99-57 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Limited Liability Company; Services; Nontaxable services

Topic

Taxability of Persons and Transactions

Date Issued

04-08-1999

April 8, 1999

Re: Ruling Request: Corporate Income, Withholding, Sales and Use Tax

Dear*********************

This will reply to your letter in which you request a ruling regarding the taxation of a single member limited liability company (LLC). I apologize for the delay in responding.

FACTS

You are the owner of a business (B) operating in Virginia and registered as a limited liability company (LLC) with the State Corporation Commission. You have asked several questions concerning the treatment of B for income, withholding and sales and use tax purposes.

RULING

1. Will B be required to register for corporate income tax and file a corporate income tax return?

Effective January 1, 1997, Treasury Regulations § 301.7701-1 et seq., also known as "check the box' regulations, allow entities to choose a federal classification or be classified under the regulations default provisions. Under the "check the box' regulations, the default provisions call for a single member LLC to be treated as a sole proprietorship or disregarded entity and a multiple member LLC to be treated as a partnership. Thus, an LLC will generally be treated as a pass-through entity unless it elects to be taxed as a corporation.

The department has previously ruled in Public Document (P.D.) 97-343, (8-28-97), (copy attached), that Virginia's conformity with the Internal Revenue Code means that Virginia will follow an election by an LLC not to be treated as a separate entity for federal taxation purposes. If, however, the LLC checks the box and makes the election to be taxed as a corporation for federal income tax purposes, it will have federal taxable income and would be subject to tax on its income. Therefore, for Virginia purposes the taxable income of the LLC and its member or members would be determined in accordance with federal treatment.

In this case, the default election under the "check the box' regulations would require that B be treated as a sole proprietorship. Under this scenario, B would not be required to register with the department for corporate income tax. However, if you were to make the election to have B taxed as a corporation for federal income tax purposes, you would be required to register with the department for corporate income tax, make estimated income tax payments, and file income tax returns.

- 2. Will B be required to register for withholding tax and file withholding returns?

You have indicated that you will not receive any wages or salary of any kind from B in your capacity of General Manager and President. B does not have any other employees.

The term "employer' is defined by Code of Virginia § 58.1-460 as "[T]he person . . . for whom an individual performs or performed any service as an employee . . .' Code of Virginia § 58.1-461 provides that employers must withhold taxes on wages of employees. Accordingly, any individuals performing the services for or on behalf of an LLC have an employee/employer relationship and must have taxes withheld from their wages or salaries for each payroll period. As the employer, an LLC will be required to register and remit taxes withheld from employees' wages or salaries.

In this case, however, no wages or salaries will be paid by B. As such, there will be no withholding requirement. Thus, B will not have to register and file returns for withholding tax until such time as it starts paying salaries and/or wages.

3. Will B be required to register for sales and use tax and file sales and use tax returns?

The department has made it clear in Public Document (P.D.) 98-157, (10-20-98), (copy attached), that an LLC will be considered a dealer for sales and use tax purposes pursuant to Code of Virginia § 58.1-612. As such, an LLC that makes sales of tangible personal property in Virginia and has nexus with Virginia will be required to register, collect and remit Virginia sales and use tax.

You have indicated B is providing a nontaxable service. However, you have not provided a detailed explanation of B's business activities, which would allow the department to substantiate this classification. If B is a service provider, it is not required to collect the sales tax on the fees it charges its customers. As a service provider, B is the taxable user and consumer of all of the tangible personal property purchased for use in providing exempt services. See 23 VAC 10-210-4040(E) (copy attached). However, if a supplier fails to collect the tax from B on its purchases, B must remit use tax to the department as provided in 23 VAC 10-210-6030 (copy attached). Thus, although B would not be required to register for the collection of sales and use tax, it should register for consumer use tax if it anticipates purchasing from suppliers that are not required to collect the sales tax.

In conclusion, B will be required to register with the department if it elects to be taxed as corporation for income tax purposes, pays wages or salaries to employees, and/or makes purchases from suppliers that do not collect sales tax. On the other hand, if B follows the default provisions of the "check the box' regulations, pays no wages or salaries, and purchases only from suppliers that charge the sales tax, it will not have to register with the department for income, withholding, or sales and use tax.

Please note that if you elect to treat B as a pass-though entity of federal income tax purposes, B's income will be subject to tax on your individual Virginia income tax return. In addition, you are required to file and pay estimated individual income tax on your income from B.

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.

Sincerely,

Danny Payne
Tax Commissioner

Rulings of the Tax Commissioner