Tax Type
Corporation Income Tax
Withholding Taxes
Description
Person not subject to Virginia income tax must file a return to claim credit/refund
Topic
Credits
Taxability of Persons and Transactions
Withholding of Tax
Date Issued
07-19-2007
July 19, 2007
Dear ****:
This will reply to your letter in which you request a ruling on behalf of your client, ***** (the "Taxpayer") whether or not it is subject to individual or corporation income taxation by Virginia for the 2006 taxable year. You also ask if the Taxpayer is subject to withholding income tax requirements as the result of lottery prize payments received from the ***** (the "Lottery").
FACTS
The Taxpayer is a corporation incorporated and domiciled outside Virginia. All accounting, administration and management of the Taxpayer's investments are conducted in ***** ("State A"). The Taxpayer has no salaried employees or officers working within Virginia and does not own or lease any real or tangible personal property in Virginia. The Taxpayer conducts no business activities within Virginia and has no telephone listing, building directory listing, or any other form of address within Virginia. The Taxpayer is not registered with the State Corporation Commission.
In 2006, the Taxpayer acquired rights to a discrete number of Lottery prize annuity payment streams from the original winners pursuant to an "appropriate judicial order." The Lottery acknowledged the purchases in writing. Contracts for purchase of the Lottery annuities were executed in State A. The Taxpayer's sole contact with Virginia is the collection of the annual receipt of the Lottery prize payments.
The Taxpayer did not solicit or execute purchases of the Lottery prize annuities within Virginia, nor did it purchase the original winning tickets or claim the original Lottery prizes. Contracts for the purchase of the Lottery prize annuities were executed
in State A.
You request a ruling with respect to whether it is subject to the Virginia personal income and corporate income tax on the prize payments arising from the purchase of the Lottery prize. You also ask whether the Lottery should withhold personal income tax from the Lottery prize payments made to the Taxpayer.
RULING
Income Tax Status
Public Law (P.L.) 86-272 (15 U.S.C. §§ 381-384) provides an exemption from a state's income tax if a taxpayer's activities in such state do not exceed a narrowly defined set of activities constituting solicitation of orders for the sale 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). The Department has a long established policy of narrowly interpreting the "solicitation test" of P.L. 86-272. For example, the Department has ruled that a taxpayer must satisfy the requirements of the federal law for every day of the taxable year. See Public Document (P.D.) 85-123 (6/6/1985). Although P.L. 86-272 applies to tangible property, the Department's policy has been to extend the "solicitation test" of P.L. 86-272 to situations involving sales of services. See Public Document 06-114 (10/11/06).
The Taxpayer has no physical presence in Virginia. The Taxpayer's only connection with Virginia is the receipt of the Lottery prize payments mailed by the Lottery to the Taxpayer's office, located in another state. Although it is clear that the Taxpayer has income from Virginia sources, multistate corporations do not compute their tax liability based on income from Virginia sources. The facts presented indicate that the Taxpayer will have no Virginia taxable income after application of the statutory method of allocation and apportionment. Where a corporation has an apportionment factor of zero it is not required to file a corporation income tax return with Virginia. See P.D. 88-58 (4/5/1988). Further, barring a change in the Taxpayer's activities in Virginia or other change sufficient to create positive Virginia apportionment factors, the Taxpayer will not have a Virginia corporate tax liability in subsequent taxable years.
Withholding Requirement
The withholding tax imposed by Article 16, Chapter 3 of Title 58.1 (§ 58.1-460 et seq.) explicitly includes the Lottery prizes over $5,001 in the definition of "wages" from which tax must be withheld. As the Lottery is an agency of the Commonwealth of Virginia, and physically located in Virginia, there is no question that Virginia has the right to require that withholding tax be withheld from lottery prize payments. This right accrues because the payment is made in Virginia, and the funds are subject to Virginia law prior to payment. Thus, for withholding tax purposes, it is irrelevant whether the recipient is a nonresident, or a corporation or other entity, with no other connection to Virginia and who would otherwise not be required to file a Virginia income tax return.
Any Virginia income tax withheld from a person's wages, including Lottery prize payments, may be claimed as a payment on the Virginia income tax return. Generally, a person who is exempt or otherwise not subject to Virginia income tax would have to file a Virginia income tax return to claim the withholding credit and request a refund. In many cases a person's exempt status for income tax depends upon facts and circumstances that can vary from year to year, and tax liability may change each year. Indeed, a person may be exempt from Virginia income tax at the time a Lottery prize payment is made, but become subject to income tax later in the taxable year. Only after the close of the taxable year when all the facts are known can the recipient legitimately prove his exempt status or lack of tax liability and claim a refund of the tax withheld. Therefore, Virginia is justified in requiring withholding from each Lottery prize payment even though the taxpayer is not currently expected to have a Virginia income tax liability, and reasonably expects to remain so for the foreseeable future.
Withholding Exemption
There are situations in which the likelihood of a change in a taxpayer's income tax status is so remote that requiring withholding and a subsequent income tax return claiming a refund serves no useful purpose and is a burden to all parties. In such situations Va. Code § 58.1-461 authorizes payments without withholding when a taxpayer provides a Withholding Exemption Certificate in a form prescribed by the Department.
For purposes of exemption of income tax withholding from Lottery payments, the Taxpayer may file a completed exemption certificate with the Lottery to claim exemption from such withholding. The Taxpayer must maintain sufficient documentation to show why it is exempt from Virginia income tax withholding on the Lottery prize payments. Form VA-4P, Withholding Exemption Certificate For Recipients Of Pension And Annuity Payments, is the current form prescribed by the Department for this type of income. If the Taxpayer fails to make proper notification, the Lottery will be required to withhold income tax from the annuity payments in accordance with Va. Code § 58.1-4006.
The Taxpayer must make, at a minimum, an annual review of its income tax status in Virginia and maintain documentation of such review. Should the Taxpayer's status change at any time during a taxable year after filing the exemption certificate, the Taxpayer must then file an amended exemption certificate or otherwise notify the Lottery of such change so that proper withholding is made from subsequent lottery payments. This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
If any Virginia income tax is withheld from the Taxpayer's Lottery prize payments, the amount withheld may be claimed as a payment on the Virginia income tax return. In such case, the Taxpayer will have to file a Virginia income tax return to claim a credit for the amount withheld by the Lottery and request a 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. Form VA-4P with instructions is also available at the Department's web site. If you have any questions regarding this ruling, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Janie E. Bowen
Tax Commissioner
AR/1-736818250E
Rulings of the Tax Commissioner