Tax Type
Corporation Income Tax
Description
Nexus
Topic
Taxable Income
Date Issued
03-21-2003
March 21, 2003
Re: Request for Ruling: Corporate Income Tax
Dear **************:
This will reply to your letter in which you request a ruling regarding the application of Virginia's corporate income tax to ***** (the "Taxpayer"). I apologize for the delay in the Department's response.
FACTS
The Taxpayer is a Subchapter S corporation, headquartered in another state ("State A"). It hires Virginia residents to provide services on a part-time basis for businesses in Virginia and other states. All hiring activities are performed in State A. The Taxpayer is registered as a corporation in State A.
The Taxpayer has requested a ruling concerning Virginia's requirements for filing an income tax return in Virginia. In addition, in the event that the Taxpayer would be required to file a Virginia income tax return, you ask if the individual shareholders would be required to file Virginia income tax returns.
RULING
Under Public Law (P.L.) 86-272, codified at 15 USCA §§ 381 through 384, Virginia is prohibited from imposing an income tax on a taxpayer whose only business activities within Virginia by, or on behalf of a taxpayer during a taxable year are the solicitation of orders for the sale of tangible personal property. Although P.L. 86-272 only applies to the sale of tangible personal property, Virginia applies the same "solicitation" test to transactions of other than tangible personal property.
In this case, the Taxpayer is not selling tangible personal property in Virginia. The Taxpayer is selling services that are performed in Virginia on behalf of the Taxpayer's customers. These activities clearly serve a business function for the Taxpayer separate from solicitation. Further, based on the information provided, the nature, continuity, frequency, and regularity of the services performed by the Taxpayer's personnel in Virginia, as compared with services performed elsewhere lead to the conclusion that the Taxpayer's Virginia activities are not de minimis.
Accordingly, the Taxpayer has nexus with Virginia for income tax purposes. In following federal tax policy with respect to S corporations, Va. Code § 58.1-401 provides that such corporations are not subject to income tax in Virginia. Thus, Virginia has elected to treat S corporations in substantially the same manner as has the Internal Revenue Service, i.e., the corporate entity itself is not subject to taxation but the shareholders will be taxed as individuals on their pro rata share of S corporation income, to the extent includable in federal adjusted gross income (FAGI). See Public Document (P.D.) 88-165 (6/29/88).
In the case of nonresident individual shareholders of an S corporation that conducts business in Virginia, the Department applies the provisions of Va. Code §§ 58.1-407 through 58.1-421 in order to determine an individual's Virginia taxable income. See P. D. 95-167 (6/23/95). As such, the nonresident shareholders of the Taxpayer would be required to file nonresident individual income tax returns and pay tax on their income from Virginia sources.
Under certain circumstances, the Department will allow S corporations to file a unified income tax return on behalf of its nonresident shareholders. See P. D. 84-260 (12/28/84). In order to file such a return, the Taxpayer must request permission from the Tax Commissioner.
I trust this response answers your question. Copies of the Code of Virginia sections, regulations and public documents cited are available online in the Tax Policy Library section of the Department's web site, located at www.tax.state.va.us. If you have additional questions regarding this response, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/42864B
Rulings of the Tax Commissioner