Did Virginia repair and maintenance work performed by third-party providers create corporate income-tax nexus for an out-of-state coordinator?

Subject

Services provided by third party providers in Virginia

Plain-English summary

The ruling did not give a blanket yes-or-no nexus answer. The result depended on whether each Virginia repair provider was genuinely independent of the out-of-state company.

The company coordinated repair and maintenance calls, dispatched local providers, paid them, and billed customers for both the service call and logistics. If a Virginia provider was an unrelated independent contractor, the Department viewed the company as purchasing and reselling that provider's services. Those activities would not themselves create nexus for a corporation otherwise protected under Public Law 86-272.

If a provider was not independent, however, Virginia would attribute its unprotected repair and maintenance work to the company. The taxpayer had supplied no information about those relationships, so it had to evaluate every Virginia provider against the federal definition, including whether the provider represented multiple principals and was actually independent.

What this means for you

• Calling a worker a third-party provider did not resolve nexus.
• Virginia looked at the provider's actual independence and business relationships.
• In-state repair and maintenance were not protected solicitation activities under Public Law 86-272.
• A non-independent provider's work could be attributed to the out-of-state company.
• The ruling was conditional because the taxpayer did not provide the relationship facts needed for a final determination.

Common questions

Did $2 million of Virginia-related revenue decide the nexus question?

No. The ruling stated that figure but made the analysis turn on the providers' independence and activities.

What test did the ruling identify for an independent contractor?

The provider had to represent two or more principals and be independent from those principals in fact.

Citations and references

• Public Law 86-272, 15 U.S.C. §§ 381-384.
• Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).
• P.D. 01-136 and P.D. 99-278, cited in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-252

Original ruling text

November 10, 2010

Re: Ruling Request: Corporate Income Tax

Dear *:

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

FACTS

The Taxpayer, based in * (State A), coordinates on demand repair and maintenance services for customers that have locations in multiple states including Virginia. When the Taxpayer receives a call from one of its customers, it will engage and dispatch a third party service provider located near the customer's facility to perform the required repairs and maintenance. The third party service provider bills the Taxpayer for the services performed, and the Taxpayer bills the customer for the service call and the logistical service.

The Taxpayer is registered to do business in Virginia, but does not own or lease either tangible or real property, retain employees, or store inventory in Virginia. The Taxpayer does not perform any marketing activities in Virginia but estimates it generates approximately $2,000,000 in revenues resulting from activities conducted by third party service providers located in Virginia. The Taxpayer requests a ruling as to whether the services provided by third party providers 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 only applies to the sale of tangible personal property, Virginia applies the same "solicitation" test to business activities involving intangible personal property.

Pursuant to P.L. 86-272, there are different standards that apply to the activities of a representative versus the activities of an independent contractor. An entity is not protected from taxation by a state pursuant to P.L. 86-272 if its representatives maintain an office in such state or engage in activities that go beyond the mere solicitation of orders. However, an independent contractor can engage in a broader range of activities within a state without subjecting its out-of-state corporate customer to that state's income tax.

An independent contractor is defined in P.L. 86-272 as a:

commission agent, broker, or other independent contractor who is engaged in selling, or soliciting orders for the sale of, tangible personal property for more than one principal and who holds himself out as such in the regular course of his business activities ....

This definition sets forth a two-part test, both of which must be met, in order for an agent to be considered an independent contractor. The agent must represent two or more principals and the agent must be, in fact, independent from the principals.

In this case, the Taxpayer provides logistical services to customers in need of repair and maintenance services. When a customer is in need of services, it contacts the Taxpayer, which, in turn, engages and dispatches a third party provider to perform the services. The Taxpayer bills the customer and reimburses the third party provider for its portion of the services performed.

Maintenance and repair services carried on in Virginia are not an activity protected by P.L. 86-272. In this case, the Taxpayer does not provide the on-site repair or maintenance with its own employees. Instead, such services are purchased by the Taxpayer from third party service providers that conduct all needed on-site service. If the third party provider is an independent contractor, the Department views such activities as if the Taxpayer is purchasing services from a vendor and reselling them to its customers. See Public Document (P.D.) 01-136 (9/18/2001). Under such circumstances, sales of services on behalf of an unrelated third party would not create nexus for a corporation that is otherwise protected under P.L. 86-272.

The Department will, however, take a different approach if a third party provider is not independent of the Taxpayer. The Department attributes unprotected activities performed by an entity that is not independent to a business entity for purposes of determining whether or not the entity has nexus with Virginia. As such, a third party service provider that is not independent of the Taxpayer is considered to be providing services on behalf of the Taxpayer to the Taxpayer's customers. See P.D. 99-278 (10/14/1999).

The Taxpayer has provided no information concerning possible relationships with any of its third party providers in Virginia. As such, the question as to whether the Taxpayer is subject to Virginia tax on its income could rest on whether of not any of the third party providers located in Virginia are independent contractors. The Taxpayer will have to evaluate its relationship with each of its Virginia third party service providers in order to determine if they meet the definition of an independent contractor under 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, and public documents 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,

Craig M. Burns

Tax Commissioner

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