Tax Type
Corporation Income Tax
Description
Federal Limitation on Taxation of Interstate Commerce; Activities Exceeding Solicitation
Topic
Constitutional Provisions
Date Issued
03-18-1991
March 18, 1991
Re: §58.1-1821 Application; Corporation Income Tax
Dear*********
This will reply to your company's letter of April 18, 1990, requesting a ruling and to your company's letter of August 9, 1990, in which you seek correction of a corporation income tax assessment for ******************(the "Taxpayer").
FACTS
The taxpayer's wholly owned subsidiary (the "sub") was removed from the Virginia consolidated return by the auditor because no nexus existed between the sub and Virginia. The sub is an Ohio corporation, domiciled in California, and is in the business of selling computer systems and management services to physicians. The sub has no personnel based in Virginia.
DETERMINATION
Based on the facts as presented, the sub does have income from Virginia sources because significant quantities of tangible personal property are sold and delivered into Virginia on a regular basis. However, federal law prohibits a state from imposing a net income tax on income derived within a state from interstate commerce, if the only business activity within the state is solicitation of orders for the sale of tangible personal property filled by shipment or delivery from places outside the state after orders are sent outside the state for approval or rejection. See Public Law 86-272, 15 U.S.C.A. §§381-384.
Each sale of a computer system involves installation of the system and a one-week training period for office personnel on the processing of information through the applications software. Such activity goes beyond the protection afforded under P.L. 86-272. Thus, P.L. 86-272 protection is lost, and there is a tax nexus between the sub and Virginia.
According to the information supplied with this application, the sale of management services is under an agreement separate from the sale of computer systems. The services provided are performed by the sub's employees at physicians' offices in Virginia.
Under Va. Code §58.1-416 sales, other than sales of tangible personal property, are in Virginia if a greater proportion of the income producing activity is performed in Virginia than in any other state. "Income producing activity" is defined as the act or acts directly engaged in by the taxpayer for the ultimate purpose of producing the sale and includes the rendering of personal services by employees of the taxpayer. Virginia Regulation (VR) §630-3-416(B). The income producing activity is deemed performed at the place where such activities are performed by employees of the taxpayer.
In this case, the income producing activity is the rendering of management services by employees of the sub. The services are performed by the employees at physicians' offices in Virginia. Because the income producing activity is in Virginia, the sales of management services produce Virginia source income and a positive sales factor. Therefore, if the sub has sales of management services in Virginia, it is subject to tax in Virginia.
The auditor's adjustment was based on the information available at the time of the audit. The supplemental information provided with this application substantiates the taxpayer's claim that the subsidiary had nexus with Virginia. Therefore, the audit report will be revised to include the subsidiary in the consolidated return.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner