Tax Type
Corporation Income Tax
Description
Apportionment; Subsidiary
Topic
Allocation and Apportionment
Returns/Payments/Records
Date Issued
03-29-1993
March 29, 1993
Re: §58.1-1821 Application; Corporate Income Taxes
Dear****************
This will reply to your letter dated May 4, 1992 in which you make application for correction of the assessments for additional corporate income tax to *********** (the "Taxpayer") for fiscal years ended June 30, 1988 and 1989.
FACTS
The Taxpayer files a consolidated return for both federal and Virginia purposes. As a result of an audit by the department, numerous adjustments were made, resulting in the assessment of an additional tax. You object to adjustments made with respect to************** (the "Subsidiary").
The Subsidiary had no property or payroll in Virginia for the years ended June 30, 1988 and 1989, and no sales in Virginia for the year ended June 30, 1989. The Subsidiary apportioned income to Virginia for the year ended June 30, 1988 from a single contract. It was determined that the Subsidiary lacked sufficient nexus with Virginia to be included in the consolidated Virginia income tax return.
You contest this determination by the department's auditor for both years. With respect to the year ended June 30, 1988, your position is that the Subsidiary apportioned sales to Virginia, and that there is no basis to adjust the apportionment factors. With respect to the year ended June 30, 1989, you aver that the following activities represent Virginia payroll:
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- _ Corporate Officers: All senior officers of the Taxpayer were physically located in Virginia, and they devoted 10% of their time to the activities of the Subsidiary. These officers were not paid by the Subsidiary.
_ Other Employees: accountant and contract manager each spent time in Virginia (100% and 25% respectively) working on behalf of the Subsidiary. The Subsidiary did not pay these employees or report this compensation on its employment tax returns. -
- _ Corporate Officers: All senior officers of the Taxpayer were physically located in Virginia, and they devoted 10% of their time to the activities of the Subsidiary. These officers were not paid by the Subsidiary.
DETERMINATION
PAYROLL FACTOR: The payroll factor is a fraction, the numerator of which is the total amount paid or accrued in the Commonwealth during the tax period by the corporation for compensation, and the denominator of which is the total compensation paid or accrued everywhere during the taxable year, to the extent that such payroll is used to produce Virginia taxable income and is effectively connected with the conduct of a trade or business within the United States and income therefrom is includable in federal taxable income (Va. Code §58.1-412).
The department has previously ruled that wages paid by a parent corporation were not included in the payroll factor of a subsidiary, despite bookkeeping allocations by the parent corporation to the subsidiary for a portion of the expense (Public 90-17 (1/11/90), copy attached).
There is a strong presumption that total wages reported to Virginia for unemployment compensation purposes represent compensation paid or accrued in Virginia. See VR 630-3-412 (C) (copy attached). The Virginia Unemployment Compensation Act (Va. Code §60.2) does not provide for any type of common paymaster arrangement. Each employer is separately liable for taxes on its wages. Accordingly, a common paymaster arrangement is not recognized for purposes of determining Virginia apportionment.
You have not provided sufficient documentation to substantiate that the Subsidiary has a positive payroll factor. Services provided by employees of other corporations and stewardship services performed by officers of the Taxpayer do not constitute compensation paid by the Subsidiary. Services performed by the Subsidiary's employees in Virginia were not demonstrated to be other than incidental in nature and therefore do not constitute compensation paid in Virginia accordance with VR 630-3-413 (copy attached). Accordingly, I do not find that the Subsidiary had a positive payroll factor for the year ended June 30, 1989.
SALES FACTOR: The consolidated sales factor for the year ended June, 1988 included receipts from one isolated contract of the Subsidiary. Information provided subsequent to the audit indicates that this contract extended beyond the fiscal year ended June 30, 1988, and the revenue from the contract for the fiscal year ended June 30, 1989 was incorrectly omitted from the sales apportionment factor for that year. The contract required the performance of personal services, and such personal services were performed entirely in Virginia. The revenue earned from the contract for the two years in question represented approximately 1% of the total revenue of the Subsidiary and exceeded
Sales of services are deemed to be apportionable to Virginia if the income producing activity is performed in Virginia. Generally, the performance of services by an employee will be deemed to constitute the income producing activity. See VR 630-3-416 (copy attached).
The new information indicates that the Subsidiary had income from a contract to perform personal services in Virginia. The services were performed by employees of a related corporation, which precludes the ability to consider the services to have been performed by "independent contractors". An agency relationship must therefore exist.
Based on the unaudited information, I find that the Subsidiary has income from Virginia sources and would be required to file a Virginia income tax return if separate returns were filed. It is therefore eligible to be included in the consolidated return. See VR 630-3-442 (C) (2), and VR 630-3-302, copies attached.
The information presented subsequent to the audit has not subjected to examination by the department. The case shall be returned to the ******** Virginia District Office and, pending a satisfactory review of the following items, the audit report shall be revised to include the Subsidiary as part of the consolidated return:
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- _ The Taxpayer must demonstrate that a bona fide contract existed between the Subsidiary and a third party to provide personal services, and that the services are considered to have been performed in Virginia Pursuant VR 630-3-416.
_ The Taxpayer must document the revenue produced by the contract in fiscal years ended June 30, 1988 and 1989, and demonstrate that such revenue was recorded in the books of the Subsidiary.
- _ The Taxpayer must demonstrate that a bona fide contract existed between the Subsidiary and a third party to provide personal services, and that the services are considered to have been performed in Virginia Pursuant VR 630-3-416.
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- _ The taxpayer must document the compensation paid with respect to services performed in Virginia pursuant to the contract, and indicate which company paid it. The Taxpayer must indicate (and document) if such compensation was already included in the consolidated payroll factor. If such compensation was not included in the consolidated payroll factor, the auditor shall determine if inclusion would be proper in accordance with VR 6303-413.
- _ The taxpayer must document the compensation paid with respect to services performed in Virginia pursuant to the contract, and indicate which company paid it. The Taxpayer must indicate (and document) if such compensation was already included in the consolidated payroll factor. If such compensation was not included in the consolidated payroll factor, the auditor shall determine if inclusion would be proper in accordance with VR 6303-413.
Please provide the necessary relevant information to the auditor for review and adjustment. If the necessary information has not been provided within 30 days of the date of this letter, or if the auditor has not been shown good cause for extending the period to supply information, the information on which the audit assessment was based shall be presumed to be the best available. The assessment will then be immediately due and payable, and collection action will resume.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/6186M
Rulings of the Tax Commissioner