United States: Illinois Adopts New Regulation For Apportioning Business Income Of Transportation Companies

The Illinois Department of Revenue has adopted a regulation to provide guidance on how to apportion the business income of transportation companies.1 The regulation clarifies the major statutory changes for apportioning transportation company income that apply to taxable years ending on or after December 31, 2008. Specifically, the apportionment fraction for business income derived from transportation services other than airline services (e.g., trucking) is based on a combination of actual receipts and mileage, but the fraction for airline transportation services is based on the amount of revenue miles within and outside the state. The regulation also provides definitions and examples, including guidance on calculating apportionment fractions for transportation companies that use different measures for apportioning income and companies that offer several types of transportation services, including both ground and air services.

Background

Under Illinois law, for tax years ending before December 31, 2008, business income from furnishing transportation services was apportioned to the state by multiplying the income by a fraction, the numerator of which was the revenue miles of the person in Illinois, and the denominator of which was the revenue miles of the person everywhere.2 A "revenue mile" was defined as the transportation of one passenger or one net ton of freight the distance of one mile for consideration. If a person was engaged in the transportation of both passengers and freight, the fraction was determined by using an average of the passenger revenue mile fraction and the freight revenue mile fraction, weighted to reflect the person's relative gross receipts from passenger and freight transportation.3

In 2007, the apportionment statute for transportation services was amended to provide a new methodology for taxable years ending on or after December 31, 2008.4 Business income from providing transportation services other than airline services is apportioned to Illinois by using a fraction, the numerator of which is: (i) all receipts from any movement or shipment of people, goods, mail, oil, gas, or any other substance (other than by airline) that both originates and terminates in Illinois; plus (ii) that portion of the person's gross receipts from movements or shipments of people, goods, mail, oil, gas or any other substance (other than by airline) that originates in one state and terminates in another state, that is determined by the ratio that the miles traveled in Illinois bears to total miles everywhere.5 The denominator is all revenue from the movement or shipment of people, goods, mail, oil, gas or any other substance (other than by airline). If a taxpayer is engaged in the transportation of both passengers and freight, the apportionment fraction is first determined separately for passenger miles and freight miles. An average of the passenger miles fraction and freight miles fraction must be weighted to reflect the taxpayer's relative gross receipts from passenger and freight transportation.

For taxable years ending on or after December 31, 2008, business income derived from airline services is apportioned to Illinois by using a fraction, the numerator of which is the revenue miles of the person in Illinois, and the denominator of which is the revenue miles of the person everywhere.6 If a person is engaged in the transportation of both passengers and freight, the apportionment fraction is the average of the passenger revenue mile fraction and freight revenue mile fraction, weighted to reflect the person's relative gross receipts from passenger and freight airline transportation.

Effective November 18, 2015, the Department promulgated a regulation that clarifies the apportionment of business income for transportation companies.7 This regulation addresses the 2007 legislation that significantly changed transportation company apportionment for tax years ending on after December 31, 2008.8

Apportionment for Tax Years Ending Prior to December 31, 2008

As discussed above, the apportionment factor for tax years ending prior to December 31, 2008 is uniform across all types of transportation services."9 The regulation follows the statute and provides that the business income of all transportation companies must be apportioned to Illinois by multiplying the income by a fraction in which the numerator is the "revenue miles of the person in this State" and the denominator is the "revenue miles of the person everywhere."

Apportionment for Tax Years Ending on or After December 31, 2008

The apportionment regulation is consistent with the statute and provides that the sourcing of transportation services for tax years ending on or after December 31, 2008 depends upon whether such services relate to airline transportation or other forms of transportation.10

Transportation Other than Airline Services

The regulation adopts the statutory language and provides that the apportionment for transportation services other than airline services is based on a gross receipts calculation instead of revenue miles. The numerator is the receipts from any movement of "people, goods, mail, oil, gas, or any other substance (other than by airline)" that both originates and terminates in Illinois (intrastate service), plus a portion of the gross receipts of the shipment of these items outside Illinois that originates in one state and terminates in another state or jurisdiction (interstate service).11 The portion of receipts that should be included is determined by the ratio of miles traveled in Illinois to total miles everywhere. The denominator is all the revenue derived from the movement of these items.12

Airline Transportation Services

Similar to the prior method of apportioning transportation services, the regulation follows the statute and provides that the business income of airline transportation services is apportioned to Illinois by multiplying the income by a fraction in which the numerator is the "revenue miles of the person in this State" and the denominator is the "revenue miles of the person everywhere."13

Definitions

The regulation provides definitions to help taxpayers correctly apportion their income depending on the type of transportation they provide. Other than the definition of "revenue mile" for tax years ending before December 31, 2008,14 the statute for apportioning transportation services does not define any terms. Also, no prior regulation defined the statutory terms. Therefore, the definitions in the regulation are particularly useful.

The regulation defines "miles transported or traveled" for purposes of determining the distance transported or traveled relative to the movement or shipment of people, goods, oil, gas or any other substance.15 For transportation by land, unless the taxpayer maintains specific records of miles or routes actually traveled in a particular trip, the miles transported or traveled is the standard distance in miles between the points of pickup and delivery.16 For transportation by air, the miles transported in a flight is the air distance in miles on the most common route between the airports.17

Under the regulation, a "revenue mile" is defined as the transportation of one ton of freight, one passenger, one barrel of oil via pipeline, 1,000 cubic feet of gas via pipeline, or any other specified quantity of a substance other than gas or oil via pipeline for one mile for consideration.18

For purposes of the regulation, "in this State" means the transportation of these items within the geographic boundaries of Illinois.19 With respect to interstate land travel, the revenue miles that should be used in the numerator of the apportionment factor are the miles traveled between the Illinois border and the point in Illinois in which that route begins or ends.20 Similarly, interstate transportation via air should be the miles traveled between the Illinois border and the point in Illinois in which that route begins or ends.21 Finally, the number of miles of transportation in the state on water that is not completely located within the state, such as Lake Michigan or the Mississippi River, is 50 percent of the total number of miles on that water, absent evidence to the contrary.22

The definition of "gross receipts from furnishing transportation services by airline and by other means" is defined as a transaction in which both transportation by air and any other means are used to deliver a passenger or freight.23 The gross receipts from providing the airline service are the total gross receipts multiplied by a fraction equal to the miles travel by air over the total miles traveled. For example, if the gross receipts of a trip were $100, and the trip was 100 miles, 50 miles by air and 50 miles by truck, the formula to calculate the gross receipts from the air travel would be $100 * (50/100), or $50. The gross receipts for furnishing the other means of transportation are the remaining receipts from the transaction. However, the taxpayer may use any other reasonable method supported by its books and records for allocating gross receipts from the transaction between airline transportation and other forms of transportation.24 If more than 95 percent of the total miles traveled was by air, the entire transaction is deemed to be transportation by airline.25

Finally, the definition of "freight" means any item, other than an individual passenger, that is transported for consideration.26

Examples

The regulation provides several comprehensive examples of how to apportion the income of transportation companies.27

Transportation Companies Providing Non-Airline Services

The first example illustrates the computation of the apportionment factor of a transportation company, other than for furnishing transportation services by airline, for taxable years ending on or after December 31, 2008.28 In this example, specific facts relating to a transportation company's gross receipts and miles traveled are presented. The apportionment factor is calculated in the following manner:

Step 1: Calculate the Illinois portion of the transportation company's interstate trips, which is equal to the gross receipts from interstate travel, multiplied by the ratio of Illinois interstate travel to everywhere interstate miles.

Step 2: Add the transportation company's Illinois intrastate gross receipts to the Step 1 calculation, which calculation represents the overall Illinois numerator.

Step 3: Divide the result in Step 2 by the transportation company's total gross receipts, the denominator, to arrive at the Illinois apportionment factor.

Transportation Companies Providing Services Using Different Apportionment Measures

The regulation also provides examples for transportation companies providing transportation services that use different measures for apportioning income.29 In these situations, a taxpayer determines its apportionment fraction by computing a separate apportionment fraction for its air and surface transportation services, and for its passenger and freight transportation services within each type. The taxpayer then combines these separate fractions, weighted by the gross receipts derived from the transportation services related to each separate fraction.30

The first example provides an apportionment factor calculation for a company that generates income from freight transportation, passenger transportation, and non-transportation services. The apportionment factor is calculated in the following manner:

Step 1: Exclude the receipts from non-transportation services from the apportionment factor calculation.

Step 2: Multiply the freight transportation income by the apportionment factor for this specific activity, and then multiply that result by the ratio of freight transportation income to all transportation income to arrive at a weighted apportionment factor for freight transportation.

Step 3: Multiply the passenger transportation income by the apportionment factor for this specific activity, and then multiply that result by the ratio of passenger transportation income to all transportation income to arrive at a weighted apportionment factor for passenger transportation.

Step 4: Add the apportionment percentages obtained in steps 2 and 3 to arrive at the Illinois apportionment factor.

The second example provides an apportionment factor calculation for a company that generates income from ground transportation services, air transportation services and non-transportation services. The apportionment factor is calculated in a manner similar to the first example, in that non-transportation services are excluded from the apportionment factor calculation, separate weighted apportionment factor percentages are obtained for ground and air transportation services, and the resultant percentages are added together to arrive at the Illinois apportionment factor.

Commentary

The Department has finally issued this long-awaited regulation to support the law change that was effective for tax years ending on or after December 31, 2008. The law change was a significant departure from the apportionment method applicable to tax years ending prior to December 31, 2008. In addition to adding clarity to the current apportionment methodology, the regulation provides useful examples. However, the regulation does not address a course of action for taxpayers who applied an apportionment methodology after the statutory change that may have been inconsistent with the definitions of the key statutory terms or overall methodology provided by the regulation. Taxpayers that overpaid taxes for tax years still open under the statute of limitations may want to consider filing refund claims. Likewise, taxpayers that underpaid taxes may need to consider filing amended tax returns.

The most significant aspect of the law change concerned transportation services other than airline services. The application of a "pure" mileage based ratio to some modes of transportation stays consistent. However, for other modes of transportation, the Department appears to leverage language in the Multistate Tax Commission's Special Rule for Trucking Companies,31 as well as other states' rules, in arriving at a "hybrid" methodology that uses both receipts and mileage. Thus, actual intrastate receipts are added to a percentage, based on mileage, of interstate receipts.

Also, the Department's interpretation of the statutory phrase "total miles everywhere"32 in the regulation provides important guidance. A plain reading of the phrase would suggest that a taxpayer consider all of its miles, from both intrastate and interstate trips. However, in reviewing the example provided in the regulation, the Department is only factoring in the interstate miles traveled into the formula. For clarity, the use of the phrase "total interstate miles everywhere" may have been more representative, leading to the argument that the Department's interpretation of the plain language of the statute may be impermissibly broad.

Some taxpayers may have the information necessary to determine the total intrastate receipts by states. However, to the extent a taxpayer does not, it would be prudent to have a reasonable methodology in place to arrive at this number. Additionally, not only must a taxpayer have the ability of tracking either revenue or International Fuel Tax Agreement (IFTA) miles, but the regulation distinguishes the need to differentiate between intrastate and interstate miles.

The regulation should be useful to taxpayers in taking tax return filing positions, as well as defending these positions at the audit level. The regulation also reinforces the need for detailed recordkeeping and careful analysis for transportation companies when filing their Illinois tax return, especially when dealing with multiple transportation revenue streams.

Finally, while this regulation is welcome guidance for many taxpayers within the transportation industry, another sourcing regulation that would be applicable to taxpayers in a broad array of industries has yet to be finalized. As part of the significant statutory changes in 2007, Illinois adopted a market-based sourcing methodology for sourcing sales other than sales of tangible personal property. While the Department has drafted a regulation on this topic, the regulation has not been formally promulgated to date.

Footnotes

1 ILL. ADMIN. CODE tit. 86 § 100.3450, effective Nov. 18, 2015.

2 35 ILL. COMP. STAT. 5/304(d)(1).

3 Note that a separate provision addressed apportionment for transportation by pipeline for tax years ending before December 31, 2008. 35 ILL. COMP. STAT. 5/304(d)(2).

4 P.A. 95-233 (S.B. 1544), Laws 2007, adding 35 ILL. COMP. STAT. 5/304(d)(3), (4).

5 35 ILL. COMP. STAT. 5/304(d)(3).

6 35 ILL. COMP. STAT. 5/304(d)(4). Similar to the apportionment statute for prior years, a "revenue mile" is the transportation of one passenger or one net ton of freight the distance of one mile for consideration.

7 ILL. ADMIN. CODE tit. 86 § 100.3450. Note that this regulation did not replace an existing regulation. Presumably, a regulation was not needed because the prior apportionment methodology for transportation services was fairly simple.

8 P.A. 95-233 (S.B. 1544), Laws 2007, adding 35 ILL. COMP. STAT. 5/304(d)(3), (4).

9 ILL. ADMIN. CODE tit. 86 § 100.3450(a)(1).

10 35 ILL. COMP. STAT. 5/304(d)(3), (4); ILL. ADMIN. CODE tit. 86 § 100.3450(a)(2).

11 ILL. ADMIN. CODE tit. 86 § 100.3450(a)(2)(A)(i) (emphasis added).

12 ILL. ADMIN. CODE tit. 86 § 100.3450(a)(2)(A)(ii).

13 ILL. ADMIN. CODE tit. 86 § 100.3450(a)(2)(B).

14 35 ILL. COMP. STAT. 5/304(d)(1).

15 ILL. ADMIN. CODE tit. 86 § 100.3450(b)(1).

16 ILL. ADMIN. CODE tit. 86 § 100.3450(b)(1)(A). For transportation by land, distances may be rounded to the nearest mile.

17 ILL. ADMIN. CODE tit. 86 § 100.3450(b)(1)(D). For air transportation, the distances may be rounded to the nearest mile or tens of miles. Note that this definition also includes transportation by water and transportation by pipeline. ILL. ADMIN. CODE tit. 86 § 100.3450(b)(1)(B), (C).

18 ILL. ADMIN. CODE tit. 86 § 100.3450(b)(2) (emphasis added).

19 ILL. ADMIN. CODE tit. 86 § 100.3450(b)(3).

20 ILL. ADMIN. CODE tit. 86 § 100.3450(b)(3)(A).

21 Note, flyover miles, i.e., routes that both originate and terminate outside Illinois, but fly over Illinois airspace, cannot be included in the numerator. ILL. ADMIN. CODE tit. 86 § 100.3450(b)(3)(C); Northwest Airlines, Inc. v. Department of Revenue, 692 N.E.2d 1264 (Ill. App. Ct. 1998), appeal denied, 705 N.E.2d 440 (Ill. 1998).

22 ILL. ADMIN. CODE tit. 86 § 100.3450(b)(3)(B).

23 ILL. ADMIN. CODE tit. 86 § 100.3450(b)(4).

24 ILL. ADMIN. CODE tit. 86 § 100.3450(b)(4)(A).

25 ILL. ADMIN. CODE tit. 86 § 100.3450(b)(4)(B).

26 ILL. ADMIN. CODE tit. 86 § 100.3450(b)(5).

27 ILL. ADMIN. CODE tit. 86 § 100.3450(c), (d).

28 ILL. ADMIN. CODE tit. 86 § 100.3450(c).

29 ILL. ADMIN. CODE tit. 86 § 100.3450(d).

30 For transportation by railroad, this must be weighted by the transportation company's operating income from the transportation of passengers and the transportation of freight, as reported to the Interstate Commerce Commission or the Surface Transportation Board.

31 Under the model rule, the total revenue of the taxpayer attributable to a state from hauling freight, mail and express is: (i) all receipts from any shipment which both originates and terminates within the state (intrastate); and (ii) that portion of the receipts from movements or shipments passing through, into, or out of the state as determined by the ratio which the mobile property miles traveled by such movements or shipments in the state bear to the total mobile property miles traveled by movements or shipments from points of origin to the destination (interstate).

32 This term is used in 35 ILL. COMP. STAT. 5/304(d)(3).

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