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New Illinois Tax Incentive Bill Ill-Annoys Many Out-of-State Taxpayers

llinois enacted legislation on December 16, 2011, that includes several new tax provisions, some of which benefit only Illinois-based companies.

llinois enacted legislation on December 16, 2011, that includes several new tax provisions, some of which benefit only Illinois-based companies. SB397 gives two Illinois taxpayers—CME Group and Sears Holdings—a tax incentive to stay in the state after Illinois’s recent significant tax rate increases. SB397 also extends and broadens the Illinois research and development tax credit for five years, extends the Illinois Economic Development for a Growing Economy (EDGE) job creation program, and restores the corporate income tax operating loss deduction.

One of the most contentious aspects of SB397 is the revised sourcing provision for federally regulated exchanges. Federally regulated exchanges include securities and commodities exchanges and clearing agencies. The Illinois legislature crafted an elective regime that allows exchanges to source receipts using an alternate methodology. This provision includes two unique, potentially problematic aspects. First, the provision imposes a fixed percentage to source electronic trading receipts. The fixed percentage for tax years ending on or after December 31, 2013, is 27.54%. This fixed percentage appears to be arbitrarily determined, and is at a level that will likely benefit only exchanges based in Illinois. Most out-of-state exchanges likely have an Illinois apportionment factor much lower than 27.54%, while most in-state exchanges likely have an Illinois apportionment factor much higher than 27.54%. Second, the provision effectively eliminates the throw-out rule that applies to services. Some may question whether eliminating the often problematic throw-out rule only for electing exchanges—which will generally only be in-state exchanges—raises discrimination concerns.

On the other hand, most taxpayers are happy to hear that SB397 finally creates an independent tax tribunal. Beginning July 1, 2013, the Illinois Independent Tax Tribunal Board will assume responsibility for protests of all taxes administered by the Department of Revenue.

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