Tax Type
Corporation Income Tax
Description
Federal limitation on taxation of interstate commerce; Activities in excess of solicitation
Topic
Constitutional Provisions
Date Issued
05-21-1997
May 21, 1997
Re: § 58.1-1821 Application: Corporate Income Tax
Dear*****************
This will reply to your letter in which you request a redetermination of the department's ruling previously issued to ******** (the "Taxpayer"). A copy of this ruling, Public Document (P.D.) 96-281, (10/11/96), is attached.
FACTS
The Taxpayer requested refunds of tax for taxable years ending March 31, 1990, March 31, 1991, and December 31, 1991, citing a lack of nexus pursuant to 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.
The department ruled that the educational programs and troubleshooting activities of the Taxpayer's clinical support specialists created nexus with Virginia. The Taxpayer has asked the department to reconsider its decision based on the unique nature of the pharmaceutical industry and the Taxpayer's products. Due to this uniqueness, the Taxpayer believes the educational and troubleshooting activities of the clinical support specialists do meet the test of activities covered by Wrigley's definition of solicitation of orders.
DETERMINATION
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- In Wrigley, the U. S. Supreme Court determined:
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- Once it is acknowledged, as we have concluded it must be, the "solicitation of orders" covers more than what is strictly essential to making requests for purchases, the next (and perhaps the only other) clear line is the one between those activities that are entirely ancillary to requests for purchases - those that serve no independent business function apart from their connection to the soliciting of orders - and those activities that the company would have reason to engage in anyway but chooses to allocate to its in-state sales force.
The Taxpayer asserts that the educational programs are a part of the solicitation process and does not meet the Wrigley test of an activity that would be engaged in anyway but has been assigned to its instate sales force. To support its position, the Taxpayer contends they are not in the business of providing educational programs, and only provides the programs to promote safe and effective use of its products. Also, because nurses have an active role in a patient's treatment plan and administer the drugs, the Taxpayer designed the educational programs to increase the understanding of nurses about the products and the diseases treated by the products. As such, the Taxpayer asserts the aim of these programs is to facilitate future treatments that are directly related to future sales and are ancillary to solicitation.
While acknowledging the fact that the educational programs contribute positively to the Taxpayer's sales, the department cannot concede that this activity is a part of solicitation or ancillary to requests for purchases. Increasing sales is at the heart of practically every activity conducted by a business. The U. S. Supreme Court in Wrigley recognized many business activities contribute to sales increases, but are not considered ancillary to solicitation.
The court went on to say that these activities "cannot be converted into 'solicitation' by merely being assigned to a salesman." As such, the fact that the clinical support specialists are employed in the sales and marketing department carries little weight in determining whether their activities create nexus with Virginia.
According to the Taxpayer, their products are still relatively new. In addition, the Taxpayer has indicated that determining the optimum dosage level for each patient is necessary to facilitate safety and efficiency of the treatments. Based on these statements, it appears that a great deal of knowledge and training is required to administer these products. It is, therefore, obligatory for the Taxpayer to insure the individuals dispensing these treatments are highly knowledgeable and proficient in administering the medicine.
Accordingly, the department must conclude that the training conducted through the educational programs is a necessary activity separate and apart from the solicitation of sales. The fact that the Taxpayer chooses to conduct such educational programs on a regular and continuing basis in Virginia constitutes taxable nexus with Virginia.
The Taxpayer also asserts the clinical support specialists' activities in troubleshooting should be considered an essential activity in making requests for purchases. Due to the nature and regulation of the industry, and because the products meet life-threatening needs of human beings, the Taxpayer has deduced that troubleshooting should be viewed as a normal and expected activity in connection with solicitation. Wrigley's standard does not provide protection for activities necessitated by government regulation. As such, the department will analyze the nature, continuity, frequency, and regularity of the activity in Virginia to decide if the activity creates nexus with Virginia.
While, troubleshooting usually occurs when a clinical support specialist is calling on an account with a sales representative, the nature of the activity is to answer questions about product application in specific situations or address problems with specific patients. The Taxpayer considers this activity important enough to maintain a 24-hour a day hotline to answer customer questions as an independent business function. Thus, to the extent that the Taxpayer engages in troubleshooting on a regular and continuing basis in Virginia, the Taxpayer has nexus with Virginia.
Based on the facts presented, the department concludes that the Taxpayer's activities exceed mere solicitation of orders. Accordingly, the department must deny your request for refunds for the taxable years ending March 31, 1990, March 31, 1991, and December 31, 1991, and uphold its previous ruling.
Because the Taxpayer has had a continued and increasing presence in Virginia and has income from Virginia sources as defined by Title 23 of the Virginia Administrative Code (VAC) 10-120-20, corporation income tax returns for the taxable years ended December 31, 1993 through 1996 must be filed. Based on the circumstances described in P.D. 96-281, the department will allow the Taxpayer to file the corporation income tax returns without penalties, and file an amended Virginia return for the taxable year ended December 31, 1991 to carryback a net operating loss in 1994.
Please forward your returns within 90 days to*******, Office of Tax Policy, Virginia Department of Taxation, P.O. Box1880, Richmond Virginia 23218-1880. Should you have any questions regarding this matter, please contact *****at ****** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11788O
Rulings of the Tax Commissioner