January 25, 2019
Re: Request for Ruling: Corporate Income Tax
Dear *****:
This will reply to your letter in which you request a ruling concerning corporate income tax nexus on behalf of your company (the “Taxpayer”). I apologize for the delay in responding to your request.
FACTS
The Taxpayer, an entity headquartered in ***** (State A), maintains an Internet website that provides listings in which landlords post residences for rent and tenants search the listings. Revenue is generated from commissions paid by the landlord when the residence is rented out, advertising and background checks performed on behalf of the landlord.
The Taxpayer does not operate a facility nor have any servers in Virginia. The Taxpayer employs one sales person in Virginia who is a national sales representative. All contracts with Virginia sales landlords were put into place with the Taxpayer’s ***** (State B) representative. The Taxpayer requests a ruling as to whether it is required to file a Virginia corporate income tax return and whether it has nexus with Virginia for purposes of corporate income tax. It also presents questions regarding the application of nexus and filing requirements to several scenarios.
RULING
Filing Requirement
Virginia Code § 58.1-441 requires every corporation organized under Virginia law or having income from Virginia sources to file a return. In addition, Title 23 VAC 10-120-310 A 1 requires every foreign corporation registered to do business in Virginia with the State Corporation Commission (SCC) to file a return even if it has no income from Virginia sources and no income tax is due.
If a Taxpayer has nexus, it must file a return if it has income from Virginia sources. In addition, even if the Taxpayer does not have nexus or any Virginia source income, it must still file a return if it is registered with the SCC to do business in Virginia. See Title 23 of the Virginia Administrative Code (VAC) 10-120-310 A 4.
Virginia Source Income
Virginia Code § 58.1 400 imposes 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 the applicable apportionment factor positive. See Virginia Code §§ 58.1-408 through 58.1-414. The existence of a positive Virginia apportionment factor establishes income from Virginia sources.
Under Virginia Code § 58.1-302, an entity has income from Virginia sources if it has any items of income, gain loss and deduction attributable to ownership in real or tangible personal property in Virginia or resulting from a business, trade, profession or occupation carried on in Virginia. The Taxpayer appears to be conducting business in Virginia. As such, it may have Virginia source income earned from commissions and background checks on behalf of Virginia landlords and from advertising placed by Virginia businesses.
Nexus
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 Public Law (P. L.) 86-272, codified at 15 U.S.C. §§ 381 384. See Public Document (P.D.) 94-175 (6/8/1994). P. L. 86-272 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. 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 sale of other than tangible personal property. See P.D. 91-33 (3/18/1991) and P.D. 93-75 (3/17/1993). 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). The Department has a long established policy of narrowly interpreting the provisions of P. L. 86-272.
The Taxpayer indicates that its Virginia employee is engaged in the solicitation of sales, but has provided no detailed explanation of the specific duties and responsibilities of such employee. In Wrigley, the United States Supreme Court set forth a number of activities that constitute mere solicitation of sales. Such activities include in state recruitment, training, and evaluation of sales representatives, use of hotels and homes for sales related meetings, provision of product displays and promotional materials, and the use of a business owned automobile by sales personnel. In addition, the Department has issued numerous public documents addressing whether specific activities would be considered to be ancillary to solicitation. See P.D. 92-150 (8/24/1992), P.D. 94-111 (4/14/1994), P.D. 95-57 (3/28/1995), P.D. 96-1 (1/4/1996), P.D. 96-281 (10/11/1996), 97-232 (5/21/1997), P.D. 97-447 (11/10/1997), P.D. 01-157 (10/19/2001), 08-142 (7/30/2008), and P.D. 09-142 (10/23/2009). The Taxpayer should analyze the activities conducted in Virginia by its employee to verify if any of the activities exceed the mere solicitation of sales.
Even if some of the salesperson’s activities exceed the mere solicitation of sales, the Taxpayer may not have nexus with Virginia if such activities are de minimis. Title 23 VAC 10-120-90 G exempts activities that are de minimis in nature. Under 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. Pursuant to Wrigley, all nonancillary activities are examined to determine if, when considered together, they create more than a de minimis connection to Virginia. Without a full examination of the activities conducted in Virginia by the Taxpayer, a determination cannot be made as to whether such activities discussed in the preceding sections would be a de minimis connection with Virginia.
Based on the facts presented, the salesperson’s activities appear not to create nexus in Virginia. As previously stated, however, if the salesperson’s activities are sufficient to create nexus and if there is sufficient business activity within Virginia to make the applicable apportionment factor positive, the Taxpayer’s income would be apportioned in accordance with Virginia Code §§ 58.1-408 through 58.1-416 and subject to Virginia corporate income tax.
Scenarios
The Taxpayer has presented several scenarios in which it asks whether it would be subject to Virginia corporate income tax. These examples are as follows:
1. In 2017, the Taxpayer will not have any employees or property in Virginia. It asks whether it would have a filing requirement if it receives income from Virginia landlords.
The Taxpayer would need to file a Virginia corporate income tax return if it is registered to do business in Virginia or if it has Virginia source income. The Taxpayer would not have a positive payroll or property factor. Such sales would be protected under P.L. 86-272 and the Taxpayer would not have any Virginia corporate income tax liability.
2. If the Taxpayer has an employee in Virginia and sales were derived from a contract he or she signed with a landlord, would such income be considered Virginia source income?
If the employee’s activity were limited to soliciting and signing the sales contract subject to the Taxpayer’s approval, there would be no Virginia corporate income tax liability because there would be no nexus. The solicitation and signing of a sales contract would be considered activity protected under P.L. 86-272 provided the contract is required to be approved by the Taxpayer. If, however, the employee has the authority to enter into the contract without the approval of the Taxpayer, such an activity would exceed the P.L. 86-272 protections. If the employee’s activities exceed the protection of P.L. 86-272, the Taxpayer would have nexus with Virginia and would have a positive payroll and sales factor. See Virginia Code §§ 58.1-412 through 58.1-416.
Pursuant to Virginia Code § 58.1-302, an entity has income from Virginia sources if it has any items of income, gain loss and deduction attributable to ownership in real or tangible personal property in Virginia or resulting from a business, trade, profession, or occupation carried on in Virginia. The Taxpayer would be engaged in a business in Virginia. As such, income from commissions, advertising and background checks resulting from the contract would be Virginia source income.
3. Please provide some scenarios in which the Taxpayer would be liable for Virginia corporate income tax.
Scenarios under which the Taxpayer would be liable for Virginia corporate income tax could include innumerable activities that exceed the protections afforded by P.L. 86-272. As such, the Department will not speculate as to which activities could create nexus for the Taxpayer.
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, regulations, 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