February 7, 2018
Re: Request for Ruling: Corporation Income Tax
Dear *****:
This will reply to your letter in which you request a ruling concerning whether your client (“Company A”) has a positive Virginia sales factor and nexus with Virginia for corporate income tax purposes and whether it is required to pay pass-through entity (PTE) withholding tax.
FACTS
Company A is a ***** (State A) limited partnership. Its general partner (Company B) is also a State A partnership. Neither Company A nor Company B has an office in Virginia or any employees or representatives who perform services in Virginia. In addition, neither company has any property in Virginia.
Company A buys natural gas and petroleum for resale. Company A typically buys and sells natural gas while it is in a pipeline. The buyers are typically companies that also buy natural gas while it is in the pipeline and resell it to other parties. Some of the buyers may be located in Virginia.
Company A also ships petroleum in a pipeline. Along the route, petroleum is supplied into a number of states, including Virginia. Typically, the origin point of the petroleum is in ***** (State B) and the destination point is either in ***** (State C) or in ***** (State D). If these are not the origin or destination points, however, the contract price is adjusted accordingly. The ultimate purchaser instructs Company A as to where the petroleum should be directed. Sales of petroleum are usually made to counterparties, some of whom may request that the product be directed to counterparties located in Virginia. Company A states that it has no control over these requests and the product may be resold a number of times after the original sale by Company A.
Company A asks whether it has a positive sales factor and nexus with Virginia and an obligation to pay pass-through entity (PTE) withholding tax.
RULING
Sales Factor
Virginia Code § 58.1-400 imposes the 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.
Virginia Code § 58.1-415 provides that tangible property received in Virginia as a result of a sales transaction is considered a Virginia sale unless the delivery was for transportation purposes. Specifically, Virginia Code § 58.1-415 states:
In the case of delivery by common carrier or other means of transportation, the place at which such property is ultimately received after all transportation has been completed shall be considered as the place at which such property is received by the purchaser.
As such, Virginia attributes sales of tangible personal property on a destination basis. The Department has held that a sale of tangible property is not included in the numerator of the Virginia sales factor when the initial delivery within Virginia is for transportation purposes and the seller knows that the ultimate recipient is located outside of Virginia. See Public Document (P.D.) 91-248 (10/8/1991) and P.D. 95-24 (2/13/1995).
These rulings state that the determinative factor is not the mode of transportation because the standard imposed by the statute merely stipulates that the goods be subject to some form of transportation. Instead, the Department weighs more heavily the fact that the original seller of tangible property had knowledge that the ultimate destination of the tangible property was outside Virginia once goods enter the delivery function.
In the case of a direct delivery to a person designated by the purchaser, the sale is attributed to Virginia if it is ultimately received in Virginia by the designated person. See Title 23 VAC 10-120-220 A 1. Receipts and transfers by parties other than the purchaser or the designated ultimate recipient, however, are considered part of the transportation process. See Title 23 VAC 10-120-220 A 2. In addition, a direct delivery does not occur if another person is known to be the ultimate recipient at or before the time of shipment. See id.
Natural Gas
Company A buys natural gas while it is in transit in a pipeline. Sometimes Company A sells to a buyer located in Virginia. Frequently, the buyers are third parties that also resell the natural gas. The facts are not specific enough in order for the Department to make a definitive ruling. The Department, however, disagrees with Company A's argument that no destination sales can occur merely because it sells natural gas while it is in a pipeline. If Company A knows at the time of the sale that the product will ultimately be delivered to a customer in Virginia, such sale should be included in the numerator of Company A's Virginia sales factor.
Petroleum
Company A ships petroleum products in a pipeline as well. Company A sells petroleum while it is in the pipeline. Such sales normally have a location in State C or State D as the destination. The ultimate purchaser, however, instructs Company A where the product should be directed if not to one of these two locations. It appears that there are instances in which the product is directed into Virginia. Similar to the analysis for natural gas above, if Company A knows at the time of the sale that the product will ultimately be delivered to a customer in Virginia, such sale should be included in the numerator of Company A's Virginia sales factor.
Nexus
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. Under certain conditions, a corporation may have income from Virginia sources resulting from a positive apportionment factor, but not be subject to tax by virtue of the protections afforded under P.L. 86-272. See P.D. 94-175 (6/8/1994). P.L. 86-272 prohibits a state from imposing a net income tax on a foreign corporation when its only contact with the state constitutes solicitation of sales. This same protection has been extended by the United States Supreme Court to include activities that are ancillary to solicitation or de minimis in nature.
The Department narrowly interprets P.L. 86-272 within the context of the decision of the Court in Wisconsin Department of Revenue v. William Wrigley, Jr. Co., 505 U.S. 214 (1992). A taxpayer that engages in activities beyond solicitation may exceed the protection provided by P.L. 86-272 and be subject to the Virginia corporate income tax. Title 23 VAC 10-120-90 G, however, exempts activities that are de minimis in nature. Pursuant to Wrigley, all nonancillary activities are examined to determine if, when considered together, they create more than a de minimis connection to the Commonwealth.
Although Company A appears to do business with other companies located in Virginia, it does not appear that Company A actually conducts any activities in Virginia. It has no property in Virginia and none of its employees engage in any activity in Virginia. In addition, the products are delivered in pipelines that are not owned or controlled by either Company A or Company B. Therefore, it is unlikely that Company A has nexus with Virginia.
Company A should be aware, however, that nexus determinations are highly dependent on the facts and circumstances of each case. As the Department has observed, if a taxpayer performs some activities in Virginia beyond the mere solicitation of sales, it may not take much activity to exceed the de minimis standard set forth in Wrigley. See P.D. 14-145 (8/26/2014). In Wrigley, the Court reasoned that a “nontrivial additional connection” with the state will be established when all unprotected activities are considered together. See Wrigley, 505 U.S. at 235. One of the activities, the sales through agency stock checks, accounted for only 0.00007% of sales in the state. Id.
In addition, even though Company A states that it has no property in Virginia, it should be aware that if it owns any product stored in Virginia while awaiting a sale, such product would likely be considered inventory and result in a positive property factor. See Title 23 VAC 10-120-160 A 2. Virginia has held that the storage of inventory in a state goes beyond the mere solicitation of sales that is protected by P.L. 86-272. See P.D. 92-125 (7/17/1992). Further, the Department's longstanding policy is that the presence of inventory in Virginia subjects a corporation to income tax. See P.D. 02-132 (10/8/2002) and P.D. 97-447 (11/10/1997). Therefore, the presence of inventory would create nexus as long as it was more than de minimis.
Commerce Clause
The Department declines to rule whether subjecting Company A to Virginia income tax would violate the Commerce Clause of the United States Constitution. As stated above, it is unlikely Company A has nexus with Virginia and even if Company A had nexus with Virginia, it is not possible to evaluate this issue without a complete examination of Company A's business activities.
PTE Withholding
If Company A does not have nexus with Virginia for income tax purposes, then it would have no Virginia income tax liability. PTEs with no Virginia income tax liability are not subject to the PTE withholding tax. See the Guidelines for Pass-Through Entity Withholding, issued as P.D. 15-240 (12/22/2015). The Department declines to express an opinion concerning whether any other exemptions may apply. For a detailed explanation of the rules concerning PTE withholding tax, including the exemption requirements, Company A should review the Guidelines.
CONCLUSION
Because sales are attributed to Virginia on a destination basis for purposes of the sales factor and some ultimate purchasers may be located Virginia, Company A may have a positive Virginia sales factor provided it has knowledge at the time of the sale that the sale is ultimately destined for Virginia. Based on Company A's representations, however, it is unlikely Company A has nexus with Virginia. Nexus determinations, however, are highly dependent on the facts and circumstances of each taxpayer, and Company A should be aware that it may not take much business activity in Virginia beyond the solicitation or sales or activities ancillary to solicitation of sales to exceed the de minimis standard. Provided that Company A does not have nexus with Virginia, it would not be subject to Virginia corporate income tax. Company A would also not be subject to the PTE withholding tax.
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/1386.M