Tax Type
Corporation Income Tax
Description
Eligibility of subsidiaries for inclusion in consolidated return
Topic
Returns/Payments/Records
Date Issued
09-10-1992
September 10, 1992
Re: §58.1-1821 Application; Corporation Income Tax
Dear**********************
This will reply to your letter of December 18, 1989, in which you make application for correction of the assessments for additional corporate income tax to********************(the "Taxpayer") for taxable years 1985, 1986 and to your letter of June 26, 1990, in which you provide additional information.
FACTS
The Taxpayer is a Virginia corporation, filing a consolidated income tax return for both federal and Virginia purposes. As the result of an audit by the department, it was determined that two subsidiaries of the Taxpayer lacked sufficient nexus with Virginia to be included in the consolidated Virginia corporate income tax return. You contest this determination by the department's auditors and offer the following information in support of your contention that these two subsidiaries do have sufficient contact with Virginia to be included in the consolidated Virginia income tax return.
*************(Subsidiary 1)*****************(Subsidiary 2) are foreign corporations which make sales of tangible personal property in Virginia. Subsidiary 1 has one employee located in Virginia who is furnished a company owned car. In addition to this salesman located in Virginia, Subsidiary 1 uses brokers who are independent contractors located in Virginia to make sales. Subsidiary 2 has no employees in Virginia, and all Virginia sales are made through brokers, who are independent contractors located in Virginia.
You assert chat the independent contractors for both subsidiaries. as well as the salesman for Subsidiary 1. perform the following functions in Virginia on a regular basis:
-
- 1. Collecting delinquent accounts
2. Investigating credit worthiness
3. Handling customer complaints
4. Approving and accepting orders
5. Repossessing property
6. Picking up or replacing damaged or returned products
7. Providing shipping information and coordinating deliveries
8. Carrying samples for sale. exchange or distribution
- 1. Collecting delinquent accounts
DETERMINATION
To be included in a Virginia consolidated income tax return, a corporation must be subject to Virginia income tax, if separate returns were to be filed. See Virginia Regulation (VR) 630-3-441. Generally. corporations organized under Virginia law and foreign corporations having income from Virginia sources are subject to Virginia tax. However, under Public Law (P.L.) 86-272 (15 U.S.C.A. §§381-384), a state is prohibited from imposing a net income tax on a foreign corporation having no place of business within the state, whose sole activity within the state is solicitation of orders which are accepted and filled by shipment via common carrier from places outside the state.
Based on the information provided, the activities of the salesman/employee of Subsidiary 1 clearly go beyond soliciting orders in Virginia. In addition to actually making sales (accepting orders), this individual services accounts and performs a quality control function by replacing defective merchandise, as well as a collections function by collecting delinquent accounts. These activities exceed the limitations of P.L. 86-272.
P.L. 86-272 prohibits the taxation of a corporation if an independent contractor's "activities on behalf of such person in such state consist solely of making sales, or soliciting orders for sales of tangible personal property." If an independent contractor represents more than one principal, and holds himself out as such, he can "make" a sale (solicit and accept an order) and maintain an office in the state without subjecting his principal to tax. With these two exceptions, any activities conducted by the independent contractors on behalf of the principal (in other words, as an agent with the capacity to act for the principal) will subject the principal to taxation in the state to the same extent as if the activity had been conducted by an employee.
You have not provided sufficient documentation to substantiate that the activities of the independent contractors for Subsidiary 2 go beyond making sales in Virginia. The one situation you describe (for which no documentation exists) which may have involved activities beyond making sales (inspecting inventory and trucking the product from location to location to keep a customer from having product shortages) appears to have been an isolated incident and not one which is a frequent and regular activity of the independent contractors in Virginia.
In an application for correction of an erroneous assessment under Va. Code §58.1-1821, the taxpayer has the burden of proving that the assessment is erroneous. Based on the information provided, I cannot find that the adjustment by the auditor regarding Subsidiary 2 was incorrect. The activities of the independent contractors for Subsidiary 2 do not appear to exceed the limitations of P.L. 86-272. Therefore, the auditor properly removed the corporation from the Taxpayer's consolidated Virginia income tax return.
Based on the nature, continuity, frequency. and regularity of the activities in Virginia. I have determined that Subsidiary 1 would be subject to Virginia income tax, if a separate return were to be filed. Therefore, Subsidiary 1 would be eligible under VR 630-3-441 to be included in the Virginia consolidated income tax return filed by the Taxpayer. I am directing that the audit be adjusted accordingly.
Refund Issue: In January 1989, the Taxpayer filed amended returns for refund for taxable years 1986-1988 to correct an erroneous sales factor throwback. The audit for those taxable years was initiated in August 1989, and when the audit was completed, the figure for tax previously paid was computed assuming the refunds had been issued. In fact, the refunds were never issued and the audit report understated the amount of tax previously paid. Therefore, the audit report will be revised to reflect the correct amount of tax previously paid.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/3866F
Rulings of the Tax Commissioner