Did one Virginia employee selling an out-of-state energy company's services create Virginia sales-tax or corporate-income-tax duties?

Subject

Virginia sales employee and service-company tax nexus

Plain-English summary

Virginia found no sales-tax collection duty and no corporate-income-tax nexus on the facts presented, even though the out-of-state energy-services company had one salesperson in Virginia.

The company used software to help customers sell unused electricity to an independent system operator. It did not itself sell tangible personal property or sell anything directly between the two participants. It therefore was not a “dealer” required to collect Virginia sales tax.

As a service provider, however, the company was the taxable user and consumer of tangible property used in Virginia. It had to pay tax to vendors or self-accrue Virginia use tax when vendors did not charge it.

For corporate income tax, the employee only promoted and sold the company's services to Virginia organizations. The Commissioner treated that mere solicitation, without other Virginia activity, as insufficient nexus. The ruling warned that changed activities or operations could change the result.

What this means for you

• Having a Virginia employee did not automatically create every Virginia tax duty in this ruling.
• Sales-tax dealer status failed because the company sold services rather than tangible personal property.
• A service provider can still owe use tax on its own equipment and supplies used in Virginia.
• The corporate-income-tax result was narrow: the employee merely solicited service customers and no other in-state activities were presented.

Common questions

Did the company have to collect sales tax from customers?

No. It was not a statutory dealer because it did not sell tangible personal property.

Did it owe any sales or use tax?

Yes, potentially on tangible property it used in Virginia to provide services.

Did the Virginia salesperson create corporate-income-tax nexus?

No, not where the employee's only activity was attempting to sell the company's service.

Would additional Virginia operations matter?

Yes. The ruling expressly says changed activities may change the company's obligations.

Citations and references

• Va. Code §§ 58.1-400, 58.1-612, and 58.1-613.
• 23 VAC 10-210-4040.
• 15 U.S.C. §§ 381-384.
• Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-181

Original ruling text

November 21, 2007

Re: Request for Ruling: Retail Sales and Use Tax/Corporate Income Tax

Dear *:

This is in response to your letter in which you request a ruling regarding the tax obligations of * (the "Taxpayer") based on its business activities in Virginia. I apologize for the delay in the Department's response.

FACTS

The Taxpayer is an energy service company that assists customers in selling their unused electricity back to the energy grid. The Taxpayer owns and manages a software application that enables Virginia customers to transact with an independent system operator, located outside Virginia, who purchases the unused electricity. The Taxpayer has hired an employee in Virginia who promotes and sells the Taxpayer's services to Virginia based organizations. The Taxpayer requests a ruling regarding whether its activities create any tax obligations for Virginia corporate and retail sales and use tax purposes.

RULING

Retail Sales and Use Tax

Pursuant to Va. Code § 58.1-612, the sales tax is collectible from all persons who are dealers and who have sufficient contact with Virginia to require registration under Va. Code § 58.1-613. Virginia Code § 58.1-612 B defines the term "dealer" to include every person who:

[s]ells at retail, or who offers for sale at retail, or who has in his possession for sale at retail, or for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth, tangible personal property . . . .

Virginia Code § 58.1-612 C sets forth the nexus requirements that give the Commonwealth the authority to require a business to register to collect and remit Virginia sales and use tax. Virginia law generally requires dealers with a physical presence in Virginia to collect tax on all sales to Virginia customers.

Based on the facts presented, and with regard to the requirements of Va. Code § 58.1-612, the Taxpayer does not qualify as a "dealer" under the statute because it does not offer tangible personal property for sale at retail. The Taxpayer merely facilitates the sale of unused electricity between two parties through its software application. It does not sell anything directly to the participants. Consequently, the Taxpayer is not a dealer and does not have a sales tax collection obligation.

The Taxpayer is a service provider and is the user and consumer of all tangible personal property used in Virginia in the provision of its services. See Title 23 of the Virginia Administrative Code (VAC) 10-210-4040. As such, the Taxpayer will be liable for the payment of the tax on all tangible personal property used in the performance of its services in Virginia. When making purchases, if the vendor does not charge the tax, the Taxpayer must accrue and remit use tax directly to the Department. To secure use tax registration and forms information, the Taxpayer may contact the Department's Customer Service Office at (804) 367-8037 or visit the Department's website at www.tax.virginia.gov.

Corporate Income Tax

Virginia Code § 58.1-400 imposes an income tax "on the Virginia taxable income for each taxable year of every corporation organized under the laws of the Commonwealth and every foreign corporation having income from Virginia sources." Generally, a corporation will have income from Virginia sources if there is sufficient business activity within Virginia to make any one or more of the applicable apportionment factors positive. The existence of positive Virginia apportionment factors clearly establishes income from Virginia sources.

Public Law (P.L.) 86-272, codified at 15 U.S.C. §§ 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. The Department has a long established policy of narrowly interpreting the provisions of P.L. 86-272. 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 Wrigley, Jr., Co. , 505 U.S. 214 (1992). Although P.L. 86-272 only applies to the sale of tangible personal property, Virginia applies the same "solicitation" test to business activities involving intangible personal property.

Based on the facts provided, the Taxpayer does not have sufficient nexus with Virginia to impose its corporate income tax. You indicate that the employee working in Virginia will be attempting to sell the Taxpayer's service to Virginia based organizations. The mere presence of a salesman in Virginia is not a sufficient basis to establish nexus where no other activities are present.

This ruling is based on the facts as set forth in your letter. If the Taxpayer's activities or operations in Virginia change, the tax obligations of the Taxpayer may change. In that case, you should seek a new ruling from the Department.

The Code of Virginia sections cited, along with other reference documents, 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 Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1052431810i