03-23 | Virginia Tax

Tax Type

Corporation Income Tax

Description

Corporate income tax assessment; "cost of performance"

Topic

Allocation and Apportionment

Taxability of Persons and Transactions

Date Issued

03-21-2003

March 21, 2003

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 your client, ***** (the "Taxpayer") for the taxable year ended March 31, 1993. I apologize for the delay in the Department's response.

FACTS

Prior to the taxable year at issue, the Taxpayer had never filed a Virginia income tax return. The Taxpayer is incorporated and located in another state ("State A"). In December 1991, the Taxpayer acquired a 25% interest in a corporation ("Corporation A") that owned property and had operations in Virginia. The remaining 75% interest was owned by an unrelated third party ("Corporation B"). In January 1993, the Taxpayer sold its 25% interest in Corporation A to Corporation B pursuant to a put/call option agreement. The Taxpayer did not file a Virginia corporate income tax return for the period at issue.

Because a portion of Corporation A's tangible and real assets were located in Virginia at the time of the sale, the auditor issued an assessment that included a portion of the gain in the numerator of the Taxpayer's apportionment factors. You contend that the assessment is erroneous because the Taxpayer lacked nexus with Virginia.

DETERMINATION

Va. Code § 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.

Public Law (P.L.) 86-272, as codified at 15 U.S.C.A. §§ 381-384, however, prohibits a state from imposing an income tax on businesses when the only contacts with the state are a narrowly defined set of activities. 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 activities. See Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992). The Department has along established policy of narrowly interpreting the provisions of P.L. 86-272.

When the business of a corporation is conducted both within and without Virginia, taxable income is determined by allocation and apportionment as provided in Va. Code §§ 58.1-406 through 58.1-420.

In this case, the Taxpayer derived all its income from the sale of its interest in the stock of Corporation A. Pursuant to Va. Code § 58.1-418, the Taxpayer qualifies as a "financial corporation," and the taxable income of a financial corporation

- shall be apportioned within and without this Commonwealth in the ratio that the business within this Commonwealth is to the total business of the corporation. Business within this Commonwealth shall be based on the cost of performance in the Commonwealth over cost of performance everywhere.

Title 23 of the Virginia Administrative Code 10-120-250 (B) defines "cost of performance" as the cost of all activities directly performed by the taxpayer for the ultimate purpose of obtaining gains or profit. In the instant case, the sale of the stock occurred outside Virginia. There is no evidence that any of the activities performed by the Taxpayer to sell the stock or earn interest occurred in Virginia. As such, the cost of performance occurred outside Virginia, and all the Taxpayer's income would be apportioned outside Virginia.

Accordingly, the corporate income tax assessment issued to the Taxpayer for the taxable year ended March 31, 1993, has been abated. Copies of the Code of Virginia sections and regulations cited along with other reference documents 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 any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/30354B

Rulings of the Tax Commissioner