Tax Type
Corporation Income Tax
Description
Domestic and Foreign Corporations; Industrial Products
Topic
Taxpayers' Remedies
Date Issued
07-17-1992
July 17, 1992
Re: Ruling Request: Corporation Income Taxes
Dear*****************
This will reply to your letter dated October 30, 1991, sent on behalf of an anonymous taxpayer. You ask the department to consider whether the taxpayer's sales and solicitation activity in Virginia is in excess of the level of such activity permitted by Public Law 86-272, subjecting the taxpayer to the Virginia income tax.
FACTS
The taxpayer manufactures custom made industrial products, sold in Virginia by a nonresident salesperson. Orders for these products are approved in another state. No office or place of business is maintained in Virginia.
For various reasons, the taxpayer's customers cannot maintain an inventory of the product at their place of business. Further, the product is essential in the customers' manufacturing operations, with delivery required upon short notice from the customer.
When the taxpayer receives and approves an order, the product is manufactured, and then shipped by common carrier to a public warehouse in Virginia, so that the product is in close proximity to the customer. Once delivery of the product is required by the customer, the taxpayer arranges with a common carrier to deliver the product from the public warehouse to the customer's facility. The taxpayer does not receive payment until after the completion of delivery from the Virginia public warehouse to the customer; however, since the product is custom made, the customer recognizes that it is obligated to pay for the product upon acceptance of its original order by the taxpayer.
Other taxpayer employees follow up with Virginia customers after product delivery to ensure that customers are satisfied with the product, and that it is performing as designed. The taxpayer does not perform any other activity in Virginia.
RULING
Based upon the facts presented, the taxpayer clearly has income from Virginia sources because tangible property is stored and sold in Virginia.
However, Public Law 86-272, 15 U.S.C.A. §§381-384 prohibits Virginia from imposing an income tax on the income from Virginia sources if the only taxpayer activity is solicitation, and customers' orders are filled by shipment from out of state. The following exceed solicitation as defined in P.L. 86-272.
Storing manufactured products in Virginia warehouses until requested by the customer, and arranging for their delivery, is clearly not ancillary to the solicitation of sales, and is not a de minimis activity. In this instance, the taxpayer would provide the service of "just in time" delivery regardless of the existence of a sales force. Since the products are not shipped from outside of Virginia, the taxpayer does not qualify for the P.L. 86-272 protection. See Wisconsin Dept. of Revenue v. William Wrigley, Jr. Co. No. 91-119, 6/19/92
Also, taxpayer personnel, other than sales representatives, follow up with customers after product delivery to ensure customer satisfaction, and that the product is performing as designed. This is not an ancillary activity to solicitation, and serves a business function apart from soliciting sales. See Wrigley.
Accordingly, the taxpayer has income from Virginia sources and is required to file Virginia income tax returns for all years in which it has conducted business in Virginia as described.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/5713G
Rulings of the Tax Commissioner