Tax Type
Corporation Income Tax
Description
Federal limitation on taxation of interstate commerce
Topic
Constitutional Provisions
Date Issued
10-11-1996
October 11, 1996
Re: § 58.1-1821 Application: Corporate Income Tax
Dear*************
This will reply to your letter in which you furnished additional information concerning your refund request for************(the "Taxpayer"). I apologize for the delay in responding to your correspondence.
FACTS
The Taxpayer is a manufacturer of prescription drugs and is located in another state. The majority of the Taxpayer's sales are made to wholesalers, although end-users occasionally place orders directly with the Taxpayer.
The Taxpayer employs sales professionals in Virginia for the purpose of informing its end-users of company products. The Taxpayer furnishes the salesmen with automobiles and computers. No real property is owned or rented in Virginia by the Taxpayer. In addition, the Taxpayer employs a sales manger and clinical support specialists who travel into Virginia as part of their job responsibilities. The sales manager provides direction, management and training to the team of sales professionals. A clinical support specialist functions as a held resource for the sales force and customers.
The Taxpayer is requesting refunds of tax for all open years and cites Public Law (P.L.) 86-272 (15 U.S.C.A. §§ 381-384), and Wisconsin Department of Revenue v. William Wrigley, Jr,. Co., 112 S. Ct. 2447 (1992) (Wrigley) as the basis for the refunds.
DETERMINATION
The Taxpayer had income from Virginia sources from the sale of tangible personal property for the refund years in question (taxable years ending March 31, 1990, March 31, 1991 and December 31, 1991) and filed returns for these years. Subsequent review of these returns raised doubts as to whether the Taxpayer was subject to Virginia tax.
P.L. 86-272 prohibits Virginia from imposing a net income tax on a taxpayer when the taxpayer's only contact with Virginia constitutes solicitation of sales. This same protection has been extended by the United States Supreme Court to include activities which are ancillary to direct sales solicitation, as well as de minimis nonancillary activities.
In Wrigley, the U.S. Supreme Court found that a "solicitation of orders" means any speech or conduct explicitly or implicitly proposing a sale, and activities entirely ancillary to soliciting orders. Activities in which a taxpayer would engage regardless of whether a sale is made are not exempt solicitation just because they are performed by salesmen, unless the activities are de minimis.
Under Virginia Regulation (VR) 630-3-401 (G) any additional activity beyond solicitation may subject the taxpayer to Virginia income tax, based upon analysis of the "nature, continuity, frequency, and regularity of the activities in Virginia compared with the nature, continuity, frequency, and regularity of its activities everywhere."
Based on the information provided, the additional activities of the sales professional appear to be ancillary to soliciting an order and do not appear to be an independent business function that the Taxpayer would engage in whether or not it had a sales force in the state. In addition, the sales manger for Virginia engages in permissive ancillary sales activities only.
The Taxpayer does maintain property in Virginia in the form of automobiles and computers. The automobiles used by the sales professionals are included in activities considered to be ancillary to solicitation in Wrigley. The computers are provided to the sales professionals for the purpose of preparing sales presentations, reports to record the sales professional's activities, and other administrative functions. In as much as the computers serve in activities considered to be the solicitation of orders, they will be considered to be ancillary to solicitation of sales.
While some of the duties performed by the clinical support specialist in Virginia are ancillary to solicitation, it appears that the services performed for the Taxpayer constitute a frequent, regular and continuing presence in Virginia for business purposes that are separate and apart from solicitation. These duties include presenting educational programs for customers, troubleshooting customer problems, and assisting in the identification of potential patients.
The educational programs are presented free of charge to customers to teach them how to use, or make better use of the Taxpayer's products. In addition to the training, the individuals attending the educational programs may qualify for continuing professional education credits as required for professional certification. Although, providing the programs is clearly beneficial to sales, it serves a separate and distinct business function. Due to the specialized nature of Taxpayer's products, training of customers in the use of the products would be a necessary activity even without solicitation.
The clinical support specialist also engages in troubleshooting which involves answering questions and problems pertaining to specific applications of the product. Troubleshooting usually occurs during an account call and may deal with a question about the products application in a specific situation or a problem with a specific patient. This activity goes beyond mere solicitation of orders.
Another duty of the clinical support specialist is assisting in the identification of potential patients for one of the Taxpayer's products. The information provided does not clearly define this activity. Should this entail identifying the types of patients which would benefit from the product, it could be considered part of solicitation. On the other hand, assistance in identifying specific patients who would benefit from the drug would not be a protected activity.
Based on the facts presented, the Taxpayer's activities exceed mere solicitation of orders. The educational programs are not activities ancillary to soliciting an order for a sale of tangible personal property. In addition, the troubleshooting and identification of patient activities go beyond mere solicitation. Further, while these activities taken separately may be de minimis, taken as a whole, the department concludes these activities constitute a continuous pattern of activity, which is not de minimis, and is not considered trivial additions to the Taxpayer's business carried on in Virginia.
Accordingly, your request for refunds for the taxable years ending March 31, 1990, March 31, 1991 and December 31, 1991 must be denied. Since the Taxpayer has had a continued presence in Virginia and has income from Virginia sources as defined by VR 630-3-302 corporation income tax returns for the taxable years ended December 31, 1993, 1994 and 1995 must be filed. Due to the extended amount of time it took to resolve this case, the Taxpayer will be allowed to file the corporation income tax returns without penalties, and file an amended Virginia return for the taxable year ended December 31, 1994 to use a loss carryback.
Please forward your returns within 90 days to****** , Office of Tax Policy, Virginia Department of Taxation, P.O. Box 1880, Richmond Virginia 23218--1880. Should you have any questions regarding this matter, please contact *********** at ************* .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9673O
Rulings of the Tax Commissioner