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An analysis of Illinois' new bank apportionment regime
Expansion of data requirements and potential tax liability
This article summarizes significant legislative changes that have occurred during the last 18 months concerning the apportionment provisions related to the Illinois income taxation of banks and other financial organizations.¹There is more intricacy in the potential application of these new provisions than an article of this length could hope to cover. Therefore, the focus here is on those applications that are believed by the author to be of the most general importance to affected members of the bank and financial organization taxpayer community, as well as those issues that most effectively illustrate broader matters of tax policy.
From the first enactment of the Illinois Income Tax Act (IITA) in 1969, banks, bank holding companies, savings and loans, sales finance companies and the other 13 categories of financial organization enumerated in IITA §1501(a)(8)4 have always had their own one factor apportionment formula.5 Dramatic statutory changes were made to that formula over the last 18 months by the enactment of two pieces of legislation, Ill. P.A. 95-233 and Ill. P.A. 95-707. The changes that were made collectively by these two legislative enactments were effective for tax years ending on or after Dec. 31, 2008.6 Taxpayers and their advisers will be dealing with these changes on returns first coming due in March 2009, and it is these changes that are the primary subject of this article.
1 The legislation in question is Ill. P.A. 95-233 and Ill. P.A. 95-707. As a matter of scope, the entire discussion in this article focuses on how the new apportionment provisions will apply in the context of banks. However, there are 16 other statutory categories of financial organization for Illinois income tax purposes. It should be noted that the new apportionment provisions do not differentiate between banks and these other categories of financial organization, so the new provisions would also apply in varying contexts to those other financial organizations.
4 The IITA is found at 35 ILCS 5/101 through 5/1701. Throughout this article, it will be cited in text and footnotes as IITA §101 through IITA §1701.
5 Similarly, insurance companies and companies providing transportation services have also had their own one factor apportionment formulas from the first enactment of the IITA. All other taxpayers, not coming within one of the three special classifications of financial organization, insurance company, or company providing transportation services, were originally required with the first enactment of the IITA to utilize a three-factor apportionment formula based on property, payroll, and sales. Over the years that followed, the weight given to the sales factor was increased at various points in time with a corresponding decrease in the weight given to the property and payroll factors. Ultimately, beginning with the year 2000, the property and payroll factors were completely eliminated from the apportionment formula, leaving a single sales factor for all taxpayers that do not qualify as financial organizations, insurance companies, or companies providing transportation services. The sales factor and the one factor formula for financial organizations are statutorily entirely separate apportionment formulas that apply to mutually exclusive groups of taxpayers, though they do have some provisions in common, most notably for 2008 forward, the sourcing of service receipts.
6 Ill. P.A. 95-0233 was passed by the General Assembly in May 2007 and signed by the governor in August 2007. Its financial organization apportionment provisions were scheduled to take effect for years ending on or after Dec. 31, 2008. Ill. P.A. 95-707 was passed by the General Assembly in November 2007 and signed by the governor in January 2008. P.A. 95-707 repealed and revised certain of the provisions of P.A. 95-233 related to the financial organizations before those provisions had a chance to be implemented on any actual tax returns. All of the amendments by P.A. 95-707 to bank and financial organization apportionment provisions in the IITA, like those of P.A. 95-233, were to be operative for tax years ending on or after Dec. 31, 2008. With that history now established for the reader, from this point forward, this article will discuss the newly legislated bank and financial organization apportionment provisions for tax years ending on or after Dec. 31, 2008, as they emerged after the enactment of the latter of these two bills, which was P.A. 95-707. This article will not specifically discuss provisions that were enacted in P.A. 95-233 only to be revised in P.A. 95-707.