Document Number
12-164
Tax Type
Income Tax
Description
Virginia's treatment of nonresidents participating in sporting events in Virginia.
Topic
Nexus
Pass-Through Entities
Persons Subject to Tax
Withholding of Tax
Date Issued
10-18-2012


October 18, 2012



Re: Ruling Request: Income Tax

Dear *****:

This is in response to your correspondence in which you request a ruling concerning Virginia's treatment of nonresidents participating in sporting events in Virginia. I apologize for the delay in responding to your letter.

FACTS


The nonresidents each own a pass-through entity (APTE) headquartered in a state other than Virginia. The APTEs' primary source of income is derived from fees for the nonresident owners' participation in an event. The APTEs also generate income from personal appearances by the nonresident owners and use of the owners' image/name on souvenirs, and product testing. Several of the APTEs also own competition teams that win purse money depending on the results of a competition and sponsorship fees.

The operations of the APTE require equipment and a number of employees. The equipment is moved to states in which the competitive sporting events are conducted. In addition to the nonresident owner, the APTE employs administrative assistants, a pilot, driver, and a dozen or more crew members for the team. Most of these employees generally travel to the competitive events.

A ruling has been requested as to whether the activities conducted by the APTEs within Virginia are sufficient to establish nexus. Although a number of different scenarios have been set forth as to how the APTEs operate, the facts presented show substantial similarities in their Virginia activities. If the Department determines the APTEs have nexus in Virginia, they request to participate in a voluntary disclosure program.

RULING


Nexus

Virginia Code § 58.1-400 imposes an 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.

Public Law (P.L.) 86-272, as codified at 15 U.S.C. §§ 381-384, however, 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 sales other than tangible personal property. The Department has a longstanding policy of narrowly interpreting the provisions of P.L. 86-272.

In this instance, a group of APTEs participates in seasonal competitions in which they bring administrative, logistical and competition staff members and equipment into Virginia for the purpose of participating in events. The nonresident owners engage in competitive sporting events and the employees move with the owners to support this activity. These activities are directly related to the APTEs' operations and clearly exceed the mere solicitation of sales. Based on the information provided, the APTE engages in activities that exceed the protection provided by P.L. 86-272 and would be subject to the Virginia income tax.

Income of Pass-Through Entities

Under Va. Code § 58.1-392, pass-through entities (including S corporations, partnerships, and limited liability companies) doing business in Virginia or having income from Virginia sources are required to file a return with the Department. Pursuant to Va. Code § 58.1-302, an entity has income from Virginia sources if it has any items of income, gain loss and deduction attributable to ownership in real or tangible personal property in Virginia or resulting from a business, trade, profession, or occupation carried on in Virginia.

Pass-through entities that have income from activity both within and without Virginia are required to compute their Virginia source income in accordance with the corporate statutory formula set forth in Va. Code §§ 58.1-408 through 58.1-421. As such, pass-through entities generally must allocate dividends to the state of commercial domicile and apportion all other income. Income is apportioned using a three-factor formula based on the property, payroll and sales within Virginia. See Public Document (P.D.) 88-165 (6/29/1988) and P.D. 07-150 (9/21/2007).

Property Factor

Virginia Code § 58.1-409 provides that the property factor consists of the ratio of the average value of the Taxpayer's real and tangible personal property owned or rented and used in Virginia over the like property located everywhere. The value of movable tangible personal property used both within and without Virginia is includable to the extent of its utilization in Virginia. Under Title 23 of the Virginia Administrative Code (VAC) 10-120-170, utilization is determined by the ratio of the number of days of physical location in Virginia to the number of days of physical location everywhere.

In this case, the APTEs move equipment into Virginia for the sporting events then moves it out when the sporting event has concluded. All equipment would be included in the numerator of the property factor to the extent it was used in Virginia. The amount would be divided by the APTEs' total property everywhere to determine the property factor used in the apportionment formula.

Payroll Factor

Virginia Code § 58.1-412 provides that payroll for purposes of the numerator of the payroll factor is the total amount paid or accrued in Virginia for the tax period for compensation and the denominator is the total compensation paid or accrued everywhere. However, if the employees' service is performed both within and without Virginia, the compensation is deemed paid at the employees' base of operations pursuant to Title 23 VAC 10-120-200.

Sales Factor for Sales of Other than Tangible Personal Property

The Taxpayer is engaged in sales of other than tangible personal property. 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.

Pursuant to Title 23 VAC 10-120-230, sales of services from multistate activities are included in the numerator of the Virginia sales factor if the greater proportion of the income-producing activity is performed in Virginia than in any other state, based on costs of performance. The regulation defines "cost of performance" as the cost of all activities directly performed by the taxpayer for the ultimate purpose of producing the sale to be apportioned. "Income producing activity" is the act or acts directly engaged in by the taxpayer for the ultimate purpose of producing the sale to be apportioned. Indirect expenses such as interest or activities produced by independent contractors are not included.

In General Motors Corporation v. Commonwealth of Virginia, 268 Va. 289, 602 S. E.2d 123 (2004), the Virginia Supreme Court held that Title 23 VAC 10-120-250 is inconsistent with Va. Code § 58.1-418 when it limits the costs of performance used to apportion income of a financial corporation to direct costs, excluding costs of independent contractors. Because the language defining "cost of performance" and "income producing activity" in Title 23 VAC 10-120-230 is identical to the language in Title 23 VAC 10-120-250, the cost of performance for purposes of sales of intangibles may not be limited to direct costs and may not exclude indirect expenses such as interest or activities produced by independent contractors.

In response to the General Motors decision, the Department issued Tax Bulletin (VTB) 05-3 (4/18/2005). This bulletin explains that financial corporations may elect to file returns prepared in accordance with Title 23 VAC 10-120-250, pending the Department's adoption of policies in response to the General Motors decision. Because the Department administers Va. Code § 58.1-416 in a manner similar to Va. Code § 58.1-418, taxpayers with sales other than tangible personal property may also elect to file returns prepared in accordance with Title 23 VAC 10-120-230 pending the adoption of policies in response to the General Motors decision.

The determination as to whether a transaction or sale is a Virginia transaction or sale is an all or nothing test. A taxpayer would first have to determine the direct cost associated with each transaction for a given taxable year. Then the direct costs would be attributed to the states in which they occurred. See Title 23 VAC 10-120-230 C 1. If the transaction resulted from direct costs occurring both in Virginia and outside Virginia, such transaction would considered to be in Virginia if a greater portion of the direct costs occurred in Virginia than in any other state. See Title 23 VAC 10-120-230 C 2. Conversely, a transaction would not be a Virginia sale if a greater portion of the direct costs occurred in any state other than Virginia.

Based on facts presented in your letter, the APTEs earn revenues from participation fees for the nonresident owner's entry into an event, personal appearance fees, royalties, product testing, and, in some cases, purse winnings and sponsorship fees. Generally, when services (such as participation in events, personal appearances, operating the competition team in events, and product testing) are performed in Virginia, the greater portion of the costs occurs in Virginia. Income received by a pass-­through entity, which is determined to be income from Virginia sources, will remain Virginia source income in the hands of the nonresident owners.

Pass-through Entity Withholding

According to the ruling request, the owners of the APTEs are not residents of Virginia. Pursuant to Va. Code § 58.1-486.1 et seq., every pass-through entity doing business in the Commonwealth and having taxable income derived from Virginia sources is required to pay a withholding tax equal to 5% of their nonresident owners' shares of income from Virginia sources unless certain conditions are met. In P.D. 07­150, the Department has published "Guidelines for Pass-Through Entity Withholding" to provide guidance to taxpayers regarding the withholding requirements. If the ATPEs are subject to Virginia income tax, they will be required to withhold Virginia income tax on behalf of the nonresident owners in accordance with the Department's guidelines.

Employer Withholding

The employees of the APTE will be traveling into Virginia performing services on behalf of the APTE in Virginia. Virginia Code § 58.1-460 defines employee as, an individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages. Consequently, unless a state has a reciprocity agreement with Virginia, an employer located outside of Virginia may be required to withhold Virginia income taxes for an employee who is not a resident of Virginia when that employee earns wages or salary while performing services for the employer in Virginia. See Va. Code § 58.1-461.

In this case, all the APTEs would be required to withhold Virginia income tax from all of the employees that travel into Virginia to work at the sporting events. The employees may be able to adjust the amounts withheld by providing a Personal Exemption Worksheet (Form VA-4) to the APTE. In addition, an employee may reduce or eliminate Virginia income tax withholding by submitting a Virginia Employee's Withholding Income Tax Credit for Income Taxes Paid to Another State form (Form VA­4b). This form allows an employee to estimate the credit that would be claimed by an employee for income taxes paid to another state and have his Virginia income tax withholding adjusted accordingly.

Nonresident Wages and Salaries

Based on the facts presented, the owners of the APTEs would be participating in events or contests in Virginia and the APTEs' employees will be working in Virginia. Pursuant to Va. Code § 58.1-341, a nonresident individual who has income from carrying on a business, trade, profession, or occupation within Virginia is required to file a Virginia individual income tax return, unless the individual meets the filing exception described in Va. Code § 58.1-321. The Virginia taxable income of a nonresident is computed by multiplying his Virginia taxable income, computed as if he were a resident by the ratio of his net income, gain, loss, and deductions from Virginia sources to his net income, gain, loss, and deduction from all sources.

Under Va. Code § 58.1-325, individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents. Virginia Code § 58.1-302 limits the term income and deductions from Virginia sources to the items of income gain, loss and deductions attributable to the ownership of property in Virginia or the conduct of a business, trade, profession or occupation in Virginia. As such, Taxpayers who are not residents of Virginia are required to file a Virginia nonresident individual income tax return.

Under Virginia's longstanding policy, nonresident athletes and entertainers are considered to have conducted a business, trade, profession or occupation in Virginia when they participate or conduct events in Virginia. See P.D. 88-302 (10/31/1988) and P.D. 94-280 (9/14/1994). Generally, a nonresident athlete must apportion his income to determine the amount of his pay that is attributable to Virginia sources. Such apportionment should be based upon factors which most equitably determine the athlete's portion of total income that is attributable to services performed in Virginia.

For salaries and wages from an employer, the "net income, gain, loss, and deductions from Virginia sources" would be an amount equal to (1) the total annual salary from the employer, (2) multiplied by the number of days or portion thereof that the nonresident individual spent in Virginia performing duties for their employer, and (3) divided by the number of days or portion thereof spent anywhere performing duties for the employer. See P.D. 84-90 (7/3/1984).

A nonresident should compute the ratio of work days spent within Virginia to his total number of work days. As a general rule, the Department uses 260 days in the denominator of the ratio for determining wages attributable to Virginia for full-time employees. Taxpayers who claim to have worked more than 260 days during a given taxable year must document that claim. Likewise, taxpayers who worked less than 260 days are limited to using days actually worked in the denominator of the ratio. For part-time employees, semi-retired individuals, and consultants, a ratio of hours worked in Virginia divided by hours worked anywhere may be a better indicator of income from Virginia sources. See P.D. 09-66 (5/13/2009).

If the amount of Virginia source income can be separately identified by event (i.e., race winnings, etc.), it is not necessary to allocate wages to determine the amount of income from Virginia sources. See P.D. 88-302 (10/31/1988).

Nonresident Income from Pass-Through Entities

For those APTEs that are subject to Virginia income tax, the nonresident owners will be required to file a Virginia Nonresident Income Tax Return (Form 763) to report their income from Virginia sources, if the Virginia adjusted gross income from all sources exceeds the applicable filing threshold. See P.D. 07-148 (9/12/2007).

Retail Sales and Use Tax

One of the APTEs receives orders for equipment. However, all orders are processed and shipped from its headquarters in State A. The APTE maintains no inventory in Virginia.

Virginia Code § 58.1-603 imposes a tax upon every person who engages in the business of selling at retail or distributing tangible personal property in Virginia. Virginia Code § 58.1-612 requires dealers that have sufficient contact with the state of Virginia to collect and remit the retail sales and use tax on all sales or leases of tangible personal property. A dealer is be deemed to have sufficient activity within Virginia to require registration if such dealer "solicits business in this State by employees, independent contractors, agents or other representatives." P. L. 86-272 does not limit the imposition of a sales tax.

CONCLUSION


I trust this letter will answer your questions concerning Virginia's taxation of the ATPEs. 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 APTEs may request a voluntary disclosure agreement with the Department as a result of this ruling. Proposals, tax reports, tax payments and registration applications should be sent to: Virginia Department of Taxation, Voluntary Disclosure Program, Attention: *****, Post Office Box 5640, Richmond, Virginia 23220. If you have any questions, you may contact ***** at *****.

The Code of Virginia sections, regulations, tax bulletin, and public documents cited, along with other reference materials, 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 *****.
                • Sincerely,



Craig M. Burns
                • Tax Commissioner




AR/1-4512401764.D


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46