Tax Type
Corporation Income Tax
Description
Federal limitation on taxation of interstate commerce; Warranty service by third party
Topic
Constitutional Provisions
Date Issued
10-14-1999
October 14, 1999
Dear ****
This will respond to your letter in which you request a ruling with respect to corporate income tax nexus for your client (the ``Taxpayer'). I apologize for the delayed response.
FACTS
The Taxpayer is incorporated outside Virginia, and maintains no physical presence within Virginia. The Taxpayer employs no salesmen or independent solicitors of business in Virginia. All sales are made into Virginia directly from the Taxpayer's office, and the products are shipped by common carrier from locations outside Virginia.
The Taxpayer's products carry a parts warranty and an on-site service warranty. The parts warranty is fulfilled by the Taxpayer shipping any parts deemed necessary directly to the customer, or by the customer shipping the product directly to the Taxpayer's repair facility located outside Virginia. The on-site service warranty service is furnished by a third party warrantor. You request a ruling as to whether the services provided by a third party warrantor in Virginia would subject the Taxpayer to Virginia income tax. Furthermore, you ask what impact, if any, a minority equity/ownership interest in a
third party warrantor held by the Taxpayer would have on the department's ruling.
RULING
Under P.L. 86-272, as codified at 15 U.S.C.A. Secs. 381-384, Virginia is prohibited from imposing an income tax on a corporation whose only business activity within the state is the solicitation of orders for the sale of tangible personal property. The department has a long established policy of narrowly interpreting the provisions of P.L. 86-272.
The Taxpayer provides two types of warranties that are bundled with its product. The warranties are included as part of the purchase of the product. Based on the information provided, the Taxpayer's bundling of warranties including parts and repairs at its out-of-state facilities with its products do not exceed the protection afforded under P.L. 86-272.
On the other hand, warranty services carried on in Virginia are not an activity protected by P.L. 86-272. In this case however, the Taxpayer does not provide on-site warranty service with its own employees. The on-site service warranties are purchased by the Taxpayer from an unrelated third party warrantor who provides all needed on-site service. The department views these activities as if the Taxpayer is purchasing the warranty services from a vendor and reselling them to its customers.
Although P.L. 86-272 only applies to the sale of tangible personal property, Virginia applies the same ``solicitation' test to sales of intangible personal property. Under these circumstances, sales of services on behalf of an independent third party would not create nexus for a corporation that is otherwise protected under P.L. 86-272.
The department will, however, take a different approach if a third party warrantor is not independent of the Taxpayer. The department attributes unprotected activities performed by someone who is not independent to a corporation for determining whether or not the corporation has nexus with Virginia. As such, a third party on-site warrantor that is not independent of the Taxpayer is considered to be providing services on behalf of the Taxpayer to the Taxpayer's customers.
In this case, the Taxpayer may hold a minority ownership in the third party warrantor. As such, the question as to whether the Taxpayer is subject to Virginia tax on its income could rest on whether of not the third party warrantor is an independent contractor.
Pursuant to P.L. 86-272, there are different standards which apply to the activities of a corporation's representative verses the activities of an independent contractor. A corporation is not protected from taxation by a state pursuant to P.L. 86-272 if its representatives maintain an office in such state or engage in activities that go beyond the mere solicitation of orders. However, an independent contractor can engage in a broader range of activities within a state without subjecting its out-of-state corporate customer to that state's income tax.
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- An independent contractor is defined in P.L. 86-272 as a:
commission agent, broker, or other independent contractor who is engaged in selling, or soliciting orders for the sale of, tangible personal property for more than one principal and who holds himself out as such in the regular course of his business activities. . . (emphasis added.)
- An independent contractor is defined in P.L. 86-272 as a:
The fact that the Taxpayer holds a minority interest in the third party warrantor would not preclude that warrantor from being considered an independent contractor of the Taxpayer. However, the nature of the overall relationship between the Taxpayer and the third party warrantor must be taken into account. For example, if a corporation holds a 5% interest in an entity but the entity's sole source of income is from services performed for that corporation the potential for control or influence by that corporation clearly exists.
In its analysis as to what is an independent contractor, the Virginia Supreme Court stated ``It is not the actual exercise of control, but the right to control-that is to say, the potential power of control. . .' The Texas Company, et al v. M. Ziegler Administrator Etc., 177 Va. 557 (1941). The Court found that an entity's right to control may be determined by a necessity of obedience to orders or instructions, if given. Thus, according to the Virginia Supreme Court, the mere potential of an entity to control an agent disqualifies the agent as an independent contractor. In addition, P.L. 86-272 precludes an independent contractor from representing only one principal.
Accordingly, if the third party warrantor meets the standards of an ``independent contractor' under P.L. 86-272, the on-site warranty sold with the Taxpayer's products will not exceed protection afforded to activities of independent contractors. However, if the third party warrantor is not an independent contractor, it is a ``representative' and its warranty services performed on behalf of the
Taxpayer exceed protection afforded to activities of representatives pursuant to P.L. 86-272.
I trust this will answer the questions posed in your letter however, please contact ***** at ***** if you have additional questions or if we may be of further assistance.
Rulings of the Tax Commissioner