Tax Type
Corporation Income Tax
Description
Nexus
Topic
Property Subject to Tax
Date Issued
10-08-2002
October 8, 2002
Re: Request for Ruling: Corporate Income Tax
Dear *****:
This will reply to your letter in which you request a ruling regarding nexus for corporate income tax purposes based as it relates to the activities of your client (the "Taxpayer"). I apologize for the delay in the department's response.
FACTS
The Taxpayer is a manufacturer located in another state. Its only physical presence in Virginia is a limited amount of inventory stored in a distributor's warehouse pursuant to a sale and security agreement between the Taxpayer and the distributor. The products are shipped to the distributor's warehouse via common carrier and stored until sold. The Taxpayer is paid for the products upon sale. While the distributor bears the risk of damage, loss or injury to the product from and after delivery to the warehouse, title remains with the Taxpayer until the product is sold. At the end of each six-month period, the distributor must purchase any product that has not been sold or otherwise return it to the Taxpayer. The Taxpayer's employees are afforded access to the inventory location on a monthly basis to perform an inspection of the inventory and audit sales records. They do not directly participate in retail sales.
You request a ruling as to whether the Taxpayer's activities in Virginia would subject it to Virginia corporate income tax. Further, you have made an inquiry concerning the department's voluntary disclosure program.
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.
Public Law (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., 505 U.S. 214 (1992).
In the instant case, the Taxpayer maintains an inventory at each distributor's location in Virginia. Under the sale and security agreement, the Taxpayer receives sales income when the distributor sells an item from the Taxpayer's inventory or if the distributor fails to return unsold inventory to the Taxpayer. The U.S. Supreme Court in Wrigley did not consider the storage of inventory within a state to be ancillary to solicitation. Further, the department's longstanding policy is that the presence of inventory in Virginia subjects a corporation to income tax. See Public Document (P.D.) 97-447 (11/10/97).
The Taxpayer has access to the inventory in Virginia on a monthly basis, at which time the Taxpayer conducts an inspection and inventory of its products and performs an audit of the distributor's books and records related to those products. A payment of the list price of the product plus a service charge is due at that time for any shortage or failure to properly report or account for sales. The Taxpayer also imposes a service charge for excessive returns. These activities constitute business functions separate and apart from the solicitation of sales and, as such, are clearly not protected activities.
Accordingly, the Taxpayer is subject to Virginia corporate income tax and is required to file Virginia corporate income tax returns for all years in which it conducts business in Virginia a 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 faxed to our Customer Services section at *****. In addition, you may contact ***** in the Office of Customer Relations, Compliance Unit, at ***** for information on participating in the department's voluntary disclosure program.
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.
A copy of the Code of Virginia sections cited and other documents are available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions with respect to this ruling, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
AR/39376E
Rulings of the Tax Commissioner