05-103 | Virginia Tax

Tax Type

Corporation Income Tax

Description

A parent corporation of an affiliated group files a combined Virginia return

Topic

Allocation and Apportionment

Corporate Distributions and Adjustments

Date Issued

07-01-2005

July 1, 2005

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 ***** (the "Taxpayer") for the taxable year ended December 31, 1994. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is the parent corporation of an affiliated group that files a combined Virginia corporate income tax return. The Department audited the Taxpayer and its affiliates and made a number of adjustments to the combined return. Several adjustments involved removing ****** ("Corporation A"), ***** ("Corporation B""), ***** ("Corporation C"), ****** ("Corporation D") and ***** ("Corporation E") from the combined return because they lacked nexus with Virginia.

The Taxpayer contests the removal of the five corporations, asserting that each member engaged in business activities in Virginia and produced income from those activities during the taxable year at issue. The Taxpayer further contends that the Department inconsistently applied the apportionment factor rules because it did not remove from the combined return two other affiliated corporations that had activities in Virginia similar to those of the corporations that were removed. Finally, the Taxpayer contends that the Department did not remove Corporations A through E from the combined return for years prior to the taxable year at issue.

DETERMINATION

Virginia 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 establishes income from Virginia sources.

Public Law (P.L.) 86-272, as codified at 15 U.S.C. §§ 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. Public Law (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 a long-established policy of narrowly interpreting the provisions of P.L. 86-272.

In this case, the five corporations at issue did not have positive property or payroll factors. The auditor concluded that, without assets or employees in Virginia, the corporations lacked sufficient business activity in Virginia for the Commonwealth to impose an income tax.

The Department requested documentation concerning the business activities and apportionment factors of the five corporations at issue in order to substantiate the Taxpayer's claim that they had Virginia nexus. The Taxpayer has not provided the requested information. Pursuant to Va. Code § 58.1-205, in any proceeding relating to the interpretation of the tax laws of Virginia, an "assessment of a tax by the Department shall be deemed prima facie correct." As such, the burden of proof is on the Taxpayer to show that the assessment is incorrect. The Taxpayer has not met its burden.

The Taxpayer further contends that the Department inconsistently applied the apportionment factor rules because it did not remove two other companies, ***** ("Corporation F") and ***** ("Corporation G"), with facts and circumstances similar to the five corporations removed from the combined return. Again, because the Taxpayer has not provided the requested information, the Department is unable to ascertain the validity of the Taxpayer's claims.

Prior Year Audits

The Taxpayer contends that the Department examined its prior year returns and no adjustments were made to remove the five corporations. As a practical matter, the determination of nexus is a factual issue based on a business' activities in a state within a taxable period of time. Accordingly, a business may have nexus with Virginia in one taxable year, but not the next, and then re-establish nexus in the third taxable year. As such, the fact that the five corporations were not removed from the combined return in prior taxable years has no bearing on the nexus findings for the taxable year at issue.

CONCLUSION

Based on the foregoing, the assessment issued for the taxable year ended December 31, 1994 is upheld. The Taxpayer will receive an updated bill with interest accrued to date. No additional interest will accrue provided the outstanding balance is paid within 30 days from the date of the bill. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attention: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.

The Code of Virginia sections cited, as well as other reference documents, are available on-line in the Tax Policy Library section of the Department's web site, located at www.policylibrary.tax.virginia.gov. If you have any have any questions regarding this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/48259B

Rulings of the Tax Commissioner