Tax Type
Corporation Income Tax
Income Tax
Description
Developer and manufacturer of prescription drugs; Virginia physical presence
Topic
Nexus
Records/Returns/Payments
Tangible Personal Property
Date Issued
11-29-2012
November 29, 2012
Re: Request for Ruling: Corporate Income Tax
Dear *****:
This will reply to your letter in which you seek a ruling regarding corporate income tax nexus in Virginia on behalf of your client (the "Taxpayer").
FACTS
The Taxpayer, a partnership located in another state, is a developer and manufacturer of prescription drugs. Both of the Taxpayer's general partner and limited partner are related corporations. The Taxpayer markets its products in Virginia through sales personnel, product approval representatives, and medical science liaisons located both within and without the Commonwealth. The Taxpayer also has contracts with an unrelated third party located in Virginia that conducts clinical trials on drug products in Virginia. The Taxpayer requests a ruling as to whether it has nexus for Virginia income tax purposes.
RULING
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. The existence of positive Virginia apportionment factors clearly establishes income from Virginia sources.
Public Law (P.L.) 86-272, 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 has a long established policy of narrowly interpreting the provisions of P.L. 86-272. 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).
Sales Personnel
The Taxpayer's salespersons solicit sales directly to hospitals, home care pharmacies, wholesalers, standard pharmacies, and chain drug stores. They also promote or detail products indirectly with doctors through presentations, literature, and samples. These activities of the sales personnel do not appear to exceed the protection afforded under P.L. 86-272.
Product Approval
Product approval representatives work with state agencies and insurance companies in order to get the Taxpayer's products approved for coverage under both private and public healthcare plans (i.e., Medicaid and Medicare). Before promoting a product to physicians and the general public, the Taxpayer seeks approval for inclusion of its pharmaceutical products by states and insurance companies. The Taxpayer considers this presale activity to be a necessary part of the solicitation process.
In Public Document (P.D.) 88-269 (10/3/1988), the Department found that a pharmaceutical company that has a "government affairs" office located in Virginia constitutes a business activity that is not covered by P.L. 86-272. It is unclear from the Taxpayer's request as to the nature of the approval process. The Department will not consider activities aimed at gaining approval as to the safety and effectiveness of a drug, such as that provided by the United States Food and Drug Administration (FDA), or lobbying state legislative bodies or government agencies for favorable treatment of a pharmaceutical company's products to be a part of solicitation process.
On the other hand, the majority of individuals purchase prescription drugs through a healthcare plan provided by either a state government or insurance company. Without approval from a state or insurance company, the Taxpayer's market would be extremely limited. It is the Department's opinion that the activity of merely seeking to gain approval for a product to be covered under a health care plan would be ancillary to solicitation.
Medical Science Liaison
The Taxpayer indicates that the duties of the medical science liaisons are substantially similar to the veterinarians, who worked for a manufacturer of medications for animals, in P.D. 09-172 (10/23/2009). The job description provided for the medical science liaison, however, includes a number of duties that were not performed by the veterinarians.
Several of the activities are not clearly defined as to how they are ancillary to solicitation. While developing professional relationships with current leaders in academic and clinical medicine, practitioners and healthcare decision makers could be an ancillary activity, it could also serve several other business functions. Other activities that the Department could not clearly limit to solicitation activities include communicating with investigators and institutions, maintaining relationships with patient advocacy groups and developing medical and scientific advocates.
In addition, the Department has identified several activities that it would not consider to be activities ancillary to solicitation. The medical science liaisons are the primary science contact for the Taxpayer. While the Department could see how this function would benefit solicitation, it would appear to include activities that would occur during the product manufacturing and testing, as well as, providing expertise in post sale situations. Further, the Department would consider tracking relevant state and federal compliance guidelines and regulations to exceed the protection afforded under P.L. 86-272.
Clinical Trials
The Department would not consider clinical trials conducted for the purpose of testing pharmaceuticals to be an activity protected under P.L. 86-272. In this case, however, the Taxpayer contracted with an independent third party research organization to conduct trials in Virginia. Under terms of the contract, the Taxpayer provides the drugs and the research organization is responsible for the labeling and storage of the drugs, conducting the study, and patient kits. Any drugs remaining at the end of the study are destroyed by the research organization.
Pursuant to P.L. 86-272, there are different standards that apply to the activities of a representative versus the activities of an independent contractor. An entity 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.
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 ...." This definition sets forth a two-part test, both of which must be met, in order for an agent to be considered an independent contractor. The agent must represent two or more principals and the agent must be, in fact, independent from the principals.
When a corporation contracts with a third party service provider in Virginia, the Department views such activities as if a corporation is purchasing services only if a third party service provider is an independent contractor. See P.D. 01-136 (9/18/2001). Under such circumstances, the corporation is not considered to be conducting the activities in Virginia and the unrelated 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 provider is not independent of the Taxpayer. The Department attributes unprotected activities performed by an entity that is not independent to a business entity for purposes of determining whether or not the entity has nexus with Virginia. As such, a third party service provider that is not independent of the Taxpayer is considered to be providing services on behalf of the Taxpayer to the Taxpayer's customers. See P.D. 99-278 (10/14/1999).
The Taxpayer has provided no information concerning possible relationships with the research organization that conducted clinical trials in Virginia. As such, the question as to whether the Taxpayer is subject to Virginia tax on its income could rest on whether or not the research organization located in Virginia is an independent contractor. The Taxpayer will have to evaluate its relationship with the research organization in order to determine if it meets the definition of an independent contractor under P.L. 86-272.
Physical Presence
The Taxpayer has several employees residing in Virginia, including sales personnel, product approval representatives, and a medical science liaison. The Taxpayer has provided no information, other than sample product inventory, as to its physical presence in Virginia. Certain types of property may be considered to be ancillary to the solicitation process and, therefore, not deemed to create a physical presence in a state. Automobiles used by the sales representatives are included in activities considered to be ancillary to solicitation according to the United States Supreme Court in Wrigley. In P.D. 96-281 (10/11/1996), the Department found that computers provided to sales professionals for the purpose of preparing sales presentations, reports to record the sales professional's activities, and other administrative functions were considered to be ancillary to solicitation of sales.
De Minimis Activities
Title 23 of the Virginia Administrative Code (VAC)10-120-90 G exempts activities that are de minimis in nature. Pursuant to this regulation, consideration is given to the nature, continuity, frequency and regularity of the unprotected activities, in Virginia, compared to the nature, continuity, frequency and regularity of such activities outside Virginia. Under Wrigley, all nonancillary activities are examined to determine if, when considered together, they create more than a de minimis connection to Virginia.
The medical science liaisons travel into Virginia 30 to 40 times annually. No information has been provided concerning how often product approval representatives perform their job functions in Virginia. Without a full examination of the specific activities conducted in Virginia by the medical science liaisons and product approval representatives, a determination cannot be made as to whether such activities discussed in the preceding sections would be a de minimis connection with Virginia.
CONCLUSION
Based on facts presented, the Department finds that the Taxpayer may be conducting some activities in Virginia that exceed the protection afforded under P.L. 86272. The Taxpayer should evaluate whether some of its activities of the medical science liaisons and product approval representatives would be considered to be part of the solicitation process. The Taxpayer will also need to verify its relationship with the third party research organization and consider how any tangible personal property provided to employees residing in Virginia is being used.
Further, the Taxpayer must determine if any unprotected activities occurred in Virginia, and if so, how frequently and regularly such activities occurred compared to the continuity, frequency and regularity of how such activities conducted outside Virginia. The Taxpayer should then analyze whether all unprotected activities, when considered together, create more than a de minimis connection to Virginia. If the Taxpayer believes it is engaging in activities that exceed mere solicitation, and are not de minimis, it should take the appropriate steps to file all applicable income tax returns.
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, regulation, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions regarding this ruling, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
-
-
-
-
-
-
-
- Sincerely,
-
-
-
-
-
-
-
-
-
-
-
-
-
- Craig M. Burns
Tax Commissioner
- Craig M. Burns
-
-
-
-
-
-
AR/1-5167366979.o
Rulings of the Tax Commissioner