Tax Type
Individual Income Tax
Description
All work performed in State B wages are not subject to Virginia income tax
Topic
Nexus
Date Issued
11-21-2007
November 21, 2007
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessment issued to ***** (the "Taxpayer") for the taxable year ended December 31, 2003.
FACTS
The Taxpayer was a resident of ***** (State A) who worked entirely in ***** (State B), and was employed by an S Corporation (Corporation A) based in Virginia. In addition, the Taxpayer is a shareholder of an S Corporation (Corporation B) based in State B that shared some common shareholders with Corporation A. In 2003, the Taxpayer filed individual tax returns in State A and State B, but not in Virginia.
The Department obtained information indicating that the Taxpayer received income from a Virginia employer. Based on this information, the Department issued an assessment for 2003. The Taxpayer contests the assessment asserting that he performed no work in Virginia.
DETERMINATION
Nonresident Salaries and Wages
Pursuant to Va. Code § 58.1-341, a nonresident individual who has income from carrying on a business, trade, profession, or occupation within Virginia is required to file a Virginia individual income tax return, unless the individual meets the filing exception described in Va. Code § 58.1-321. The Virginia taxable income of a nonresident is computed by multiplying his Virginia taxable income (computed as if he were a resident by the ratio of his net income, gain, loss, and deductions from Virginia sources to his net income, gain, loss, and deduction from all sources.
For salaries and wages from an employer, the "net income, gain, loss, and deductions from Virginia sources" would be an amount equal to (1) the total annual salary from the employer, (2) multiplied by the number of days or portion thereof that the nonresident individual spent in Virginia performing duties for their employer, and (3) divided by the number of days or portion thereof spent anywhere performing duties for the employer. See Public Document (P.D.) 84-90 (7/3/1984).
In the instant case, the information provided demonstrates the Taxpayer performed all work in State B. As such, none of his wages would be subject to Virginia income tax.
Pass Through Entity Income
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 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). 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 the sales of services.
A taxpayer, however, that engages in activities that exceed the protection afforded by P.L. 86-272 would be subject to the Virginia income tax. Corporations (including S corporations) that have income from business both within and without Virginia are required to compute their Virginia source income in accordance with the corporate statutory formula set forth in Va. Code §§ 58.1-408 through 58.1-421. As such, S Corporations generally must allocate dividends to the state of commercial domicile and apportion all other income. Income is apportioned using a three-factor formula based on the property, payroll and sales within Virginia. See P.D. 88-165 (6/29/1988).
As such, income received by an S Corporation, which is determined to be income from Virginia sources, will remain Virginia source income in the hands of the shareholders. Shareholders of an S Corporation that are individuals report such income on their individual income tax returns in kind and remit the tax on behalf of the S Corporation.
The evidence shows that Corporation B did not conduct sufficient business activities in Virginia during 2003 to create nexus. As such, Corporation B did not have nexus with Virginia and had no Virginia source income.
CONCLUSION
Based on this determination, the Taxpayer is not liable for any Virginia income tax for the 2003 taxable year. As such, the Virginia individual income tax assessment issued to the Taxpayer for 2003 has been abated.
The Code of Virginia sections and public documents cited, as well as other reference documents, are available online 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, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/1-1387859481B
Rulings of the Tax Commissioner