Could a parent restore a subsidiary to its Virginia consolidated return without documenting the subsidiary's Virginia nexus and source income?

Subject

Documentation required to include a subsidiary in a consolidated return

Plain-English summary

Virginia left the 2010-2012 consolidated-return assessments in place because the parent did not document its subsidiary's Virginia nexus or source income. The parent had filed consolidated returns with its wholly owned subsidiary, but the auditor removed the subsidiary after concluding that it lacked Virginia nexus.

A corporation generally had Virginia-source income when its business activity made at least one apportionment factor positive. A corporation could still be protected from income tax under P.L. 86-272 when its in-state activity was limited to protected solicitation, but the Department narrowly interpreted that protection.

The consolidated-return regulation required an affiliated corporation to be included after the group elected consolidated filing unless an exclusion applied, including that the corporation would not be subject to Virginia tax on a separate-return basis. That made the subsidiary's actual contacts and income evidence essential.

The Department had requested supporting documents in July 2015 and again by telephone. The parent did not provide them. Because a Department assessment was presumed correct, the Commissioner found no basis for an adjustment on the existing record.

Result: the assessments remained in place, but the parent received one final 30-day opportunity to submit adequate nexus documentation. The Department would then review the evidence and adjust the assessments if appropriate.

What this means for you

• Consolidated-return membership depends on each affiliate's own Virginia tax status.
• Keep records supporting property, payroll, sales, employees, solicitation, and other Virginia contacts.
• A bare assertion of nexus or no nexus will not overcome a presumptively correct assessment.
• P.L. 86-272 can protect some solicitation activity, but it does not answer every nexus or consolidated-return question.

Common questions

Q: Did the Commissioner finally rule that the subsidiary had no nexus?

A: No. The ruling said the taxpayer had not provided enough evidence and gave it one last chance to do so.

Q: Why did documentation matter?

A: The subsidiary's inclusion depended on whether it had Virginia-source income and would be subject to tax if filing separately.

Q: How long did the parent have to respond?

A: Thirty days from the ruling date.

Citations and references

• Va. Code §§ 58.1-205, 58.1-219, 58.1-302, 58.1-400, 58.1-401, 58.1-442, and 58.1-446.
• 23 VAC 10-120-322.
• 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. 15-229

Original ruling text

December 11, 2015

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 assessments issued to * (the "Taxpayer") for the taxable years ended December 31, 2010, through 2012.

FACTS

The Taxpayer, a parent corporation located outside of Virginia, filed consolidated Virginia corporate income tax returns with its wholly-owned subsidiary, * (Corporation A), for the taxable years at issue. Under audit, the Department's auditor determined that Corporation A lacked nexus with Virginia and removed it from the consolidated return. The Taxpayer appealed, contending that Corporation A should be included in the consolidated return because it had nexus with Virginia and income from Virginia sources.

DETERMINATION

Virginia Code § 58.1-400 imposes the 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.

Pursuant to Va. Code § 58.1-442, an affiliated group of corporations may elect to file a consolidated Virginia income tax return. If such an election is made, Title 23 of the Virginia Administrative Code (VAC) 10-120-322 provides that, once an election to file a consolidated return is made, a related corporation must be included in the Virginia consolidated return unless it is not affiliated as defined under Va. Code § 58.1-302, exempt from Virginia income tax under Va. Code § 58.1-401, exempt from Virginia income tax under Public Law (P.L.) 86-272, not subject to Virginia income tax if separate returns were to be filed, or using different taxable years.

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. 93-75 (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.

Under certain conditions, a corporation may have income from Virginia sources resulting from a positive apportionment factor, but not be subject to tax by virtue of the protections afforded under P.L. 86-272. See P.D. 94-175 (6/8/1994). Further, corporations that do not have a positive apportionment factor are not considered to be subject to Virginia income tax if separate returns are filed. Under appropriate circumstances, however, the Department is authorized under Va. Code § 58.1-446 to determine that income of an affiliate be deemed Virginia income even if the affiliate does not have nexus. See P.D. 96-346 (11/25/1996).

The Department has the authority to investigate any books and records of a taxpayer in order to ascertain the proper tax liability. See Va. Code § 58.1-219. Further, Va. Code § 58.1-205 provides that in any proceeding relating to the interpretation of the tax laws of Virginia, an "assessment of a tax by the Department shall be deemed prima facie correct. As such, the burden of proof is on the Taxpayer to show they had no Virginia taxable income.

By correspondence dated July 20, 2015 and a follow up phone call, the Department requested documentation to substantiate whether Corporation A had nexus with Virginia and Virginia source income. Because the Taxpayer has failed to furnish the information required, there is no basis to adjust the Department's assessments as issued.

However, I will give the Taxpayer one last opportunity to provide adequate documentation with regard to Corporation A's nexus with Virginia. The documentation should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23161-7203, Attention: *, Senior Tax Analyst. Upon receipt, the documentation will be reviewed and assessment will be adjusted, as appropriate. If the documentation is not received within the allotted time, the assessment will be considered to be correct as issued.

The Code of Virginia sections, regulation, 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 response, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5888720760.B