Document Number
14-158
Tax Type
Corporation Income Tax
Description
Virginia payroll factor/VEC
Topic
Clarification
Taxability of Persons and Transactions
Date Issued
08-28-2014

August 28, 2014



Re: Request for Ruling: 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 the Virginia payroll factor. I apologize for the delay in responding to your request.

FACTS

The Taxpayer, a ***** (State A) limited liability company, operates an athletic competition organization. The Taxpayer does not maintain an office or physical presence in Virginia but does have an employee who is a Virginia resident. The employee travels extensively throughout the United States and abroad to identify and evaluate athletes who may be skilled enough to participate in the Taxpayer's sporting events. The employee confers with the Taxpayer's management team which then decides whether to offer any contracts and approves the specific terms. The Taxpayer requests a ruling as to whether the employee's wages should be included in the numerator of its Virginia payroll factor for purposes of Virginia's income tax.

RULING

Virginia's payroll factor is a fraction, the numerator of which is the total amount paid or accrued in Virginia during the tax period by the corporation for compensation, and the denominator is the total compensation paid everywhere during the taxable year. See Va. Code § 58.1-412. Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-120-190, total wages reported to the Virginia Employment Commission (VEC) are presumed to be compensation paid to employees in Virginia.

Under Va. Code § 60.2-217 A 2, compensation must be reported to the VEC if the employment is not localized in any state but is performed to some extent in Virginia and either:
  • 1. the base of operations is located in Virginia,
    2. the place from which such employment is directed or controlled is in Virginia,
    3. the base of operations or place from which such employment is directed or controlled is not in any state in which a portion of the employment is performed, but the employee resides in Virginia.

Because the Department does not administer the Virginia Unemployment Compensation Act (Title 60.2 of the Code of Virginia), the Taxpayer should request guidance from the VEC to determine if it is required to report the employee's wages. Even if the compensation is not subject to the Act, however, it must nevertheless be included in the numerator of the Virginia payroll factor if it is deemed paid or accrued in Virginia under Va. Code § 58.1-413. See Title 23 VAC 10-120-190 C.

In this case, the employee performs services both within and without Virginia. Under such circumstances, compensation will be deemed paid or accrued in Virginia under Va. Code § 58.1-413 3 if:
    • a. The base of operations or, if there is no base of operations, the place from which the service is directed or controlled is in the Commonwealth; or

      b. The base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed, but the employee's residence is in the Commonwealth.

Pursuant to Title 23 VAC 10-120-200 B 2, a "base of operations" is defined as:
    • [A] place of more or less permanent nature from which the employee starts his work and to which he customarily returns in order to receive instructions from the taxpayer or communications from his customers or other persons, or to replenish stock or other materials, repair equipment, or perform any other functions necessary to the exercise of his trade or profession at some other point or points.

In addition, "place from which the service is directed or controlled" means the place from which the power to direct, control or supervise the employee's service is exercised by the taxpayer. See Title 23 VAC 10-120-200 B 3.

Based on the Taxpayer's request, it is not clear whether some part of the service is performed in Virginia. If none of the service is performed in Virginia, the compensation would not need to be reported to the VEC or attributed to Virginia for purposes of the payroll factor.

If the employee performs some part of the service in Virginia, however, additional analysis would be required. According to the Taxpayer, the service is directed or controlled from State A, not Virginia. As long as the employee performs part of his service in State A and has no base of operations in Virginia, his compensation would not be attributed to Virginia. If the employee does not perform part of his service in State A, however, his compensation would be attributed to his place of residence in Virginia by default.

In addition, with the proliferation of employees working remotely for their homes (i.e., teleworking or telecommuting), the Taxpayer will have to consider whether the employee's residence or any other location may be a base of operations. While an employee's residence has been designated as the default base of operations in certain circumstances under Va. Code § 58.1-413 3 b, nothing in the relevant statutory or regulatory provisions precludes the residence itself from being a base of operations. If the employee's residence meets the requirements of a base of operations in Virginia, his compensation would be attributed to Virginia regardless of where the service is directed or controlled.

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 regulations cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions 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/1-5604599779.M

Rulings of the Tax Commissioner

Last Updated 09/22/2014 13:42