Did two employees living in Virginia create corporate income-tax nexus when they performed all work under an out-of-state contract?

Plain-English summary

Virginia found no 2007 corporate income-tax nexus even though two employees lived in Virginia. The engineering and consulting company had registered to withhold Virginia income tax from those residents' wages.

The company itself had no Virginia property, sales, or service contracts. The two employees performed all services under a contract in another state and did no work for the company in Virginia.

Because there was no Virginia business activity supporting a positive apportionment factor or other nexus, the company should not have been included in its affiliates' Virginia consolidated return. The audit was returned for adjustment.

What this means for you

• Employee residence and wage withholding do not alone prove corporate income-tax nexus.
• Identify where employees actually perform services.
• Track property, sales, contracts, and apportionment factors separately.
• Revisit the conclusion if remote employees begin working from Virginia.

Common questions

Q: Did the company have Virginia employees?
A: It had two employees who lived in Virginia.

Q: Where did they work?
A: Under a contract in another state, with no Virginia activity.

Q: What happened to the consolidated return?
A: Virginia directed removal of the company and revision of the assessment.

Citations and references

• Va. Code § 58.1-400.
• Public Law 86-272, 15 U.S.C. §§ 381-384.
• Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).

Subject

Taxpayer did not have nexus with Virginia for the taxable year

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-139

Original ruling text

August 2, 2011

Re: § 58.1-1821 Application: Corporate Income Tax

Dear:

This will reply to your letter in which you seek correction of the corporate income tax assessment issued to * (the "Taxpayer"), for the taxable year ended December 31, 2007. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, a corporation commercially domiciled in * (State A), provides engineering technology and consulting services. The Taxpayer's affiliates filed a Virginia consolidated income tax return for the 2007 taxable year. Under audit, the Department determined that the Taxpayer had nexus with Virginia and included it in the Virginia consolidated return. The Department issued an assessment for additional tax and interest. The Taxpayer appeals the audit assessment, contending the, activities in Virginia were not sufficient to establish nexus.

DETERMINATION

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.

Public Law (P.L.) 86-272, as 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 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 longstanding policy of narrowly interpreting the provisions of P.L. 86-272.

During 2007, the Taxpayer had no property or sales in Virginia. The Taxpayer did employ two employees who resided in Virginia. The Taxpayer registered with Virginia to withhold income tax on behalf of the resident employees.

The Taxpayer was located outside Virginia and had no contracts to perform services in Virginia. The employees that lived in Virginia performed services pursuant to a contract in * (State B) during 2007. The employees performed no activities on behalf of the Taxpayer in Virginia. As such, the Taxpayer did not have nexus with Virginia for the 2007 taxable year and should not have been included in the Virginia consolidated return.

Based on this determination, the audit will be returned to the audit staff to adjust the assessment as noted above. After the auditor makes the appropriate adjustments, the Taxpayer will receive a revised bill. The Taxpayer should remit its payment for the outstanding balance as shown on the revised bill within 30 days from the date of the bill to avoid the accrual of additional interest.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of Tax's web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4415582328.D