Tax Type
Corporation Income Tax
Description
Nexus; Sales staff working out of their homes
Topic
Taxable Income
Date Issued
05-25-2001
May 25, 2001
Re: Request for Ruling: Corporation Income Tax
Dear ****
This will respond to your letter in which you request a ruling with respect to the activities of your client (the "Taxpayer") would create nexus for purposes of the Virginia corporate income tax.
FACTS
The Taxpayer is a corporation headquartered outside of Virginia. The Taxpayer is a manufacturer of tangible personal property and primarily sells its products to distributors. The Taxpayer also has no property in Virginia, but does employ sales staff in Virginia. The sales staff works out of their homes and is compensated for providing their own office equipment. In addition to soliciting orders, the Taxpayer states that the sales staff also:
Serve as a liaison with dealers to ensure communication and implementation of the taxpayer's policies; serve a consultant's role for dealers for their product support operations; evaluate dealers' sales & marketing needs; provide input for dealer business plan development; provide sales coverage analysis; provide dealer operations studies; assess dealer management capabilities and address deficiencies including replacing dealers; assist dealers in assessing sales personnel; assist in development and implementation of sales strategies; provide both sales and technical training to customers; and, resolve user, customer and dealer disputes and problems.
In addition, the Taxpayer has several employees who periodically offer training to its customers. According to the Taxpayer, however, no training was provided in Virginia through the first part of the 2000 taxable year.
The Taxpayer believes that its activities in Virginia are incidental to the solicitation of its products. As such, the Taxpayer's position is that it is not liable for Virginia income tax. You are requesting that the department rule whether the Taxpayer is liable for Virginia income tax.
RULING
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. In this case, the Taxpayer would have a positive sales factor from the sale of tangible personal property in Virginia resulting in income from Virginia sources.
P.L. 86-272, codified at 15 U.S.C.A. §§ 381-384, prohibits 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 appear to go beyond the mere solicitation of sales. These activities include serving in a consultant's role for dealers for their product support operations; providing input for dealer business plan development; providing sales coverage analysis; providing dealer operations studies; assessing dealer management capabilities and addressing deficiencies including replacing dealers; assisting dealers in assessing sales personnel; providing technical training to the dealer's customers; and, resolving user, customer and dealer disputes and problems. See attached Public Documents 94-111 (4/14/94), 97-232 (5/21/97), and 98-134 (8/21/98).
Title 23 of the Virginia Administrative Code ("VAC") 10-120-90 (G) exempts activities that 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. Because P.L. 86-272 may exempt a business from state income tax even though that business may have a substantial amount of income from sources within the state, the department applies a very narrow interpretation of the activities that are ancillary or de minimis.
The information provided gives no indication as to whether or not the activities of the Taxpayer would be considered de minimis. However, taken as a whole, it appears likely 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 is subject to Virginia income tax.
Consequently, the Taxpayer would be required to file Virginia income tax returns to report its income from Virginia sources for all years in which it conducts business in Virginia as described above. For your convenience, I have included a Combined Registration Application Form (Form R-1) which should be completed and may be mailed to the Department of Taxation, Registration Unit, P.O. Box 1114, Richmond, Virginia 23218-1114, or may be faxed to our Customer Services section at (804) 786-2682.
This ruling has been made subject to the facts presented to the department as summarized above. Any change in these facts or the introduction of facts by another party may lead to a different result. If you have any questions regarding this ruling, please contact **** of the Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/31100G
Re: Request for Ruling: Corporation Income Tax
Dear ****
This will respond to your letter in which you request a ruling with respect to the activities of your client (the "Taxpayer") would create nexus for purposes of the Virginia corporate income tax.
FACTS
The Taxpayer is a corporation headquartered outside of Virginia. The Taxpayer is a manufacturer of tangible personal property and primarily sells its products to distributors. The Taxpayer also has no property in Virginia, but does employ sales staff in Virginia. The sales staff works out of their homes and is compensated for providing their own office equipment. In addition to soliciting orders, the Taxpayer states that the sales staff also:
Serve as a liaison with dealers to ensure communication and implementation of the taxpayer's policies; serve a consultant's role for dealers for their product support operations; evaluate dealers' sales & marketing needs; provide input for dealer business plan development; provide sales coverage analysis; provide dealer operations studies; assess dealer management capabilities and address deficiencies including replacing dealers; assist dealers in assessing sales personnel; assist in development and implementation of sales strategies; provide both sales and technical training to customers; and, resolve user, customer and dealer disputes and problems.
In addition, the Taxpayer has several employees who periodically offer training to its customers. According to the Taxpayer, however, no training was provided in Virginia through the first part of the 2000 taxable year.
The Taxpayer believes that its activities in Virginia are incidental to the solicitation of its products. As such, the Taxpayer's position is that it is not liable for Virginia income tax. You are requesting that the department rule whether the Taxpayer is liable for Virginia income tax.
RULING
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. In this case, the Taxpayer would have a positive sales factor from the sale of tangible personal property in Virginia resulting in income from Virginia sources.
P.L. 86-272, codified at 15 U.S.C.A. §§ 381-384, prohibits 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 appear to go beyond the mere solicitation of sales. These activities include serving in a consultant's role for dealers for their product support operations; providing input for dealer business plan development; providing sales coverage analysis; providing dealer operations studies; assessing dealer management capabilities and addressing deficiencies including replacing dealers; assisting dealers in assessing sales personnel; providing technical training to the dealer's customers; and, resolving user, customer and dealer disputes and problems. See attached Public Documents 94-111 (4/14/94), 97-232 (5/21/97), and 98-134 (8/21/98).
Title 23 of the Virginia Administrative Code ("VAC") 10-120-90 (G) exempts activities that 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. Because P.L. 86-272 may exempt a business from state income tax even though that business may have a substantial amount of income from sources within the state, the department applies a very narrow interpretation of the activities that are ancillary or de minimis.
The information provided gives no indication as to whether or not the activities of the Taxpayer would be considered de minimis. However, taken as a whole, it appears likely 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 is subject to Virginia income tax.
Consequently, the Taxpayer would be required to file Virginia income tax returns to report its income from Virginia sources for all years in which it conducts business in Virginia as described above. For your convenience, I have included a Combined Registration Application Form (Form R-1) which should be completed and may be mailed to the Department of Taxation, Registration Unit, P.O. Box 1114, Richmond, Virginia 23218-1114, or may be faxed to our Customer Services section at (804) 786-2682.
This ruling has been made subject to the facts presented to the department as summarized above. Any change in these facts or the introduction of facts by another party may lead to a different result. If you have any questions regarding this ruling, please contact **** of the Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/31100G
Rulings of the Tax Commissioner