Tax Type
Corporation Income Tax
Description
Residency
Topic
Taxpayers
Date Issued
05-18-1999
May 18, 1999
Re: Request for a Ruling: Corporate Income and Sales Taxes
Dear******************
This will reply to your letter in which you request a ruling on whether (the "Taxpayer') is subject to Virginia corporate income and sales taxation. I apologize for the delay in responding.
FACTS
The Taxpayer is an out-of-state corporation in the business of selling tangible personal property to the United States government. The Taxpayer will soon employ a salesperson who resides in Virginia. The salesperson will solicit orders in Virginia and submit them to the Taxpayer's out-of-state location. Orders will be fulfilled from the out-of-state location directly to the United States government or to the salesperson for delivery to the customer.
The Taxpayer requests a ruling as to its registration and filing requirements with the department for Virginia sales and use tax purposes, as well as a ruling as to whether it would be subject to Virginia income tax.
DETERMINATION
Corporate Income Tax
Public law (P.L.) 86-272, codified at 15 U.S.C.A. §§ 58.381-384, prohibits Virginia from imposing a net income tax on a foreign corporation when its only contact with Virginia constitutes solicitation of sales. This same protection has been extended by the United States (U. S.) Supreme Court to include activities which are ancillary to solicitation or de minimis in nature.
The department narrowly interprets P.L. 86-272 within the context of the decision of the U.S. Supreme Court in Wisconsin Department of Revenue v. William Wrigley, Jr. Co., 112 S. Ct. 2447, (1992). A taxpayer which engages in activities that may exceed the protection provided by P.L. 86-272 would be subject to the Virginia corporate income tax. Title 23 of the Virginia Administrative Code (VAC) 10-120-90 (G), copy enclosed, however, exempts activities which are de minimis in nature. Pursuant to Wrigley, all non-ancillary activities are examined to determine if, when considered together, they create more than a de minimis connection to the Commonwealth.
Based on the information provided, the only activity which the Taxpayer performs that goes beyond the mere solicitation of sales is the receipt of inventory in Virginia by the salesperson for delivery to the customer. In Commonwealth v. National Private Truck Council, 253 Va. 74, 480 S.E.2d 500 (1997), the Virginia Supreme Court held that deliveries into Virginia using one's own vehicles does not exceed immunity under P.L. 86-272. However, the delivery of tangible personal property to the Taxpayer's salesperson in Virginia constitutes the receipt and maintenance of inventory in Virginia. As such, the
Taxpayer has inventory in Virginia which is stored, temporarily, by the salesperson. These activities are similar to those that the U. S. Supreme Court ruled were not ancillary to solicitation in Wrigley. Specifically, the U. S. Supreme Court determined that the storage of inventory was not a protected activity.
The question then becomes whether the activities performed by the Taxpayer are de minimis. The department has previously ruled that non-ancillary activities, that may be considered de minimis on an individual basis, will exceed P.L. 86-272 protection when they are considered non-trivial in the aggregate. See Public Documents ("P.D.') 97-447 (11/10/97), 96-281 (10/11/96), 94-111 (4/14/94), and 88-146 (6/20/88), copies enclosed. In Wrigley. the non-ancillary activities conducted by the taxpayer only represented .00007% of the annual sales made in Wisconsin during the year. Although this amount was not large when compared to the taxpayer's other operations in that state, the Court found that such activities were not de minimis when considered together. Accordingly, the dollar amount of sales resulting from the non-immune activities was not the driving vehicle in deciding the merits of Wrigley: but rather, whether such activities created more than a trivial additional connection with the state when considered in the aggregate.
In this case, there is not enough information to indicate whether the non-ancillary activities in question will occur on a regular and continuing basis over time. In addition, the Taxpayer's ruling provides only limited information about the salesperson's activities in Virginia. Other activities which the salesperson may perform to further sales may create nexus for Virginia corporate income tax. For example, the salesperson's regular approval of purchase orders and the collection of payment are not considered ancillary to the solicitation of sales. Based on this limited knowledge, the department must conclude that the Taxpayer's activities will make it subject to Virginia income tax
Sales Tax
Under Code of Virginia § 58.1-612, copy enclosed, the sales tax is collectible from all persons who are dealers. That same section defines the term "dealer' and includes every person who "[m]anufactures or produces tangible personal property for sale at retail, for use, consumption, or distribution or for storage to be used or consumed in this Commonwealth.' The term "dealer' also includes every person who "sells at retail ... or who has in his possession for sale at retail, or for use consumption, or distribution, tangible personal property.' The Taxpayer clearly qualifies as a "dealer' under Code of Virginia § 58.1-612.
Code of Virginia § 58.1-612 also sets forth the nexus requirements which give the Commonwealth the authority to require a business to register for the collection and remittance of the Virginia sales tax. The statute provides, in pertinent part, that a dealer shall be deemed to have sufficient activity within this state to require registration if he "[s]olicits business in this Commonwealth by employees, independent contractors, agents or other representative.' Therefore, if the Taxpayer hires a salesperson to solicit business within Virginia, it is required to register with the department and collect the tax on sales to its Virginia customers.
However, Title 23 of the Virginia Administrative Code (VAC) 10-210-690 (A), copy enclosed, provides that: "Sales to the United States ... are exempt from the [retail sales and use tax] if the purchases are pursuant to required official purchase orders to be paid out of public funds.' Therefore, if the Taxpayer's sale of tangible personal property is made to the U.S. government pursuant to official purchase orders to be paid out of the public funds, all of the Taxpayer's sales will be exempt from the retail use and sales tax. In such cases, the department has not required a dealer to register and file sales and use tax returns.
Based on the information provided, the Taxpayer is required to file and pay Virginia corporate income tax, but will not be required to register to collect the Virginia retail sales and use tax if its sales are made exclusively to the U.S. Government. On the other hand, if the Taxpayer sells tangible personal property to individuals who pay for the items with their own funds, the sales do not qualify for the governmental exemption. In such an instance, the Taxpayer is required to register with the department to collect and remit sales tax on such sales. This ruling has been made subject to the facts presented to the department as summarized above. Any change in these facts or the introduction of facts by another party may lead to a different result. If you have any questions regarding this ruling, you may contact ***** in my Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13757B
Rulings of the Tax Commissioner