Rulings of the Tax Commissioner

April 26, 2000

Re: Ruling Request: Corporate Income and Sales and Use Tax


Dear ****

This will respond to your letter in which you request a ruling as to whether your client (the "Taxpayer") would be required to collect and remit the Virginia sales and use tax and file and pay Virginia corporate income tax.

FACTS

The Taxpayer is an out-of-state corporation engaging in the sale of tangible personal property, specifically, a single product (Product X) and accessory items used in conjunction with the use of Product X. Approximately 25% of the Taxpayer's revenues are generated from sales to residents of Virginia.

Product X is delivered into Virginia 25% of the time via common carrier and 75% of the time on the Taxpayer's trucks. The delivery drivers unpack and set up Product X. On average, the Taxpayer's trucks enter Virginia twelve times per year to make deliveries of Product X. Usually, delivery is made to more than one customer per trip. All accessory items are shipped by common carrier. You indicate that 90% of these accessories are sold for resale.

The Taxpayer does not offer warranties on Product X, but does honor the manufacturer's warranty. The Taxpayer's employees come into Virginia approximately five times per year to provide warranty service and about twice every three years to repair an item not covered under a manufacturer's warranty for a fee. Generally, the Taxpayer does not make separate trips to Virginia to repair items. Rather, delivery drivers stop to make the repairs on their way to or from delivery destinations in Virginia.

The Taxpayer believes that its activities in Virginia are incidental to the solicitation and delivery of its products or are de minimis. As such, the Taxpayer's position is that it is not liable for Virginia income tax or required to register for the collection of Virginia sales and use taxes. You are requesting that the department rule whether the Taxpayer is liable for Virginia income tax and/or required to collect Virginia sales and use tax.

DETERMINATION

Income Tax

Code of Virginia § 58.1-400 imposes income tax "on the Virginia taxable income for each taxable year of every corporation organized under the laws of the Commonwealth and every foreign corporation having income from Virginia sources." Generally, a corporation will have income from Virginia sources if there is sufficient business activity within Virginia to make any one or more of the applicable apportionment factors positive. The existence of positive Virginia apportionment factors clearly establishes income from Virginia sources.

Public Law ("P.L.") 86-272, codified at 15 U.S.C.A. §§ 381-384, does prohibit a state from imposing a net income tax where the only contacts with a state are a narrowly defined set of activities constituting solicitation of orders for sales of tangible personal property. The department limits the scope of P.L. 86-272 to only those activities that constitute solicitation, are ancillary to solicitation, or are de minimis in nature. See Wisconsin Department of Revenue v. William Wrigley, Jr., Co.,112 S. Ct. 2447 (1992).

Based on the information provided, several activities in which the Taxpayer engages in Virginia go beyond the mere solicitation of sales. The warranty services and repairs made by the delivery drivers clearly exceed the standards of protected activities under P.L. 86-272. In addition, the department would not generally consider the set up or installation of tangible personal property as part of the solicitation of orders.

While ruling that "delivery" into Virginia using one's own trucks did not exceed the protection afforded by P.L. 86-272 in Commonwealth v. National Private Truck Council, 253 Va. 74, 480 S.E.2d 500 (1997), the Virginia Supreme Court conceded that the term "may be disputed in a particular factual situation." Because you have provided no description as to what Product X is or any explanation of the set up process, the department cannot make a definitive ruling as to whether or not the set up process exceeds the protection afforded under P.L. 86-272.

The information provided does provide some indication as to whether or not the activities of the Taxpayer would be considered de minimis. Title 23 of the Virginia Administrative Code ("VAC") 10-120-90 (G) exempts activities which are de minimis in nature. Pursuant to Wrigley. all non-ancillary activities are examined to determine if, when considered together, they create more than a de minimis connection to the Commonwealth.

In the instant case, the Taxpayer's drivers effect repairs, either under warranty or for a fee, on roughly half of the delivery trips made into Virginia. Setup services are performed with every Product X delivered to Virginia by the Taxpayer's drivers. Taken as a whole, the department concludes these activities constitute a continuous pattern of activity, which is not de minimis, and not considered trivial additions to the Taxpayer's business carried on in Virginia. Thus, it appears that Taxpayer is subject to Virginia income tax.

Sales and Use Tax

Under Code of Virginia § 58.1-612, the sales tax is collectible from all persons who are dealers. That same section defines the term "dealer" to include every person who "[s]ells at retail, or who offers for sale at retail, or who has in his possession for sale at retail, or for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth, tangible personal property." The Taxpayer clearly qualifies as a "dealer" under § 58.1-612.

Code of Virginia § 58.1-612 also sets forth the nexus requirements which give the Commonwealth the authority to require a business to register to collect and remit Virginia sales and use tax. The statute provides in part that a dealer shall be deemed to have sufficient activity in Virginia if the dealer solicits business in Virginia "by employees, independent contractors, agents or other representatives;..." Nexus will also be established if the dealer makes deliveries into Virginia more than twelve times during a calendar year by means other than common carrier.

It is not clear from your letter how the Taxpayer solicits sales from its Virginia customers. However, it is clear that, on average, the Taxpayer's trucks enter Virginia twelve times per year to make deliveries. If I understand you correctly, there are some years during which the Taxpayer makes more than twelve such deliveries, thus establishing nexus with Virginia. Public Document 97-81 (2/19/87) further addresses this issue.

Proposed Resolution

You note that the Taxpayer has made a good faith effort to determine whether it is liable for Virginia taxes based on the above facts. In this regard, the Taxpayer has previously telephoned the department but received conflicting responses to its verbal inquiries. Accordingly, you propose that in the event the Tax Commissioner determines the Taxpayer is liable for Virginia income tax and/or required to collect Virginia sales and use tax, that such determination have prospective application.

I will certainly consider the Taxpayer's proposed resolution. In this respect, the department has frequently entered into voluntary registration agreements with out-of-state businesses. Before making a final acceptance, however, l will need additional information, including a more detailed understanding of the Taxpayer's Virginia activities and some sense of the volume of sales to Virginia customers.

I am referring this matter to **** the department's Nexus Officer. He will contact you for the additional information noted above. If you need to contact ****, his phone number is **** and his fax number is (804) ************.

If you have any questions regarding this letter, please contact **** (income tax) or **** (sales and use tax) in the department's Office of Tax Policy at *****.

Sincerely,



Danny M. Payne
Tax Commissioner
OTP/26768(I/O)

TO WHOM IT MAY CONCERN

Under the authority of Section 58.1-1 of the Code of Virginia, l hereby delegate to Janie E. Bowen, Assistant Tax Commissioner, the authority to sign for me any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.

This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and the Treasury Board.

This authority will continue until revoked. The delegation of authority dated June 3, 1994, is hereby revoked and replaced.

Done at Richmond, Virginia this tenth day of September, 1999.


Danny M. Payne
Tax Commissioner