Tax Type
Corporation Income Tax
Description
Federal limitations on taxation of interstate commerce; Corporate affiliate lacked nexus
Topic
Constitutional Provisions
Date Issued
10-23-1998
October 23, 1998
Dear**********:
This will reply to your letter requesting the correction of a corporation income tax audit assessment for ***** (the ``Taxpayer') and affiliates for the taxable years ended December 31, 1987 through 1991. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer was the subject of a field audit by the department and several adjustments were made. The contested adjustments will be addressed separately in the following paragraphs.
DETERMINATION
Combined Returns
The Taxpayer and its affiliated companies filed separate Virginia corporate income tax returns for the taxable years prior to 1991. With the 1991 tax return, the Taxpayer submitted a letter requesting permission to elect to change its filing status from separate returns to a combined return. A reply from the department granting permission to file this election was never issued. A corporate income tax audit was conducted by the department, and the combined return was disallowed. Separate assessments were issued to the Taxpayer and affiliates based on their separate taxable incomes. The Taxpayer contends that the returns were filed in accordance with Code of Virginia Sec. 58.1-442, and that there was no guidance or procedures to request permission to change filing status from separate returns to a combined return.
Code of Virginia Sec. 58.1-442 allows corporations which are affiliated to elect to file a separate, combined, or consolidated return regardless of how the corporations file their federal income tax return. Once an election has been made, a taxpayer may not change its status unless permission is granted by the Tax Commissioner. Title 23 of the Virginia Administrative Code l(VAC) 10-120-324(B), however, provides that:
The Taxpayer has provided sufficient evidence to show that they timely requested permission to change the filing status to a combined return for the taxable year ended December 31, 1991. Permission, therefore, is hereby granted for combined returns to be filed for the taxable year 1991 and subsequent years. The audit assessments have been adjusted accordingly.
Nexus
For the 1987 through 1990 taxable years, one of the Taxpayer's affiliates (the ``Affiliate') operated primarily in other states, but received a small portion of its income from Virginia sources. The Affiliate did not register with the State Corporation Commission to do business in Virginia.
The Virginia income resulted from agreements entered into by the Affiliate with dealers to administer an extended warranty program on the dealers' behalf. Under this program, the dealer would sell extended warranty contracts on new products sold to its customers. The dealer would provide coverage for certain repairs. An insurance company, a party to the agreement to whom the dealer pays premiums, would reimburse the dealer for costs incurred in making repairs. The Affiliate was not responsible for performing any repairs to products and did not assume any liability for obligations of the warranty contract.
In administering the program on behalf of the dealer, the Affiliate acted as agent for the dealer in connection with the contracts. Administrative services were performed by the Affiliate's employees at its out-of-state location. Additionally, the Affiliate had no property located in Virginia. The Taxpayer contends that the Affiliate did not have nexus in Virginia, and the income from Virginia sources was not subject to Virginia taxation.
Under Code of Virginia Sec. 58.1-400, every corporation having income from Virginia sources is subject to the corporate income tax. A taxpayer will have income from Virginia sources when sales are made to customers located in Virginia. Public Law (P.L.) 86-272, however, prohibits a state from imposing an income tax on businesses when the only contacts with the state are a narrowly defined set of activities. Although P.L. 86-272 applies to tangible property, the department's policy has been to extend the ``solicitation test' of P.L. 86-272 to situations involving the sale of intangible personal property. 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. In this case, the taxpayer's activities in Virginia were missionary work and ancillary activities performed by a sales staff located outside of Virginia, who solicited orders from Virginia businesses. The Affiliate, therefore, did not have nexus in Virginia, even though it clearly had income from Virginia sources.
Based upon the information provided, the activities conducted by the Affiliate in Virginia did not exceed those protected by P.L. 86-272. The Affiliate, therefore, was not subject to Virginia tax on the income received from Virginia sources for the taxable years 1987 through 1990.
The audit assessments have been adjusted in accordance with this determination on the enclosed schedules. Because part of the 1991 contested assessment for one of the subsidiaries was paid, the payment has been transferred to an outstanding assessment of another subsidiary. These adjustments are shown on the enclosed schedule. Please remit the balance due to the attention of ***** at Office of Tax Policy, Virginia Department of Taxation, Post Office Box 1880, Richmond, Virginia 23218-1880 within 30 days to avoid additional interest. If there are additional questions, ***** may be contacted at *****.
Dear**********:
This will reply to your letter requesting the correction of a corporation income tax audit assessment for ***** (the ``Taxpayer') and affiliates for the taxable years ended December 31, 1987 through 1991. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer was the subject of a field audit by the department and several adjustments were made. The contested adjustments will be addressed separately in the following paragraphs.
DETERMINATION
Combined Returns
The Taxpayer and its affiliated companies filed separate Virginia corporate income tax returns for the taxable years prior to 1991. With the 1991 tax return, the Taxpayer submitted a letter requesting permission to elect to change its filing status from separate returns to a combined return. A reply from the department granting permission to file this election was never issued. A corporate income tax audit was conducted by the department, and the combined return was disallowed. Separate assessments were issued to the Taxpayer and affiliates based on their separate taxable incomes. The Taxpayer contends that the returns were filed in accordance with Code of Virginia Sec. 58.1-442, and that there was no guidance or procedures to request permission to change filing status from separate returns to a combined return.
Code of Virginia Sec. 58.1-442 allows corporations which are affiliated to elect to file a separate, combined, or consolidated return regardless of how the corporations file their federal income tax return. Once an election has been made, a taxpayer may not change its status unless permission is granted by the Tax Commissioner. Title 23 of the Virginia Administrative Code l(VAC) 10-120-324(B), however, provides that:
-
- Separate and combined returns do not affect the allocation and apportionment formulas for each corporation and permission to change from separate to combined returns . . . will generally be granted.
The Taxpayer has provided sufficient evidence to show that they timely requested permission to change the filing status to a combined return for the taxable year ended December 31, 1991. Permission, therefore, is hereby granted for combined returns to be filed for the taxable year 1991 and subsequent years. The audit assessments have been adjusted accordingly.
Nexus
For the 1987 through 1990 taxable years, one of the Taxpayer's affiliates (the ``Affiliate') operated primarily in other states, but received a small portion of its income from Virginia sources. The Affiliate did not register with the State Corporation Commission to do business in Virginia.
The Virginia income resulted from agreements entered into by the Affiliate with dealers to administer an extended warranty program on the dealers' behalf. Under this program, the dealer would sell extended warranty contracts on new products sold to its customers. The dealer would provide coverage for certain repairs. An insurance company, a party to the agreement to whom the dealer pays premiums, would reimburse the dealer for costs incurred in making repairs. The Affiliate was not responsible for performing any repairs to products and did not assume any liability for obligations of the warranty contract.
In administering the program on behalf of the dealer, the Affiliate acted as agent for the dealer in connection with the contracts. Administrative services were performed by the Affiliate's employees at its out-of-state location. Additionally, the Affiliate had no property located in Virginia. The Taxpayer contends that the Affiliate did not have nexus in Virginia, and the income from Virginia sources was not subject to Virginia taxation.
Under Code of Virginia Sec. 58.1-400, every corporation having income from Virginia sources is subject to the corporate income tax. A taxpayer will have income from Virginia sources when sales are made to customers located in Virginia. Public Law (P.L.) 86-272, however, prohibits a state from imposing an income tax on businesses when the only contacts with the state are a narrowly defined set of activities. Although P.L. 86-272 applies to tangible property, the department's policy has been to extend the ``solicitation test' of P.L. 86-272 to situations involving the sale of intangible personal property. 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. In this case, the taxpayer's activities in Virginia were missionary work and ancillary activities performed by a sales staff located outside of Virginia, who solicited orders from Virginia businesses. The Affiliate, therefore, did not have nexus in Virginia, even though it clearly had income from Virginia sources.
Based upon the information provided, the activities conducted by the Affiliate in Virginia did not exceed those protected by P.L. 86-272. The Affiliate, therefore, was not subject to Virginia tax on the income received from Virginia sources for the taxable years 1987 through 1990.
The audit assessments have been adjusted in accordance with this determination on the enclosed schedules. Because part of the 1991 contested assessment for one of the subsidiaries was paid, the payment has been transferred to an outstanding assessment of another subsidiary. These adjustments are shown on the enclosed schedule. Please remit the balance due to the attention of ***** at Office of Tax Policy, Virginia Department of Taxation, Post Office Box 1880, Richmond, Virginia 23218-1880 within 30 days to avoid additional interest. If there are additional questions, ***** may be contacted at *****.
Rulings of the Tax Commissioner