Tax Type
Corporation Income Tax
Description
Entity headquartered outside Virginia, has an employee located in Virginia.
Topic
Appropriateness of Audit Methodology
Nexus
Pass-Through Entities
Date Issued
09-19-2013
September 19, 2013
Re: Request for Ruling: Corporate Income Tax
Dear *****:
This will reply to your letter in which you request a ruling concerning corporate income tax nexus on behalf of your client (the "Taxpayer").
FACTS
The Taxpayer, an entity headquartered outside Virginia, has an employee located in Virginia. The employee will travel to consult with customers in the United States. The consulting services include conducting training at customer facilities and the Taxpayer's office. The employee would also develop test methods from the Virginia office in her home. None of the Taxpayer's customers are located in Virginia.
The Taxpayer acknowledges it will need to withhold Virginia income tax from the employee's compensation. Based on the facts presented, the Taxpayer requests a ruling that it does not have nexus with Virginia for purposes of corporate income tax.
RULING
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 the applicable apportionment factor positive. See Va. Code §§ 58.1-408 through 58.1-416. The existence of a positive Virginia apportionment factor 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. 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 sale of other than tangible personal property. See Public Document (P.D.) 91-33 (3/18/1991) and P.D. 9375 (3/17/1993). 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 provisions of P. L. 86-272.
The Taxpayer states that its Virginia employee is engaged in the development of test methods in Virginia. Although not directly stated, it appears these test methods would be related to the consulting and training services provided to customers outside Virginia. The preparation of consulting and training materials would generally be considered to part of the services provided by the employee.
In P.D. 01-70 (5/25/2001), the Department held that providing technical training to the dealer's customers exceeds the protections set out by P.L. 86-272. This public document did not distinguish between pre-sale or post-sale technical advice with regard to sales solicitation. It stands to reason, however, that technical information that is provided prior to a sale could be ancillary to sale solicitation when such activity occurs for the purpose of soliciting sales. In general, however, post-sale technical training or support provided to customers would not be considered to be ancillary to the solicitation of sales, and if occurring in Virginia, would create nexus. See P.D. 09-172 (10/23/2009).
In this case, the Taxpayer is in the business of providing consulting and training services to customers. These services do not appear to be related to the sale of products by the Taxpayer. Such services provided to customers exceed the protections afforded under P.L. 86-272. Thus, the employee's activities of creating tests related to the provision of consulting and training services would create nexus for the Taxpayer in Virginia, unless they are found to be de minimis.
Title 23 of the Virginia Administrative Code (VAC) 10-120-90 G exempts activities that are de minimis in nature. Under this regulation, consideration is given to the nature, continuity, frequency and regularity of the unprotected activities in Virginia, compared to the nature, continuity, frequency and regularity of such activities outside Virginia. Pursuant to Wrigley, all nonancillary activities are examined to determine if, when considered together, they create more than a de minimis connection to Virginia. Without a full examination of the activities conducted in Virginia by the Taxpayer, a determination cannot be made as to whether such activities discussed in the preceding sections would be a de minimis connection with Virginia.
Based on the facts presented, the Taxpayer's activities in Virginia would appear to create nexus, allowing the Commonwealth to impose tax on the Taxpayer's income apportioned to Virginia. As previously stated, a corporation or pass-through entity will have income from Virginia sources if there is sufficient business activity within Virginia to make the applicable apportionment factor positive. See Va. Code §§ 58.1-408 through 58.1-416. The existence of a positive Virginia apportionment factor establishes income from Virginia sources. In this case, the Taxpayer would have a positive payroll factor. Thus, it appears the Taxpayer would be required to file Virginia corporate income tax returns if its employee develops test methods in Virginia for use in its consulting and training operations.
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, regulations, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5440800805.o
Rulings of the Tax Commissioner