Tax Type
Retail Sales and Use Tax
Description
Interstate Transactions; Franchises in Virginia
Topic
Taxability of Persons and Transactions
Date Issued
05-04-1992
May 4, 1992
Dear********:
This will reply to your letter dated July 2, 1990 in which you request a ruling on the applicability of Virginia taxes to the operations of your client, * * * the "Taxpayer') in the state of Virginia.
FACTS
The Taxpayer is a corporation chartered in ********, with all manufacturing and distribution facilities in Texas. Because the Taxpayer conducts business activities with retailers located in Virginia, you wish to know which Virginia taxes, if any, are applicable to the Taxpayer.
The Taxpayer has no subsidiary or related corporation transacting business in Virginia. The Taxpayer does not maintain a stock of goods in Virginia. All inventory is located in *********. The Taxpayer neither owns nor leases any real property or tangible personal property in Virginia. The Taxpayer does not maintain any bank accounts in Virginia, nor does it earn interest from any financial institutions in Virginia. The Taxpayer purchases advertising on the national level only. Local advertising (if any) is purchased by and for the benefit of the franchised retailers in Virginia.
All sales by the Taxpayer are wholesale in nature. The Taxpayer's district managers solicit orders from franchised retailers located in Virginia. All purchases of company products ordered by franchised retailers in Virginia must be approved by the Taxpayer's corporate home office located in *****before the sale is accepted and the merchandise is shipped. The inventory is shipped directly to franchised retailers in Virginia from the ******** plant via certified common carriers. Title and risk of loss for these goods transfers to the franchised retailer when the goods leave the ****** location.
The Taxpayer grants franchise in Virginia, but receives no fee. The franchise agreement requires the franchisee to stock only products that meet the Taxpayer's approval. In exchange, the franchisee receives the benefit of national advertising by the Taxpayer and an agreement by the Taxpayer not to grant another franchise in direct competition with the franchisee. The Taxpayer's district managers and field engineers provide technical service to the franchised retailers of the Taxpayer's products in a support, training, and liaison function. They do not directly participate in retail sales.
RULING
Retail Sales and Use Tax
Va. Code § 58.1-612 sets forth the "nexus' requirements which give the Commonwealth the authority to require a business to register for the collection and remittance of the Virginia sales tax. Effective July 1, 1991, a dealer is deemed to have nexus with Virginia if the dealer solicits business on a continuous, regular, seasonal or systematic basis in Virginia by means of:
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- advertising broadcast or relayed from a Virginia transmitter or distributed from a location within Virginia; or
- mailings into Virginia if the dealer benefits from any banking, financing, debt collection, or marketing activities occurring in Virginia or the location of authorized installation, service, or repair facilities in Virginia.
An out-of-state dealer is also required to collect the Virginia tax if it:- is owned or controlled by the same interests which own or control a business currently located in Virginia;
- has a franchise or licensee operating under the same trade name in Virginia and the franchisee or licensee is required to collect the Virginia tax; or
- owns tangible personal property that is rented or leased to a consumer in Virginia, or offers tangible personal property on approval to consumers in Virginia.
Based upon the foregoing, the Taxpayer is subject to the registration and collection requirements of the Virginia retail sales and use tax. However, because the sales made by the Taxpayer are purchased by the franchised retailers in Virginia for resale, these sales are exempt from Virginia sales and use tax. The resale exemption extends to any tangible personal property that will pass to the ultimate purchaser. The Taxpayer, however, will be relieved of its responsibility to collect and pay sales tax only if the purchaser provides a resale exemption certificate (Form ST-10), (copy enclosed).
Corporation Income Tax
A tax is imposed on the Virginia taxable income of every foreign corporation having income from Virginia sources, unless specifically exempted. Under Public Law 86-272, codified at 15 U.S.C.A. § 381 (copy enclosed), Virginia is prohibited from imposing an income tax on a corporation whose only business activity within the state is the solicitation of orders for the sale of tangible personal property. Thus, if the Taxpayer's only activity in Virginia is the missionary work by its salesmen and the resulting sales of its product to purchasers in Virginia, the Taxpayer would be exempt from the Virginia income tax, even though it clearly has income from Virginia sources.
However, the Taxpayer also provides a support, training, and liaison function. Under a strict construction of the limitations on the jurisdiction to tax provided by P.L. 86-272, such activity is a business activity which exceeds the mere solicitation of orders. Under regulation VR 630-3-401.G (copy enclosed), any additional activity may subject the taxpayer to Virginia income tax based upon analysis of the "nature, continuity, frequency, and regularity of the activities in Virginia compared with the nature, continuity, frequency, and regularity of its activities everywhere.'
The provision of a technical support and training in Virginia is not an isolated transaction, but a regular and continuing presence in Virginia for business purposes. Therefore, the maintenance of a training program and technical liaison in Virginia subjects the taxpayer to Virginia income tax.
Any corporation having income from business activity which is taxable both within and without this state must allocate and apportion its Virginia taxable income as provided in Va. Code §§58.1-402-58.1-420 (copy enclosed). Specifically, the taxpayer will apply the three factor apportionment method provided in Va. Code §§ 58.1-408-58.1-414 in computing its Virginia income tax liability.
I hope the foregoing information has answered your questions. However, please contact the department if you need additional information.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner