Tax Type
Corporation Income Tax
Description
Federal limitation on taxation of interstate commerce; Activities of salespersons
Topic
Constitutional Provisions
Date Issued
11-10-1997
November 10, 1997
Re: § 58.1-1821 Application: Corporate Income Taxes
Dear******************
This will reply to your letter in which you make an application for the correction of corporate income taxes assessed to *********** (the "Taxpayer") for the fiscal years ended September 1989 through September 1993. I apologize for the delayed response.
FACTS
The Taxpayer is incorporated and headquartered outside of Virginia. The Taxpayer employs salesmen in Virginia who solicit sales of the Taxpayer's products. Orders are forwarded to the Taxpayer's headquarters for approval or rejection. If approved, the orders are shipped from inventory located outside Virginia. The salesmen operating in Virginia do not carry or install displays, do not monitor accounts, and do not intervene in collection disputes. The Taxpayer does not own or rent facilities in the Commonwealth .
For taxable years ended September 1989 through 1993, the Taxpayer was audited by the department. The auditor concluded that the Taxpayer was engaged in activities not protected by Public Law (P.L.) 86-272 (15 U.S.C.A. §§ 381 - 384). Specifically, the auditor determined that the Taxpayer maintained an inventory in Virginia and had salesmen making sales in Virginia with such inventory. Consequently, an assessment was made for corporate income taxes pursuant to Code of Virginia § 58.1--400.
You contend that the activities conducted within Virginia do not exceed the protection provided by P.L. 86-272. Further, you believe that any activity which is nonancillary is de minimis in nature and within the guidelines prescribed by the United States Supreme Court.
DETERMINATION
The Taxpayer had income from Virginia sources from the sale of tangible personal property for the taxable years ended September 1989 through September 1993. P.L. 86--272, however, prohibits Virginia from imposing a net income tax on a foreign corporation when its 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 solicitation or de minimis in nature.
The department narrowly interprets P.L. 86-272 within the context of the decision of the U.S. Supreme Court in Wisconsin Department of Revenue v. William Wrigley, Jr. Co.,112 S. Ct. 2447, (1992). A taxpayer which engages in activities beyond solicitation may exceed the protection provided by P.L. 86-272 and be subject to the Virginia corporate income tax. Title 23 of the Virginia Administrative Code (VAC) 10-120-90 (G), however, exempts activities which are de minimis in nature. Pursuant to Wrigley, all nonancillary activities are examined to determine if, when considered together, they create more than a de minimis connection to the Commonwealth.
The Taxpayer has established a "car stock program" where salesmen may acquire inventory on a voluntary basis for resale to the Taxpayer's customers. The salesmen acquire the stock from the Taxpayer or an outside party, and hold title and bear all risks of loss. Because of the nature of the "car stock program," participation requires that inventory be maintained in the state. The Taxpayer asserts that the "car stock" inventory belongs to the salesmen and not the Taxpayer. Consequently, the Taxpayer feels that the salesmen who participate in this program are acting as independent contractors and, therefore, the activities related to the "car stock program" do not create sufficient nexus with Virginia.
Pursuant to federal law, there are different standards which apply to the activities of a taxpayer's agent or representative versus the activities of an independent contractor. An independent contractor is defined in P.L. 86-272 as:
-
- A commission agent, broker, or other independent contractor who is engaged in selling, or soliciting orders for the sale of, tangible personal property for more than one principal and who holds himself out as such in the regular course of his business activities... (Emphasis added)
Consequently, an independent contractor meeting the above definition can "make" a sale (solicit and accept an order) and maintain an office in the state without subjecting his principal to taxation. With these two exceptions, however, all other activities conducted by an independent contractor on behalf of the principal will be treated as if the activity had been conducted by an employee of the principal.
In this particular case, sales related to the "car stock program" are made at the same time the salesmen regularly solicit orders for the Taxpayer's products. Further, "car stock" sales are only made to those customers who are in good credit standing with the Taxpayer. Moreover, the salesmen receive no additional compensation for these sales. Instead, the Taxpayer pays the salesmen the same rate of commission on all sales, including those made through the "car stock program."
Based on the facts presented, the department cannot agree with the Taxpayer's conclusion that the salesmen are acting as independent contractors when participating in the "car stock program." The activities conducted under this program are clearly related to the salesmen's regular course of business in representing the Taxpayer.
While acknowledging the fact that the "car stock program" contributes positively to the Taxpayer's sales, the department cannot concede that these activities are a part of solicitation or ancillary to requests for purchases. The U.S. Supreme Court in Wrigley recognized many business activities contribute to sales increases, but they are not considered ancillary to solicitation. Further, the department's longstanding policy is that the presence of inventory in Virginia subjects a corporation to income tax. At issue here is whether the nonimmune activities are de minimis in nature.
In Wrigley, the nonancillary activities conducted by the taxpayer only represented .00007% of the annual sales made in Wisconsin during the year. Although this amount was not large when compared to the taxpayer's other operations in that state, the Court found that such activities were not de minimis when considered together. Accordingly, the dollar amount of sales resulting from the nonimmune activities was not the driving vehicle in deciding the merits of Wrigley; but rather, whether such activities created more than a trivial additional connection with the state when considered in the aggregate.
The department has previously ruled that nonancillary activities, that may be considered de minimis on an individual basis, will exceed P.L. 86-272 protection when they are considered nontrivial in the aggregate. See Public Documents ("P.D.") 96-281 (10/11/96), 94-111 (4/14/94), and 88-146 (6/20/88), copies enclosed.
In this particular case, the salesmen conduct numerous activities which exceed the protection of P.L. 86-272. Participation in the "car stock program" goes beyond the mere solicitation of orders for the Taxpayer's products. The salesmen accept, approve, and fill the order. The salesmen also maintain inventory in the state for this program. Further, the salesmen either collect payment for the order, which is then forwarded to the Taxpayer, or the salesmen have the customer invoiced directly by the Taxpayer. These activities are not ancillary to the solicitation of orders. Moreover, these activities occurred on a regular basis over the five-year period examined. Consequently, the department concludes that the nonancillary activities in question, when taken as a whole, constitute a continuous pattern of activity which creates more than a minimal connection with Virginia.
Accordingly, your request for relief must be denied. For the reasons stated herein, the department finds that the activities conducted by the Taxpayer's salesmen in Virginia exceed the protection of P.L. 86-272 and subject the Taxpayer to the Virginia corporate income tax for the tax years in question. For your convenience, a schedule of the outstanding assessments is attached. Interest has been accrued through the date of this letter. The balance should be paid in full within 30 days to avoid the accrual of additional interest. Please forward your payment to the attention of ****at the Department of Taxation, Office of Tax Policy, Post Office Box 1880, Richmond, Virginia, 23218-1880. If you have any questions, please contact**** at ***** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11193M
Rulings of the Tax Commissioner