Tax Type
Corporation Income Tax
Description
Multistate corporations and the Virginia sales factor
Topic
Allocation and Apportionment
Tangible Personal Property
Date Issued
08-29-2012
August 29, 2012
Re: Ruling Request: Corporate Income Tax
Dear *****:
This is in response to your letter submitted on behalf of your client, ***** (the "Taxpayer"), in which you request a ruling regarding multistate corporations and the Virginia sales factor. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a manufacturer of equipment whose headquarters and sole production facility are located in Virginia. A majority of the Taxpayer's equipment is sold to the United States government (the "Government") and is exported overseas at the direction of the Government.
The Government takes title to the completed equipment at the Taxpayer's production facility prior to it being shipped overseas to Government installations. Generally, the Taxpayer holds the equipment from one to 30 days prior to shipment. The Taxpayer always knows the final destination of the equipment upon acceptance of title by the Government.
The Taxpayer sends its employees to foreign countries to assist with the set up and installation of the equipment. It owns and maintains structures and other tangible property in foreign countries for use while providing the services.
The Taxpayer requests a ruling as to whether it may apportion its income for Virginia income tax purposes, and if so, whether the sales of equipment should be excluded from the numerator of its Virginia sales factor.
RULING
Apportionment
Under Va. Code § 58.1-405, a corporation is presumed to be doing business entirely within Virginia if its business activities within another state are such that the other state does not have jurisdiction to impose a net income tax, a franchise tax measured by net income, or a privilege tax measured by net income. The actual imposition of a net income, franchise, or privilege tax is not required, but the state must have jurisdiction, if it so chooses, to impose a tax measured by net income. See Title 23 of the Virginia Administrative Code (VAC) 10-120-120.
A corporation will be subject to one of the above enumerated taxes if it carries on sufficient business within any other state or foreign country so that the other state has jurisdiction to impose such taxes on the corporation. A state or foreign country has sufficient jurisdiction over a corporation if the corporation has nexus pursuant to Public Law (P.L.) 86-272, codified at 15 U.S.C.A. § 381, regardless as to whether the tax is actually imposed or a treaty is in effect. See Public Document (P.D.) 02-57 (4/17/2004).
P.L. 86-272, however, prohibits a state from imposing a net income tax on a foreign corporation when its only contact with the state constitutes solicitation of sales. This same protection has been extended by the United States Supreme Court to include activities that are ancillary to solicitation or de minimis in nature.
The Department narrowly interprets P.L. 86-272 within the context of the decision of the Court in Wisconsin Department of Revenue v. William Wrigley, Jr. Co., 505 U.S. 214 (1992). A taxpayer that engages in activities beyond solicitation may exceed the protection provided by P.L. 86-272 and be subject to the Virginia corporate income tax. Title 23 VAC 10-120-90 G, however, exempts activities that are de minimis in nature. Pursuant to Wrigley, all nonancillary activities are examined to determine if, when considered together, they create more than a de minimis connection to the Commonwealth.
Based on the information provided, the Taxpayer appears to be engaged in activities in a foreign country that exceed the protections afforded by P.L. 86-272. Specifically, the Taxpayer's employees assist with the set up and installation of the equipment and maintain tangible property.
Notwithstanding the above analysis, Title 23 of the Virginia Administrative Code (VAC) 10-120-90 G exempts activities that are de minimis in nature. Under this regulation, consideration would be given to the nature, continuity, frequency and regularity of the unprotected activities in the foreign countries in which the set up and installation of equipment and maintenance of tangible property occurred. Pursuant to Wrigley, all nonancillary activities are examined to determine if, when considered together, they create more than a de minimis connection to the foreign countries. Without a full examination of the activities conducted in the foreign countries by the Taxpayer, a determination cannot be made as to whether such activities discussed in the preceding sections would be a de minimis connection to the foreign countries.
Sales Factor
Virginia Code § 58.1-415 provides that tangible property received in Virginia as a result of a sales transaction is considered a Virginia sale unless the delivery was for transportation purposes. Specifically, Va. Code § 58.1-415 states:
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- In the case of delivery by common carrier or other means of transportation, the place at which such property is ultimately received after all transportation has been completed shall be considered as the place at which such property is received by the purchaser [Emphasis added.]
As such, Virginia attributes sales on a destination basis. The Department has held in previous rulings that direct delivery in Virginia to an independent carrier designated by the purchaser for transportation purposes does not constitute a sale attributable to Virginia, when the seller knows the ultimate recipient of the merchandise is located outside of Virginia. See P.D. 06-86 (8/30/2006), P.D. 91-277 (10/29/1991), and P.D. 91-248 (10/8/1991). Virginia Code § 58.1-415, however, does not limit the attribution of sales to the delivery destination if the shipment is by common carrier. A shipment can be made by other means of transportation.
These rulings state that the determinative factor is not the mode of transportation because the standard imposed by the statute merely stipulates that the goods be subject to some form of transportation. Instead, the Department weighs more heavily the fact that the original seller of tangible property had knowledge that the ultimate destination of the tangible property was outside Virginia once goods enter the delivery function.
In example 5 of Title 23 VAC 10-120-220, the purchaser is considered to have received the tangible personal property at the Virginia manufacturing facility because the purchaser directs shipping to its customers and the shipping destination is unknown to the manufacturer. In essence two transactions occur. In the first, the manufacturer sells to the purchaser with the inventory held at the manufacturer's storage facility in Virginia. A second transaction occurs when the purchaser makes a sale to its customer and directs the manufacturer to ship the property to the customer. See P.D. 99-149 (6/21 /1999).
In this case, the Government arranges for the shipment of the equipment. Unlike, example 5, the Taxpayer has knowledge of the destination of the sold equipment. As such, the Taxpayer's sales would be attributed to the location where the equipment is shipped.
Accordingly, if the Taxpayer establishes that is has nexus with a foreign country in which its products are shipped and its employees install the equipment, it may be considered to be a multistate corporation eligible to apportion its income for Virginia income tax purposes. Under such conditions, the equipment shipped outside of Virginia would not be included in the numerator of the Taxpayer's sales factor.
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, regulations, 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, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Craig M. Burns
Tax Commissioner
- Craig M. Burns
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AR/1-4723677576 B
Rulings of the Tax Commissioner