Tax Type
Corporation Income Tax
Description
Payroll Factor; Commissions Paid to Sales Representatives
Topic
Allocation and Apportionment
Date Issued
08-26-1991
August 26, 1991
Re: §58.1-1821 Application; Corporation Income Tax
Dear***************
This will reply to your letter of June 1, 1990, in which you seek correction of corporation income tax assessments for****************(the "Taxpayer").
FACTS
The taxpayer was audited and changes were made to the payroll factor to include commissions paid to the taxpayer's sales representatives. You contend that the commissions should not be included in the payroll factor because the representatives are not employees of the taxpayer, but rather independent contractors. You base this position on the fact that the Internal Revenue Service has reviewed the relationship between the taxpayer and the sales representatives and has concluded that the representatives are independent contractors for income tax withholding purposes, and you believe that this determination excludes the commissions from the payroll factor. However, you also state that the representatives are classified as employees for FICA and FUTA tax purposes, and their compensation is included in the taxpayer's Virginia unemployment tax returns.
DETERMINATION
Va. Code §58.1-412 and the regulations thereunder describe the method used to compute the payroll factor. Compensation, as defined in Va. Code §58.1-302, is included in the payroll factor if it is effectively connected with the taxpayer's trade or business within the United States and the income from such trade or business is includable in both Virginia taxable income and federal taxable income. Compensation includes wages, salaries, tips, commissions and other remuneration paid to employees and reported to the Internal Revenue Service.
The fact that the sales representatives' commissions are excluded from federal withholding does not mean that the commissions should be excluded from the payroll factor. The term "compensation," as used in computing the payroll factor, means all remuneration or wages for employment as defined in Internal Revenue Code (IRC) §3121(a), including the excess of wages over the contribution base. See Virginia Regulation (VR) 630-3-302 (copy enclosed). IRC §3121(a) provides that an exclusion of wages for withholding purposes shall not require a similar exclusion of wages under §3121(a). Therefore, even if the sales representatives are not employees under IRC §3401(c)(for withholding of wages), this does not exclude their compensation from the payroll factor.
There is a strong presumption that total wages reported to Virginia for unemployment compensation purposes represent compensation paid or accrued in Virginia (the numerator of the payroll factor). See VR 630-3-412.C. (copy enclosed). Strong evidence is required to overcome this presumption; no such evidence is provided by the taxpayer. The auditor properly included in the numerator of the payroll factor the entire amount of compensation reported by the taxpayer for unemployment compensation purposes.
Accordingly, the assessment is correct as made and is now due and payable. You will receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner