Tax Type
Corporation Income Tax
Description
Federal limitation on taxation of interstate commerce; Activity of salespersons
Topic
Constitutional Provisions
Date Issued
04-14-1994
April 14, 1994
RE: Ruling request: Corporate Income Taxes
Dear****************
This will reply to your letter dated October 24, 1991, in which you requested a ruling regarding Virginia corporate income taxes on behalf of ********** (the "Taxpayer") for the taxable years 1989 and 1990. I apologize for the delay in responding.
FACTS
The Taxpayer is incorporated and headquartered outside of Virginia. There is one resident salesman in Virginia who solicits sales of the Taxpayer's products. All orders are sent outside Virginia for approval, and shipped from stocks outside Virginia via common carrier. Salesmen do not perform credit checks, rectify problems, or approve sales. Salesmen are provided with samples, which are not available for purchase. The salesmen sell to retailers who resell the merchandise to consumers. The Taxpayer also solicits sales of merchandise through the mail directly to consumers.
The Taxpayer believes that it is protected from the imposition of Virginia income tax by Public Law (P. L.) 86-272 (15 U.S.C.A. §§ 381-384), and has requested a ruling on this matter from the department.
RULING
Sales & Use Tax: Va. Code §58.1-612 (copy attached), sets forth the "nexus" requirements which give the Commonwealth the authority to require dealers to register for collection and remittance of the retail sales and use tax. The statute provides, in pertinent part, that a dealer shall be deemed to have sufficient activity within this state to require registration if he "solicits business in this State by employees, independent contractors, agents or other representatives." Based upon the facts presented within your request, it is my understanding that the Taxpayer is currently soliciting business within Virginia through its salesman. Therefore, the Taxpayer is required to register with the department and, within the statute of limitations provided by Va. Code §58.1-634 (copy attached), is liable for the sales tax during the period it met the nexus requirements. P. L. 86-272 does not limit the imposition of a sales tax.
The Taxpayer has a program for "collectors" which allows for the purchase of limited edition merchandise not available to the general public. As the Taxpayer has nexus under Va. Code §58.1-612, it is liable to collect and remit the Virginia sales tax on any merchandise sold directly to customers in Virginia through this type of program, even if it is done on a "mail order" basis.
Corporate Income Tax: Under P. L. 86-272 Virginia is prohibited from imposing an income tax on the Taxpayer "if the only business activities within such State by or on behalf of such person during such taxable year are..." the solicitation of orders for the sale of personal property. Thus, if the Taxpayer's only activities in Virginia were 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.
The information provided indicates that the Taxpayer's salesmen do engage in several activities that exceed mere solicitation. Each activity will be examined to determine if it is ancillary to solicitation. All non-ancillary activities will also be examined to determine if, when considered together, they create more than a de minimis connection to the Commonwealth. Because P.L. 86-272 may exempt a business from state income tax even though that business may have a substantial amount of income from sources within the state, the department will apply a very narrow interpretation of the activities that are ancillary or de minimis.
Sales activity: The salesmen advise customers on advertising, display methods, how to keep the merchandise clean while on display, etc. The salesmen also explain the history of the Taxpayer and the merchandise in order to assist the customer to resell the merchandise. When the merchandise is received by the customer the salesman may unpack and place it on the display racks. On subsequent visits the salesman may inspect inventory levels to determine what merchandise should be ordered by the customer. Salesmen also recommend new distributors or dealers. These activities appear to be ancillary to soliciting an order and do not appear to be an independent business function that the Taxpayer would engage in whether or not it had an in-state sales force.
Repairs: The Taxpayer's salesmen were involved in repair and servicing in two respects. They "in rare instances" acted as an intermediary in handling returned merchandise, and they also repaired damaged merchandise during regular sales calls using a repair kit furnished by the Taxpayer. If the intermediary role is limited to merely facilitating communications between the Taxpayer's office and the customer it would be considered ancillary to requesting purchases. If, however, the salesmen inspect damaged merchandise to determine if it can be repaired by them on the spot or should be returned to the factory, or investigate how the merchandise was damaged, this would represent an independent business function that the Taxpayer has assigned to in-state salesmen for its own convenience. The statements contained in your letter do not provide sufficient information to determine whether the number of occasions and nature of the activities, when considered as a whole with any other non-ancillary activities, can be characterized as de minimis.
As the United States Supreme Court stated in Wisconsin Dept. of Revenue v. William Wrigley, Jr. Co., 112 S. Ct. 2447 (1992):
-
- Repair and servicing may help to increase purchases; but it is not ancillary to requesting purchases, and cannot be converted into "solicitation" by merely being assigned to salesmen. (Emphasis in original.)
Display cases: The information provided indicates that merchandise is marketed in display cases provided by the Taxpayer. The exact nature or ownership of the displays was not indicated. Display racks which are provided at no cost to retailers may be ancillary to solicitation. However, elaborate displays owned by the Taxpayer would in most circumstances constitute property employed in Virginia, and thus violate the protection of P. L. 86-292 and Wrigley.
The Taxpayer's present activities, as described by the limited information contained in your request and further limited by the assumptions made herein, exceed mere solicitation. Many of the activities are ancillary to solicitation, but repair activities and ownership of display cases are not activities ancillary to soliciting an order for the sale of tangible personal property. Because of the numerous activities that a business may engage in during any taxable year, I will not issue a retroactive ruling on the issue of whether the unprotected activities are de minimis without the benefit of further examination of the facts or an audit of your actual business activities in Virginia.
With respect to your future activities, Wrigley did not create a bright line test in determining protected activities under P. L. 86-272. The Taxpayer can limit its activities to those ancillary activities described in Wrigley if it desires to engage in activities that exceed mere solicitation and claim protection from Virginia income tax under P. L. 86-272. However, to the extent the Taxpayer's activities exceed the ancillary activities described in Wrigley, it will not enjoy the protection of P. L. 86-272.
A corporation whose income from Virginia sources is not subject to tax because of P. L. 86-272 must file a return if it is registered with the State Corporation Commission for the privilege of doing business in Virginia. See Virginia Regulation (VR) 630-3-441 (copy attached).
Enclosed is a registration application for the Taxpayer to complete and return to the department in order to register for sales and other applicable taxes. Please contact the department if you have any additional questions or if we may be of any further assistance.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/5702M
Rulings of the Tax Commissioner