Did an out-of-state mobile-content services company owe Virginia corporate income tax when it had Virginia users but no property, employees, or costs here?

Subject

Provider of communication infrastructure, concept development and creative design.

Plain-English summary

The company owed no Virginia corporate income tax on the stated facts, but the Department did not decide the nexus question. The company electronically connected mobile-content marketers and network providers with end users, including users in Virginia, while owning no Virginia property and employing no one who worked here.

Because the services occurred electronically, the Department said it could not determine where they took place or whether the Virginia contacts exceeded Public Law 86-272-style protection or were only de minimis.

That uncertainty did not create a tax bill. The company had no Virginia property or payroll, and its employees performed the income-producing activities outside Virginia. Under the cost-of-performance sales-factor rule applied in the ruling, it had no positive Virginia apportionment factors, no Virginia-source taxable income, and no Virginia corporate income tax liability.

What this means for you

• The ruling did not hold that electronic access to Virginia customers could never create nexus.
• Nexus and Virginia-source income were separate questions.
• A corporation could have possible nexus but still owe no tax if every Virginia apportionment factor was zero.
• The result depended on the company's lack of Virginia property, employees, and income-producing costs.

Common questions

Did Virginia find that Public Law 86-272 protected the company?

No. The Department expressly said it could not determine whether the electronic activity exceeded that protection or was de minimis.

Why was no corporate income tax due?

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

Citations and references

• 15 U.S.C. §§ 381-384.
• Va. Code §§ 58.1-400 and 58.1-416.
• 23 VAC 10-120-90(G) and 23 VAC 10-120-230.
• Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-217

Original ruling text

September 16, 2010

Re: Ruling Request: Corporate Income Tax

Dear *:

This will reply to your letter in which you request a ruling concerning corporate income tax nexus on behalf of your client (the "Taxpayer"). I apologize for the delay in responding.

FACTS

The Taxpayer, a corporation commercially domiciled in * (State A), operates as a provider of technology and marketing services for businesses that provide content for mobile telephones. The Taxpayer provides communication infrastructure and other services that allows marketers to sell mobile content to end users. The Taxpayer engages in concept development, creative design, product delivery, billing, customer service and campaign analysis. The Taxpayer can also provide a business with the ability to integrate mobile messaging with existing email applications, CRM systems, websites, and other software systems. Finally, the Taxpayer provides user friendly programs that send bulk standard messaging and multimedia messaging.

The Taxpayer operates through two primary business models. In the "business to business" model, the Taxpayer works with third-party direct marketers and mobile network providers (mobile or cellular phone companies) to develop and sell mobile content. Under this model, the Taxpayer's primary responsibility is to provide the marketers with connectivity to the mobile network providers and the end users (mobile phone customers). Fees are collected by the provider and a portion is distributed to the Taxpayer and marketers. This model makes up approximately 95% of the Taxpayer's business.

In the "direct to customer" model, the Taxpayer develops its own content to sell to end users through providers. The Taxpayer provides the connectivity to the mobile network providers. Again, the fees are collected from the end users by the provider, which takes its share, and passes the rest on to the Taxpayer.

You represent that the Taxpayer does not own or lease any property in Virginia. None of the Taxpayer's empIoyees perform their job functions in Virginia. 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 present case, the Taxpayer's primary connection with Virginia would be providing marketers with access to end users in Virginia. Because these services take place electronically, it is likely impossible to determine exactly where the services occur. Thus, the Department is unable to make a determination as to whether this activity would exceed the protections provided by P.L. 86-272 or whether, when taken as a whole, the activity creates only a de minimus connection to Virginia pursuant to 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 it 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:

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."

The Taxpayer's employees conducting the activities at issue work outside Virginia. As such, it appears that the greater proportion of the income-producing activity would be performed outside Virginia. Therefore, the Taxpayer would not have a positive sales factor in Virginia.

Because the Taxpayer would have no positive factors in Virginia, it would not have Virginia taxable income and would not be subject to Virginia 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 and regulations 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,

Linda D. Foster

Deputy Tax Commissioner

AR/1-3866116242.o