Tax Type
Corporation Income Tax
Description
S corporations; Filing requirements
Topic
Taxpayers' Remedies
Date Issued
10-11-1994
October 11, 1994
Re: Ruling request: Corporate income taxes
Dear**************
This will reply to your letter of November 1,1993, regarding corporate income tax nexus for *************(the "Taxpayer"). I apologize for the delay in responding.
FACTS
The Taxpayer is an S corporation, headquartered outside of Virginia. The Taxpayer provides operator assistance and direct-dial services for long distance telephone calls. l he Taxpayer markets its services through independent brokers to facilities which maintain a multitude of telephones such as hotels and hospitals. The Taxpayer pays commissions to its brokers based on revenue generated from end users. Although the Taxpayer has revenue from sources within Virginia, the Taxpayer does not direct bill any customer in Virginia nor does the Taxpayer have any accounts receivable from Virginia sources. The Taxpayer does not own any property in Virginia, nor does the Taxpayer directly lease any telecommunications equipment in Virginia. The Taxpayer does not maintain any employees in Virginia.
You have requested an official ruling from the department in order to determine its filing status and requirements.
RULING
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. However, an S Corporation is specifically exempted from the corporate income tax pursuant to Va. Code §58.1 -401. Virginia conforms to federal income tax treatment of S Corporations, taxing the income directly to the S Corporation shareholders. Pursuant to VR 630-3-401, copy attached, such corporations are required to file a return even though exempt from tax. Accordingly, the Taxpayer is required to file Form 500-S annually.
Virginia resident shareholders of an S corporation which conducts its business within and without of Virginia include 100% of their pro rata share of the S corporation's income in their Virginia taxable income. Virginia residents must claim a credit for taxes paid to other states in accordance with Va. Code §58.1 -332 in lieu of allocation and apportionment.
Nonresident shareholders of an S corporation which conducts its business within and without of Virginia must include in their income from Virginia sources the portion of their pro rata share of the S corporation's income which is allocated and apportioned in Virginia. In the case of the Taxpayer, income must be allocated and apportioned in accordance with Va. Code §§58.1-408 through 58.1-421, using the three factor formula of property, payroll, and sales. However, as described below, the Taxpayer's overall Virginia apportionment factor may be zero, or the Taxpayer may be otherwise considered exempt from taxation.
Sales of service 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. Because the Taxpayer has no payroll or property in Virginia, the Taxpayer's overall Virginia apportionment factor will most likely be zero.
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 sales of other than tangible personal property. See P.D. 93-75 (3/17193), 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) .
Because the Taxpayer has income from Virginia sources, it must file a return even if it believes itself exempt pursuant to P.L.86-272 or otherwise. See VR 630-3-441 A 4, copy attached.
A nonresident shareholder having Virginia taxable income is required by Va. Code § 58.1-341 to file a return unless his federal adjusted gross income, adjusted by specific Virginia modifications, is below the filing thresholds of Va. Code §58.1 -321. The Virginia taxable income of a nonresident individual, partner, shareholder or beneficiary is Virginia taxable income computed as a resident multiplied by the ratio of net income, gain, loss and deductions from Virginia sources to net income, gain, loss and deductions from all sources.
In the instant case, in a taxable year in which the Taxpayer has a zero apportionment factor or is exempt from taxation pursuant to P. L.86-272 (or Virginia's interpretation of P.L. 86-272) the Taxpayer's shareholders will have no Virginia taxable income attributable to the Taxpayer's activity carried on in Virginia. Assuming that this is their only activity carried on in Virginia, they will have no Virginia taxable income and will therefore not be required to file nonresident individual income tax returns .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/6808M
Rulings of the Tax Commissioner