Did a Maryland commission-based sales-service company have Virginia corporate income tax nexus through one Virginia sales representative?

Subject

Taxpayer requests a ruling regarding Virginia corporate income tax

Plain-English summary

A Maryland S corporation provided commission-based sales services for third-party clients. It had no Virginia office, property, advertising, bank account, or directory listing, but employed one Virginia resident who regularly solicited orders for the clients' tangible products. The employee also relayed requests for service agreements and vendor-financing information and earned additional commissions.

Virginia held that the company had corporate income tax nexus. P.L. 86-272 protects a narrow category of in-state solicitation for sales of tangible personal property, including ancillary and de minimis activity. But this employee was not selling the company's own goods. For the company, the employee's regular in-state work was the business service it sold to third-party clients.

Because that service activity exceeded protected solicitation and was not de minimis, Virginia concluded that the company had nexus and was subject to Virginia income tax.

What this means for you

• Having no Virginia office or property did not prevent nexus when a resident employee regularly performed the company's revenue-producing service in Virginia.
• P.L. 86-272 protection was unavailable because the employee solicited sales for third parties, not the employer's own tangible personal property.
• Service-agreement and financing communications added to the employee's in-state business activities, although the core holding rested on the regular third-party sales service.

Citations and references

• Va. Code § 58.1-400, tax on foreign corporations with Virginia-source income.
• 15 U.S.C. §§ 381-384, P.L. 86-272.
• Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).
• P.D. 00-160 (August 28, 2000) and P.D. 99-196 (July 22, 1999).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-51

Original ruling text

April 26, 2007

Re: Request for Ruling: Corporate Income Tax

Dear *:

This will reply to your letter in which * (the "Taxpayer") seeks a ruling as to whether it has nexus for Virginia corporate income tax purposes.

FACTS

The Taxpayer is incorporated in Maryland and acts as a commission-based sales service. It has elected to be taxed as an S corporation. The Taxpayer employs one sales representative who resides in Virginia and solicits sales of tangible personal property on behalf of the Taxpayer's third-party clients. The employee receives a salary for the first six months of employment and commissions thereafter.

The Taxpayer does not have an office in Virginia, nor does it own or lease any real or tangible personal property in Virginia. It does not advertise within Virginia and does not maintain bank accounts, telephone directory listings or building directory listings in Virginia.

The employee solicits sales orders from the third-party client's customers and remits the order forms back to the client's office. The Taxpayer does not take or hold title to any products for which it solicits sales. The Taxpayer does not approve sales orders and does not provide any financing services or collection of accounts receivable. The Taxpayer does not accept customer deposits on the sales of tangible personal

property.

Some of the Taxpayer's clients offer product service agreements that are sold as an add-on. If a client's customer is interested in purchasing an agreement, the Taxpayer's employee relays the request to the client. The Taxpayer receives a commission on the sale of the service agreement.

In addition, some of the Taxpayer's clients offer vendor financing. In these situations, the Taxpayer's employee serves as a conduit by relaying information about financing terms between the vendor and the customer. The employee earns an additional commission for providing this service.

The Taxpayer requests a ruling that it is not subject to Virginia corporate income tax.

RULING

Virginia Code § 58.1-400 imposes the 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, as codified at 15 U.S.C. §§ 381-384, however, prohibits a state from imposing an income tax on businesses when the only contacts with the state are a narrowly defined set of activities. P.L. 86-272 protection has been extended by the U.S. Supreme Court to include activities that are ancillary to direct sales solicitation, as well as de minimis activities. See Wisconsin Department of Revenue v. William Wrigley, Jr., Co. , 505 U.S. 214 (1992). Although P.L. 86-272 applies to tangible property, the Department's policy has been to extend the "solicitation test" of P.L. 86-272 to situations involving the sales of services. The Department has a long-established policy of narrowly interpreting the provisions of P.L. 86-272.

The Department has previously addressed this issue in similar cases. See Public Document (P.D.) 00-160 (8/28/2000) and P.D. 99-196 (7/22/1999). In each of these cases, the Department found that the employees were performing services in Virginia for their employer that exceeded the protection of P.L. 86-272. The rationale behind this decision is that the protections afforded by P.L. 86-272 are limited to the solicitation of sales.

In the instant case, the Taxpayer's employee is selling tangible personal property on behalf of third party clients, not for his employer. As such, this activity for purposes of the Taxpayer constitutes a business service, not the mere solicitation of sales. If the employee were selling tangible personal property on behalf of his employer, then that activity would constitute the solicitation of sales protected by P.L. 86-272. Moreover, these services do not qualify for the de minimis exception in Wrigley, as the employee performs this service on a regular basis. As such, the Taxpayer has nexus with Virginia and is subject to Virginia income tax.

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

The Code of Virginia section and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this ruling, please contact * in the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

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