Tax Type
Corporation Income Tax
Retail Sales and Use Tax
Description
Third-party contractors activities on behalf of the Company did not create nexus for VA
Topic
Taxability of Persons and Transactions
Date Issued
10-05-2004
October 5, 2004
Re: Request for Ruling: Retail Sales and Use Tax
Corporate Income Tax
Dear ***********:
This will reply to your letter in which you request a ruling as to whether a company purchased by your client (the "Taxpayer") established nexus with Virginia for sales and use tax and corporate income tax purposes. l apologize for the delay in the Department's response.
FACTS
The Taxpayer is an out-of-state corporation that is registered to collect Virginia sales and use tax and files Virginia corporate income tax returns. The Taxpayer recently acquired the stock of an out-of-state software developer (the "Company") that sells canned software programs. The software is delivered to customers electronically or on tangible media into Virginia. The Company is not registered to collect Virginia sales and use tax and does not file Virginia income tax returns. The Company still exists as a legal entity but no longer makes Virginia sales. The Taxpayer now sells the Company's products in Virginia.
Prior to being purchased by the Taxpayer, the Company solicited sales exclusively by telephone and did not have property or employees in Virginia. The Company also provided software training to customers through the use of unrelated, independent contractors. The Taxpayer seeks a ruling from the Department to address if the software training activities provided by third-party contractors on behalf of the Company created nexus for Virginia sales and use tax and corporate income tax purposes.
RULING
Sales and Use Tax
Virginia Code § 58.1-612(C) sets forth the nexus requirements that give the Commonwealth the authority to require dealers to register for the collection and remittance of the retail sales and use tax. The Company used third-party independent contractors to provide software training to the Company's customers. The Company did not send salesmen into Virginia to solicit sales, and the independent contractors were in Virginia solely to provide training services. This activity does not establish nexus for sales and use tax purposes. The Taxpayer indicates that it has now taken over the sales activities of the Company. Assuming there are no changes in the facts as presented, and the Company did not meet any of the other nexus criteria listed in Va. Code § 58.1-612(C), the Company did not establish nexus in Virginia prior to being purchased by the Taxpayer.
Corporate Income Tax
Under Public Law ("P.L.") 86-272, codified at 15 U.S.C. §§ 381-384, 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. The Department has a long-established policy of narrowly interpreting the provisions of P.L. 86-272.
In Public Document ("P.D.") 01-136 (9/18/01), the Department ruled that the provision of services in Virginia by an independent contractor on behalf of the taxpayer was the purchase by the taxpayer of services from a vendor that were then resold to the taxpayer's customers. Under such circumstances, this activity alone would not create nexus for the taxpayer purchasing the services. The result would be different if the vendor is not considered an independent contractor. See P.D. 99-278 (10/14/99).
In this case, the Company used unrelated independent contractors to provide training services in connection with the Company's software sales. The Company had no employees or property in Virginia during the time the sales were made. Based on the information provided, the provision of training in Virginia by contractors hired by the Company does not create corporate income tax nexus for the Company.
As with any guidance provided by the Department, this ruling is limited to the time period, facts and circumstances presented in your letter. Any material changes in the facts could alter this ruling.
The Code of Virginia sections and public documents cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.state.va.us. If you have any questions concerning this response, please contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at ****.
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- Sincerely,
Kenneth W. Thorson
- Sincerely,
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AR/50127S
Rulings of the Tax Commissioner