Tax Type
Corporation Income Tax
Description
Sales factor; Foreign corporation; PL 86-272
Topic
Allocation and Apportionment
Date Issued
06-06-1985
June 6, 1985
RE: § 58.1-1821 Application; Corporation Income Tax
§58-151.047 Sales Factor; P. L. 86-272
Dear ****
Virginia Code § 58-151.03, since recodified as § 58.1-400, imposes a tax on every foreign corporation having income from Virginia sources. For many years the taxpayer has been making sales of its products in Virginia in such a manner that Virginia was prohibited from imposing an income tax on the taxpayer under Public Law 86-272, codified at 15 U.S.C.A. §§ 381-384, even though the taxpayer clearly received income from Virginia sources.
Beginning October 1, 1980, the taxpayer expanded its activity in Virginia so that it was subject to Virginia income tax for taxable year 1980. The dispute involves computation of the sales factor for 1980. The taxpayer included in the numerator only the sales made in Virginia between October 1 December 31. The Department included in the numerator sales made ln Virginia for all of 1980 and assessed additional tax.
Determination
It is clear that Virginia Code § 58-151.047 requires that the numerator of the sales factor include sales for the entire taxable year. The question is whether federal law prohibits Virginia from including sales made in Virginia prior to October 1, 1980.
15 U.S.C.A. § 381 provides, in pertinent part:
No State, or political subdivision thereof, shall have power to impose, for any taxable year ending after September 14, 1959, a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person during such taxable year are either, or both, of the following:... (Emphasis added.)
Federal law prohibits the imposition of a Virginia income tax on income clearly derived from Virginia sources only if the taxpayer's business activities in Virginia do not exceed the specified activity for the entire taxable year. If the taxpayer's business activity in Virginia exceeds the specified activity for any part of a taxable year the federal prohibition does not apply and the taxpayer is subject to Virginia income tax on all of its income derived from Virginia sources for the entire taxable year.
The taxpayer cites Virginia Code §13.1-116 which requires a foreign corporation seeking to withdraw from Virginia to pay all state taxes "...on account of its income from sources within this State during the part of the taxable year and any previous period when the corporation may have had income from sources within this State."
The key words are "income from sources within this State." As stated earlier, as long as the taxpayer is selling its products in Virginia it is receiving income from Virginia sources. Federal law prohibits Virginia from taxing this income only if the taxpayer's activities within Virginia meet the federal requirements for the entire taxable year. Thus, if the taxpayer were to dispose of its Virginia operations in February of a taxable year but continue to sell its products in Virginia as it did prior to October 1, 1980, then the numerator of the sales factor for the year of disposition would include all sales in Virginia for the entire taxable year.
Accordingly, the inclusion in the numerator of the sales factor all sales made in Virginia during 1980 is proper and the assessment of additional tax is correct. The assessment is now due and payable.
Sincerely,
W. H. Forst
Tax Commissioner
RE: § 58.1-1821 Application; Corporation Income Tax
§58-151.047 Sales Factor; P. L. 86-272
Dear ****
Virginia Code § 58-151.03, since recodified as § 58.1-400, imposes a tax on every foreign corporation having income from Virginia sources. For many years the taxpayer has been making sales of its products in Virginia in such a manner that Virginia was prohibited from imposing an income tax on the taxpayer under Public Law 86-272, codified at 15 U.S.C.A. §§ 381-384, even though the taxpayer clearly received income from Virginia sources.
Beginning October 1, 1980, the taxpayer expanded its activity in Virginia so that it was subject to Virginia income tax for taxable year 1980. The dispute involves computation of the sales factor for 1980. The taxpayer included in the numerator only the sales made in Virginia between October 1 December 31. The Department included in the numerator sales made ln Virginia for all of 1980 and assessed additional tax.
Determination
It is clear that Virginia Code § 58-151.047 requires that the numerator of the sales factor include sales for the entire taxable year. The question is whether federal law prohibits Virginia from including sales made in Virginia prior to October 1, 1980.
15 U.S.C.A. § 381 provides, in pertinent part:
No State, or political subdivision thereof, shall have power to impose, for any taxable year ending after September 14, 1959, a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person during such taxable year are either, or both, of the following:... (Emphasis added.)
Federal law prohibits the imposition of a Virginia income tax on income clearly derived from Virginia sources only if the taxpayer's business activities in Virginia do not exceed the specified activity for the entire taxable year. If the taxpayer's business activity in Virginia exceeds the specified activity for any part of a taxable year the federal prohibition does not apply and the taxpayer is subject to Virginia income tax on all of its income derived from Virginia sources for the entire taxable year.
The taxpayer cites Virginia Code §13.1-116 which requires a foreign corporation seeking to withdraw from Virginia to pay all state taxes "...on account of its income from sources within this State during the part of the taxable year and any previous period when the corporation may have had income from sources within this State."
The key words are "income from sources within this State." As stated earlier, as long as the taxpayer is selling its products in Virginia it is receiving income from Virginia sources. Federal law prohibits Virginia from taxing this income only if the taxpayer's activities within Virginia meet the federal requirements for the entire taxable year. Thus, if the taxpayer were to dispose of its Virginia operations in February of a taxable year but continue to sell its products in Virginia as it did prior to October 1, 1980, then the numerator of the sales factor for the year of disposition would include all sales in Virginia for the entire taxable year.
Accordingly, the inclusion in the numerator of the sales factor all sales made in Virginia during 1980 is proper and the assessment of additional tax is correct. The assessment is now due and payable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner