Did a Virginia-based employee developing consulting test methods create corporate-income-tax nexus for an out-of-state company?

Plain-English summary

Virginia said the employee's home-office work appeared to create corporate-income-tax nexus and a Virginia filing duty. The out-of-state company provided consulting and training services, and its Virginia employee would develop test methods at home for use in those operations.

P.L. 86-272 protects only a narrow set of activities tied to soliciting orders. Virginia had extended that solicitation test by policy beyond tangible-goods sellers, but consulting, training, and related test development were not solicitation or activities ancillary to solicitation. They therefore exceeded the protection.

The Virginia employee also created a positive payroll factor, indicating Virginia-source income under the state's apportionment rules. The only unresolved issue was whether the unprotected work was de minimis. The ruling lacked enough information about its nature, continuity, frequency, and regularity to decide that exception.

What this means for you

• One Virginia employee can create income-tax nexus even when all customers are elsewhere.
• Home-office work counts when it supports the company's core services.
• Consulting, technical training, and service-development work are different from protected sales solicitation.
• A positive Virginia payroll factor can create Virginia-source income.
• Document the frequency and scope of in-state work before claiming it is de minimis.

Common questions

Q: Did the absence of Virginia customers prevent nexus?
A: No. The employee performed core service-development work in Virginia.

Q: Did P.L. 86-272 protect the activity?
A: It did not appear to. The work supported consulting and training rather than solicitation of product orders.

Q: Was nexus conclusively decided?
A: The ruling said nexus appeared to exist but left open whether the Virginia activity was de minimis.

Q: Why did a filing duty appear likely?
A: The Virginia employee created a positive payroll factor and performed unprotected service work here.

Citations and references

• Va. Code § 58.1-400 and §§ 58.1-408 through 58.1-416.
• 15 U.S.C. §§ 381-384; 23 VAC 10-120-90 G.
• Virginia Public Documents 91-33, 93-75, 01-70, and 09-172.
• Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).

Subject

Entity headquartered outside Virginia, has an employee located in Virginia.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-172

Original ruling text

September 19, 2013

Re: Request for Ruling: 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").

FACTS

The Taxpayer, an entity headquartered outside Virginia, has an employee located in Virginia. The employee will travel to consult with customers in the United States. The consulting services include conducting training at customer facilities and the Taxpayer's office. The employee would also develop test methods from the Virginia office in her home. None of the Taxpayer's customers are located in Virginia.

The Taxpayer acknowledges it will need to withhold Virginia income tax from the employee's compensation. 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

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 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.

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. 93­75 (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.

The Taxpayer states that its Virginia employee is engaged in the development of test methods in Virginia. Although not directly stated, it appears these test methods would be related to the consulting and training services provided to customers outside Virginia. The preparation of consulting and training materials would generally be considered to part of the services provided by the employee.

In P.D. 01-70 (5/25/2001), the Department held that providing technical training to the dealer's customers exceeds the protections set out by P.L. 86-272. This public document did not distinguish between pre-sale or post-sale technical advice with regard to sales solicitation. It stands to reason, however, that technical information that is provided prior to a sale could be ancillary to sale solicitation when such activity occurs for the purpose of soliciting sales. In general, however, post-sale technical training or support provided to customers would not be considered to be ancillary to the solicitation of sales, and if occurring in Virginia, would create nexus. See P.D. 09-172 (10/23/2009).

In this case, the Taxpayer is in the business of providing consulting and training services to customers. These services do not appear to be related to the sale of products by the Taxpayer. Such services provided to customers exceed the protections afforded under P.L. 86-272. Thus, the employee's activities of creating tests related to the provision of consulting and training services would create nexus for the Taxpayer in Virginia, 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 Virginia corporate income tax returns if its employee develops test methods in Virginia for use in its consulting and training operations.

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/1-5440800805.o