Tax Type
Corporation Income Tax
Description
Intercompany sales treated as a reduction of purchases; tangible personal property
Topic
Appropriateness of Audit Methodology
Collection of Delinquent Tax
Penalties and Interest
Date Issued
04-17-2002
April 17, 2002
Re: § 58.1-1821 Application: Corporate Income Taxation
Dear *****:
This will reply to your letter in which you request that the department reconsider its determination that upheld the assessment of additional Virginia corporate income tax and interest issued to your client, ***** (the "Taxpayer") for the taxable year ended December 31, 1993.
FACTS
The Taxpayer sold tangible personal property ("TPP") primarily to related entities. For the taxable year at issue, the Taxpayer treated intercompany sales as a reduction of purchases. Consequently, no sales were reported on its 1993 Virginia Income Tax return. However, a single sales factor of 100% was reported on the Taxpayer's 1993 Virginia corporate income tax return.
Under audit by the Internal Revenue Service ("IRS"), the intercompany sales were adjusted to reflect income in the 1993 taxable year. The department adjusted the Taxpayer's Virginia taxable income to reflect the federal changes and calculated the tax on all of the Taxpayer's income.
The Taxpayer conceded that it had additional Virginia taxable income as a result of the IRS audit, but asserted that it was a multistate corporation eligible to apportion its income. The department denied the Taxpayer's request in Public Document ("P.D.") 00-79 (5/15/00), on the basis that a corporation is presumed to be doing business entirely within Virginia if its business activities within another state are insufficient for that other state to impose a net income tax, a franchise tax measured by net income, or a privilege tax measured by net income. At that time, the Taxpayer was unable to demonstrate through clear and convincing evidence that another state had the jurisdiction to impose a net income tax, a franchise tax measured by net income, or a privilege tax measured by net income.
The Taxpayer has forwarded additional information to demonstrate that it had sufficient business activities in a foreign country ("Country A") to make it subject to an income tax in Country A. You are requesting a redetermination based on these new facts.
DETERMINATION
Pursuant to Code of Virginia § 58.1-405, corporate income tax is imposed upon the entire Virginia taxable income of a corporation if it conducts all of its business within the Commonwealth unless the corporation is subject to the following in another state: (1) a tax imposed on net income; (2) a franchise tax measured by net income; or (3) a franchise tax for the privilege of doing business. Title 23 of the Virginia Administrative Code ("VAC") 10-120-120 considers foreign countries to be states for purposes of this statute.
A corporation will be "subject to" one of the enumerated taxes if it carries on sufficient business within any other state or foreign country so that the other state has jurisdiction to impose such taxes on the corporation. A state or foreign country has sufficient jurisdiction over a corporation if the corporation has nexus pursuant to Public Law ("P.L.") 86-272, codified at 15 U.S.C.A. § 381, regardless as to whether the tax is actually imposed or a treaty is in effect.
P.L. 86-272, however, prohibits a state from imposing a net income tax on a foreign corporation when its only contact with the state constitutes solicitation of sales. This same protection has been extended by the United States ("U.S.") Supreme Court to include activities that are ancillary to solicitation or de minimis in nature.
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., 112 S. Ct. 2447, (1992). A taxpayer that engages in activities beyond solicitation may exceed the protection provided by P.L. 86-272 and be subject to the Virginia corporate income tax. Title 23 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.
Virginia has held that the storage of inventory in a state goes beyond the mere solicitation of sales that is protected by P.L. 86-272. See P.D. 92-125 (7/17/92). The evidence indicates that due to an impending strike the Taxpayer stockpiled inventory in Country A. As such, the Taxpayer had nexus with Country A and it is permitted to apportion its sales income.
The Taxpayer has paid a portion of the assessment based on its apportioned income to Virginia. Accordingly, the balance of the assessment of additional Virginia corporate income tax for the 1993 taxable year has been abated.
Copies of the Code of Virginia, regulations and public 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 determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/30693B
Rulings of the Tax Commissioner