Did warranty work performed in Virginia by unrelated distributors, retailers, and contractors exceed an out-of-state seller's P.L. 86-272 protection?

Subject

Independent third-party warranty work did not exceed P.L. 86-272

Plain-English summary

Virginia ruled that warranty repairs performed by unrelated Virginia businesses did not exceed the out-of-state seller's P.L. 86-272 protection. The seller had no Virginia property or employees and limited its own sales activities to protected solicitation.

Commercial contractors and residential distributors, retailers, or contractors performed the warranty work. The seller shipped parts and reimbursed repair or replacement costs but held no ownership interest in those businesses.

Virginia treated the arrangement as the seller purchasing repair services from independent vendors and reselling those services to customers. On those facts, the third parties' warranty activity did not create corporate-income-tax nexus for the seller.

What this means for you

• Warranty work performed by the seller itself is not protected solicitation.
• Independent-vendor warranty work can be analyzed as purchased and resold services.
• Ownership, control, employees, property, and the seller's own in-state activities remain critical.
• P.L. 86-272 protection is narrow and fact-specific.

Common questions

Are warranty services themselves protected solicitation?

No. The ruling said warranty services carried on in Virginia are not protected activity.

Why did these repairs not create nexus?

Unrelated third parties performed them as independent service vendors, and the taxpayer had no ownership interest in those businesses.

Would the result necessarily apply if the seller controlled the repair companies?

No. The ruling depended on the lack of ownership and the specific independent-contractor facts.

Citations and references

• 15 U.S.C. §§ 381-384.
• Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).
• P.D. 99-278 and P.D. 01-136.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-184

Original ruling text

October 17, 2008

Re: Ruling Request: Corporate Income Tax

Dear *:

This will respond to your letter in which you request a ruling with respect to corporate income tax nexus for your client (the "Taxpayer").

FACTS

The Taxpayer is commercially domiciled outside Virginia, and maintains no property or employees in Virginia. Sales solicitation activities by the Taxpayer are limited to those permitted under Public Law (P.L.) 86-272. The Taxpayer's sells two distinct products, one for commercial applications and the other for residential. Commercial products are sold directly to a contractor, who performs installation for its customer. Residential products are sold to distributors that in turn sell to retailers and contractors for sale to residential customers.

Both types of products carry a parts and labor warranty. In addition, the Taxpayer sells extended warranties. Commercial warranties are performed by the contractor that did the installation. Residential warranty claims are usually performed by the distributor, retailer or contractor. In both cases, the Taxpayer ships parts to the entity providing the warranty work and reimburses the entity for the cost of repairs, or replacements. The Taxpayer has no ownership interest in any of the distributors, retailers, or contractors operating in Virginia. The Taxpayer requests a ruling as; to whether the warranty services provided by a third party entity in Virginia would subject the Taxpayer to Virginia income tax.

RULING

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 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 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.

In Public Document (P.D.) 99-278 (10/14/99), the Department affirmed that warranty services carried on in Virginia are not an activity protected by P.L. 86-272. That ruling further states that the provision of services in Virginia by an independent contractor on behalf of a taxpayer was the purchase by the taxpayer of services from a vendor that were then resold to the taxpayer's customers. Accordingly, such activity would not create nexus for the taxpayer purchasing the services.

In this case, warranty services are not purchased from a warranty company. Instead, the services are provided by unrelated distributors, retailers, and contractors. The Taxpayer reimburses these independent contractors for providing the warranty services.

The Taxpayer's operations are substantially similar to the sign manufacturer in P.D. 01-136 (9/18/2001). In that ruling, the signs were installed on-site and warranty services were provided in Virginia by unrelated third parties. The Department viewed these activities as if the sign manufacturer was purchasing the repair services from a vendor and reselling them to its customers. Based on the facts presented, the performance of warranty services by the distributors, retailers, and contractors in Virginia are purchases of services by the Taxpayer and would not exceed the protection afforded under to P.L. 86-272.

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 sections, regulations, and tax bulletin 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 regarding this ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

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