Board Policy
Illinois Chamber Tax Institute Tax and Fiscal Policies

adopted June 2006

The Illinois Chamber of Commerce Tax Institute believes that Illinois’ fiscal policy and business tax laws should actively promote economic growth in Illinois by encouraging increased capital investment, productivity, and the creation of new job opportunities for the citizens of Illinois, by decreasing the overall tax burden and costs of doing business, particularly those costs associated with unnecessary and burdensome tax administration at the federal, State or local level.

To ensure economic growth and a fair and competitive tax climate for our members, the Illinois Chamber of Commerce Tax Institute strongly recommends adoption of the following pro-business Illinois tax policy:

Franchise Tax

The Illinois Chamber recommends the elimination or replacement of the out-dated Illinois Franchise Tax which is unduly complex and uncertain in its application and results, and which imposes unnecessary and excessive taxpayer compliance costs.

Business Perspective: The Illinois Franchise Tax is antiquated and the concept for this tax has been discarded by almost every other state. In any effort to reform Illinois business taxes, consideration should be given to repealing the tax in its entirety.

The franchise tax is based on the concept of “paid-in capital.” There is no business purpose for this concept other than as a franchise tax base. It is not a tax term or reporting requirement under Generally Accepted Accounting Principles, federal or state income tax laws, or federal or state securities laws. Accordingly, taxpayers are required to maintain additional and unique bookkeeping records solely to comply with the Illinois franchise tax and incur additional administrative expenses to do so.

The current tax often produces arbitrary results when applied to general business practices. For example, companies that redeem or cancel shares of stock may reduce their paid-in capital and their Illinois tax base. However, under Illinois franchise tax law, companies that redeem their stock but do not cancel the shares (they become treasury stock held for later sale or distribution) may not reduce their paid-in capital or Illinois tax base. This Illinois franchise tax approach is also inconsistent with general financial accounting treatment of treasury stock --where it is treated the same as authorized but unissued stock.

The apportionment method used for Illinois franchise tax purposes is significantly different from standard multi-state

apportionment methodologies and the Division of Business Services of the Secretary of State has provided little regulatory guidance on the application of the formula. Even before Illinois became a single sales factor apportionment state for income tax purposes, taxpayers had to use two separate apportionment methodologies to compute Illinois franchise tax and Illinois corporate income tax.

The current franchise tax apportionment methodology includes intangible property, such as stock in another corporation, in the property factor. That means taxpayers have to determine if stock is Illinois or non-Illinois property. The current rule looks to the physical location of the stock certificates to make this determination. Stock certificates need merely be moved to a location outside of Illinois to avoid having them treated as Illinois property—not a true measure of the exercise of a company’s business presence in Illinois.

The Illinois franchise tax also uses a unique method to compute the sales factor of the apportionment formula based on both an origination and destination concept. This method differs from the corporate income tax sales factor apportionment method. Also, under current franchise tax law, assets that are no longer used in a company’s business are still counted in the sales factor for purposes of computing how much business is actually conducted in Illinois.

Companies face double taxation if they form subsidiaries. That’s because a business pays a tax on its investment and the subsidiary pays a second time for the same investment.

There are 158,000 + taxpayers that pay the minimum $25 tax per year. The administrative burden of the tax exceeds the cost of the tax for more than 65% of all the Illinois franchise tax taxpayers.