Tax Type
Corporation Income Tax
Description
Residency
Topic
Taxpayers
Date Issued
07-22-1999
July 22, 1999
Re: Request for Ruling: Corporate Income Tax
Dear***
This will respond to your letter in which you request a ruling with respect to the activities of your client (the "Taxpayer') would create nexus for purposes of the Virginia corporate income tax. I apologize for the delay in responding.
FACTS
The Taxpayer is an S corporation headquartered outside Virginia. The Taxpayer is in the business of furnishing employees to its customers. In the instant case, the Taxpayer is leasing employees to pharmaceutical companies. These employees act as "detailmen' promoting a pharmaceutical company's products to doctors and medical facilities. The Taxpayer states that the leased employees conduct no activities in Virginia that exceeds the mere solicitation of sales for the pharmaceutical companies. The Taxpayer believes that the activities of the leased employees do not exceed the protection of Public Law (P.L.) 86-272, codified at 15 USCA Secs.381 through 384. The Taxpayer requests a ruling confirming the activities of its employees would not create nexus with Virginia.
RULING
Under P.L. 86-272, Virginia is prohibited from imposing an income tax on a taxpayer whose only business activities within Virginia by, or on behalf of a taxpayer during a taxable year are the solicitation of orders for the sale of tangible personal property. Although P.L. 86-272 only applies to the sale of tangible personal property, Virginia applies the same "solicitation' test to intangible personal property.
I
n this case, the Taxpayer is not selling tangible personal property in Virginia. The Taxpayer is selling solicitation services that are performed in Virginia on behalf of the Taxpayer's customers. These employees perform services on behalf of the Taxpayer's customers in Virginia. These activities clearly serve in a business function for the Taxpayer separate from solicitation. Further, the services performed in Virginia do not qualify for the de minimis exception in Wisconsin Department of Revenue v. William Wrigley, Jr., Co. as the Taxpayer has 25 detailmen in Virginia who perform services 3-5 days every week.
The Taxpayer has cited Smith, Kline and French Laboratories v. State Tax Commission, 403 P.2d 375 (Or. 1965), and Muro Pharmaceutical, Inc. v. Allan A. Crystal, Commissioner, CT Superior Ct., Dkt. No. 524693, 7-28-94 to support its position. In each of these cases, the taxpayer was a producer of pharmaceuticals who used their own detailmen to sell the pharmaceuticals that it produced. In this case, the Taxpayer's detailmen are leased to other pharmaceutical companies to sell the products for the pharmaceutical companies. The Taxpayer is not in the business of selling pharmaceuticals, like the taxpayers in the above cases, but rather it is in the business of selling services of its employees to be performed in Virginia.
Accordingly, the Taxpayer has nexus with Virginia for income tax purposes. However, in following federal tax policy with respect to S corporations, Code of Virginia Sec. 58.1-401 provides that such corporations are not subject to corporation income tax in Virginia. Thus, Virginia has elected to treat S corporations in substantially the same manner as has the federal government, i.e., the corporate entity itself is not subject to taxation but the shareholders will be taxed as individuals on their pro rata share of S corporation income, to the extent includable in federal adjusted gross income (FAGI). See Public Document (P.D.) 88-165, 6/29/88, copy enclosed.
In the case of nonresident individual shareholder of an S corporation that conducts business in Virginia, the department applies the provisions of Code of Virginia Sec. 58.1-407 et seq. in order to determine such individual's Virginia taxable income. See P.D. 95-167, 6/23/85, copy enclosed. As such, the nonresident shareholders of the Taxpayer would be required to file nonresident individual income tax returns and pay tax on their income from Virginia sources.
Under certain circumstances, the department will allow S corporations to file a unified income tax return on behalf of its nonresident shareholders. See P.D. 84-260, 12/28/84, copy enclosed. In order to file such a return, the Taxpayer would have to request permission from the department. If you have any questions regarding this ruling, you may contact ***** of the Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13650G
Re: Request for Ruling: Corporate Income Tax
Dear***
This will respond to your letter in which you request a ruling with respect to the activities of your client (the "Taxpayer') would create nexus for purposes of the Virginia corporate income tax. I apologize for the delay in responding.
FACTS
The Taxpayer is an S corporation headquartered outside Virginia. The Taxpayer is in the business of furnishing employees to its customers. In the instant case, the Taxpayer is leasing employees to pharmaceutical companies. These employees act as "detailmen' promoting a pharmaceutical company's products to doctors and medical facilities. The Taxpayer states that the leased employees conduct no activities in Virginia that exceeds the mere solicitation of sales for the pharmaceutical companies. The Taxpayer believes that the activities of the leased employees do not exceed the protection of Public Law (P.L.) 86-272, codified at 15 USCA Secs.381 through 384. The Taxpayer requests a ruling confirming the activities of its employees would not create nexus with Virginia.
RULING
Under P.L. 86-272, Virginia is prohibited from imposing an income tax on a taxpayer whose only business activities within Virginia by, or on behalf of a taxpayer during a taxable year are the solicitation of orders for the sale of tangible personal property. Although P.L. 86-272 only applies to the sale of tangible personal property, Virginia applies the same "solicitation' test to intangible personal property.
I
n this case, the Taxpayer is not selling tangible personal property in Virginia. The Taxpayer is selling solicitation services that are performed in Virginia on behalf of the Taxpayer's customers. These employees perform services on behalf of the Taxpayer's customers in Virginia. These activities clearly serve in a business function for the Taxpayer separate from solicitation. Further, the services performed in Virginia do not qualify for the de minimis exception in Wisconsin Department of Revenue v. William Wrigley, Jr., Co. as the Taxpayer has 25 detailmen in Virginia who perform services 3-5 days every week.
The Taxpayer has cited Smith, Kline and French Laboratories v. State Tax Commission, 403 P.2d 375 (Or. 1965), and Muro Pharmaceutical, Inc. v. Allan A. Crystal, Commissioner, CT Superior Ct., Dkt. No. 524693, 7-28-94 to support its position. In each of these cases, the taxpayer was a producer of pharmaceuticals who used their own detailmen to sell the pharmaceuticals that it produced. In this case, the Taxpayer's detailmen are leased to other pharmaceutical companies to sell the products for the pharmaceutical companies. The Taxpayer is not in the business of selling pharmaceuticals, like the taxpayers in the above cases, but rather it is in the business of selling services of its employees to be performed in Virginia.
Accordingly, the Taxpayer has nexus with Virginia for income tax purposes. However, in following federal tax policy with respect to S corporations, Code of Virginia Sec. 58.1-401 provides that such corporations are not subject to corporation income tax in Virginia. Thus, Virginia has elected to treat S corporations in substantially the same manner as has the federal government, i.e., the corporate entity itself is not subject to taxation but the shareholders will be taxed as individuals on their pro rata share of S corporation income, to the extent includable in federal adjusted gross income (FAGI). See Public Document (P.D.) 88-165, 6/29/88, copy enclosed.
In the case of nonresident individual shareholder of an S corporation that conducts business in Virginia, the department applies the provisions of Code of Virginia Sec. 58.1-407 et seq. in order to determine such individual's Virginia taxable income. See P.D. 95-167, 6/23/85, copy enclosed. As such, the nonresident shareholders of the Taxpayer would be required to file nonresident individual income tax returns and pay tax on their income from Virginia sources.
Under certain circumstances, the department will allow S corporations to file a unified income tax return on behalf of its nonresident shareholders. See P.D. 84-260, 12/28/84, copy enclosed. In order to file such a return, the Taxpayer would have to request permission from the department. If you have any questions regarding this ruling, you may contact ***** of the Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13650G
Rulings of the Tax Commissioner