Tax Type
Retail Sales and Use Tax
Description
Nexus
Topic
Partnerships
Date Issued
08-02-2005
August 2, 2005
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 your client, ***** (the "Taxpayer") has nexus for Virginia corporate and retail sales and use tax purposes. I apologize for the delay in the Department's response.
FACTS
The Taxpayer sells tangible personal property via the Internet. The Taxpayer's website is maintained on a server located in ***** ("State A"). All design, implementation, support, maintenance, and administrative services associated with the Taxpayer's website are performed in State A.
The Taxpayer is considering entering into agreements with retailers (the "Partners"). Pursuant to the agreement, an Internet link will be placed on the Partners' website that would establish a direct link to the Taxpayer's website. The link would contain technology provided by the Taxpayer that allows the Taxpayer to track sales to individuals who purchase tangible personal property from the Taxpayer while linked through the Partners' website.
You request a ruling as to whether the Taxpayer's use of an Internet link with a Partner that maintains a website on a server in Virginia (the "Virginia Partner") would create nexus for the Taxpayer for retail sales and use or corporate income tax purposes.
RULING
Retail Sales and Use Tax Nexus
Pursuant to Va. Code § 58.1-612, the sales tax is collectible from all persons who are dealers and who have sufficient contact with Virginia to require registration under Va. Code § 58.1-613. Virginia Code § 58.1-612 B defines the term "dealer" to include every person who:
-
- Sells at retail, or who offers for sale at retail, or who has in his possession for sale at retail, or for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth, tangible personal property . . . .
The Taxpayer qualifies as a "dealer" under this statute because it offers tangible personal property for sale at retail.
Virginia Code § 58.1-612 C sets forth the nexus requirements that give the Commonwealth the authority to require a business to register to collect and remit Virginia sales and use tax. Virginia law generally requires dealers with a physical presence in Virginia to collect tax on all sales to Virginia customers, including sales made over the Internet. The same nexus standards apply to out-of-state vendors doing business in the state by other remote means, such as mail order, catalog and telephone sales.
The Department has previously ruled in Public Document 00-53 (4/14/2000) that an out-of-state seller whose only presence in Virginia is a computer server used to create or maintain an Internet website does not have nexus for sales and use tax purposes. This ruling involved a business that used computer servers provided by a third party and its own computer servers located in Virginia.
Based on the facts presented, the Taxpayer's only connection with Virginia would be through the computer servers owned or used by the Virginia Partners. As Public Document 00-53 discusses, Virginia Partners would not have nexus with Virginia based solely on the presence of their computer servers in the Commonwealth. As such, the Taxpayer would not have nexus for retail sales and use tax purposes.
A change in the Virginia Partners' activities in Virginia could alter this nexus determination. The Taxpayer may obtain additional information about the Department's position on agency relationships and how they affect Virginia sales tax nexus by referring to Public Documents 99-94 (4/30/99) and 00-193 (10/20/2000).
Corporate Income Tax Nexus
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 clearly establishes income from Virginia sources.
Public Law (P.L.) 86-272, codified at 15 U.S.C. §§ 381-384, prohibits a state from imposing a net income tax where the only contacts with a state are a narrowly defined set of activities constituting solicitation of orders for sales of tangible personal property. The Department limits the scope of P.L. 86-272 to only those activities that constitute solicitation, are ancillary to solicitation, or are de minimis in nature. See Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).
Based on the facts provided, the Taxpayer lacks a positive apportionment factor and therefore has no nexus for corporate income tax purposes with Virginia. The Virginia Partner, however, maintains a server in Virginia. As such, the Virginia Partner has a positive property factor and nexus for Virginia income tax purposes.
Therefore, the Taxpayer's only activity that could subject it to Virginia income tax is the Internet link maintained on the Virginia Partner's server. Thus, the question becomes whether the Virginia Partner is an independent contractor or representative (employee, partner, etc.) of the Taxpayer.
Pursuant to P.L. 86-272, there are different standards that apply to the activities of a taxpayer's representative verses the activities of an independent contractor. A taxpayer is not protected from taxation by a state pursuant to P.L. 86-272 if its employees and/or representatives maintain an office in such state or accept orders for sales. On the other hand, an independent contractor can "make" a sale (solicit and accept an order) and maintain an office in the state without subjecting his principal to taxation.
An independent contractor is defined in P.L. 86-272 as:
-
- commission agent, broker, or other independent contractor who is engaged in selling, or soliciting orders for the sale of, tangible personal property for more than one principal and who holds himself out as such in the regular course of his business activities . . . .
According to facts presented, the Virginia Partner's only connection to the Taxpayer is that it allows the Taxpayer's Internet link and sales tracking technology to be included on the Partner's website. There is no evidence to suggest that a Virginia Partner is a representative of the Taxpayer. As such, I find that the Virginia Partner is an independent contractor acting on behalf of the Taxpayer.
Further, P.L. 86-272 prohibits the taxation of a corporation if an independent contractor's "activities on behalf of such person in such state consist solely of making sales, or soliciting orders for sales of tangible personal property." If an independent contractor represents more than one principal, and holds himself out as such, he can "make" a sale (solicit and accept an order) and maintain an office in the state without subjecting his principal to tax. With these two exceptions, any activities conducted by the independent contractors on behalf of the principal (in other words, as an agent with the capacity to act for the principal) will subject the principal to taxation in the state to the same extent as if the activity had been conducted by an employee.
In the instant case, permission to include the Taxpayer's link and sales tracking technology on a website by a Virginia Partner does not exceed the protection afforded by P.L. 86-272. As such, the Taxpayer would not be subject to Virginia corporate income taxation.
CONCLUSION
Based on the facts presented, the Taxpayer would not be subject to either the retail sales and use tax or the corporate income tax based on its relationship with its Virginia Partners.
This ruling is based on the facts presented in your letter as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
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.policylibrary.tax.virginia.gov. If you have any questions regarding this ruling, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
-
-
-
-
-
-
-
- Sincerely,
Kenneth W. Thorson
- Sincerely,
-
-
-
-
-
-
COMMONWEALTH of VIRGINIA
Department of Taxation
TO WHOM IT MAY CONCERN:
Under the authority of §§ 58.1-1 and 58.1-110 of the Code of Virginia, I hereby delegate to Gerald Gwaltney, Deputy Tax Commissioner, the authority to sign for me, in my absence, any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and Treasury Board.
This authority shall become effective January 10, 2003, and shall remain in effect until revoked.
Done at Richmond, Virginia, this 13th day of January 2003.
Kenneth W. Thorson
Tax Commissioner
Acknowledgement: Gerald H. Gwaltney Date:
Done this 13th day of January 2003 in the City of Richmond, State of Virginia. My Commission expires 9-30-2003.
Sylvia J. Wesson
Notary Public Notary Seal
Rulings of the Tax Commissioner