Tax Type
Corporation Income Tax
Description
Federal limitations on taxation of interstate commerce; Sales by independent contractors
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 April 20, 1993, in which you requested a ruling regarding nexus standards for Virginia corporate income taxes on behalf of an unidentified taxpayer. I apologize for the delay in responding.
FACTS
The taxpayer is incorporated and headquartered outside of Virginia. The taxpayer sells its product in Virginia through independent contractors who either work solely for the taxpayer, or represent a multiple number of unrelated corporations. All orders are sent outside Virginia for approval, and shipped from stocks outside Virginia via common carrier. In addition to soliciting sales, the independent contractors may assist the customers by performing maintenance services allotted to the products of the customer to facilitate future sales and to build customer relations.
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
P. L. 86-272 provides an exemption from a state's income tax if a taxpayer's activities in such state do not exceed a narrowly defined range of activities constituting solicitation.
Pursuant to this federal law, there are different standards which apply to the activities of a taxpayer's representative verses the activities of an independent contractor. A taxpayer is not protected from taxation by a state pursuant to P.L. 86-272 if its representatives maintain an office in such state or accept orders for sales. However, a taxpayer is not subject to taxation merely by reason of the maintenance of an office in a state by one or more independent contractors whose activities on behalf of such taxpayer consist solely of making sales, or soliciting orders for sales of tangible personal property.
An independent contractor is defined in P.L. 86-272 as:
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- [a] commission agent, broker, or other independent contractor who is engaged in selling, or soliciting orders for the sale of, tangible personal property for more than one principal and who holds himself out as such in the regular course of his business activities..." (emphasis added)
The information provided indicates some of the taxpayer's independent contractors work solely for the taxpayer.
Accordingly, if these contractors maintain an office or accept sales, such activity is not exempt solicitation within the meaning of P.L. 86-272.
The information provided indicates that the taxpayer's independent contractor assist the customers by performing maintenance services allotted to the products of the customers to facilitate future sales and to build customer relations. Because this activity exceeds mere solicitation, it must be examined to determine if it is ancillary to solicitation. All non-ancillary activities must 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.
Maintenance activities represent an independent business function that the taxpayer has assigned to in-state independent contractors for its own convenience. Although you state that these activities facilitate future sales and build customer relations, they are not solicitation and are not ancillary to the solicitation. Many activities facilitate future sales and build customer relations, however, it does not mean such activities are ancillary to solicitation.
As the United States Supreme Court stated in Wisconsin Dept. of Revenue v. William Wrigley Jr. Co., 112 S. Ct. 2447 (1992):
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- 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.)
The taxpayer's activities, as described by the limited information contained in your request and further limited by the assumptions made herein, exceed mere solicitation. The statements contained in your letter do not provide sufficient information to determine whether the number of occasions and precise nature of the activities, when considered as a whole with any other non-ancillary activities, can be characterized as de minimis. The department presumes the maintenance performed by the independent contractors constitutes a regular and continuous pattern of activity, is therefore not de minimis, and will not be considered a trivial addition to the taxpayer's business carried on in Virginia.
Accordingly, the corporation has income from Virginia sources as defined by VR 630-3-302. In accordance with VR 630-3-400, every foreign corporation with income from Virginia sources is subject to the income tax at a rate of 6%. Copies of applicable corporate regulations are attached.
Enclosed is a registration application for the taxpayer to complete and return to the department in order to register for income, 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/6977M
Rulings of the Tax Commissioner