Tax Type
Corporation Income Tax
Description
Disallowment of the inclusion of the Subsidiary as part of the Consolidated groups
Topic
Appropriateness of Audit Methodology
Date Issued
03-05-2002
March 5, 2002
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 assessment issued to ********* (the "Taxpayer") for the taxable year ended December 31, 1996.
FACTS
The Taxpayer and a subsidiary (the "Subsidiary") are members of an affiliated group for federal income tax purposes. Prior to the 1996 taxable year, the Taxpayer filed a separate Virginia income tax return. Beginning with the 1996 taxable year, the Taxpayer and the Subsidiary filed as part of a consolidated Virginia corporate income tax return. Under audit, the department disallowed the inclusion of the Subsidiary as part of the Taxpayer's consolidated group for the 1996 taxable year on the basis that the Subsidiary lacked nexus with Virginia. The Subsidiary did not have a positive sales or property factor for the 1996 taxable year. However, the Taxpayer contends that the Subsidiary had nexus with Virginia and a positive payroll factor.
DETERMINATION
To be included in a Virginia consolidated income tax return, a corporation must be subject to Virginia income tax if separate returns were to be filed. See Title 23 of the Virginia Administrative Code ("VAC") 10-120-322, copy enclosed. Generally, corporations having income from Virginia sources are subject to Virginia tax. 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. See Public Document ("P.D.") 92-238 (11/16/92), copy enclosed.
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).
The department has a long history of narrowly interpreting the provisions of P.L. 86-272. When a taxpayer has employees in Virginia, the "solicitation" test would be exceeded when such employees serve a business function apart from soliciting sales. In this case, the employees were acquiring property on behalf of the Subsidiary and supervising the establishment of the Subsidiary's businesses on the acquired property. Such activities are not solicitation within the meaning of P.L. 86-272.
Under Virginia law, there is a strong presumption that the total wages reported to Virginia for unemployment compensation purposes represent compensation paid or accrued in Virginia by the Subsidiary, and, therefore, should be included in the payroll factor. See 23 VAC 10-120-190(C), copy enclosed. The Taxpayer has provided copies of Virginia unemployment returns that indicate the Subsidiary had Virginia employees during the 1996 taxable year. As such, the Subsidiary would have income from Virginia sources and would be subject to the Virginia income tax.
Based on the information provided, the Taxpayer correctly elected to file a consolidated income tax return, as permitted by Code of Virginia § 58.1-442, and the Subsidiary was properly included in the consolidated return. Therefore, the audit assessment of additional tax and interest for the taxable year ended December 31, 1996 has been abated. All returns for subsequent years must be filed on the same basis unless permission to change is granted by the department. Any new affiliates becoming subject to Virginia tax after the 1996 taxable year must conform to the consolidated filing status. See Title 23 VAC 10-120-324, copy enclosed.
If you have any questions regarding this determination, you may contact ***** in the department's Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/32966B
Related Documents
Rulings of the Tax Commissioner