Did P.L. 86-272 protect an animal-medication seller whose Virginia manager administered staff and whose veterinarian trained customers?

Subject

Virginia based sales representatives solicit sales of medications at veterinary clinics.

Plain-English summary

Virginia upheld corporate-income-tax nexus because the taxpayer's in-state activities went beyond protected sales solicitation. P.L. 86-272 protected solicitation of orders for tangible personal property and activities ancillary to solicitation, but Virginia interpreted that protection narrowly.

The ordinary sales representatives' solicitation work, samples, automobiles, and sales computers were generally ancillary. The district manager, however, recruited, hired, trained, assigned, evaluated, budgeted, forecasted, tracked costs, and coordinated the sales team. Those were management and administration functions, not merely solicitation.

The veterinarian's product demonstrations and technical training taught customers how to use the medications in their businesses. The Department treated that customer-use training as a separate business function. Taken together, the non-ancillary activities formed a continuous enterprise pattern that was more than de minimis, so P.L. 86-272 did not bar Virginia tax.

What this means for you

• In-state sales solicitation may be protected, but management, administration, and customer-use training can exceed P.L. 86-272.
• An activity can support sales without being ancillary to requesting orders.
• Company cars and computers can share the treatment of the activities they support.
• Virginia aggregated all unprotected activities when deciding whether they were more than de minimis.

Common questions

Q: Were the sales representatives' activities protected?
A: Mostly yes. The ruling treated their solicitation work and related cars and computers as ancillary to sales solicitation.

Q: Why did the district manager's work exceed protection?
A: Recruiting, hiring, training, budgeting, forecasting, cost tracking, and team coordination were management functions with an independent business purpose.

Q: Why was the veterinarian's training unprotected?
A: It taught customers how to use the products in their businesses, rather than merely helping them resell or order the products.

Citations and references

• Va. Code § 58.1-400.
• 15 U.S.C. §§ 381-384.
• Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).
• P.D. 01-157, P.D. 94-111, P.D. 97-232, and P.D. 96-281.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-142

Original ruling text

July 30, 2008

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will reply to your letter in which you seek correction of the corporate income tax assessments issued to * (the "Taxpayer") for the taxable years ended October 31, 2002 through 2005.

FACTS

The Taxpayer is a * ("State A") corporation that manufactures and sells medications for animals. The Taxpayer employs several sales representatives, a district manager and a veterinarian, all of whom reside and work out of their homes in Virginia.

The sales representatives solicit sales of the Taxpayer's medications at veterinary clinics. The sales representatives distribute samples to current and prospective customers without charge.

The District Manager works out of his home and solicits sales by visiting veterinary clinics. The manager recruits, hires, trains, defines and assigns the responsibilities of the sales representatives, who report to the manager. The manager also participates in sales and marketing campaigns.

The veterinarian provides technical training and sales support, which include providing information to customers regarding the application possible interactions and dosing instructions of the product. The veterinarian conducts product demonstrations and answers questions for current and prospective customers. The veterinarian also participates in trade shows, veterinary conferences, and veterinary school meetings. Technical questions are referred to a technical support group in State A.

The Taxpayer was audited by the Department and assessments were made for the taxable years at issue. The auditor concluded that the Taxpayer had nexus with Virginia because the employees' activities in Virginia exceeded the solicitation of sales and that the Taxpayer had property in Virginia.

The Taxpayer contends that the employees' activities are either directly related to the solicitation of sales or are ancillary to the solicitation process and have no independent business purpose apart from their connection to the soliciting of orders. Moreover, the Taxpayer argues that providing company automobiles and computers to its employees merely facilitates sales solicitation.

DETERMINATION

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 a business 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). The Department has a long­established policy of narrowly interpreting the provisions of P.L. 86-272.

While most of the activities conducted by the Taxpayer's employees in Virginia would be considered to be ancillary to solicitation, the district manager conducts a number of activities that exceed the protection of P. L. 86-272. In addition to soliciting sales of veterinary medications, the district manager recruits, hires, trains defines and assigns the responsibilities of the sales representatives who report to this position. The position description provided by the Taxpayer indicates that the district manager is also responsible for providing sales forecasts, making budget recommendations, evaluating costs, tracking expenditures, and providing market input on pricing, positioning, and competitive activities. In addition, the position description reveals that the manager serves as the tactical coordinator between the regional office and district sales team.

These activities are not merely ancillary to the solicitation of sales. Although they may serve the solicitation function, the primary nature of the activities is to manage and administer the Taxpayer's business.

In addition, the veterinarian conducts product demonstrations and provides technical training to veterinary customers regarding the proper usage of the Taxpayer's products. While acknowledging the fact that the demonstrations and technical training contribute positively to the Taxpayer's sales, the Department cannot concede that the technical training 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 United States Supreme Court in Wrigley recognized many business activities contribute to sales increases, but are not considered ancillary to solicitation.

In Public Document (P.D.) 01-157 (10/19/01), the Department made a distinction between training provided to customers that is limited to reselling a taxpayer's product, which would be ancillary to solicitation (P.D. 94-111, 4/14/94) and training provided for the purpose of enabling customers to use a taxpayer's product in their business, which would be considered a business function separate and apart from the solicitation of sales (P.D. 97-232, 5/21/97). In this case, the technical training conducted by the veterinarian appears to be a necessary activity separate and apart from the solicitation of sales.

In addition, depending on the nature of the veterinarian's participation in trade shows, veterinary conferences, and veterinary school meetings, these activities likely exceed the protection afforded under P.L. 86-272.

In addition, the Taxpayer's Virginia employees are provided with a company­owned vehicle and computer for purposes of their work. Automobiles used by the sales representatives are included in activities considered to be ancillary to solicitation according to the United States Supreme Court in Wrigley . In P.D. 96-281 (10/11/1996) computers provided to sales professionals for the purpose of preparing sales presentations, reports to record the sales professional's activities, and other administrative functions were considered to be ancillary to solicitation of sales. The Taxpayer's sales representatives are engaged solely in sales. As such, the company provided automobiles and computers are used for purposes of their sales work and are ancillary for sales solicitation purposes. The district manager and veterinarian, however, engage in activities that exceed mere sales solicitation. Therefore, there is a presumption that the automobiles and computers provided to the district manager and the veterinarian are used in the activities that exceed sales solicitation. As such, automobiles and computers provided to the district manager and the veterinarian are not ancillary to solicitation.

Pursuant to Wrigley , all non-ancillary activities must be examined to determine if, when considered together, they create more than a de minimis connection to the Commonwealth. Based on the facts provided, the Department concludes the non­ancillary activities constitute a continuous pattern of enterprise, which is not de minimis and cannot be considered a trivial addition to the Taxpayer's business conducted on in Virginia.

CONCLUSION

The auditor's adjustments are correct and the assessments are upheld. A revised bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding balance in paid within 30 days from the date of the revised bill. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attention: *. If you have any questions concerning payment of the assessment, you may contact at **.

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

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2098744850.B