Document Number
Tax Type
Corporation Income Tax
Consolidated Returns, Nexus, Income From Virginia Sources
Date Issued

September 11, 2017

Re:      § 58.1-1821 Application: Corporate Income Tax

Dear *****:

This will reply to your letter in which you seek correction of the corporate income tax assessment issued to your client, ***** (the “Taxpayer”), for the taxable years ended December 31, 2010, and 2012.


The Taxpayer, an out-of-state corporation, filed consolidated Virginia corporate income tax returns with a number of affiliated entities for the taxable years at issue. The returns were audited for the taxable years at issue and several adjustments were made, resulting in the assessment of additional tax.  One of the adjustments was to include ***** (S) in the consolidated return.  The Taxpayer appeals, contending S did not have nexus with Virginia.


Consolidated Returns

Pursuant to Va. Code § 58.1-442, an affiliated group of corporations may elect to file a consolidated Virginia income tax return. Title 23 of the Virginia Administrative Code (VAC) 10-120-322 provides that a corporation cannot be included in a Virginia consolidated return if it is exempt from Virginia income tax under Va. Code § 58.1-401, exempt from Virginia income tax under Public Law (P.L.) 86-272, not affiliated as defined under Va. Code § 58.1-302, not subject to Virginia income tax if separate returns were to be filed, or using different taxable years.

Income from Virginia Sources

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.

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.  S had a positive Virginia sales factor because it was making sales of tangible personal property into Virginia.


The Taxpayer cites Public Document (P.D.) 93-116 (4/29/1993) for the rule that nexus is solely determined on the basis of each company's own activities and not on the activities of any affiliates.  The Department disagrees.  Even though the parent and subsidiaries shared common officers in P.D. 93-116, none of the subsidiaries had any property, payroll or sales in Virginia and thus no Virginia source income. Further, the Department made no determinations as to nexus because, even if any of the subsidiaries had nexus, they could not have been included in a consolidated filing because they lacked Virginia source income. S, however, made sales into Virginia and thus had a positive Virginia sales factor and Virginia source income.


Under certain conditions, a corporation may have income from Virginia sources resulting from a positive apportionment factor, but not be subject to tax by virtue of the protections afforded under P.L. 86-272.  Further, corporations that do not have a positive apportionment factor are not considered to be subject to Virginia income tax if separate returns are filed.

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).

S purchased certain administrative services from an affiliate, ***** (A), including the services of A's government affairs employee.  Her duties included advising senior management, lobbying the federal government, representing the affiliated group in national and state trade associations, and assisting with the Taxpayer's political action committee (PAC).  In P.D. 88-269 (10/3/1988), the Department found that a pharmaceutical company's “government affairs” office located in Virginia constituted a business activity that was not covered by P.L. 86-272.  The purchase of A's services by itself, however, did not necessarily create nexus as to S.  The question becomes whether A's government affairs employee was conducting such unprotected activities in Virginia on S's behalf as a representative or independent contractor.

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 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.

The Taxpayer argues that A's government affairs employee did not conduct her activities directly on S's behalf as an agent, and thus her activities cannot be attributable to S for purposes of applying P.L. 86-272.  Rather, the Taxpayer asserts that the employee only lobbied as to issues affecting the industry as a whole.  Even if the Department accepted the Taxpayer's assertion, the individual was nevertheless employed by a company doing business as a part of the industry.  Industry matters would certainly have had an impact on the group's overall business, including S.  In addition, the government affairs services were part of the group of activities the Taxpayer calls “corporate overhead functions” for which S paid a fee to A. The fact that S paid a fee to A strongly suggests that A was performing the services on S's behalf, at least in part.

In addition, the Department analyzed a relationship in which one affiliate acted as a sales agent and was paid a commission by another affiliate.  See P.D. 99-34 (3/24/1999). The Department observed that because a common parent owned and controlled both the sales agent and affiliated entity, the entity had a clear avenue of influence over the sales agent.  In addition, the sales agent was dependent on the entity and the other affiliated entities to stay in business.  Further, the fact that the entity and sales agent shared a common parent indicated the entity had the potential to exercise control over how its products were sold.  The Department stated that “even if [the entity] never attempts to interfere [in the sales agent's activities], the mere right to interfere is enough to change the status from that of independent contractor to that of a representative.”

The relationship between S in this case and the government affairs employee is similar to the relationship between the entity and sales agent in P.D. 99-34.  S and A were both subsidiaries of a common parent.  Thus, the same observations made in P.D. 99-34 about influence and control apply to this case as well.  Therefore, for purposes of applying P.L. 86-272, the Department concludes that A's government affairs employee was a representative of S.

The Taxpayer asserts that attributing A's government affairs activities to S is equivalent to asserting “affiliate nexus,” which the Department declined to do in P.D. 99­-34. The Department has not established a policy that a company can never have nexus as a result of another affiliate's activities.  Whether an entity has nexus with Virginia must be determined as to the specific facts and circumstances of each case. In P.D. 99-34, one of the entities provided administrative and oversight services to an affiliate for a fee and such services were provided in Virginia.  The services, however, had no direct relation to the affiliate's sales in Virginia.  Thus, the services by that entity did not create nexus as to the affiliate.  Nevertheless, the affiliate was held taxable in Virginia because another affiliated entity acted as its sales agent in Virginia and was not an independent agent.  Unlike P.D. 88-269, where the entity's own employees were performing lobbying activities in Virginia, there is no indication A's lobbying services had any direct relation to S's sales in Virginia.


A's government affairs employee was conducting activities in Virginia as a representative of S.  Based on the analysis above, however, these activities did not create nexus for S even though they would not normally be protected under P.L. 86-­272. Accordingly, the case will be returned to the audit staff to adjust the assessments as warranted.

The Code of Virginia sections, regulation and public documents cited are available on-line at in the Laws, Rules and Decisions section of the Department's web site.  If you have any questions about this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.



Craig M. Burns
Tax Commissioner




Last Updated 10/03/2017 12:00