Illinois court rules PepsiCo subsidiary is not an 80/20 company

On Jan. 9, 2025, a circuit court judge in Sangamon County, Illinois, affirmed the Illinois Department of Revenue’s (the Department) position that PepsiCo Inc. (PepsiCo) had created a “shell company” beneath its subsidiary Frito-Lay North America Inc. (FLNA) and the purpose of this shell company, PepsiCo Global Mobility LLC (PGM), was to generate tax benefits by ultimately excluding FNLA’s income from the Illinois combined tax return in 2016 and 2017.

80/20 company rule

For purposes of its unitary combined filing, Illinois excludes 80/20 companies from unitary business groups and defines them as, “members whose business activity outside the United States is 80% or more of any such member’s business activity.” Business activity is measured by the amount of a business’s payroll and property (35 ILCS 5/1501(a)(27)) (herein after referred to as an 80/20 company).

In determining whether the exclusion applies to a particular entity, its United States property and payroll are compared to its worldwide property and payroll. If over 80% of its business activity is outside the United States, the 80/20 exclusion is applicable and as result, the 80/20 company’s income is excluded from the Illinois unitary combined income tax return.

Circuit court decision

In 2010, PepsiCo underwent a global reorganization and, in the restructuring, PGM was formed as a disregarded entity for federal income taxes under FLNA. PGM was set up as a global employment company that held all of the foreign based U.S. expatriates for the purposes of payroll, benefits and general administration. Specifically, expatriates were listed and treated as employees of PGM through the secondment agreements with foreign host companies. As a result, the inclusion of expatriate's foreign payroll in the payroll factor of FLNA through its disregarded subsidiary, PGM, qualified FLNA as an 80/20 company based on the statute. In turn, FLNA’s domestic income was excluded from PepsiCo’s Illinois unitary combined return.

On audit, the Department disallowed the 80/20 treatment, among other items, and issued two notices of deficiency proposing tax deficiencies, penalties and interest in the aggregate amount of approximately $10.9 million. Ultimately, PepsiCo appealed to the circuit court.

PepsiCo argued, among other things, that the Department ignored the plain language of the statute when applying the 80/20 rule. Specifically, “the plain and unambiguous text of the 80/20 Company rule governs whether an entity is excluded from the combined unitary business group.” There is no other statutory requirement and PepsiCo asserted it had met its burden of proving that FLNA qualified as an 80/20 company.