Tax Type
Corporation Income Tax
Description
S Corporation
Topic
Allocation and Apportionment
Date Issued
05-19-1988
May 19, 1988
Re: Ruling Request - Nexus
Corporation Income Tax
Dear *****************
This is in reply to your letter of December 7, 1987, in which you request a ruling as to whether your client, *********** (Taxpayer), is engaged in sufficient business activities in another state as to be subject to taxation in such other state.
FACTS
The taxpayer is a Virginia S corporation engaged in business as a wholesaler of automobiles. The taxpayer ships automobiles via public carrier to several states. Additionally, on occasion the company will send personnel to a state to deal with warranty claims and to conduct training courses for mechanics at automotive dealerships. Currently, the S corporation return is filed as to reflect that all business is conducted within Virginia and that all income earned by the corporation is Virginia source income.
The tax department of one of the states in which your client does business is asserting that the taxpayer is engaging in activities within that state which destroy the taxpayer's immunity from taxation under federal law (P.L. 86-272, 15 U.S.C.A. Sections 381-384). Given the factual situation described above, you ask whether Virginia would consider your client subject to taxation in Virginia if the situation was reversed, the taxpayer was located in another state and shipping automobiles into Virginia.
RULING
Virginia expresses no opinion regarding the validity of another state's assessment of any tax. However, whether or not a taxpayer is "subject to tax" in another state determines whether or not a taxpayer is eligible to allocate and apportion income on the Virginia return. As the regulations make clear, this determination is based more on the taxpayer's activities in another state than on the taxes actually paid to such state.
Under Virginia Regulation 630-3-405 (copy enclosed), a corporation is presumed to be doing business entirely within Virginia unless it is subject to one of the following taxes in another state:
-
- 1. A tax imposed on net income, or
2. A franchise tax measured by net income, or
3. A franchise tax for the privilege of doing business.
- 1. A tax imposed on net income, or
Under this same regulation, a corporation is "subject to" one of the above taxes if:
-
- it carries on sufficient business activity within any other state so that the other state has jurisdiction to impose one of the enumerated taxes, whether or not such other state actually imposes one of the enumerated taxes. For purposes of determining whether or not a state has sufficient jurisdiction to impose a tax the-provisions of federal law (P.L. 86-272, 15 U.S.C.A. Sections 381-384) regulating state taxation of interstate commerce shall be applied...
- it carries on sufficient business activity within any other state so that the other state has jurisdiction to impose one of the enumerated taxes, whether or not such other state actually imposes one of the enumerated taxes. For purposes of determining whether or not a state has sufficient jurisdiction to impose a tax the-provisions of federal law (P.L. 86-272, 15 U.S.C.A. Sections 381-384) regulating state taxation of interstate commerce shall be applied...
Based upon the fact that your client is going beyond the mere solicitation of orders and is sending personnel into another state to deal with warranty claims and to conduct training courses for mechanics at automotive dealerships, it appears that your client would be subject to taxation in another state. Accordingly, your client must allocate and apportion its Virginia taxable income as provided in Virginia Code §§ 58.1-407 through 58.1-420.
As an S corporation, your client is not subject to the Virginia corporate income tax. Virginia generally conforms to the federal tax treatment of S corporations by imposing the tax upon the shareholders of such a corporation. In this case, the shareholders must report on their individual income tax returns their prorata share of Virginia source-income based upon their share of ownership in the S corporation and the S corporation's Virginia taxable income after allocation and apportionment.
If you have any additional questions, please do not hesitate to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner