Tax Type
Corporation Income Tax
Description
Do these Actions Constitute Nexus
Topic
Persons Subject to Tax
Taxability of Persons and Transactions
Date Issued
10-19-2001
October 19, 2001
Re: Request for a Ruling: Corporate Income Taxation
Dear *****
This will reply to your letter in which you request a ruling as to whether your client ***** (the "Taxpayer") would be subject to Virginia corporate income tax.
FACTS
The Taxpayer is an out-of-state corporation with no property or employees in Virginia. The Taxpayer sells a product to independent distributors in Virginia who resell the product. Employees of the Taxpayer train the independent distributors in Virginia. In addition, these employees occasionally help train the independent distributors' clients.
You seek a ruling as to whether the Taxpayer has nexus with Virginia for corporate income tax purposes.
RULING
A tax is imposed on the Virginia taxable income of every foreign corporation having income from Virginia sources, unless specifically exempted. Under Public Law 86-272 ("P.L."), codified at 15 U.S.C.A. § 381, Virginia is prohibited from imposing an income tax on a corporation whose only business activity within the state is the solicitation of orders for the sale of tangible personal property. P.L. 86-272 protection has been extended by the U.S. Supreme Court to include activities that are ancillary to direct sales solicitation, as well as de minimis nonancillary activities. See Wisconsin Department of Revenue v. William Wrigley. Jr., Co., 112 S. Ct. 2447 (1992).
In Wrigley, the U.S. Supreme Court found that a "solicitation of orders" means any speech or conduct explicitly or implicitly proposing a sale, and activities entirely ancillary to soliciting orders. Activities in which a taxpayer would engage regardless of whether a sale is made are not exempt solicitation just because salesmen perform them, unless the activities are de minimis.
The department has a long history of narrowly interpreting the provisions of P.L. 86-276. In Public Document ("P.L.") 94-111 (4/14/94), copy enclosed, the Commissioner determined that assisting salesmen on how to resell merchandise, including advice on advertising, display methods and keeping the merchandise clean, is ancillary to the solicitation of the order and, therefore, protected activity under P.L. 86-272.
As such, the training provided by the Taxpayer's employees to Virginia independent distributors that is limited to reselling the Taxpayer's product would be ancillary to the direct sales solicitation of the product. Any training provided for the purpose of enabling the independent distributors to use the Taxpayer's product in their business would be considered a business function separate and apart from the solicitation of sales.
Likewise the department considers the Taxpayer's employees training of the independent distributors' clients to be an activity that is not ancillary to the solicitation of sales. Because the Taxpayer has income from Virginia sources and its activities exceed those permitted by P.L. 86-272, the Taxpayer would be subject to Virginia corporate income tax unless the activity is deemed to be de minimis.
Title 23 of the Virginia Administrative Code ("VAC") 10-120-90 (G), copy enclosed, exempts activities that are de minimis in nature. Under this regulation, consideration will be given to the nature, continuity, frequency, and regularity of the nonprotected activities in Virginia, compared to the nature, continuity, frequency, and regularity of such activities outside of Virginia. 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.
The information provided gives no indication as to whether or not the activities of the Taxpayer would be considered de minimis. However, it appears that the unprotected activities would constitute a continuous pattern of activity, which are not de minimis, and are not considered trivial additions to the Taxpayer's business carried on in Virginia. As such, the Taxpayer would be subject to Virginia income tax.
Any corporation having income from business activity that is taxable both within and without Virginia must allocate and apportion its Virginia taxable income as provided in Code of Virginia §§ 58.1-402 through 58.1-420. Specifically, the Taxpayer will apply the three-factor apportionment method provided in Code of Virginia §§ 58.1-408 through 58.1-414 in computing its Virginia income tax liability.
You indicate that if the Taxpayer is subject to Virginia income taxation, it would like to enter into a voluntary disclosure agreement regarding its past liability. Please contact ***** of the Revenue Analysis Program Unit regarding your client's voluntary disclosure at *****.
As with any ruling provided by the department, this analysis is limited to the years and the facts and circumstances identified in your letter. Any material changes in the facts could alter the results. If you have any questions about this ruling, you may contact ***** in the department's Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
ARO/35595B
Rulings of the Tax Commissioner