Board Policy
Illinois Chamber Tax Institute Tax and Fiscal Policies

adopted June 2006

The Illinois Chamber of Commerce Tax Institute believes that Illinois’ fiscal policy and business tax laws should actively promote economic growth in Illinois by encouraging increased capital investment, productivity, and the creation of new job opportunities for the citizens of Illinois, by decreasing the overall tax burden and costs of doing business, particularly those costs associated with unnecessary and burdensome tax administration at the federal, State or local level.

To ensure economic growth and a fair and competitive tax climate for our members, the Illinois Chamber of Commerce Tax Institute strongly recommends adoption of the following pro-business Illinois tax policy:

Corporate Income Tax

We support federal legislation that requires a substantial physical presence nexus standard for all state business activity taxes so that Illinois businesses are able to market their products nationally without incurring an additional and prohibitive tax burden.

Business Perspective: The Illinois Chamber of Commerce urges the United States Congress to establish a substantial physical presence nexus test for all business activity taxes imposed by the various state and local taxing entities. Further, any future action by the Illinois General Assembly that would require a remote seller to collect sales tax should not be effective until federal legislation permits the collection of such tax and also prohibits the imposition of a business activity tax unless a taxpayer has a substantial physical presence in the taxing jurisdiction. [A “business activity tax” refers to a tax imposed directly on businesses and not generally passed directly on to consumers, such as corporate income taxes, franchise taxes, single business taxes or gross receipts taxes.]

Efforts by state governments to impose business activity taxes on remote taxpayers without a substantial physical presence in a state have a chilling effect on interstate commerce, increase the cost of tax compliance and encourage unnecessary and costly tax litigation. Without a physical presence nexus test, business taxpayers could be liable for income or gross receipts taxes in every state or jurisdiction where someone purchases their goods or services or in which they have some minimal economic presence, such as a lien on goods or a warranty on items purchased.

Taxpayers without a physical presence in a State will be assessed business activity taxes such as income tax or gross receipts taxes despite the fact that they are not provided with any measurable governmental protections or benefits by the taxing state and despite the fact that, without a physical presence in the state they are subject to taxation without representation.
If Congress is going to address sales tax collection requirements for remote sellers, it should also address nexus for business activity taxes to prevent widespread assessments by state and local governments of all retailers of goods and services identified as remote sellers. Simplified sales tax reporting initiatives currently underway will create a national database of taxpayers, giving state and local governments full access to taxpayer information which would easily allow for business activity tax assessments by state and local governments based on various and multiple theories of economic activity. Resulting compliance and litigation costs could be overwhelming for the business community.

Current attempts by state governments to assert “economic nexus” are being challenged by business taxpayers in the courts throughout the country and the business taxpayers are winning the vast majority of cases! Imposing a substantial physical presence nexus test at the national level would eliminate such unnecessary and costly litigation on a state-by-state, issue-by-issue basis.

Its time for the United States Congress to stop the uncertainty and the increasing costs of compliance and litigation by enacting legislation to require a substantial physical presence in a state before that state (or local government) can impose a business activity tax on a remote business taxpayer.

The Illinois Chamber continues to strongly support the existing single sales factor method of apportioning business income in lieu of the former three factor formula that placed higher income taxes on corporations that increase their Illinois employment and investment.

Business Perspective: The Illinois Chamber of Commerce actively supported the 1998 legislation to adopt “single sales factor” apportionment in Illinois. This legislation removes a corporate tax penalty for Illinois-based companies that increase their investment in Illinois payroll and property. It also encourages out-of-state companies that are currently exploiting the Illinois consumer market to increase their investment in Illinois to the benefit of all Illinois taxpayers. We view the single sales factor legislation as a critical economic development tool for the State of Illinois. Despite the common sense foundation of this legislation, some opponents have continued to criticize the move to a single sales factor. It’s important to keep in mind:

As predicted by the business community, other states are aggressively pursuing single sales factor apportionment while Illinois has benefited by being a leader in adopting it. Repealing the single sales factor formula as more and more states are moving to adopt it will only make Illinois’ business climate less competitive.

A repeal of single sales factor legislation rewards out-of-state companies with a tax reduction while penalizing Illinois-based companies with a tax increase. Illinois companies already contribute to the economy through property tax, sales tax, motor fuel tax, utility taxes, and a myriad of other taxes and fees, as do their employees. Out-of-state companies who profit from the Illinois marketplace and directly compete with Illinois businesses should pay their fair share of corporate income tax.

Business investment in Illinois is the single best way to create new jobs, spur the economy and increase government revenues. Single sales factor apportionment encourages investment in Illinois without unduly decreasing revenues to the State. Estimates of the perceived “cost” of single sales factor apportionment of which the Chamber is aware, are based on numbers projected from 1998 and 1999. They are not based on actual and current tax return information and, more importantly, do not take into account new investment in Illinois—the very goal of the single sales factor legislation.

The Illinois Chamber supports elimination of the “throwback sales” provision from the Illinois income tax apportionment formula so that Illinois business taxpayers are allowed full advantage of a market-based method of apportioning their business income.

Business Perspective: The "throwback rule" provides that a sale destined for another state is, in fact, treated as an Illinois sale for apportionment purposes if the taxpayer is not subject to income tax in the other state. A taxpayer may not be subject to income tax in another state because the state does not have an income tax or, more likely, because the business is small and does not have nexus in that state. The result of the throwback rule is that if you are commercially domiciled in Illinois--i.e., you have made a business decision to locate your payroll and property here--Illinois can count sales destined for other states as Illinois sales, thus increasing the amount of income that is apportioned and taxed in Illinois.

The throwback rule is inconsistent with single sales factor apportionment adopted by the General Assembly. Single sales factor apportionment utilizes a marketplace approach--business income should be divided between the states according to the market destination of the goods being sold.

The throwback rule deprives small and medium-sized companies of the benefits of the single sales factor apportionment. Large companies file returns in most states and are not subject to the throwback rule--they pay tax only on the portion of their business income attributable to Illinois sales. As a result of the throwback rule, small and medium-sized businesses who don't file in other states are forced to pay tax on business income attributable to both Illinois sales and sales destined for other states.
Most other states that have adopted single sales factor apportionment have eliminated the throwback rule because it is inconsistent with a marketplace approach. It is also inconsistent with how we apportion income for other types of business in Illinois. Insurance companies are taxed only on risk insured in Illinois, transportation companies are taxed only on miles driven in Illinois, and financial institutions are taxed on interest income received in Illinois from Illinois customers.

If we are truly going to a marketplace apportionment method that will benefit all Illinois businesses, we need to eliminate the throwback rule and give single sales factor apportionment the opportunity to become the economic development tool that it was intended to be.

The Illinois Chamber opposes any change to Illinois' existing water's edge apportionment method that would compel companies to pay tax on income generated outside of Illinois and the United States.

Business Perspective: The Illinois Chamber continues to oppose efforts to re-define the boundaries of the United States for purposes of determining business income tax liability. Such proposals attempt to reclassify many foreign subsidiaries of companies doing business in Illinois as domestic subsidiaries, thereby bringing these foreign companies into the Illinois tax base for the first time.

Such proposals to expand the Illinois tax base have a negative economic impact on Illinois and effectively upset more than 20 years of settled expectations, business planning and investment decisions. This change would be particularly hard on investments made in Puerto Rico, where many Illinois companies made business investments as a direct result of federal incentives to help the economy of that nation.

At a time when Illinois already lags our surrounding states in job creation, employers will be given another reason to question investing in a state with such an unsettled and unstable tax climate.