Tax Type
Corporation Income Tax
Description
Database access via phone lines
Topic
Taxability of Persons and Transactions
Date Issued
06-13-1994
June 13, 1994
Re: Ruling request: Corporate income taxes
Dear **********
This will reply to your letter of March 4, 1993, in which you have requested a ruling regarding the application of Virginia's corporate income tax to the fact pattern of an anonymous client (the "Taxpayer"). I apologize for the delay in responding.
FACTS
The Taxpayer offers its customers a service which provides access to third party computer databases. The Taxpayer enters into an agreement with the customer whereby access is provided. The customer attains access through telephone modems, using long distance lines. The Taxpayer may provide the customer with software, which is subject to a license agreement and remains the property of the Taxpayer. The software is not customized for any customer.
The customer is billed monthly based on usage. Each customer pays a one time fee to establish service, at least a minimum monthly service fee, and a software license fee is charged for mainframe computers.
The Taxpayer is located outside of Virginia, does not own or lease property in Virginia, and currently has no employees in Virginia.
The Taxpayer may engage a traveling sales force to solicit business in Virginia in the future. If such action is taken, the sales people will not have the authority to exceed the activities permitted by Public Law (P.L.) 86-272.
RULING
The Taxpayer has requested a ruling with respect to several different issues, which will be addressed separately:
Is the Taxpayer subject to the corporate income tax? The Taxpayer has income from Virginia sources within the meaning of VR 630-3-302, copy attached, attributable to a business, trade, profession or occupation carried on in Virginia, and attributable to intangible personal property employed in a business, trade, profession or occupation carried on in Virginia. Accordingly, pursuant to VR 630-3-400, copy attached, the Taxpayer is subject to the corporate income tax. However, as described below, the Taxpayer's overall Virginia apportionment factor may be zero, or the Taxpayer may be otherwise considered exempt from taxation.
Is the Taxpayer considered to be a seller of tangible Personal property, or a service Provider? Generally, Virginia does not distinguish between sellers of tangible personal property or services for purposes of corporate taxation. (However, see discussion of P.L. 86-272, and sales apportionment, below.)
What apportionment methodology must the Taxpayer utilize? The Taxpayer will utilize the three factor formula of property, payroll and sales to apportion its Virginia taxable income.
How would apportionment factors be determined?
Sales Factor: Separately identified sales of prewritten, "canned" software are considered to be sales of tangible personal property. Such sales are apportioned based on destination in accordance with VR 630-3-415, copy attached. Sales of service fees, establishment fees, and other transactions not involving the sale of tangible personal property are apportioned based on "cost of performance" pursuant to VR 630-3-416, copy attached. Because the Taxpayer's costs of performance are likely to be greater outside than inside of Virginia, the Taxpayer is not likely to have a positive Virginia sale factor as a result of its fee income.
Property Factor: The Virginia property factor is based on real and tangible personal property used in Virginia. Accordingly, the presence of the taxpayer's intangible software licensed to Virginia users not create a Virginia property factor. See Public Document (P.D.) 94-88 (3/25/94) The value of any diskettes present in Virginia would likely be de minimis, and therefore would not be considered tangible personal property used by the Taxpayer in Virginia for purposes of the property apportionment factor. See VR 630-3-409, copy attached.
Payroll factor: There would likely be a Virginia payroll factor if the taxpayer has a Virginia sales force. See VR 630-3-413, copy attached. (See discussion of P.L. 86-272 below.)
Is the Taxpayer protected from taxation by P.L. 86-272 if its salesmen only solicit in Virginia? Public Law 86-272, codified at 15 U.S.C.A. §§ 381-384, prohibits a state from imposing a net income tax where the only contacts with a state are a narrowly defined set of activities constituting solicitation of orders for sales of tangible personal property. In this situation, the Taxpayer is engaged in the sale of services, which are clearly outside the federal statutory protection of P.L. 86-272. However, the department applies P.L. 86-272 type standards to solicitation of other than tangible personal property. See P.D. 93-75 (3/17/93), copy attached.
The department's historical policy is to extend the "solicitation test" of P.L. 86-272 to situations involving the sale of intangible personal property. However, the department limits the scope of P.L. 86-272 to only those activities that constitute solicitation, are ancillary to solicitation, or are de minimis in nature. See Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 112 S. Ct. 2447 (1992).
Is the Presence of licensed software sufficient to require the Taxpayer to qualify to do business in Virginia? The State Corporation Commission determines which corporations must qualify to do business in Virginia; accordingly you should direct your questions to that agency. You may contact the State Corporation Commission directly at (804) 371-9733.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner