Tax Type
Corporation Income Tax
Description
Financial Corporations; No Cost of Performance in Virginia
Topic
Allocation and Apportionment
Date Issued
08-02-1991
August 2, 1991
Re: Request for Ruling: Corporation Income Tax
Dear*************************
This will reply to your letter of September 12, 1990, in which you request a ruling regarding nexus for Virginia corporation income tax purposes.
FACTS
The taxpayer is a Delaware corporation domiciled in Texas. The taxpayer owns storage equipment which it leases to a Delaware limited partnership (PS) under a long term lease arrangement; PS subleases the equipment to third party customers. PS conducts business in virtually all states, including Virginia. The taxpayer is not authorized to do business in Virginia and its sole source of income is from the lease contract. The taxpayer does not own any interest in PS.
You request a ruling that the taxpayer's income from the lease contract does not create nexus for Virginia income tax purposes even though some equipment may have situs in Virginia pursuant to a sublease which is entirely controlled by PS.
RULING
Under paragraph 2.b. of the definition of "Income and deductions from Virginia sources" in Virginia Regulation (VR) 630-3-302, the applicable apportionment formula determines which activities are the most relevant for sourcing income.
According to the information provided, the lease arrangement between the taxpayer and PS provides that depreciation on the equipment is claimed by PS. Therefore, PS is viewed by the Internal Revenue Service as the true owner of the equipment; the taxpayer's interest is more like a security interest. Thus, the "lease" is merely a financing device. This indicates that the taxpayer may receive compensation for financial services rendered. Because all of the taxpayer's income is from this arrangement, the taxpayer is a "financial corporation," as defined under Va. Code §58.1-418. The applicable apportionment factor is the single factor based on cost of performance.
From the information provided, the taxpayer's costs related to the capital leases appear to be either in Texas or Delaware, but not in Virginia. The taxpayer has no employees based in Virginia and conducts no business in Virginia. With no cost of performance in Virginia, the apportionment factor is not positive.
Accordingly, I find that based on the representations in your letter, the taxpayer's income from the lease contract is not subject to the Virginia corporation income tax.
If you have any questions regarding this matter, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner