE tit. 86 § 100.3373(b)(1).

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books and records. However, if the books and records are inadequate to determine where
the purchasers and subscribers are situated, then the circulation factor can be determined
by reference to rating statistics in sources such as Internet World Stats or Audit Bureau of
Circulations. The publisher can also make an election to use such rating statistics. If the
rating statistics are used, then the source selected must be consistent from year to year. 15
The regulation provides an example of a company utilizing the circulation factor. 16 In the
example, a company publishing advertising on the Internet for its customers elects to
determine the circulation factor based on Internet World Stats. The company multiplies
Illinois’ population by the Internet penetration percentage of the United States, as reported
by Internet World Stats, and divides that amount by the combined populations of all
jurisdictions in which the company does business multiplied by the Internet penetration
percentages for each of the jurisdictions. The company must use this methodology in
subsequent years.
Sales of Publishing Services
The regulation contains three cascading provisions that may apply to source sales of
publishing services. It should be noted, however, that these three sourcing provisions only
apply when the circulation factor is based on the publisher’s books and records. These
provisions do not apply when the circulation factor is determined by a method other than
the taxpayer’s own books and records, for example, if rating statistics are used.
The first cascading provision requires that gross receipts from the performance of
publishing services provided to a customer that is a corporation, partnership, or trust can
only be attributed to a state in which the customer has a “fixed place of business.” 17 If the
state where the publishing services are received cannot be readily determined or the
customer does not have a “fixed place of business” in that state, then the second cascading
provision applies, and services are deemed to be received at the ordering office or the
location from which the customer placed the order for the services. 18 If the ordering
office cannot be determined, then the third cascading provision applies, and services are
deemed to be received at the customer’s billing address. 19 If the taxpayer is not taxable in
the state in which the publishing services are received, the sale is excluded from both the
numerator and the denominator of the sales factor, regardless of how the circulation factor
is determined. 20
Commentary
The Department’s long!awaited new regulation serves as useful guidance for multistate
publishers making sales into Illinois. The regulation clarifies market!based sourcing for
sales of nontangible published material and publishing services. In particular, the
regulation is useful to those publishers making sales of advertising which appears on
Internet Web sites. The sourcing of such Internet advertising has not been addressed in
15 Id.
16 Id.
17 ILL. ADMIN. CODE tit. 86 § 100.3373(d)(1).
18 ILL. ADMIN. CODE tit. 86 § 100.3373(d)(2).
19 ILL. ADMIN. CODE tit. 86 § 100.3373(d)(3).
20 ILL. ADMIN. CODE tit. 86 § 100.3373(d)(4).

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the past. The “circulation factor” is a new concept for Illinois, which conveniently allows
for the possibility that a publisher may not have detailed information relating to its
customers’ locations or may not have the means to use such information for purposes of
the calculation of its Illinois income. The circulation factor concept also provides
flexibility for the taxpayer to consider use of rating statistics instead of its own books and
records, even if the books and records do keep detailed information on where its
customers receive the nontangible published material or publishing services.
As the new regulation is being applied in a retroactive manner, all the way back to taxable
years ending on or after December 31, 2008, some multistate publishers may be able to
claim significant refunds for open tax years in the event that their initial sourcing
methodology differed substantially from the promulgated regulation, resulting in an
overstatement of the sales factor. Likewise, other multistate publishers may determine that
the sales factor was understated for taxable years ending on or after December 31, 2008,
resulting in an outstanding tax liability and consequent ASC 740 exposure. The
Department will have to consider whether it is equitable to assert penalties on taxpayers
finding themselves in this situation.
The information contained herein is general in nature and based on authorities that are subject to change.
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