Document Number
06-114
Tax Type
Corporation Income Tax
Description
Virginia Nexus
Topic
Nexus
Date Issued
10-11-2006


October 11, 2006


Re: Request for a Ruling: Corporate Income Tax

Dear *****:

This will reply to your letter in which you request a ruling as to whether your client (the "Taxpayer") has nexus with Virginia for income tax purposes.

FACTS


You represent that the Taxpayer, a limited liability company located in another state (State A), is in the business of collecting account receivables. The Taxpayer has registered as a collections agency with the State Corporation Commission. The Taxpayer has no property or employees in Virginia.

The Taxpayer does not own receivables, but collects them on behalf of its clients. It has clients located in Virginia for whom it collects receivables. The Taxpayer's employees write or call the debtors in order to collect the receivable. If they are unable to collect a receivable, the Taxpayer will hire a Virginia attorney or forward the receivable to a collection agency located in Virginia.

You request a ruling as to whether the Taxpayer has nexus with Virginia for corporate income tax purposes. You also ask if the Taxpayer is subject to any franchise, excise, or business taxes imposed by Virginia.

RULING


Virginia Code § 58.1-400 imposes income tax "on the Virginia taxable income for each taxable year of every corporation organized under the laws of the Commonwealth and every foreign corporation having income from Virginia sources." Generally, a corporation will have income from Virginia sources if there is sufficient business activity within Virginia to make any one or more of the applicable apportionment factors positive. The existence of positive Virginia apportionment factors establishes income from Virginia sources.

Public Law (P.L.) 86-272, as codified at 15 U.S.C. §§ 381-384, prohibits a state from imposing a net income tax where the only contacts with a state are a narrowly defined set of activities constituting solicitation of orders for sales of tangible personal property. The Department limits the scope of P.L. 86-272 to only those activities that constitute solicitation, are ancillary to solicitation, or are de minimis in nature. See Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992). Although P.L. 86-272 applies to tangible property, the Department's policy has been to extend the "solicitation test" of P.L. 86-272 to situations involving the sales of services.

However, a taxpayer that engages in activities that exceed the protection provided by P.L. 86-272 would be subject to the Virginia income tax.

According to the information provided, the Taxpayer's activities are limited to making phone calls and writing letters to debtors in order to collect receivables. These activities alone would not create nexus for the Taxpayer.

The use of the Virginia attorney and in-state collection agency by the Taxpayer may create nexus. In Public Document (P.D.) 01-136 (9/18/01), the Department ruled that the provision of services in Virginia by an independent contractor on behalf of the taxpayer was the purchase by the taxpayer of services from a vendor that were then resold to the taxpayer's customers. Such activity would not create nexus for the taxpayer purchasing the services. The result would be different if the contractor is not considered to be independent. See P.D. 99-278 (10/14/99).

Therefore, the Taxpayer's potential nexus with Virginia depends upon whether the Virginia attorney and Virginia collection agency are truly independent contractors. The Taxpayer will have to examine its relationships with the Virginia attorneys and collection agencies in order to make this determination.

Even if the Taxpayer were to establish nexus with Virginia, the facts provided raise the question as to whether the Taxpayer has any Virginia source income. The Taxpayer has no property or payroll in Virginia. In addition, it appears unlikely that the Taxpayer would have a positive sales factor. Virginia Code § 58.1-416 provides that sales, other than sales of tangible personal property, are deemed in Virginia if:
  • 1. The income-producing activity is performed in Virginia; or
    2. The income-producing activity is performed both in and outside Virginia and a greater proportion of the income-producing activity is performed in Virginia than in any other state, based on costs of performance.

The term "cost of performance" is defined in Title 23 of the Virginia Administrative Code (VAC) 10-120-230 as "the cost of all activities directly performed by the taxpayer for the ultimate purpose of producing the sale to be apportioned." Based on the facts provided, it appears that the greater proportion of the income-­producing activity would be performed in State A. As such, fees generated from collecting receivables from Virginia clients or Virginia debtors would be attributed to State A.

Virginia Code § 58.1-392 requires that any pass-through entity doing business in Virginia, or having income from Virginia sources, must file a return. Because the Taxpayer would have no Virginia source income, however, no return would need to be filed. Further, because the members are considered to have the same tax attributes as the limited liability company, the members of the Taxpayer would not be subject to Virginia income tax or required to file a Virginia income tax return as a result of the Taxpayer's activities. See P.D. 97-343 (8/29/97).

Based on the facts provided, the Taxpayer would not appear to be subject to any other taxes administered by the Department.

This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this ruling, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
                • Sincerely,

                • Janie E. Bowen
                  Tax Commissioner



AR/1-592718941B

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46