Refund opportunity: Illinois retroactively eliminates double throwback
Most commonly impacting drop-shipment transactions, “double throwback” of receipts to the sales factor refers to a scenario where a taxpayer is not subject to tax in both the state where goods are shipped by a vendor and the state where the customer is located. Double throwback requires the sale be “thrown back” to the state where the taxpayer’s offices are located. Recently, the state of Illinois has retroactively eliminated this rule, providing potential refund opportunities for open tax years after 2008.
As stated by rule Ill. Adm. Code tit. 86, section 100.3380(c), for taxable years ending on or before Dec. 31, 2008, sales (a) originating from nontaxable states and (b) sales shipped to another nontaxable state, are considered Illinois sales for apportionment purposes and thus included in the Illinois numerator if the taxpayer’s activities are in Illinois, and such sales are not protected in the state by Public Law 86-272.
The regulation provides the following example to illustrate double throwback: a corporation's salesman operates out of an office in Illinois. He regularly calls on customers both within and without Illinois. Orders are approved by him and transmitted to the corporation's headquarters in State A. If the property sold by the salesman is shipped from a state in which the corporation is not taxable to a purchaser in a state in which the corporation is not taxable, the sale is attributable to Illinois. Double throwback was more commonly applied to companies headquartered in Illinois or with a main distribution center located in Illinois.
Effective for taxable years ending on or after Dec. 31, 2008, the Illinois double throwback rules no longer apply. The amended regulations state that the prior regulation did not fairly represent the market for the taxpayer’s goods, services, or other sources of business income. Taxpayers are not required to file a petition requesting permission to file an original or amended return for any tax years ending after Dec. 31, 2008, that does not apply the special rule.
Also recently amended are the occasional sales rules, located in the same regulatory section, providing that occasional sales of intangible assets should not be included in Illinois’s apportionment factor. The reasons for the exclusion include one or more of the following:
- Occasional sales are not made in the taxpayer’s regular course of business
- If the gain realized is comprised of recapture of depreciation deduction, the economic income was understated in the years that the deduction was taken
- If the gain is attributable to goodwill or similar intangibles, including the gain or the gross receipts will change the apportionment and not reflect the taxpayer’s regular course of business
- If the assets sold are made in connection with a partial or complete withdrawal from the market in the state in which the assets are located, including the gross receipts from those sales in the sales factor would increase the business income apportioned to that state when, in reality, the taxpayer’s market in that state has decreased
The amendments to double throwback are retroactive to 2008, creating a refund opportunity for any tax years open under the statute. Taxpayers have the opportunity to amend prior-year returns to claim the refund, but should remember that the statute of limitation is three years from the due date, including extensions.