Tax Type
Corporation Income Tax
Description
Refunds, The Taxpayer contends that it did not have nexus with Virginia
Topic
Returns and Payments
Date Issued
06-30-1999
June 30, 1999
Re: Request for Ruling: Corporate Income Tax
Dear********
This will reply to your letter in which you request a refund of corporate income tax for the 1993 and 1995 taxable years for ***** (the "Taxpayer'), on your contention that the Taxpayer does not have the requisite nexus in Virginia to subject it to the Virginia corporate income tax. I apologize for the delay in responding.
FACTS
The Taxpayer is a financial corporation within the definition of Code of Virginia § 58.1-418. It has no property or employees in Virginia as all of its transactions are intercompany in nature. The Taxpayer, however, owns a 49% interest in a general partnership ("P') which does business in Virginia and operates as a financing unit of an affiliated group of corporations that includes the Taxpayer. The Taxpayer contends that it did not have nexus with Virginia for the 1993 and 1995 taxable years and requests that taxes paid for 1993 and 1995 be refunded.
RULING
Public Law ("P.L.') 86-272, codified at 15 U.S.C.A. §§ 381-384, prohibits a state from imposing a net income tax where the only contacts with the state are a narrowly defined set of activities constituting solicitation of orders of tangible personal property. The Taxpayer is a financial corporation to which P.L. 86-272 would not apply. However, Virginia applies the same solicitation test to sales other than tangible personal property.
Traditionally, a partnership, although having a separate legal existence and business activities, will pass all its income and other tax attributes to its partners for federal and Virginia income tax purposes. Consequently, the department regards P's general partner, the Taxpayer, as having the attributes and conducting the activities of P for determining whether the Taxpayer can be taxed on its income by Virginia.
Basically, P provides financing to a customer who purchases tangible personal property from one of the Taxpayer's affiliated dealers. P's employees provide information and training to the dealers regarding P's financing plans, audit dealer inventory, and assist with difficult collections and repossessions. The dealers are responsible for handling repossessions on behalf of P.
Based on the facts presented, P's activities exceed mere "solicitation of orders' as defined by the United States Supreme Court in Wisconsin Department of Revenue v. William Wrigley. Jr.. Co. 112 S. Ct. 2447 (1992). Further, taken as a whole, the department concludes these activities constitute a continuous pattern of activity, which is not de minimis, and not considered trivial additions to P's business carried on in Virginia. Thus, the Taxpayer is subject to tax on its Virginia income because of the Virginia tax attributes of P.
The department's longstanding policy on partnerships requires that a general partner include its proportionate share of the partnership's property, payroll, and sales in the apportionment factors of the corporate partner. In the instant case, the Taxpayer and P are financial corporations which would apportion income using a one factor formula consisting of cost of performance and, therefore, would not use the usual property, payroll and sales factors to apportion income. However, the Taxpayer clearly has income and deductions from Virginia sources which must be represented in its apportionment factors.
Code of Virginia § 58.1-391.B. requires that "each item of partnership income, gain, loss or deduction shall have the same character for a partner under this chapter as for federal income tax purposes. Where a item is not characterized for federal income tax purposes, it shall have the same character for a partner as if realized directly from the source from which realized by the partnership or incurred in the same manner by the partnership'.
In this case, P has employees in Virginia that incur expenses related to its Virginia activities. For apportionment factor purposes, these expenses are Virginia costs included in the numerator of the financial factor in determining P's income within Virginia. These expenses will retain their character as Virginia costs as P's income passes through to the
Taxpayer and should be included in the numerator of the Taxpayer's financial factor.
Because the Taxpayer has nexus with Virginia and a positive apportionment factor for the 1993 and 1995 taxable years, the request for refunds must be denied. If you have any questions regarding this ruling, please contact ***** of the Office of Tax Policy at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12727P
Re: Request for Ruling: Corporate Income Tax
Dear********
This will reply to your letter in which you request a refund of corporate income tax for the 1993 and 1995 taxable years for ***** (the "Taxpayer'), on your contention that the Taxpayer does not have the requisite nexus in Virginia to subject it to the Virginia corporate income tax. I apologize for the delay in responding.
FACTS
The Taxpayer is a financial corporation within the definition of Code of Virginia § 58.1-418. It has no property or employees in Virginia as all of its transactions are intercompany in nature. The Taxpayer, however, owns a 49% interest in a general partnership ("P') which does business in Virginia and operates as a financing unit of an affiliated group of corporations that includes the Taxpayer. The Taxpayer contends that it did not have nexus with Virginia for the 1993 and 1995 taxable years and requests that taxes paid for 1993 and 1995 be refunded.
RULING
Public Law ("P.L.') 86-272, codified at 15 U.S.C.A. §§ 381-384, prohibits a state from imposing a net income tax where the only contacts with the state are a narrowly defined set of activities constituting solicitation of orders of tangible personal property. The Taxpayer is a financial corporation to which P.L. 86-272 would not apply. However, Virginia applies the same solicitation test to sales other than tangible personal property.
Traditionally, a partnership, although having a separate legal existence and business activities, will pass all its income and other tax attributes to its partners for federal and Virginia income tax purposes. Consequently, the department regards P's general partner, the Taxpayer, as having the attributes and conducting the activities of P for determining whether the Taxpayer can be taxed on its income by Virginia.
Basically, P provides financing to a customer who purchases tangible personal property from one of the Taxpayer's affiliated dealers. P's employees provide information and training to the dealers regarding P's financing plans, audit dealer inventory, and assist with difficult collections and repossessions. The dealers are responsible for handling repossessions on behalf of P.
Based on the facts presented, P's activities exceed mere "solicitation of orders' as defined by the United States Supreme Court in Wisconsin Department of Revenue v. William Wrigley. Jr.. Co. 112 S. Ct. 2447 (1992). Further, taken as a whole, the department concludes these activities constitute a continuous pattern of activity, which is not de minimis, and not considered trivial additions to P's business carried on in Virginia. Thus, the Taxpayer is subject to tax on its Virginia income because of the Virginia tax attributes of P.
The department's longstanding policy on partnerships requires that a general partner include its proportionate share of the partnership's property, payroll, and sales in the apportionment factors of the corporate partner. In the instant case, the Taxpayer and P are financial corporations which would apportion income using a one factor formula consisting of cost of performance and, therefore, would not use the usual property, payroll and sales factors to apportion income. However, the Taxpayer clearly has income and deductions from Virginia sources which must be represented in its apportionment factors.
Code of Virginia § 58.1-391.B. requires that "each item of partnership income, gain, loss or deduction shall have the same character for a partner under this chapter as for federal income tax purposes. Where a item is not characterized for federal income tax purposes, it shall have the same character for a partner as if realized directly from the source from which realized by the partnership or incurred in the same manner by the partnership'.
In this case, P has employees in Virginia that incur expenses related to its Virginia activities. For apportionment factor purposes, these expenses are Virginia costs included in the numerator of the financial factor in determining P's income within Virginia. These expenses will retain their character as Virginia costs as P's income passes through to the
Taxpayer and should be included in the numerator of the Taxpayer's financial factor.
Because the Taxpayer has nexus with Virginia and a positive apportionment factor for the 1993 and 1995 taxable years, the request for refunds must be denied. If you have any questions regarding this ruling, please contact ***** of the Office of Tax Policy at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12727P
Rulings of the Tax Commissioner