Did periodic Virginia logistics work subject an out-of-state support company to Virginia income tax or inclusion in a combined return?

Subject

No Virginia property, payroll, or sales factor meant no taxable income

Plain-English summary

Virginia ruled that the logistics company had no Virginia taxable income and could not be included in its family's Virginia combined return. The company designed package routes and systems, coordinated movement, and supported a Virginia affiliate, while its own employees periodically entered Virginia.

Those in-state logistics activities appeared to go beyond protected solicitation. Virginia could not determine whether they were merely de minimis because the request did not say how often they occurred.

Even if nexus existed, the company had no Virginia property or payroll. It performed and controlled virtually all engineering, system planning, and logistics activity from State B, so under the cost-of-performance rule it also lacked a positive Virginia sales factor.

Without any positive factor, it had no Virginia-source taxable income and could not join the combined return.

What this means for you

• Nexus contacts and Virginia taxable income were related but distinct questions in this ruling.
• Activities beyond solicitation could still require a frequency and de minimis analysis.
• No property, payroll, or Virginia-sourced service receipts meant no positive apportionment factor here.
• Combined-return membership required the corporation itself to be subject to Virginia tax.

Common questions

Did Virginia decide that the company lacked nexus?

Not conclusively. The activities appeared unprotected, but their frequency was not provided.

Why was no tax due anyway?

The company had no positive Virginia property, payroll, or sales factor under the sourcing rules applied.

Citations and references

• Va. Code §§ 58.1-400 and 58.1-416.
• 23 VAC 10-120-90(G), 10-120-230, and 10-120-323.
• 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. 09-81

Original ruling text

May 26, 2009

Re: Request for Ruling: Corporate Income Tax

Dear *:

This will reply to your fetter in which you request a ruling concerning corporate income tax nexus on behalf of * (the "Taxpayer").

FACTS

The Taxpayer is a corporation commercially domiciled in * (State A) and operates out of *** (State B). It is not registered to do business in Virginia. The Taxpayer provides logistical support for both affiliated and unrelated corporations for which it charges an arm's length rate. Specifically, it employs engineers, system planners, and logisticians to develop and maintain the delivery systems and manage the coordination and movement of tangible personal property (TIPP).

The Taxpayer designs the routes and methods of package movement including the mode of transportation. It develops contingency plans to account for weather or other unexpected events that can delay package movement. The Taxpayer also manages the contractual relationships with the affiliated and unrelated entities. It has no Virginia property or payroll. One of its affiliates (Corporation A) sorts and transports the TPP in Virginia. It has property, employees and sales in Virginia and contracts with the Taxpayer for logistical support. The Taxpayer's employees periodically enter Virginia to perform logistical support activities.

The Taxpayer's parent corporation files a combined Virginia return. The Taxpayer is not included in the combined return. Based on the facts presented, the Taxpayer requests a ruling that it does not have nexus with Virginia for purposes of corporate income tax.

RULING

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 only applies to the sale of tangible personal property, Virginia applies the same "solicitation" test to business activities involving intangible personal property.

In the instant case, the Taxpayer's employees perform logistical support activities in Virginia. These activities appear to exceed the protections provided by P.L. 86-272. In addition, the facts presented do not indicate the frequency with which the logistical support activities occur. Accordingly, the Department cannot determine whether the Taxpayer's activities, when taken as a whole, create only a de minimus connection to Virginia. See Title 23 of the Virginia Administrative Code (VAC) 10-120­-90 G.

Income from Virginia Sources

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. The existence of positive Virginia apportionment factors clearly establishes income from Virginia sources.

Even if the Taxpayer were to establish nexus with Virginia, the facts provided raise the question as to whether the Taxpayer has any Virginia source income. The Taxpayer has no property or payroll in Virginia. In addition, it appears unlikely that the Taxpayer would have a positive sales factor. Virginia Code § 58.1-416 provides that sales, other than sales of tangible personal property, are deemed in Virginia if:

1. The income-producing activity is performed in Virginia; or

2. 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."

The Taxpayer conducts virtually all of its engineering, system planning, and logistical support activities and controls these activities from its headquarters in State B. As such, it appears that the greater proportion of the income-producing activity would be performed in State B. Therefore, the Taxpayer would not have a positive sales factor in Virginia.

Because the Taxpayer has no positive factors in Virginia, it would not have Virginia taxable income and would not be subject to Virginia income tax. Further, the Taxpayer cannot be included in the Virginia combined income tax return that includes other members of the corporate family. See Title 23 VAC 10-120-323.

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 section and public document 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

AR/1-2467918437.B