Tax Type
Corporation Income Tax
Description
Consolidated returns; Activities sufficient to create nexus with state
Topic
Returns and Payments
Date Issued
09-26-1996
September 26, 1996
Re: § 58.1-1821 Application: Corporate Income Tax
Dear*********
This will respond to your letters in which you seek correction of assessments of additional corporate income taxes to ******and its successor,*********(the "Taxpayer") for the taxable years ended July 31, 1992 and July 31, 1993 (the "1991 and 1992 taxable years"). I apologize for the delay in responding to your correspondence.
FACTS
The Taxpayer filed consolidated Virginia corporation income tax returns for the 1991 and 1992 taxable years which included its parent company ("Parent") and other affiliated corporations. The returns were field audited, and the Parent was removed from the consolidated returns due to a lack of nexus with Virginia. This adjustment resulted in assessments of additional tax. You protest these assessments, contending that Parent had nexus with Virginia and therefore was properly included in the Taxpayer's consolidated Virginia returns.
DETERMINATION
Virginia Regulation (VR) 630-3-442 provides that in order to be included in a consolidated Virginia corporation income tax return, a corporation must be subject to Virginia income tax if a separate return were to be filed. Generally, a corporation not organized under Virginia law is subject to Virginia income tax if the corporation receives income from Virginia sources, unless exempted by Code of Virginia § 58.1-401 or U.S. Public Law (P.L.) 86-272 (15 U.S.C.A. §§ 381-384). As stated by the department in Public Documents (P.D.s) 91-257 and 95-113, (10/8/91 and 5/11/95, respectively), copies enclosed, a corporation with sufficient business activity in Virginia to make any of the appropriate apportionment factors positive will be considered to have income from Virginia sources.
In the instant case, schedules filed with the consolidated Virginia returns indicated that Parent had positive payroll and sales factors. The department's auditor, however, determined that the Virginia payroll as reflected on those schedules was actually compensation paid to operating officers of the Taxpayer, which was headquartered in Virginia. The auditor, in determining whether Parent had nexus with Virginia, concluded that since these officers worked exclusively in the management of the Taxpayer's operations, then their wages should be removed from Parent's payroll factor and included in the Taxpayer's. The auditor also determined that the sales utilized in the sales factor were actually mail order sales and therefore Parent, absent a positive property or payroll factor, did not exceed the minimum activity threshold set by P.L. 86-272. Consequently, the auditor found that Parent lacked nexus with Virginia.
The determining issue in this case then becomes whether the compensation paid to the operating officers of the Taxpayer is properly included in Parent's payroll factor. The department has previously addressed a similar issue in P.D.s 90-17 and 93-116, (1/11/90 and 4/29/93, respectively), copies enclosed. In P.D. 90-17, the department ruled that wages actually paid by a parent corporation to its own employees were properly included in the parent's payroll factor, regardless of any bookkeeping adjustments which allocated these wages to a subsidiary. In P.D. 93-116, the department ruled that wages cannot be attributed to one corporation for Virginia Unemployment Compensation purposes and to another corporation for income tax purposes. Additionally, the department stated in P.D. 93-116 that services provided by the employees of other corporations does not constitute compensation paid by the corporation for whom those services are provided.
The evidence presented indicates that Parent adhered to the rulings in P.D.s 90-17 and 93-116. Parent, and not the Taxpayer, reported these wages to the Virginia Employment Commission (VEC) for unemployment tax purposes and paid the applicable taxes. The wages were also reported as being paid by the Parent on the corresponding W-2 forms. The department's own records indicate that the income tax withheld on those wages which were subject to Virginia withholding was paid by the Parent. The facts clearly indicate that this compensation was paid by the Parent to personnel for services performed as employees of the Parent. These employees performed managerial and executive duties typical of upper level corporate management. These duties extended beyond the mere solicitation of sales, and therefore exceeded the level of activity protected by P.L. 86-272.
Given the department's clear policy regarding the proper attribution of compensation for payroll factor purposes, the compensation paid by the Parent to its employees and reported to the VEC is properly included in Parent's payroll factor for the 1991 and 1992 taxable years. VR 630-3-412(C) states that the total wages reported to Virginia for unemployment compensation purposes are presumed to be compensation paid in Virginia. Consequently, Parent has a positive apportionment factor and therefore has income from Virginia sources. The Parent is thus subject to Virginia income tax and, pursuant to VR 630-3442, may be included in the Taxpayer's consolidated Virginia corporation income tax returns. Accordingly, since all audit adjustments were based upon the exclusion of Parent from the consolidated returns, the auditor's assessments will be abated in full.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10379G/10380G
Rulings of the Tax Commissioner