Did a Canadian corporation with no Virginia office or employees owe Virginia corporate tax or have to file a return?

Subject

Virginia Source Income, Foreign Corporations, Returns, Nexus, Tax Treaty, Filing Requirements

Plain-English summary

Virginia said the Canadian corporation appeared to have no Virginia corporate income tax liability because the U.S.-Canada treaty left it with no federal taxable income, Virginia's starting point for this foreign corporation. The treaty itself did not bind Virginia state taxes; the result came through Virginia's conformity rules.

That did not necessarily eliminate a filing obligation. A foreign corporation registered to do business with the Virginia State Corporation Commission must file a return even if it has no Virginia-source income and owes no tax.

The Department could not decide whether the corporation otherwise had Virginia nexus because the request did not disclose whether it had Virginia sales or other in-state activities. P.L. 86-272 can protect a seller whose only Virginia contacts are narrowly defined solicitation of orders for tangible personal property, but the ruling did not establish that those were the taxpayer's facts.

Citations and references

• Va. Code §§ 58.1-400, 58.1-441, 58.1-301, and 58.1-402.
• 23 VAC 10-120-100 and 23 VAC 10-120-310.
• 15 U.S.C. §§ 381-384.
• Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).
• P.D. 96-228 and P.D. 00-199.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-195

Original ruling text

November 16, 2017

Re: Request for Ruling: Corporate Income Tax

Dear *:

This will respond to your letter in which you request a ruling regarding whether a foreign corporation (the “Taxpayer”) is subject to Virginia income tax and is required to file a Virginia corporate income tax return. I apologize for the delay in responding to your request.

FACTS

The Taxpayer is a Canadian corporation subject to the Convention between the United States of America and Canada with Respect to Taxes on Income and on Capital (the “Convention”). In accordance with the Convention, the Taxpayer files a federal income tax return reporting no taxable income. It does not have a location or employees in Virginia. The Taxpayer requests a ruling as to whether it is subject to Virginia income tax or is required to file a Virginia corporate income tax return.

RULING

Corporate Returns

Virginia Code § 58.1-441 requires every corporation organized under Virginia law or having income from Virginia sources to file a return. In addition, Title 23 of the Virginia Administrative Code (VAC) 10-120-310 A 1 requires every foreign corporation registered to do business in Virginia with the State Corporation Commission (SCC) to file a return even if it has no income from Virginia sources and no income tax is due. As such, even if the Taxpayer has no Virginia corporate income tax liability, it still must file a return if it is registered with the SCC to do business in Virginia. See Title 23 VAC 10­-120-310 A 4.

Nexus

Virginia Code § 58.1-400 imposes an 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, however, 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 has a long established policy of narrowly interpreting the provisions of P.L. 86-272. 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 Taxpayer states that it does not have a location or employees in Virginia. It is not clear from the facts whether the Taxpayer has sales in Virginia, or whether any activities are conducted in Virginia that would constitute sufficient business activity in the Commonwealth to make it subject to corporate income tax.

Corporate Tax Liability

Virginia Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia have the same meaning as provided in the Internal Revenue Code (IRC), unless a different meaning is clearly required. As such, Virginia's conformity to federal law is limited to the actual use of a specific term in a Virginia statute. Further, conformity does not extend to terms, concepts, or principles specifically provided for in Title 58.1 of the Code of Virginia . For corporate income tax purposes, Virginia generally “conforms” to federal law in that it starts the computation of Virginia taxable income with federal taxable income (FTI).

Virginia Code § 58.1-402 provides that a corporation's Virginia taxable income for any given taxable year is the FTI and any other income taxable to the corporation under federal law for such year, adjusted and modified by certain specified additions, subtractions, and exemptions. For purposes of this statute, the term “federal taxable income” means all income from whatever source derived and however named on which a federal tax is imposed. See Title 23 of the Virginia Administrative Code (VAC) 10-­120-100 A.

For Virginia purposes, the FTI of a corporation organized under the laws of a foreign country and doing business with the United States is the taxable income under the terms of any applicable treaty. See Title 23 VAC 10-120-100 B 4. Pursuant to Article II(2)(b) of the Convention, only certain taxes imposed at the federal level by the United States and Canadian national governments are subject to the Convention. Taxes imposed by provincial and state governments, including Virginia, are unaffected. See Public Documents (P.D.) 96-228 (9/9/1996) and P.D. 00-199 (10/30/2000). In this case, the Taxpayer has no FTI under the Convention. Under Virginia's conformity to the IRC, it appears the Taxpayer would have no Virginia taxable income and would not be subject to Virginia corporate income tax.

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 documents 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 may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/883.B