Tax Type
Corporation Income Tax
Description
Co. doing business within Virginia; Subject to tax in another state; Jurisdiction
Topic
Allocation and Apportionment
Date Issued
05-15-2000
May 15, 2000
Re: § 58.1-1821 Application: Corporate Income Tax
Dear ****
This will reply to your letter in which your contest the assessment of additional tax and interest against ***** (the "Taxpayer") for the 1993 taxable year. I apologize for the delay in responding.
FACTS
The Taxpayer sells tangible personal property ("TPP") to affiliated corporations and partnerships. It treated all intercompany sales as a reduction of expenses. Consequently, no sales were reported on its 1993 Virginia Income Tax return. However, the Taxpayer reported an apportionment factor of 100% on its 1993 return.
The Internal Revenue Service ("IRS") audited the Taxpayer and adjusted its intercompany sales to reflect income in the 1993 taxable year. The department then adjusted the Taxpayer's income to reflect the increase in federal income and calculated the Taxpayer's corporate income tax using the 100% sales factor.
The Taxpayer concedes that it has additional Virginia taxable income as a result of the IRS audit, but contests the sales factor used by the department because only a portion of the sales of TPP were made in Virginia. It requests the department adjust the sales apportionment factor to reflect sales made outside of Virginia.
DETERMINATION
Under Code of Virginia § 58.1-405, a corporation is presumed to be doing business entirely within Virginia if its business activities within another state such that the other state does not have jurisdiction to impose a net income tax, a franchise tax measured by net income, or a privilege tax measured by net income. The actual imposition of a net income, franchise, or privilege tax is not required, but the state must have jurisdiction, if it so chooses, to impose a tax measured by net income. See Title 23 Virginia Administrative Code ("VAC") 10-120-120.
Pursuant to 23 VAC 10-120-120, the department will consider the taxpayer's business activities in light of Public Law ("P.L.") 86-272 (15 U.S.C.A. §§ 381-384) in order to determine whether a taxpayer is subject to tax in another state. See Department of Taxation v. Westmoreland Coal, 235 Va. 94 (1988). If federal law prohibits a state from imposing an income tax on the taxpayer because its connection with the state does not exceed certain protected activities, then that state does not have jurisdiction to impose an income tax for purposes of allowing the taxpayer to allocate and apportion income in Virginia.
The Taxpayer has submitted personal property tax receipts from another state (State A) to show that the Taxpayer's inventory was present in the state during the years in question. However, no State A tax returns have been provided even though State A imposes a franchise tax measured by net income. One of the activities protected by P. L. 86-272 is the delivery of inventory to a customer. In the absence of actual franchise tax returns, or proof that there was sufficient presence in a state that does not impose a tax based on income, the department finds that the evidence submitted is inconclusive.
In addition, the Taxpayer has stated that it files tax returns in a number of states where it is required to file a combined return as a unitary business as part of an affiliated group. Under the unitary business principle, a corporation must be included in a state's combined return regardless of whether or not it has nexus with that state. As stated above, in order for a corporation to be subject to one of the specified taxes, the corporation must actually engage in business activities in another state or engage in activity sufficient to create nexus with another state. Because inclusion in a unitary combined return does not require a corporation to have nexus with the state, the fact that the corporation is included in such a return provides no clear indication as to whether the Taxpayer has nexus with another state. As such, the mere fact that the Taxpayer is included in a unitary corporate tax return does not create nexus with any other states.
Based on the information provided, the auditor's assessment is upheld. The Taxpayer's tax and interest have been adjusted according to the enclosed schedule. Please remit the balance to Office of Tax Policy Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23218-1880 within 30 days to avoid the assessment of additional interest. If you have any questions regarding this
determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/18009B
Re: § 58.1-1821 Application: Corporate Income Tax
Dear ****
This will reply to your letter in which your contest the assessment of additional tax and interest against ***** (the "Taxpayer") for the 1993 taxable year. I apologize for the delay in responding.
FACTS
The Taxpayer sells tangible personal property ("TPP") to affiliated corporations and partnerships. It treated all intercompany sales as a reduction of expenses. Consequently, no sales were reported on its 1993 Virginia Income Tax return. However, the Taxpayer reported an apportionment factor of 100% on its 1993 return.
The Internal Revenue Service ("IRS") audited the Taxpayer and adjusted its intercompany sales to reflect income in the 1993 taxable year. The department then adjusted the Taxpayer's income to reflect the increase in federal income and calculated the Taxpayer's corporate income tax using the 100% sales factor.
The Taxpayer concedes that it has additional Virginia taxable income as a result of the IRS audit, but contests the sales factor used by the department because only a portion of the sales of TPP were made in Virginia. It requests the department adjust the sales apportionment factor to reflect sales made outside of Virginia.
DETERMINATION
Under Code of Virginia § 58.1-405, a corporation is presumed to be doing business entirely within Virginia if its business activities within another state such that the other state does not have jurisdiction to impose a net income tax, a franchise tax measured by net income, or a privilege tax measured by net income. The actual imposition of a net income, franchise, or privilege tax is not required, but the state must have jurisdiction, if it so chooses, to impose a tax measured by net income. See Title 23 Virginia Administrative Code ("VAC") 10-120-120.
Pursuant to 23 VAC 10-120-120, the department will consider the taxpayer's business activities in light of Public Law ("P.L.") 86-272 (15 U.S.C.A. §§ 381-384) in order to determine whether a taxpayer is subject to tax in another state. See Department of Taxation v. Westmoreland Coal, 235 Va. 94 (1988). If federal law prohibits a state from imposing an income tax on the taxpayer because its connection with the state does not exceed certain protected activities, then that state does not have jurisdiction to impose an income tax for purposes of allowing the taxpayer to allocate and apportion income in Virginia.
The Taxpayer has submitted personal property tax receipts from another state (State A) to show that the Taxpayer's inventory was present in the state during the years in question. However, no State A tax returns have been provided even though State A imposes a franchise tax measured by net income. One of the activities protected by P. L. 86-272 is the delivery of inventory to a customer. In the absence of actual franchise tax returns, or proof that there was sufficient presence in a state that does not impose a tax based on income, the department finds that the evidence submitted is inconclusive.
In addition, the Taxpayer has stated that it files tax returns in a number of states where it is required to file a combined return as a unitary business as part of an affiliated group. Under the unitary business principle, a corporation must be included in a state's combined return regardless of whether or not it has nexus with that state. As stated above, in order for a corporation to be subject to one of the specified taxes, the corporation must actually engage in business activities in another state or engage in activity sufficient to create nexus with another state. Because inclusion in a unitary combined return does not require a corporation to have nexus with the state, the fact that the corporation is included in such a return provides no clear indication as to whether the Taxpayer has nexus with another state. As such, the mere fact that the Taxpayer is included in a unitary corporate tax return does not create nexus with any other states.
Based on the information provided, the auditor's assessment is upheld. The Taxpayer's tax and interest have been adjusted according to the enclosed schedule. Please remit the balance to Office of Tax Policy Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23218-1880 within 30 days to avoid the assessment of additional interest. If you have any questions regarding this
determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/18009B
Rulings of the Tax Commissioner