02-159 | Virginia Tax

Tax Type

Corporation Income Tax

Description

Nexus, independent securities broker/dealers and registered money managers

Topic

Taxability of Persons and Transactions

Date Issued

12-16-2002

December 16, 2002

Re: Request for Ruling: Corporate Income Tax

Dear *****:

This will reply to your letter in which you request a ruling as to whether your clients (the "Taxpayers") have sufficient nexus with Virginia that would subject them to corporate income tax or create a retail sales and use tax collection obligation.

FACTS

The Taxpayers perform paperwork and other administrative activities on behalf of independent securities broker/dealers and registered money managers who operate in Virginia. The administrative activities include: (1) the processing of independent representatives' transactions for their clients; (2) the processing and record keeping of independent representatives' clients' funds managed by such representatives; (3) the collection and payment of commissions, income and expenses; and (4) the handling of license and compliance issues. The Taxpayers are licensed in the Commonwealth and no office or property is located in Virginia.

You contend that the Taxpayers' services to the broker/dealers do not create nexus and, therefore, they are not subject to Virginia corporate income tax or retail sales and use tax.

DETERMINATION

Corporate Income Tax

Public law (P.L.) 86-272, codified at 15 U.S.C.A. §§ 381-384, prohibits Virginia from imposing a net income tax on a foreign corporation when its only contact with Virginia 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. Although P.L 86-272 applies to tangible property, the Department's policy has been to extend the "solicitation test" of P.L. 86-272 to situations involving the sales of services.

The Department narrowly interprets P.L. 86-272 within the context of the decision of the U.S. Supreme Court in Wisconsin Department of Revenue v. William Wrigley, Jr. Co., 505 U.S. 214 (1992). A taxpayer that engages in activities that may exceed the protection provided by P.L. 86-272 would be subject to the Virginia corporate income tax. Title 23 of the Virginia Administrative Code (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.

Based on the facts presented, the Taxpayers do not own or lease any property in Virginia and they have no employees who work in Virginia. It is unclear how the Taxpayers solicit business from Virginia customers. While it is clear that if the Taxpayers' employees perform their services in Virginia, the Taxpayers would have nexus for corporate income tax purposes, this does not appear to be the case. Accordingly, based on the limited information provided, it would appear the Taxpayers do not have nexus with Virginia for corporate income tax purposes.

Retail Sales and Use Tax

Va. Code § 58.1-603 imposes the sales tax on "the gross sales price of each item or article of tangible personal property when sold at retail or distributed in this Commonwealth." Virginia does not currently impose the retail sales and use tax on the services described in your letter. As such, there is no need to address the issue of nexus in this case. However, if the Taxpayers engage in activities in addition to those described in your letter, nexus with Virginia may exist and the Taxpayers may be required to register and collect the retail sales and use tax. See Va. Code § 58.1-612.

As with any ruling provided by the Department, this analysis is based on the facts and circumstances identified in your letter and on information provided via the telephone and as summarized in this letter. Any change in the facts could alter the results.

I hope that the foregoing answers your questions. Copies of the Code of Virginia section, regulation and other documents cited 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 regarding this response, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/41665B

Rulings of the Tax Commissioner