12-37 | Virginia Tax

Tax Type

Corporation Income Tax

Withholding Taxes

Description

Out of state employer with salesperson living and working in VA

Topic

Exemptions

Nexus

Pass-Through Entities

Tangible Personal Property

Taxability of Persons and Transactions

Date Issued

03-30-2012

March 30, 2012

Re: Request for Ruling: Corporate Income Tax

Dear *****:

This will reply to your letter in which you seek a ruling regarding corporate income tax nexus in Virginia for ***** (the "Taxpayer"). I apologize for the delay in responding to your request.

FACTS

The Taxpayer, incorporated in ***** (State A), sells products to customers within and outside of Virginia. The Taxpayer employs one sales representative who resides in Virginia and solicits sales of tangible personal property on behalf of the Taxpayer. The employee maintains an office in his home in Virginia. The employee does not advertise to the public on behalf of the Taxpayer, and all inventories, sales orders, shipping and billing functions are performed in State A. The Taxpayer is currently registered for corporate income and employee withholding taxes. The Taxpayer believes that it does not have nexus with Virginia and requests to be exempted from corporate income and employer withholding taxes.

RULING

Corporate Income Tax

Virginia Code § 58.1-400 imposes an 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 has a long established policy of narrowly interpreting the provisions of P.L. 86-272. 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 Taxpayer indicates that its Virginia employee is engaged in the solicitation of sales, but has provided no detailed explanation of the specific duties and responsibilities of such employee. In Wrigley, the United States Supreme Court set forth a number of activities that constituted mere solicitation of sales. Such activities include in-state recruitment, training, evaluation of sales representatives, use of hotels and homes for sales-related meetings, provisions of product displays and promotional materials, and use of a business owned automobile by sales personnel. In addition, the Department has issued numerous public documents addressing whether specific activities would be considered ancillary to solicitation. See Public Document (P.D.) 92-150 (8/24/1992), P.D. 94-111 (4/14/1994), P.D. 95-57 (3/28/1995), P.D. 96-1 (1/4/1996), P.D. 96-281 (10/11/1996), 97-232 (5/21/1997), P.D. 97-447 (11/10/1997), P.D. 01-157 (10/19/2001), 08-142 (7/30/2008), and P.D. 09-142 (10/23/2009). The Taxpayer should analyze the activities conducted in Virginia by its employee to verify if any of the activities exceed the mere solicitation of sales. If the activities of the employee do not exceed the protection afforded under P.L. 86-272, the Taxpayer would not be subject to Virginia corporate income tax.

Withholding Tax

Virginia Code § 58.1-461 requires employers to withhold taxes from employee wages for each payroll period. Virginia Code § 58.1-460 defines "employer" as "the person, whether a resident or nonresident of the Commonwealth, for whom an individual performs or performed any service as an employee . . . ." Further, this section defines "employee" as, "an individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages . . . ."

The Taxpayer avers P.L. 86-272 would provide relief from the requirement to withhold tax from its employee's compensation. The protections afforded under P.L. 86-272, however, only relate to a state's ability to impose a net income tax. It has no application when evaluating a state's ability to impose a requirement to withhold income taxes from employees.

In a prior ruling, the Tax Commissioner determined that the presence of employees within Virginia clearly constitutes the requisite nexus to impose withholding tax collection on the Taxpayer. See P.D. 95-56 (3/27/1995).

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.

The Code of Virginia sections cited, along with other reference documents, 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 about this ruling, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Craig M. Burns
        Tax Commissioner

AR/1-4825178812.D

Rulings of the Tax Commissioner