Tax Type
Corporation Income Tax
Description
Nexus, Royalty Income, Ordinary Gains, DISC
Topic
Accounting Periods and Methods
Appropriateness of Audit Methodology
Date Issued
10-08-1982
October 8. 1982
Re: Application for Correction
Corporation Income Tax Assessments
For the Fiscal Year Ended 5/31/77 and 5/31/78,
The Seven Month Period Ended 12/31/78 and
The Calendar Year 1979
Dear *************
Your application dated May 26, 1981, for correction of corporation income taxes assessed for the above taxable periods has been reviewed and discussed with my staff. Your application raises four issues which I will discuss in the order which you have presented them.
1. Nexus
This is the primary issue since a favorable determination would render the remaining issues moot. In this regard you express a belief that*******does not have "nexus" with Virginia and you support this belief by stating that, ***************
a)********* has no place of business in Virginia,
b) *********has no inventory in Virginia, and
c)*********Salesmen do missionary work, only, in Virginia.
Apparently, this issue has not been previously raised since I note that the corporation has filed returns reflecting property, payroll and sales in Virginia for a number of years, since I find no reference to "nexus" in previous correspondence and since there is no indication that the issue was raised with our field auditor.
Virginia law imposes a tax on all corporations having income from Virginia sources, subject only to the exceptions provided in § 58-151.03 of the Code of Virginia and the limitations provided by U.S.C.A. §§ 381-385 (Public Law 86-272).
§ 58-151.03 of the Code provides exemption for certain corporations which are subject to other State taxes in lieu of corporation income tax and Public Law 86-272 limits a state's power to impose a tax on the income of a corporation whose only activity within the state is the solicitation of orders for sales of tangible personal property to be filled by shipment or delivery from outside the state.
While the corporation has no office and no inventory in Virginia, it is my understanding that it maintains representatives in this State who not only solicit sales of industrial refrigeration equipment, but who also provide substantial technical assistance in the installation and maintenance of equipment sold.
It is my opinion that the corporation's activities in Virginia exceed the limitations of Public Law 86-272 and that it is accordingly subject to Virginia income tax on income derived from sources within this State.
2. Royalty Income from Patents
As explained in audit, § 58-151.038, prior to 1981 amendment, provides for the allocation of net royalties from real and tangible personal property, but leaves net royalties from intangible personal property as apportionable income.
3. Ordinary Gains
The ordinary gains here involved are those reflected on line 9(b) of Federal Form 1120 as "Net gain or (loss) from Form 4797, line 11, Part II, which are ordinary gains and accordingly apportionable under Virginia law. See Commonwealth of Virginia v. Champion International Corporation.
4. DISC Dividends
While you disagree with the Department's treatment of DISC income, you have been advised of our established policies in this regard and the reasons therefor. The issues that you raise are currently pending before the Circuit Court of the City of Richmond in the case of General Electric Company v. Commonwealth of Virginia. We believe our position is soundly based on Virginia income tax laws and we believe it will be sustained by the courts.
For the reasons stated above, the issues raised by your application for correction are hereby denied and the assessments of tax in the total amount of ********* plus interest accrued to date should now be paid. However, in regard to DISC income, which is currently pending before the court, you may desire to file protective claims under the provisions of § 58-1119.1 of the Code of Virginia.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner