June 27, 2016
Re: § 58.1-1821 Application: Corporate Income Tax
Dear *****:
This will reply to your letter in which you seek a refund of corporate income tax paid by ***** (the “Taxpayer”) and its affiliates for the taxable years ended December 31, 2009 through 2011. I apologize for the delay in responding to your request.
FACTS
In 2009, ***** (Corporation A) and ***** (Corporation B) held general partnership interests and the Taxpayer held a limited partnership interest in ***** (the “Partnership”). Corporation A also held a general partnership interest in the Partnership in 2010 and 2011. The Taxpayer held a limited partnership interest in 2010. In 2011, the remaining partnership interest was held by ***** (Corporation C) as a limited partner. The Corporations and the Partnership were affiliates of the Taxpayer.
The Taxpayer and its affiliates filed combined Virginia income tax returns for the taxable years at issue. All of Corporation A's income for the 2009 and 2010 taxable years, all of Corporation B's income for the 2009 taxable year and all Corporation C's income for the 2011 taxable year was apportioned to Virginia. The partnership was subject to the Ohio Commercial Activity Tax (CAT) for all of the 2009-2011 taxable years.
The Taxpayer subsequently filed amended combined returns to report reductions to each of the Corporation's Virginia sales factors. Under review, the Department denied the refunds due, on the basis that the Taxpayer had used an alternative method of allocation and apportionment to compute the Corporations' Virginia income tax liability.
The Taxpayer appealed, contending that the Corporations were allowed to apportion income because they were subject to the CAT and had nexus with Ohio during the taxable years at issue. In addition, the Taxpayer asserts that the Corporations' sales factors were determined using Virginia's statutory method of apportionment.
DETERMINATION
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. § 381, regardless as to whether the tax is actually imposed or a treaty is in effect. See Public Document (P.D.) 02-57 (4/17/2002).
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). Pursuant to Wrigley, all nonancillary activities are examined to determine if, when considered together, they create more than a de minimis connection to the state.
Ohio Commercial Activity Tax
The Taxpayer asserts that the Corporations were subject to and paid the CAT during the taxable years at issue. The CAT is a franchise tax on gross receipts for the privilege of doing business in Ohio. See Ohio Grocers Ass'n v. Levin, 123 Ohio St. 3d 303, 306, 916 N.E. 2d 446, 450 (2009). The information provided, however, indicates that it was the Partnership, not the Corporations, that was subject to and paid the CAT. In addition, Ohio does not consider the CAT to be a transactional tax subject to the same nexus standard of P.L. 86-272. See Ohio Rev. Code Ann. § 5751.02. Therefore, the mere fact that an entity is subject to and pays the CAT is not determinative of whether it has nexus with Ohio such that it may apportion its income for Virginia corporate income tax purposes. If the Corporations had nexus with Ohio or any other state pursuant to P.L. 86-272, however, the Corporations would have been permitted to apportion their income.
Nexus of Corporate Partners
The Department has previously ruled that a corporation that holds a general partnership interest in a partnership must include its proportionate share of partnership property, payroll and sales in its own factors for purposes of apportioning Virginia taxable income. See P.D. 88-226 (7/12/1988).
In P.D. 95-19 (2/13/1995), the Department expanded this ruling to include a limited partner, unless all of the following tests are met: (1) a corporation holds a limited partnership; (2) all general partners are unrelated third parties; (3) the combined partnership interests held by the corporation and all related parties constitute 10% or less of the profit and capital interest of the limited partnership; and (4) the structure is not a device primarily designed to avoid Virginia taxation of the limited partnership's income. The corporate limited partner in P.D. 95-19 failed the test because the general partner was another corporation in the same affiliated group and the two corporations owned 100% of the partnership interests combined. Accordingly, the Department held that the limited partner in P.D. 95-19 was subject to Virginia income tax even though it had no other connection to Virginia other than its interest in the limited partnership.
Under Internal Revenue Code (IRC) § 702(b), “The character of any item of income, gain, loss, deduction, or credit included in a partner's distributive share . . . shall be determined as if such item were realized directly from the source from which realized by the partnership or incurred in the same manner as incurred by the partnership.” In addition, each item of pass-through entity income, gain, loss or deduction has the same character for an owner for Virginia income tax purposes as for federal income tax purposes. See Va. Code § 58.1-391 B.
For federal income tax purposes, the partners are considered the owners of all the pass-through entity's assets and liabilities. Consequently, the Department regards such owners as having the attributes and conducting the activities of the pass-through entities. Consequently, the tax attributes of a pass-through entity, which may create nexus in a taxing jurisdiction, will be considered to be passed through to the owners.See P.D. 99-174 (6/30/1999), P.D. 06-85 (8/25/2006), P.D. 07-50 (4/26/2007), and P.D. 08-123 (6/26/2008).
In addition, P.D. 88-226 and P.D. 95-19 imply that nexus with respect to both general partners and limited partners that do not satisfy the tests described in P.D. 95-19 depends on the partnership's nexus. Although these rulings addressed whether corporate partners were subject to Virginia income tax, the Department will apply the same principles to determine whether they were subject to a net income, franchise or privilege tax in other states as well.
In this case, the Corporation A held a general partnership interest for all three taxable years at issue. Corporation B also held a partnership interest as a general partner in the 2009 taxable year, and Corporation C held the remainder of the partnership interests in the 2011 taxable year as a limited partner. Applying the principles set forth in P.D. 88-226 and P.D. 95-19, therefore, all three Corporations would have had nexus with any state the Partnership had nexus with.
The information provided indicates that the Partnership had a contract to supply products to a customer in Ohio. The contract was governed by Ohio law and the parties agreed to bring any actions involving the contract into certain courts located in Ohio. During the taxable years at issue, the Partnership and the customer were, in fact, involved in litigation involving the contract. The Partnership and the customer held regular meetings, at least quarterly, at the customer's corporate office in Ohio in which contract issues, quality, supply chain, and on-site operations were discussed. Such meetings were conducted by employees of another of the Taxpayer's affiliates working on behalf of the Partnership.
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. See P.D. 99-278 (10/14/1999). Therefore, the activities of such employees were attributable to the Partnership. In the Department's opinion, such contact with the customer involved more than the solicitation of sales in Ohio and was not de minimis.
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:
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.
As such, Virginia attributes sales on a destination basis. The Taxpayer states that the returns were amended to apportion its sales of tangible personal property on a destination basis in accordance with Virginia law. There is no indication the Corporations were attempting to use an alternative method of allocation and apportionment.
CONCLUSION
Because the Partnership had nexus with at least one other state, the Corporations also had nexus. Therefore, they were permitted to amend the returns to apportion income in accordance with Va. Code § 58.1-408 through § 58.1-421. There is no indication the Corporations attempted to use an alternative method of allocation and apportionment when recomputing their Virginia sales factors.
Therefore, the amended returns will be processed and refunds issued as warranted. The Taxpayer should be aware, however, that this determination is limited to addressing the Corporations' ability to apportion income and should not be construed as a final determination regarding the accuracy of the amended apportionment factors. As such, the refund claims remain subject to adjustment within the period of limitations described in Va. Code § 58.1-312 E.
The Code of Virginia sections, regulation, 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 determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5980533777.M