Tax Type
Corporation Income Tax
Description
Federal limitation on taxation of interstate commerce; Nonexempt activities
Topic
Constitutional Provisions
Date Issued
03-28-1995
March 28, 1995
Re: §58.1-1821 Application: Corporate income taxes
Dear****************
This will reply to your letters in which you request an alternative method of allocation and apportionment on behalf of ************* (the "Taxpayer"), and a refund with respect to the Taxpayer's 1992 taxable year.
FACTS
The Taxpayer, an importer, conducts business and makes sales of tangible personal property in Virginia and other states. The Taxpayer has one employee, located in Virginia, who performs clerical functions. The Taxpayer maintains an office in the employee's home in Virginia, and advertises the office in local Virginia telephone directories. You halve suggested that the decision of the United States Supreme Court in Wisconsin Department of Revenue v. William Wrigley. Jr.. Co., 112 S. Ct. 2447 (1992) prohibits Virginia from imposing its net income tax on the Taxpayer. However, you have suggested that an alternative method of allocation and apportionment based on sales only, in lieu of the standard three-factor formula of property, payroll and sales, would be an acceptable compromise.
DETERMINATION
It has long been established by judicial doctrine that the establishment of an office within a state creates ample nexus for the imposition of a net income tax. In addition, the functions performed by the Virginia employee do not constitute solicitation, and cannot be defined as entirely ancillary to solicitation (i.e. serving no independent business function apart from their connection to the solicitation of orders). The office is the Taxpayer's only location in the United States, and expedites delivery of orders to customers in the United States. Coordination of delivery is clearly a business function which is outside of the solicitation process.
The Taxpayer makes sales in Virginia, maintains and advertises an office in Virginia, and has an employee physically present in Virginia. The department finds that the Taxpayer is subject to the Virginia corporate income tax, and that its activities exceed exempt solicitation within the meaning of Public Law 86-272 and the Court's decision in Wrigley The Taxpayer's 1992 amended return, and its claim for refund, must therefore be denied.
A corporation subject to taxation in Virginia and at least one other state is required by Code of Virginia § 58.1-406 to allocate and apportion its Virginia taxable income. Code of Virginia §58.1-408 provides that all Virginia taxable income is apportioned to Virginia by a three-factor formula.
The Code of Virginia mandates the use of the three-factor formula for multistate operations; an alternative to the three-factor formula is clearly an exception to Virginia's statutory requirement. Code of Virginia §58.1-421 is not intended to allow taxpayers to use an alternative method merely because they believe some other method is more accurate or more equitable than the statutory method. Rather, use of the alternative method is allowed only in extraordinary circumstances where the need for relief has been demonstrated by clear and cogent evidence.
The policies which apply to requests for an alternative method of allocation and apportionment under Code of Virginia §58.1-421 are well established. The Taxpayer has not furnished any substantive documentation to refute the statutory method, other than a general statement that the functions conducted at its Virginia office are clerical in nature. The Taxpayer has not shown that the statutory method of apportionment produces an unconstitutional result. The United States Supreme Court has recognized that allocation and apportionment of income is an arbitrary process designed to approximate the income from business transactions within a state. As long as each state's method of allocation and apportionment is rationally related to the business transacted within a state, then each state's tax is constitutionally valid even though there may be some overlap. See Moorman Mfg. Co. v. Bair. 437 U.S. 277, 98 S.Ct. 2340 (1978). The department has considered the nature of the Taxpayer's business, and the portion of it conducted in Virginia, and finds that the statutory method is rationally related to the business conducted in Virginia.
The Taxpayer has not demonstrated the extraordinary circumstances necessary to justify an alternative method of accounting. Accordingly, permission to use an alternative method of accounting in lieu of the statutory three-factor apportionment formula of property, payroll, and sales must be denied.
If you have any questions regarding this ruling, please call *******the Office of Tax Policy at************
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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Rulings of the Tax Commissioner