Tax Type
Corporation Income Tax
Description
Sales Factor
Topic
Allocation and Apportionment
Date Issued
10-08-1991
October 8, 1991
Re: §58.1-1821 Application; Corporation Income Tax
Dear******************
This will reply to your letter of April 15, 1991, in which you seek correction of an assessment of corporation income tax for*************** (the "Taxpayer").
FACTS
The taxpayer filed a consolidated Virginia corporation income tax return for the 1987 taxable year, reporting a loss. The return was audited, and the income and apportionment factors of five subsidiaries were removed from the consolidated return because of lack of nexus with Virginia. The adjustment resulted in the assessment of tax. You maintain that the subsidiaries had nexus with Virginia and, therefore, were properly included in the consolidated Virginia return. You also contend that a mathematical error was made in the auditor's calculation of the denominator of the sales factor.
DETERMINATION
Nexus: Based on the facts as presented, ********** (Affiliate #1) had income from Virginia sources because significant quantities of tangible personal property were sold and delivered into Virginia in 1987. However, federal law prohibits states from imposing an income tax on businesses when the only contacts with the state are a narrowly defined set of activities related to the sale of tangible property, generally referred to as "solicitation." See Public Law 86-272, 15 U.S.C.A. §§381-384.
The department has ruled that additional activities beyond the solicitation of orders that are frequent and a continuing part of a corporation's regular course of business render a corporation subject to Virginia's income tax. You state that Affiliate #1 employed customer equipment service representatives to regularly assist customers with the installation, maintenance and use of the equipment and products sold by Affiliate #1. This is supported by the fact that Affiliate #1 had payroll in Virginia for the first two quarters of 1987.
Because it had payroll and sales in Virginia, Affiliate #1 clearly had "income and deductions from Virginia sources" as defined in Va. Code §58.1-302 and Virginia Regulation (VR) 630-3-302. Even though each apportionment factor is very small, Affiliate #1 is subject to the Virginia income tax and would be required to file a separate return (assuming that the affiliated group had not previously elected to file a consolidated return). Therefore, Affiliate #1 should be included in the taxpayer's consolidated return.
*********(Affiliate #2) was not included in the original consolidated Virginia return. You now request that it be included in the return, because it had Virginia source income.
The information provided with your letter indicates that Affiliate #2 owned property located in Virginia and had sales in Virginia. The property was located in Virginia as a regular and continuing part of the affiliate's business. This is sufficient to establish nexus with Virginia and render the affiliate subject to Virginia income tax. Affiliate #2 should be included in the consolidated Virginia return for 1987.
You contend that all the affiliates removed from the 1987 consolidated Virginia return should be included in the return. Your position is based on the fact that each affiliate has been included in the consolidated Virginia return in prior years and each affiliate is required to file a Virginia income tax return pursuant to VR 630-3-441, because each affiliate is qualified to do business in Virginia.
Under Va. Code §58.1-442 a consolidated return is defined as a single return for the affiliated group. To be eligible for inclusion in the consolidated return, each subsidiary must: (1) be affiliated, as defined in Va. Code §58.1-302; (2) use the same taxable year; (3) not be exempt from Virginia income tax under Va. Code §58.1-401 or P.L. 86-272; and (4) be subject to Virginia income tax if separate returns were to be filed. It is this last requirement that is lacking for the remaining affiliates.
A foreign corporation is subject to Virginia income tax if it has income from Virginia sources. See Va. Code §58.1-400. A review of the taxpayer's return reveals that none of the remaining affiliates have a positive apportionment factor. This indicates that the affiliates do not have sufficient business activity within Virginia to produce income from Virginia sources. With no Virginia source income, the affiliates would not be subject to Virginia income tax if separate returns were to be filed. Therefore, the remaining affiliates are not eligible to be included in the 1987 consolidated Virginia return and were properly removed by the auditor.
The fact that a foreign corporation is required to file a Virginia income tax return under Va. Code §58.1-441 because it is registered with the SCC for the privilege of doing business in Virginia does not render the corporation subject to Virginia income tax if it has no income from Virginia sources. Furthermore, the fact that the affiliates were included in a consolidated Virginia income tax return since 1984 does not require that they be included in every consolidated return. The business activity of each affiliate must be examined each year to determine if it is sufficient to be eligible for inclusion in a consolidated return.
Sales factor: The figure you submit for the denominator of the consolidated sales factor cannot be accepted. It includes "everywhere" sales from affiliates that have no nexus with Virginia. The auditor's computation of the denominator excluded the "everywhere" sales of Affiliate #1 and Affiliate #2; these sales should have been included because those corporations have nexus with Virginia and should have been included in the consolidated Virginia return.
While you do not specify what the mathematical error was in the auditor's computations, it is evident that the denominator of the sales factor must be recomputed. Therefore, I will refer this audit back to the auditor so that the denominator of the sales factor can be revised to reflect the "everywhere" sales of the corporations properly included in the consolidated Virginia return.
Accordingly, the audit report will be revised to include Affiliate #1 and Affiliate #2 in the 1987 consolidated Virginia income tax return, and the sales factor will be adjusted. You will shortly receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest. Though you requested a conference, this ruling has been issued without one. If you still desire a conference, contact the department within 30 days.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/5168F
Rulings of the Tax Commissioner