Did a Virginia home-based employee soliciting orders create sales tax nexus while the out-of-state manufacturer remained protected from income tax?

Subject

Tax Responsibilities; Corporate Income Tax

Plain-English summary

Virginia ruled that the planned home-based employee would create retail sales tax nexus but would not create corporate income tax liability while the employee's activity remained limited to soliciting orders for tangible personal property.

The out-of-state manufacturer made CDs, DVDs, and replication equipment. Its Virginia employee would receive sales calls routed through the out-of-state contact center and solicit orders from home. Employee solicitation was sufficient contact for Virginia to require sales tax registration, collection on all Virginia sales, monthly returns, and payment.

The corporate income tax answer differed. P.L. 86-272 protected a seller whose only in-state contacts were qualifying solicitation of tangible-personal-property orders. On the proposed facts, the employee did nothing beyond solicitation, so Virginia found no corporate income tax liability.

The ruling warned that activities beyond solicitation could change that result. It is a 2007 analysis and should not be treated as a complete statement of current nexus law.

What this means for you

• Sales tax and income tax nexus can produce different answers from the same employee.
• A home office is not required for employee solicitation to create sales tax collection duties.
• Define and monitor the employee's duties if relying on P.L. 86-272.
• Service, installation, complaint resolution, inventory, or other nonsolicitation activity may change the income-tax analysis.

Common questions

Did the lack of a company office prevent sales tax nexus? No. The employee's in-state solicitation was enough.

Was the company required to collect only on the employee's sales? The ruling says all Virginia sales.

Why was corporate income tax different? The employee's stated work stayed within P.L. 86-272's solicitation protection.

Citations and references

• Va. Code § 58.1-612(A) and (C)(2), § 58.1-613, § 58.1-615, and § 58.1-616.
• Va. Code § 58.1-400.
• 15 U.S.C. §§ 381-384.
• P.D. 91-286 (November 8, 1991) and P.D. 96-130 (June 13, 1996).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-138

Original ruling text

September 5, 2007

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer") requesting a ruling on the application of the retail sales and use tax and the corporate income tax when the Taxpayer has an employee located in Virginia.

FACTS

The Taxpayer is an out-of-state manufacturing company that makes and sells CDs, DVDs and replication equipment to musicians. All of the Taxpayer's sales orders are received and accepted at its out-of-state location. The Taxpayer uses common carriers to ship its products. The Taxpayer plans to hire an employee that will work from home in Virginia. The Taxpayer will not maintain an office in Virginia. The employee will receive sales calls that come in through the Taxpayer's out-of-state contact center. The Taxpayer requests a ruling regarding nexus, the application of the sales tax and the application of the corporate income tax.

RULING

Retail Sales and Use Tax

Nexus

Virginia Code § 58.1-612 A provides, in pertinent part, that the sales and use tax "shall be collectible from all persons who are dealers .... and who have sufficient contact with the Commonwealth . . . ." Additionally, Va. Code § 58.1-612 sets forth the "nexus" requirements that give the Commonwealth the authority to require dealers to register for collection and remittance of the sales tax.

Virginia Code § 58.1-612 C 2 provides that a dealer has sufficient contact with the Commonwealth to require registration if the dealer "[s]olicits business in this Commonwealth by employees, independent contractors, agents or other representatives."

In Public Document (P.D.) 91-286 (11/8/91), the taxpayer planned to have a representative located in Virginia that would be responsible for soliciting sales of tangible personal property. In accordance with Va. Code § 58.1-612, the Tax Commissioner ruled the taxpayer would be required to collect the retail sales and use tax on all of its Virginia sales because it had a representative in Virginia soliciting sales.

Based on the facts provided, the Taxpayer will have an employee located in the Commonwealth who will be responsible for soliciting sales of tangible personal property. The solicitation of sales by the Taxpayer's employee creates nexus with the Commonwealth for retail sales and use tax purposes. In accordance with Va. Code § 58.1-612 and P.D. 91-286, the Taxpayer in this instance must register for the tax and will be responsible for collecting the tax on all Virginia sales.

Tax Responsibilities

As a result of the nexus created through the Taxpayer's Virginia employee, and pursuant to Va. Code § 58.1-613, the Taxpayer must file with the Tax Commissioner an application for a certificate of registration in order to conduct business in the Commonwealth. Additionally, Va. Code § 58.1-612 requires that all dealers collect and remit the retail sales and use tax. In accordance with Va. Code § 58.1-615, the Taxpayer would be required to submit a sales and use tax return to the Tax Commissioner "on or before the twentieth day of the month following the month" when the tax became effective. Pursuant to Va. Code § 58.1-616, the Taxpayer's payment must accompany the return. The Department's web site provides additional information regarding registration for the retail sales and use tax and filing sales and use tax returns.

Corporate Income Tax

Virginia Code § 58.1-400 imposes a corporate income tax on Virginia taxable income derived from a Virginia source.

Public Law (P.L.) 86-272, 15 U.S.C. §§ 381-384 prohibits a state from imposing a net income tax where the only contacts with the state are a narrowly defined set of activities constituting solicitation of orders for sales of tangible personal property.

Based on the facts provided, the Taxpayer's employee that will be located in Virginia will be responsible for soliciting sales only. The Taxpayer's activities do not extend beyond the protection of P.L. 86-272. Accordingly, the Taxpayer will not be subject to the corporate income tax. However, should the Taxpayer's activities extend beyond solicitation for sales of tangible personal property, the Taxpayer may become subject to the corporate income tax. See P. D. 96-130 (6/13/96).

This ruling is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this response, you may contact * in the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1379322144P