Tax Type
Individual Income Tax
Description
LLC does not have nexus with Virginia
Topic
Taxable Income
Date Issued
02-07-2005
February 7, 2005
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This is in reply to your letters in which you contest the individual income tax assessment issued to your client, ***** (the "Taxpayer"), for the taxable year ended December 31, 2000. I apologize for the delay in the Department's response.
FACTS
The Taxpayer, a domiciliary resident of ***** ("State A"), is a principal partner in ***** (the "LLC") and a full-time employee of the company. The LLC is organized under Virginia law and uses a Virginia address for its financial records. The Department received information from the Internal Revenue Service ("IRS") indicating the Taxpayer received income from the LLC for the 2000 taxable year. As a result, the Department sent a letter to the Taxpayer requesting that he file the proper Virginia returns or provide an explanation concerning why the income was not taxable. No response was received from the Taxpayer and an assessment was issued based on the available information.
The Taxpayer states that the LLC had no Virginia taxable income for the taxable year 2000 because it operated exclusively in State A. Furthermore, the LLC's only connections to Virginia are its organization under Virginia law and preparation of its financial documents by a Virginia accounting firm. The Taxpayer contends that neither his wages nor the income distributed from the LLC for the 2000 taxable year constitute income from Virginia sources. Accordingly, the Taxpayer requests abatement of the assessment for the 2000 taxable year.
DETERMINATION
Public Law ("P.L.") 86-272, as codified at 15 U.S.C. §§ 381-384, prohibits a state from imposing a net income tax on a business 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).
In this case, the LLC's only activities in Virginia result from the purchase of administrative services from an unrelated third party and the use of the unrelated third party's address for financial records. Our analysis of the facts shows the LLC has no property, payroll, or sales in Virginia and the use of the Virginia address is an administrative convenience for accounting and financial records. Accordingly, I find that the LLC does not have nexus with Virginia for the 2000 taxable year, and the income from the LLC is not subject to Virginia income tax.
Virginia generally conforms to the federal treatment of pass-through entities. Such entities are not subject to income tax, but rather, every resident or nonresident shareholder, partner or member with income from Virginia sources is required to report such income on the appropriate Virginia income tax return. Individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents. Under Virginia Code § 58.1-302, "Income and deductions from Virginia sources" includes income from "a business, trade, profession or occupation carried on in Virginia."
The Taxpayer has provided documentation proving that he was a resident of State A and worked for the LLC exclusively in State A during the 2000 taxable year. Accordingly, neither the wages earned by the Taxpayer nor the income distribution from the LLC constitutes income from Virginia sources for the 2000 taxable year. Therefore, the assessment issued to the Taxpayer for taxable year 2000 has been abated.
The Code of Virginia section cited, along with 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 questions regarding this determination, 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/49591E
Rulings of the Tax Commissioner