Could an out-of-state construction affiliate join a Virginia consolidated return based on a final billing and solicitation visits in 2003?

Subject

Final billing and solicitation visits did not create 2003 Virginia nexus

Plain-English summary

Virginia upheld removal of the construction affiliate from the 2003 consolidated return. A corporation could join only if it would be subject to Virginia income tax on a separate-return basis.

The affiliate's only revenue was a final progress billing for a Virginia contract completed in 2002. Although most contract costs had been incurred in Virginia, none occurred in 2003, so the receipt did not enter the 2003 Virginia sales-factor numerator.

Affiliate personnel also made repeated Virginia visits to bid on future work, but no contracting services were performed that year. Virginia treated the bidding, site visits, and company vehicle as protected or ancillary solicitation. The affiliate therefore lacked a positive factor and nexus, though the auditor was directed to verify claimed mathematical errors after removing it.

What this means for you

• Consolidated-return membership requires each affiliate to be independently subject to Virginia tax.
• A later billing does not necessarily create a current-year Virginia sales numerator when performance costs occurred earlier.
• Solicitation alone may not create nexus under the Department's policy, even for service contracts.

Common questions

Did the 2003 final invoice create Virginia sales?

No. No income-producing performance costs occurred in Virginia during 2003.

Did bidding visits create nexus?

No evidence showed activity beyond protected solicitation and its ancillary conduct.

Citations and references

• 23 VAC 10-120-322, 10-120-210(B), and 10-120-230.
• Va. Code §§ 58.1-400, 58.1-401, and 58.1-416.
• 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. 09-121

Original ruling text

August 7, 2009

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 assessment issued to * (the "Taxpayer"), for the taxable year ended December 31, 2003.

FACTS

The Taxpayer was the lead corporation in an affiliated group (the "Group") that filed a consolidated Virginia corporate income tax return for the 2003 taxable year. Under audit, the Department removed * (S) from the consolidated return. The Department's auditor determined that S lacked a positive apportionment factor and, therefore, did not have income from Virginia sources.

S is a construction contractor based outside Virginia. For the 2003 taxable year, S's sole revenue resulted from a final progress billing invoice for a contract completed in a previous taxable year. In addition, S had out-of-state personnel traveling into Virginia soliciting additional contract work. The Taxpayer contests the assessment, asserting that S had nexus with Virginia for the 2003 taxable year and was properly included in the Group's consolidated return because it was actively pursuing additional work in Virginia.

DETERMINATION

Title 23 of the Virginia Administrative Code (VAC) 10-120-322 provides that in order to be included in a consolidated Virginia corporation income tax return, a corporation must be subject to Virginia income tax if a separate return were to be filed. Generally, a corporation not organized under Virginia law is subject to Virginia income tax if the corporation receives income from Virginia sources, unless exempted by Va. Code § 58.1-401 or Public Law (P.L.) 86-272.

Virginia Code § 58.1-400 imposes 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.

S had no payroll or property in Virginia and reported a small amount of Virginia sales during the taxable year at issue. The auditor concluded that S could not have had nexus without property and payroll in Virginia and removed S from the consolidated return.

Sales Factor

The Taxpayer asserts that S's sales resulted from a multi-year contract that was completed toward the end of 2002. The 2003 sales represented a final progress billing for work performed in Virginia by S. Title 23 VAC 10-120-210 B provides that "[s]ales shall be included in the sales factor if the gross receipts or net gain are included in Virginia taxable income and are connected with the conduct of taxpayer's trade or business within the United States."

Virginia Code § 58.1-416 provides that sales, other than sales of tangible personal property, are deemed in Virginia if:

The income-producing activity is performed in Virginia; or

The income-producing activity is performed both in and outside Virginia and a greater proportion of the income-producing activity is performed in Virginia than in any other state, based on costs of performance.

The term "cost of performance" is defined in Title 23 VAC 10-120-230 as "the cost of all activities directly performed by the taxpayer for the ultimate purpose of producing the sale to be apportioned." In this case, the preponderance of costs for all activities directly performed by S on the contract occurred in Virginia. However, all of these costs occurred prior to the 2003 taxable year. Because no costs were incurred in Virginia during the 2003 taxable year, the sale could not be included in the numerator of the Virginia sales factor.

Nexus

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 the instant case, S did not provide contracting services in Virginia in 2003. However, S did have personnel traveling into Virginia to pursue potential contracts. These activities involved a bidding process the extended several months involving multiple visits to potential construction sites. The bid work was primarily conducted by a project superintendent who traveled into Virginia in a company owned truck. S was eventually granted a contract set to begin in 2004, but lack of funding caused the contract to be cancelled.

Actively pursuing business in Virginia generally includes activities included in the solicitation of orders. Such activities cannot create nexus pursuant to P.L. 86-272. The Taxpayer has provided no evidence that the project superintendent conducted any activities in Virginia that exceeded the protection afforded under P.L. 86-272. Further, in Wrigley , automobiles used by the sales professionals are included in activities considered to be ancillary to solicitation. See Public Document (P.D.) 96-281 (10/11/1996). Based on the information provided, S did not have nexus with Virginia for the 2003 taxable year.

CONCLUSION

The evidence shows that S did not have a positive apportionment factor or nexus with Virginia for the 2003 taxable year. As such, the auditor appropriately removed S from the Group's consolidated return.

The Taxpayer also asserts that a number a mathematical errors were made on the audit report when S was removed from the consolidated return. The audit will be returned to the Department's auditor to verify the mathematical errors and make the appropriate adjustments. A revised bill will be sent to the Taxpayer that includes accrued interest and should be paid by the Taxpayer within 30 days to avoid the accrual of additional interest.

The Code of Virginia sections, regulations, and public document cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site located at www.tax.virginia.gov. If you should have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2468513117.B