Tax Type
Corporation Income Tax
Description
S corporations; Sales solicitation by foreign corporation
Topic
Taxpayers' Remedies
Date Issued
07-31-1995
July 31, 1995
Re: Request for Ruling: Corporate Income Tax
Dear********************
This will reply to your letter of July 15, 1995, in which you requested a ruling regarding the application of Virginia's corporate income tax to the fact pattern of an anonymous client (the "Taxpayer").
FACTS
The Taxpayer is a S corporation, headquartered outside Virginia. The Taxpayer markets tangible personal property for unrelated manufacturers which it represents. The Taxpayer's activities are limited to solicitation of orders by employees, some of whom live in Virginia. The orders are subject to approval outside Virginia and are filled from outside Virginia. The employees carry on no other activities for the manufacturers they represent. The Taxpayer owns no property, maintains no office, and has no telephone listing in Virginia.
The Taxpayer has requested a ruling as to its liability for corporate income tax, its liability to file a corporate return, and whether its nonresident shareholders would be subject to Virginia individual income tax.
RULING
S corporations are specifically exempted from the corporate income tax pursuant to Code of Virginia Virginia conforms to federal income tax treatment of S corporations, taxing the income directly to the S corporation shareholders. If the Taxpayer has income from Virginia sources attributable to a business, trade, profession or occupation carried on in Virginia, it is required to file a return even though it is exempt from tax. Because the Taxpayer receives commissions from the solicitation of orders within Virginia, it is required to file a Virginia return even though such income may be exempt pursuant to Public Law (P.L.) 86-272 (15 U.S.C.A. §§381-384).
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 to Virginia. In the case of the Taxpayer, income would be allocated and apportioned in accordance with Code of Virginia §§58.1-408 through 58.1-421, using the standard three factor formula of property, payroll, and sales.
Assuming that the Taxpayer limits its activities in Virginia to solicitation, and to activities which are ancillary to solicitation, and based on the limited facts as presented in your letter, the Taxpayer is exempt from income tax pursuant to P.L.86-272. It must file a tax return in accordance with VR 630-3-441, copy attached, and state the basis for its exemption clearly thereon. Assuming that the shareholders' (of the Taxpayer) only Virginia source income is from the S corporation, they will have no Virginia adjusted gross income and will therefore not be required to file nonresident Virginia individual income tax returns.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9957P
Rulings of the Tax Commissioner