06-38 | Virginia Tax

Tax Type

Corporation Income Tax

Description

Taxpayer had sufficient nexus with Virginia to be subject to corporate income tax

Topic

Taxable Transactions

Date Issued

04-05-2006

April 5, 2006

Re: § 58.1-1821 Application: Corporate Income Tax

Dear ***************:

This is in reply to your letter in which you seek correction of the corporate income tax assessment issued to your client, **************** for the taxable years ended December 31, 2000 and 2001. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a corporation located outside Virginia. Under audit, the Department identified invoices for rentals of heavy equipment to Virginia businesses. Consequently, the auditor determined that the Taxpayer had sufficient nexus with Virginia to be subject to corporate income tax and issued assessments for tax based on the Taxpayer's income from Virginia sources.

The Taxpayer has paid the assessments and filed a claim for refund, asserting that the transactions at issue were, in fact, installment sales. The Taxpayer also contends that its business activity within Virginia was insufficient to have nexus for corporate tax purposes.

DETERMINATION

Rentals vs. Installment Sales

The Taxpayer asserts that the transactions labeled as rentals were, instead, installment sales, and that it misapplied the term "rental" on certain invoices. The transactions, however, were evidenced by standard rental agreements as opposed to sales contracts. Further, a number of invoices were examined that did not include interest, which is normally associated with an installment sale. No additional documentation has been provided to support your position that the transactions at issue were, in fact, installment sales.

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 establishes income from Virginia sources.

Public Law ("P.L.") 86-272, as codified at 15 U.S.C. §§ 381-384, prohibits a state from imposing an income tax on businesses when the only contacts with the state are a narrowly defined set of activities. 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.

During the course of a retail sales and use tax audit, the Department determined that the Taxpayer was renting tangible personal property to customers in Virginia. As a result, the Department determined that the Taxpayer had sufficient nexus for corporate income tax purposes because the Taxpayer maintained tangible personal property in Virginia, creating a positive property factor.

The Taxpayer contends that its position is consistent with, and is supported by, the U.S. Supreme Court's opinions in Quill Corporation v. North Dakota, 504 U.S. 298 (1992) and Scripto v. Carson, 362 U.S. 207 (1960). These cases addressed the limits on a state's authority to impose a duty to collect use tax on out-of-state vendors when the vendors had no physical presence or minimal contacts with the taxing state. Neither case, however, addressed corporate income tax nexus.

In Wrigley, the William Wrigley, Jr., Co. maintained a stock of gum in Wisconsin for activities that were determined to exceed the mere solicitation of sales. The U. S. Supreme Court found this to be an unprotected activity that would create nexus with a state, unless it was found to be de minimus.

In the case at hand, the Taxpayer rented equipment to customers in Virginia on a regular basis. The Taxpayer is in the business of selling and leasing equipment. The renting of property in Virginia clearly exceeded the protection afforded under P.L. 86-272. As such, the Taxpayer has nexus with Virginia and has a physical presence in Virginia by owning equipment in the state. Further, the physical presence creates a positive property factor resulting in income Virginia sources. Accordingly, because the Taxpayer has nexus with Virginia and income from Virginia sources, it has income subject to tax in Virginia.

CONCLUSION

In accordance with this determination, the Department properly imposed tax on the income of the Taxpayer for the taxable years ended December 31, 2000 and 2001. Accordingly, I must deny your request for refund.

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

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/50949E

Rulings of the Tax Commissioner