Tax Type
Corporation Income Tax
Description
Apportionment of income; Factors of insurance company
Topic
Allocation and Apportionment
Date Issued
07-13-1994
July 13, 1994
Re: Ruling request: Corporate and individual income taxes
Dear**********
This will reply to your letter of December 31, 1993, in which you have requested a ruling with respect to corporate and individual income taxes. I apologize for the delay in responding.
FACTS
Corporation X is incorporated outside of Virginia, and maintains its headquarters and sole business office outside Virginia. Corporation X operates a life insurance sales business. Representatives (salesmen) of Corporation X travel nationwide, and meet with present and potential customers. Salesmen meet with customers and gather general information for the purpose of making a sale. A proposal is prepared, and if it is accepted by the customer Corporation X arranges for placement of life insurance with appropriate companies. Except for short meetings with customers regarding parameters of possible life insurance, Corporation X and its representatives conduct no other business activities in Virginia. Corporation X receives commission income from life insurance companies for the policies sold, and is licensed as an agent in Virginia.
The salesmen are licensed in Virginia, and receive salaries and other compensation from Corporation X for services performed.
Corporation X has requested a ruling as to its liability for Virginia's corporate income tax, and as to the liability of its salesmen for Virginia individual income tax.
RULING
Corporation X has income from Virginia sources within the meaning of VR 630-3-302, copy attached, attributable to a business, trade, profession or occupation carried on in Virginia. Accordingly, pursuant to VR 630-3-400, copy attached, Corporation X is subject to the corporate income tax. However, as described below, Corporation X's overall Virginia apportionment factor may be zero, or Corporation X may be otherwise considered exempt from taxation.
Corporation X will utilize the three factor formula of property, payroll and sales to apportion its Virginia taxable income.
Sales Factor: Commission income from the sales of life insurance and other transactions not involving the sale of tangible personal property are apportioned based on "cost of performance" pursuant to VR 630-3-416, copy attached. Because Corporation X's costs of performance are likely to be greater outside than inside of Virginia, Corporation X is not likely to have a positive Virginia sale factor as a result of its fee income. See Public Document (P.D.) 92-151 (8/24/92), copy attached.
Property Factor: The Virginia property factor is based on real and tangible personal property used in Virginia. Accordingly, based on the information provided, it is unlikely that Corporation X will have a positive property factor. See VR 630-3-409, copy attached. To the extent that Corporation X has automobiles assigned to traveling employees, they may be included in the numerator of the property factor of the state to which the employees compensation is assigned under the payroll factor. See VR 630-3-410 (D), copy attached.
Payroll factor: Based on the information provided, it is unlikely that Corporation X would have a positive payroll factor. See VR 630-3-413 (A)(3), copy attached. (See discussion of P.L. 86-272 below.)
Public Law 86-272, codified at 15 U.S.C.A. 381-384, prohibits a state from imposing a net income tax where the only contacts with a state are a narrowly defined set of activities constituting solicitation of orders for sales of tangible personal property. In this situation, Corporation X is engaged in the sale of insurance products, which are clearly outside the federal statutory protection of P.L. 86-272. However, the department applies P.L. 86-272 type standards to solicitation of other than tangible personal property. See P.D. 93-75 (3/17/93), copy attached.
The department's historical policy is to extend the "solicitation test" of P.L. 86-272 to situations involving the sale of intangible personal property. However, the department limits the scope of P.L. 86-272 to only those activities that constitute solicitation, are ancillary to solicitation, or are de minimis in nature. See Wisconsin Department of Revenue v. William Wriqley, Jr., Co., 112 S. Ct. 2447 (1992).
Based on the information provided, it is unlikely that Corporation X would be subject to the corporate income tax. However, in accordance with VR 630-3-441, copy attached, Corporation X is required to file a Virginia return and state thereon the basis for its exemption from tax.
Taxation of salesmen: A nonresident who has income from carrying on a business, trade, profession, or occupation within Virginia is required to file a Virginia return, unless the individual meets the "$5,000 filing exception" described in Va. Code §58.1-321, copy attached. Generally, a nonresident employee receiving salary for services performed both inside and outside of Virginia will prorate their wages on the basis of days spent in Virginia performing duties verses days spent anywhere performing services. See P.D. 85-134 (6/18/85), copy attached. Accordingly, Corporation X's salesmen who solicit sales of insurance products in Virginia are subject to the Virginia individual income tax. Please note, Va. Code § 58.1-413 is only applied for purposes of determining the numerator of the Virginia corporate payroll factor, and does not apply for purposes of individual taxation of nonresidents.
Withholding taxes. Va. Code §§58.1-460 and 58.1-461 require an employer to withhold taxes from wages paid to an individual who performs services in Virginia. See P.D. 94-192 (6/20/94), copy attached. Accordingly, Corporation X is required to register as an employer and withhold Virginia income taxes from employees working in Virginia.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner