Tax Type
Corporation Income Tax
Description
Distinguish between an employee and an independent contractor
Topic
Appropriateness of Audit Methodology
Returns/Payments/Records
Withholding of Tax
Date Issued
03-24-2003
March 24, 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 assessments issued to your client, ***** (the "Taxpayer), for the taxable years ended June 30, 1995 through 1997. I apologize for the delay in the Department's response.
FACTS
The Taxpayer is an out-of-state corporation with apportionable Virginia taxable income. The Taxpayer reported no payroll factor on its corporate income tax returns for the taxable years ended June 30, 1995 through 1997. Under audit, compensation paid to the Taxpayer's Virginia sales personnel was determined to be Virginia wages for payroll purposes because compensation was reported to the Virginia Employment Commission ("VEC") for employment tax purposes. The Taxpayer contends that its Virginia sales personnel are independent contractors, not employees, and the information reported to VEC was in error. The Taxpayer maintains that their compensation is not eligible to be included in the payroll factor.
DETERMINATION
Va. Code § 58.1-412 provides that the payroll factor is a fraction, the numerator of which is the total amount paid or accrued in Virginia during the tax period by the corporation for compensation, and the denominator is the total compensation paid everywhere during the taxable year. Under Title 23 of the Virginia Administrative Code ("VAC") 10-120-190, total wages reported to the VEC are presumed to be compensation paid to employees in Virginia. Activities performed by an independent contractor are not to be considered in the apportionment of income. See Public Document ("P.D.") 95-113 (5/11/95).
The Code of Virginia does not define "employee" for payroll factor purposes. Nevertheless, Virginia has adopted the factors enumerated in Treasury Regulation §31.3121(d)-1 to distinguish between an employee and an independent contractor for income tax withholding purposes. See 23 VAC 10-140-10. Under the circumstances of this case, such an analysis is applicable.
Some factors support an employer/employee relationship. The Taxpayer provided basic furnishings to regional and district sales agents and some sales training was provided to the sales personnel.
There are also a number of factors that support an independent contractor relationship. The various sales agent agreements clearly note that the parties agree that the relationship between the Taxpayer and the sales personnel "is at all times that of an independent contractor and not an employee." The sales personnel are "free from control or direction by [the Taxpayer] over the performance of his services" and "nothing contained [in the agreement] shall be considered to be any direction or control over the [sales personnel] as to the manner or method of conducting . . . business or the hours his office shall be open." In fact, the sales personnel operated in a manner consistent with the agreement. They scheduled their own hours and hired employees. They developed their own leads and used their own sales methods. Sales personnel provided the majority of their own sales equipment and had to purchase sales merchandise from the Taxpayer.
The weight of the documentation provided by the Taxpayer does not support an assertion of an employer/employee relationship. Accordingly, the Taxpayer's sales personnel were independent contractors for purposes of the payroll factor for the taxable years ended June of 1995 through 1997. As such, the numerator of the payroll factors will-be zero, and the assessments for the taxable years at issue will be adjusted pursuant to the enclosed schedules.
Accordingly, a refund will be issued pursuant to the enclosed schedules as soon as possible. Copies of the Code of Virginia sections and regulations 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/245298
Rulings of the Tax Commissioner