Did one employee providing legal services from a Virginia home create withholding and corporate-income-tax duties?

Plain-English summary

Virginia required the out-of-state corporation to withhold Virginia income tax from its employee's wages, and said the employee's in-state legal work appeared to create corporate-income-tax nexus. The employee lived in Virginia and performed services from her Virginia home.

Virginia's withholding statutes covered resident and nonresident employers whose employees performed services in the Commonwealth. Filing frequency depended on the amount withheld, ranging from quarterly to monthly and, for larger liabilities, accelerated payment tied to federal deposit periods.

For corporate income tax, the employee's Virginia wages created a positive payroll factor and therefore Virginia-source income. Public Law 86-272 protects only a narrow category of solicitation activity. Legal services generally exceeded that protection unless the unprotected activity was de minimis. The Department lacked a full factual record for that comparison, but concluded the described activity appeared to create nexus and a corporate filing duty.

Virginia Tax did not decide unemployment-insurance liability and directed the corporation to the Virginia Employment Commission.

What this means for you

• One employee working from a Virginia home can trigger state wage withholding even when the employer is domiciled elsewhere.
• Non-sales work such as legal services can fall outside Public Law 86-272's solicitation protection.
• Virginia payroll can create a positive apportionment factor and corporate-income-tax filing duty.
• Analyze unemployment insurance separately with the agency that administers it.
• Register before payroll begins and monitor withholding frequency as liability grows.

Common questions

Q: Did the employer have to withhold Virginia income tax?
A: Yes. The employee performed services for wages in Virginia.

Q: Did the employee create corporate-income-tax nexus?
A: Virginia said the facts appeared to create nexus because legal work exceeded protected solicitation and produced a positive payroll factor.

Q: Was Public Law 86-272 protection completely ruled out?
A: The Department said legal services generally exceeded it but lacked enough facts for a full de minimis analysis.

Q: Did Virginia Tax decide unemployment insurance?
A: No. It directed that question to the Virginia Employment Commission.

Citations and references

• Va. Code §§ 58.1-460, 58.1-461, 58.1-472, 60.2-511, 58.1-400, and 58.1-408 through 58.1-416.
• 15 U.S.C. §§ 381-384 (Public Law 86-272).
• 23 VAC 10-120-90 G.
• Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).
• Virginia Public Documents 91-33 and 93-75, discussed in the ruling.

Subject

Taxpayer's activities in Virginia would appear to create nexus

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-203

Original ruling text

November 1, 2013

Re: Ruling Request: Employee Withholding

Dear *:

This is in response to your letter in which you request a ruling regarding whether * (the "Taxpayer") is required to withhold Virginia state income taxes and pay Virginia unemployment insurance for an employee who works and resides within Virginia.

FACTS

The Taxpayer is a corporation domiciled in * (State A). The Taxpayer has one employee who resides in Virginia and performs services for the Taxpayer from her Virginia home. The Taxpayer asks if it is required to register for withholding tax with the Department and deduct Virginia state taxes from its employee's payroll. In addition, the Taxpayer inquires as to whether it is required to contribute to the Virginia State Unemployment Insurance Program.

RULING

Employer Withholding

Virginia Code § 58.1-461 requires an employer to withhold taxes from employee wages for each payroll period. Virginia Code § 58.1-460 defines "employer" as the person or agency whether a resident or nonresident of the Commonwealth, for whom an individual performs or performed any services as an employee. This section defines employee as an individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages. Based on the information provided, the Taxpayer would be required to withhold income tax from the wages of its employee performing services in Virginia.

Under Va. Code § 58.1-472 an employer is required to file monthly or quarterly returns and remit the payment depending on the amount of withholding collected during a given period. Every employer whose monthly liability is $100 or less is required to report and remit the required amount before the last day of the month following the close of each quarterly period. Every employer whose average monthly liability can reasonably be expected to be $100 or more is required to file a return and pay the tax monthly on or before the twenty-fifth day of the following month. Every employer whose average monthly liability can reasonably be expected to be $1,000 or more, and the aggregate amount required to be withheld by an employer exceeds $500, is required to file a form with the Tax Commissioner within three banking days following the close of any period for which the employer is required to deposit federal withholding tax and pay the amount so withheld.

Unemployment Tax

Pursuant to Va. Code § 60.2-511, employers are required to accrue and remit unemployment insurance tax based on wages payable to an employee. The Department does not administer unemployment insurance tax and cannot issue an opinion in matters pertaining to requirements or administration of the tax. The Taxpayer must contact the Virginia Employment Commission to determine if it is liable for Virginia's unemployment insurance tax.

Income Tax

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, 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. 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 sale of other than tangible personal property. See Public Document (P.D.) 91-33 (3/18/1991) and P.D. 93-75 (3/17/1993). 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). The Department has a long-established policy of narrowly interpreting the provisions of P. L. 86-272.

According to the request, the Virginia employee would be performing legal services for the Taxpayer. It is not clear whether these services are related to the sale of products by the Taxpayer, but legal services are generally considered to be the type of activity that exceeds the protections afforded under P.L. 86-272, unless they are found to be de minimis .

Title 23 of the Virginia Administrative Code (VAC) 10-120-90 G exempts activities that are de minimis in nature. Under this regulation, consideration is given to the nature, continuity, frequency and regularity of the unprotected activities in Virginia, compared to the nature, continuity, frequency and regularity of such activities outside Virginia. Pursuant to Wrigley , all nonancillary activities are examined to determine if, when considered together, they create more than a de minimis connection to Virginia. Without a full examination of the activities conducted in Virginia by the Taxpayer, a determination cannot be made as to whether such activities discussed in the preceding sections would be a de minimis connection with Virginia.

Based on the facts presented, the Taxpayer's activities in Virginia would appear to create nexus, allowing the Commonwealth to impose tax on the Taxpayer's income apportioned to Virginia. As previously stated, a corporation or pass-through entity will have income from Virginia sources if there is sufficient business activity within Virginia to make the applicable apportionment factor positive. See Va. Code §§ 58.1-408 through 58.1-416. The existence of a positive Virginia apportionment factor establishes income from Virginia sources. In this case, the Taxpayer would have a positive payroll factor. Thus, it appears the Taxpayer would be required to file a Virginia corporate income tax return for taxable years in which its employee provides legal services in the Commonwealth.

Because the Taxpayer is required to pay withholding taxes and file a Virginia corporate income tax return, the Taxpayer should contact the Department's Registration Unit at (804) 367-2603 for assistance with registering.

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 public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this ruling, you contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5451117058.D