Illinois Judicial Ruling Impacts Out-of-State Businesses

Across the country, state legislatures have been searching for ways to increase their income tax revenue. The result: a growing trend to move away from the requirement that taxpayers must have a physical presence in the state in order to satisfy substantial nexus requirements in the taxing jurisdiction.

Illinois is the latest state to abandon the physical presence standard. In Capital One Financial Corporation v. Brian Hamer, et al. (2012-TX-0001/02), an Illinois circuit court ruled on summary judgment that “significant economic presence” is the proper test to determine substantial nexus.

Substantial Nexus Defined

Significantly, neither Illinois statutory law nor case law contains a test or definition of substantial nexus. Because the parties in this case couldn’t offer any specific Illinois cases interpreting substantial nexus as it’s applied to corporate income tax, the court adopted West Virginia’s substantial nexus test, which was developed by the West Virginia Supreme Court of Appeals. In Tax Commissioner of the State of West Virginia v. MBNA America Bank, the West Virginia court ruled that a substantial economic presence standard incorporates “purposeful direction” toward a state—a standard it determined mimics the due process clause—while “examining the degree to which a company has exploited a local market.”

Adopting that reasoning, the Illinois Court ruled that Capital One—although it has no physical presence in Illinois—has a significant economic presence. The decision was based on four reasons, namely, that Capital One:

  • Collects millions of dollars in fees and interest from Illinois residents
  • Systematically and continuously engages Illinois consumers via the telephone, email, and direct mail solicitation to apply for credit
  • Uses Illinois courts to recover debts on delinquent accounts
  • Files and enforces judgment liens in Illinois

Who Is Impacted?

Considering that the Illinois decision in Capital One relied on another state’s legal standards, out-of-state businesses should note they may be subject to the Illinois corporate income tax due to factors that aren’t defined by Illinois statutes or case law. Although Illinois based its decision on four reasons specific to Capitol One’s Illinois business, Illinois is by no means limited to these specific facts. Any taxpayer shown to have “exploited a local market” could be vulnerable to an Illinois assessment.

This type of judicial interpretation isn’t unique to Illinois. As more businesses expand their footprint through e-commerce and Internet sales, more states, such as Washington, are attempting to collect taxes from businesses that have no physical locations in the state.

We're Here to Help

If your company makes sales outside of jurisdictions where it’s physically located, we can help you understand how Illinois or any other state will tax your organization. For more information, reach out to your Moss Adams professional or email

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