Recently, Illinois Department of Revenue (“Department”) issued a Private Letter Ruling regarding sales apportionment for cloud services.  A non-resident taxpayer requested the Department determine the sales factor used to determine the percentage of non-resident’s business income taxable by Illinois. Taxpayer provides two types of cloud computing services. First, a dedicated cloud that provides services for specific customers with dedicated servers. Customers using the dedicated cloud are responsible for managing the admin functions.  The other cloud is the public cloud, which allows customers to use applications without downloading them on their own computers. In both cloud computing services, the taxpayer owns the servers and applications.

Illinois imposes a business income tax on sales of services; however Illinois does not have a specific definition of sales of services. The Department concluded that taxpayer’s cloud computing services are sales of services using IRC Section 7701(e). The sales factor consists of total sales in Illinois over total sales in one year. Per Illinois Income Tax Act, sales of services are sources at either a customer’s fixed place of business where services are provided; if customer’s place is not determinable, sources are sourced where services were ordered; or if place of order location is not determinable, services are sourced where services are billed.

In instant case, taxpayer’s cloud computing services are provided to customers that neither their location nor order origination is determinable. Accordingly, the Department concluded that taxpayer’s source of sales should be sourced at customers’ billing address.

Based on the Illinois’ statute, location does matter and provides tax planning opportunities to minimize taxes. A corporation can weigh the costs of creating software to have the ability to track transactions. In addition, a corporation may minimize taxes by drafting contracts with specific language. Lastly, a corporation needs to include analysis of what other states regulations are and the impact of potential amendments.