June 27, 2016
Re: § 58.1-1821 Application: Corporate Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the corporate income tax assessments issued to ***** (the “Taxpayer”) for the taxable years ended December 31, 2010 and 2011. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is headquartered in ***** (State A) but has offices in Virginia. Its files combined Virginia corporate income tax returns with its Virginia affiliates. The Taxpayer was audited by the Department and the net operating losses (NOLs) were adjusted for several of the Taxpayer's Virginia affiliates, resulting in assessments.
The Taxpayer has filed amended returns requesting the inclusion of its subsidiary ***** (Corporation A), a holding company, into the combined group on the basis that Corporation A was commercially domiciled in Virginia and had a 100% apportionment factor. In the alternative, the Taxpayer argues that Corporation A had a positive apportionment factor in Virginia for the taxable years at issue.
DETERMINATION
Commercial Domicile
In general, a corporation that is commercially domiciled in Virginia will be subject to tax on its income and be eligible to be included in a combined Virginia income tax return. Under Title 23 of the Virginia Administrative Code (VAC) 10-120-140, the commercial domicile of a corporation is defined as the location of the principal office where “the business affairs of the corporation are normally directed or managed.” This is usually a corporation's headquarters.
The Taxpayer contends that Corporation A was directed and managed in Virginia because its headquarters were in a Virginia office. Corporation A had no employees. The Taxpayer's directors also acted as Corporation A's officers. Four out of the seven directors resided within commuting distance of the Virginia office. The Taxpayer states that the sole activity of Corporation A consisted of board of director meetings held at the Virginia office. There were no minutes of any of these meetings, but the Taxpayer has provided copies of consent decrees that purportedly were executed by three of the Virginia board members in Virginia.
In this case, the only evidence of Corporation A's operations being directed or managed in Virginia is the consent decrees. Nothing in the decrees indicates where they were executed. Further, the only business conducted appears to be the installation of new officers. No other evidence, other than the assertions of the Taxpayer, shows that any of Corporation A's operations occurred at or were directed from the Virginia office.
The Taxpayer argues that both Public Document (P.D.) 97-382 (9/23/1997) and P.D. 06-76 (8/23/2006) support its contention that Corporation A was commercially domiciled in Virginia. In P.D. 97-382, the Department determined that a company is commercially domiciled in Virginia when it has a Virginia address and its books and records are located in the Commonwealth. In this case, Corporation A's pro forma federal tax returns and annual reports filed with the Virginia State Corporation Commission (VSCC) list a State A location as Corporation A's address.
Further, the information provided indicates Corporation A's business activities were primarily conducted in State A. The only document showing Corporation A as having a Virginia address is a Taxpayer directory. The Taxpayer has also indicated that Corporation A's books and records are not kept in Virginia and the vice-president, based in State A, approved Corporation A's income tax returns.
In P.D. 06-76, the taxpayer was able to provide satisfactory documentation to the Department to show that its business affairs were primarily conducted in Virginia. As stated above, the Taxpayer has not provided evidence to show that Corporation A's business was conducted in Virginia.
Apportionment
Under Va. Code § 58.1-405, a corporation is presumed to be doing business entirely within Virginia if its business activities within another state are 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 VAC 10-120-120.
A corporation will be subject to one of the above enumerated taxes if it carries on sufficient business within any other state or foreign country so that the other state has jurisdiction to impose such taxes on the corporation. A state or foreign country has sufficient jurisdiction over a corporation if the corporation has nexus pursuant to Public Law (P.L.) 86-272, codified at 15 U.S.C. § 381, regardless as to whether the tax is actually imposed or a treaty is in effect. See P.D. 02-57 (4/17/2002).
P.L. 86-272, however, prohibits a state from imposing a net income tax on a foreign corporation when its only contact with the state constitutes solicitation of sales. This same protection has been extended by the United States Supreme Court to include activities that are ancillary to solicitation or de minimis in nature.
The Department narrowly interprets P.L. 86-272 within the context of the decision of the Court in Wisconsin Department of Revenue v. William Wrigley, Jr. Co., 505 U.S. 214 (1992). A taxpayer that engages in activities beyond solicitation may exceed the protection provided by P.L. 86-272 and be subject to the Virginia corporate income tax. Title 23 VAC 10-120-90 G, however, exempts activities that are de minimis in nature. Pursuant to Wrigley, all nonancillary activities are examined to determine if, when considered together, they create more than a de minimis connection to the Commonwealth.
The Taxpayer did not include Corporation A in its corporate returns in any states requiring nexus, but did incorporate it as part of the Taxpayer's returns in all unitary states. Because inclusion in unitary combined returns does not require a corporation to have nexus with the unitary state, the mere fact that a taxpayer is included in a unitary corporate tax return does not create nexus with other states. See P.D 00-79 (5/15/2000).
However, accounting support services exceed the protections afforded by P.L. 86-272 and create nexus. See P.D. 99-260 (9/27/1999). The Taxpayer states that Corporation A's accounting operations were automated and occurred on servers located in Virginia. Corporation A's pro forma returns were completed in State A. Tax preparation is an accounting function. As such, Corporation A was engaged in activities that created nexus outside of Virginia. Corporation A's accounting activities do not appear to be de minimus.
Virginia Code § 58.1-400 imposes the 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.
Under certain conditions, a corporation may have income from Virginia sources resulting from a positive apportionment factor, but not be subject to tax by virtue of the protections afforded under P.L. 86-272. See P.D. 94-175 (6/8/1994). Further, corporations that do not have a positive apportionment factor are not considered to be subject to Virginia income tax if separate returns are filed. Under appropriate circumstances, however, the Department is authorized under Va. Code § 58.1-446 to determine that income of an affiliate be deemed Virginia income even if the affiliate does not have nexus. See P.D. 96-346 (11/25/1996).
The Taxpayer's documentation indicates that Corporation A did not have a positive Virginia sales or payroll factor. Virginia Code § 58.1-409 provides that the property factor consists of the ratio of the average value of a taxpayer's real and tangible personal property owned or rented and used in Virginia over the like property located everywhere.
Corporation A paid rent for a Virginia office. However, neither the Taxpayer's amended returns nor Corporation A's federal pro forma returns for the taxable years at issue report any rent expense. Further, the Department has upheld adjustments under Va. Code § 58.1-446 where a taxpayer's only activity in Virginia was the rental of property. See P.D. 04-188 (10/8/2008).
CONCLUSION
Based on the evidence provided, Corporation A was not commercially domiciled in Virginia and 100% of its NOL should not be attributed to Virginia. Further, Corporation A does not appear to have a positive apportionment factor for the 2010 and 2011 taxable years. Accordingly, Corporation should not be included in the combined Virginia return. The assessments are upheld and the Taxpayers request for refund cannot be approved.
The Code of Virginia sections, regulations, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5963694805.B