June 30, 2015
Re: Ruling Request: Corporate Income Tax
Dear *****:
This will respond to your letter in which you request a ruling with respect to corporate income tax nexus for your client (the "Taxpayer").
FACTS
The Taxpayer, a Subchapter S corporation commercially domiciled in ***** (State A), is a procurement company doing business via telephone and internet. Based on its customers' needs, the Taxpayer procures goods and services from vendors, which deliver the goods or services directly to the customer. The vendor is paid by the Taxpayer. The Taxpayer in turn invoices the customer for the cost of the products or services plus a transaction fee.
The Taxpayer maintains no property or employees in Virginia, but does have one commercial customer located in Virginia. All sales and solicitation activities by the Taxpayer occur at its facility in State A. The Taxpayer requests a ruling as to whether these transactions with its Virginia customer create nexus in Virginia.
RULING
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 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. The Department has a long established policy of narrowly interpreting the provisions of P.L. 86-272.
In this case, the Taxpayer provides procurement services to customers in need of goods and services. When a customer is in need of goods or services, it contacts the Taxpayer, which, in turn, engages a third party vendor to fulfill the customer's request. The Taxpayer bills the customer and reimburses the third party vender for its portion of goods or services.
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.
Procurement services carried on in Virginia are not an activity protected by P.L. 86-272. In this case, the Taxpayer does not provide services in Virginia. However, although not stated, the Taxpayer could be procuring goods and services on behalf of vendors that have nexus with Virginia. If the third party vendor is an independent contractor, the Department would view such activities as if the Taxpayer is purchasing services from a vendor and reselling them to its customers. See Public Document (P.D.) 01-136 (9/18/2001). Under such circumstances, sales of goods and services on behalf of an 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 vendor 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 vendor 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) and P.D. 10-252 (11/10/2010).
The Taxpayer has provided no information concerning possible relationships with any of its third party vendors 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 any of the third party vendors located in Virginia are independent contractors. The Taxpayer will need to evaluate its relationship with each of its Virginia third party service providers in order to determine if they meet the definition of an independent contractor under P.L. 86-272.
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 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/1-5903986754.o