What does Virginia Ruling of the Tax Commissioner P.D. 20-192 conclude about Exemption : Nexus (P.L. 86-272) - De Minimis, Property, Payroll Compensation : Nonresident - Virginia Wages Virginia Source Income : Nonresident - Apportionment?

Plain-English summary

This ruling addresses whether a wholly-owned subsidiary ("Corporation A") of an out-of-state parent company had enough contact with Virginia to be taxed here, and if so, when. The parent had filed consolidated Virginia corporate income tax returns including Corporation A, but a Department audit removed Corporation A for the 2013-2015 tax years on the theory that it lacked Virginia nexus. The Taxpayer appealed, arguing Corporation A did have nexus because it owned property and performed services in Virginia.

The Commissioner's answer was split by year. For 2013, Corporation A had no Virginia property, sales, or payroll at all -- its computers weren't placed in the state until 2014 -- so there was no positive apportionment factor and no nexus; the Department's removal of Corporation A for that year was correct. For 2014 and 2015, the analysis turned on federal law: P.L. 86-272 (15 U.S.C. §§ 381-384) shields an out-of-state company from a state's net income tax if its only in-state activity is soliciting orders for tangible personal property, and Virginia extends that shield to activities that are merely "ancillary" to solicitation or truly de minimis (Title 23 VAC 10-120-90 G). Here, six laptops with Corporation A's proprietary software sat in the Taxpayer's Virginia office, and Corporation A's employees traveled to Virginia (37 days in 2014, 6 days in 2015) to install software updates, run client simulations, and provide technical support and training -- all for existing clients, not to solicit new sales. Because that work was unrelated to soliciting orders and, under the U.S. Supreme Court's Wrigley test, was not trivial when considered together, the Commissioner held it exceeded the P.L. 86-272 shield and created Virginia nexus for both years.

Having found nexus for 2014-2015, the Commissioner walked through the downstream consequences: Corporation A's Virginia payroll (its employees' compensation while working from the Virginia office, which functioned as their "base of operations") had to be included in the numerator of Virginia's payroll apportionment factor; the Taxpayer, as an out-of-state employer, was obligated to withhold Virginia income tax on those employees' Virginia-source wages; and the employees themselves, as nonresidents earning Virginia-source income, were required to file Virginia nonresident individual income tax returns for the days they worked in the state.

The bottom line: the Taxpayer correctly included Corporation A in its 2014 and 2015 consolidated returns, but the Department correctly excluded it for 2013. The case was sent back to the audit staff to adjust the assessments accordingly, and the Taxpayer was directed to file any missing Virginia withholding returns for Corporation A and ensure the affected nonresident employees filed Virginia returns for 2014-2015.

What this means for you

Multistate businesses and their tax professionals

If your company relies on P.L. 86-272 to avoid state income tax, Virginia (like many states) reads the protection narrowly: it covers only solicitation of orders for tangible personal property and activities genuinely ancillary to that solicitation. This ruling shows that even something as small as leaving a handful of laptops in a Virginia office, combined with a few dozen employee work-days spent on unrelated post-sale support, training, or client service, can tip the balance. The Department and the courts (via Wrigley) look at all your non-solicitation activities together, not activity by activity, so small individually-forgivable contacts can add up to a "nontrivial" connection that forfeits the protection.

Corporate tax and payroll professionals dealing with apportionment

Once nexus is established, the ruling is a reminder that property and payroll physically located or performed in Virginia (even briefly) can flow into your apportionment factors, and that a Virginia office used as a "base of operations" for traveling employees can pull their full compensation into the Virginia payroll numerator -- not just a pro-rated share.

Employers with employees who travel into Virginia

If out-of-state employees perform services in Virginia -- even temporarily, like the technical-support trips in this case -- the employer may owe Virginia withholding on their wages, and the employees themselves may need to file Virginia nonresident returns for the portion of their income attributable to days worked in the state.

Common questions

Q: Did the Commissioner rule that Corporation A owed Virginia tax for all three years at issue (2013-2015)?
A: No. The ruling found no Virginia nexus for 2013 because Corporation A had no property, sales, or payroll in the state that year (the laptops weren't placed in Virginia until 2014). Nexus was found only for 2014 and 2015.

Q: Why didn't the P.L. 86-272 solicitation-of-orders protection apply to Corporation A's Virginia activities?
A: P.L. 86-272 only protects solicitation of orders for tangible personal property and closely related ancillary activities. Corporation A's Virginia work -- installing software updates, running client simulations, and providing post-sale technical support and training to existing clients -- was not solicitation of new sales, so it fell outside the statute's protection.

Q: The Virginia activity was only 37 days in 2014 and 6 days in 2015 -- how did that count as more than "de minimis"?
A: The Commissioner applied the U.S. Supreme Court's Wrigley standard, which asks whether all non-solicitation activities considered together create a "nontrivial additional connection" with the state, not whether any single activity is large. The ruling cited Wrigley's own example (activity accounting for just 0.00007% of in-state sales was still found non-de-minimis) to explain why even a modest number of days, combined with the nature and recurring need for the work, was enough here.

Q: What did the Taxpayer have to do as a result of this ruling?
A: Because nexus existed for 2014 and 2015, the case went back to the auditor to adjust the corporate income tax assessments for those years (with 2013 corrected to exclude Corporation A). The Taxpayer also had to file any missing Virginia employer withholding returns for Corporation A for 2014-2015, and the affected nonresident employees needed to file Virginia nonresident individual income tax returns for those years if they had not already done so.

Citations and references

• 15 U.S.C. §§ 381-384 (P.L. 86-272 -- federal limit on state net income taxation of out-of-state sellers whose only contact is solicitation of orders)
• Wisconsin Dept. of Revenue v. William Wrigley, Jr. Co., 505 U.S. 214 (1992) (Supreme Court test for ancillary/de minimis activity under P.L. 86-272)
• Va. Code § 58.1-400 (Virginia corporate income tax on Virginia-source income)
• Title 23 VAC 10-120-90 G (de minimis exception under Virginia's P.L. 86-272 rules)
• Va. Code § 58.1-412, § 58.1-413 (payroll apportionment factor; when compensation is deemed Virginia-source)
• Title 23 VAC 10-120-190, 10-120-200 (payroll factor computation; "base of operations" definition)
• Va. Code § 58.1-460, § 58.1-461, § 58.1-475, § 58.1-104 (employer withholding obligations, penalties, and assessment periods)
• Va. Code §§ 58.1-341, 58.1-321, 58.1-325, 58.1-302, 58.1-312 (nonresident individual filing requirements and Virginia-source income)
• Prior Public Documents applied: P.D. 94-175 (6/8/1994); P.D. 95-203 (8/3/1995); P.D. 06-38 (4/5/2006); P.D. 96-281 (10/11/1996); P.D. 12-36 (3/28/2012); P.D. 01-70 (5/25/2001); P.D. 09-172 (10/23/2009); P.D. 93-75 (3/17/1993); P.D. 13-172 (9/19/2013); P.D. 14-145 (8/26/2014); P.D. 94-219 (7/13/1994); P.D. 99-230 (8/11/1999); P.D. 84-90 (7/3/1984); P.D. 09-66 (5/13/2009)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-192

Original ruling text

November 24, 2020

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 years ended December 31, 2013 through 2015. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer, a parent corporation located outside of Virginia, filed consolidated Virginia corporate income tax returns with its wholly-owned subsidiaries, including * (Corporation A), for the taxable years at issue. Under audit, the Department 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 tangible property and performed services that created nexus with Virginia.

DETERMINATION

Nexus

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.

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. 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 Public Document (P.D.) 94-175 (6/8/1994). P.L. 86-272 prohibits a state from imposing a net income tax on a foreign corporation when its only contact with the state constitutes solicitation of sales. This same protection has been extended by the United States Supreme Court to include activities that are ancillary to solicitation or de minimis in nature.

The Department narrowly interprets P.L. 86-272 within the context of the decision of the Court in Wisconsin Department of Revenue v. William Wrigley, Jr. Co., 505 U.S. 214 (1992). A taxpayer that engages in activities beyond solicitation may exceed the protection provided by P.L. 86-272 and be subject to the Virginia corporate income tax. Title 23 of the Virginia Administrative Code (VAC) 10-120-90 G, however, exempts activities that are de minimis in nature.

In this case, Corporation A owned six laptop computers that were placed in the Taxpayer’s Virginia office in 2014. The laptops contained proprietary software created by Corporation A and used by the Taxpayer and all of its subsidiaries. Employees of Corporation A traveled to the Virginia office to make software updates and serve as technical and information technology support.

The Department removed Corporation A from the consolidated return because its employees did not use the laptops and neither the Taxpayer nor any of its subsidiaries were charged for the software updates. In addition, the auditor found that the value of the laptops in Virginia was de minimus as compared to the total value of Corporation A’s property. The Taxpayer contends that the activities performed by Corporation A employees in Virginia were more than de minimus .

Lack of Positive Apportionment Factor

The Taxpayer reported that Corporation A had no Virginia sales or payroll on the Virginia consolidated corporate returns for any of the taxable years at issue. Because its returns indicate that the computers were not placed into Virginia until the 2014 taxable year, Corporation A did not have a positive apportionment factor during the 2013 taxable year.

Pursuant to P.D. 94-175, it is possible for a corporation to have nexus with Virginia even if it does not have any positive apportionment factors. In order to be included in a Virginia consolidated return, a corporation must be subject to Virginia tax if a separate return was filed. Sufficient business activities must be conducted within Virginia to make one or more of the apportionment factors positive. A positive factor establishes income from Virginia sources. The lack thereof, however, does not preclude a corporation from having income from Virginia sources but it prevents the Virginia source income from becoming subject to taxation in Virginia. See P.D. 95-203 (8/3/1995).

Property in Virginia

Pursuant to P.D. 06-38 (4/5/2006), the ownership of equipment in Virginia typically results in a positive property factor that creates nexus for corporate income tax purposes. However, the Department has extended the protections afforded under P.L. 86-272 to computers that are provided to sales professionals for the purpose of preparing sales presentations, reports to record the sales’ professional activities, and other administrative functions. See P.D. 96-281 (10/11/1996) and P.D. 12-36 (3/28/2012).

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, Corporation A’s computers were used to maintain software that is used for client consultation and training, as well as to run simulations of client situations. These activities were performed on behalf of existing clients, not to solicit sales from new clients. As such, Corporation A’s Virginia computers were not eligible for the P.L. 86-272 protections.

De Minimus Activities

The software installation, technical training, and support performed by the Corporation A employees in Virginia would be considered an activity exceeding the protections provided by P.L. 86-272. See P.D. 93-75 (3/17/1993) and P.D. 13-172 (9/19/2013). However, such activities would need to be more than de minimus in order to create nexus.

In accordance with Title 23 VAC 10-120-90 G, 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. Under Wrigley , all nonancillary activities are examined to determine if, when considered together, they create more than a de minimus connection to Virginia.

As the Department has observed, if a taxpayer performs some activities in Virginia beyond the mere solicitation of sales, it may not take much activity to exceed the de minimis standard set forth in Wrigley . See P.D. 14-145 (8/26/2014). In Wrigley , the Supreme Court reasoned that a “nontrivial additional connection” with a state will be established when all unprotected activities are considered together. See Wrigley , 505 U.S. at 235. One of the activities, the sales through agency stock checks, accounted for only 0.00007% of sales in the state. Id. Although this amount was not large when compared to the taxpayer's other operations in that state, the Supreme Court found that such activities were not de minimis when considered together.

Corporation A’s employees worked on the computers located in Virginia for 37 days in 2014 and for six days in 2015. The nature of the activities are integral to the operations of entities within Corporation A’s corporate family both within and without Virginia. In addition, while 6 days may seem infrequent, the percentage of days spent working on the computers in 2015 far exceeds the percentage of activity established in Wrigley . Coupled with the nature, continuity and regularity of the activities, these activities established a nontrivial connection with Virginia in 2014 and 2015. Although the number of days that the computers worked on diminished from year to year, ongoing maintenance and software updates were required.

Employer Withholding

As stated above, Corporation A’s employees worked in Virginia during the 2014 and 2015 taxable years. Virginia Code § 58.1 460 defines employee as an individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages. Consequently, unless a state has a reciprocity agreement with Virginia, an employer located outside of Virginia may be required to withhold Virginia income taxes for an employee who is not a resident of Virginia when that employee earns wages or salary while performing services for the employer in Virginia. See Virginia Code § 58.1 461 and P.D. 94-219 (7/13/1994).

Virginia Code § 58.1-475 states that an employer who fails to withhold or fails to file withholding returns is subject to a penalty equal to six percent of the amount which should properly have been withheld for the first month, and each month after that, up to a maximum of 30%. Interest is also assessed upon the tax which has not been paid. In addition, Virginia Code § 58.1-104 provides that withholding tax must be assessed within three years from the last day that the returns are due or within six years from the last day that the returns are due if no returns were filed or the returns were fraudulently filed. See P.D. 99-230 (8/11/1999).

Nonresident Wages and Salaries

Pursuant to Virginia Code § 58.1 341, a nonresident individual who has income from carrying on a business, trade, profession, or occupation within Virginia is required to file a Virginia individual income tax return, unless the individual meets the filing exception described in Virginia Code § 58.1 321. The Virginia taxable income of a nonresident is computed by multiplying his Virginia taxable income, computed as if he were a resident by the ratio of his net income, gain, loss, and deductions from Virginia sources to his net income, gain, loss, and deduction from all sources.

Under Virginia Code § 58.1 325, individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents. Virginia Code § 58.1 302 limits the term income and deductions from Virginia sources to the items of income gain, loss and deductions attributable to the ownership of property in Virginia or the conduct of a business, trade, profession or occupation in Virginia. As such, individuals who are not residents of Virginia are required to file a Virginia nonresident individual income tax return.

For salaries and wages from an employer, the “net income, gain, loss, and deductions from Virginia sources” would be an amount equal to (1) the total annual salary from the employer, (2) multiplied by the number of days or portion thereof that the nonresident individual spent in Virginia performing duties for their employer, and (3) divided by the number of days or portion thereof spent anywhere performing duties for the employer. See P.D. 84 90 (7/3/1984).

A nonresident should compute the ratio of work days spent within Virginia to his total number of work days. As a general rule, the Department uses 260 days in the denominator of the ratio for determining wages attributable to Virginia for full time employees. Individuals who claim to have worked more than 260 days during a given taxable year must document that claim.

Likewise, individuals who worked less than 260 days are limited to using days actually worked in the denominator of the ratio. For part-time employees, semi retired individuals, and consultants, a ratio of hours worked in Virginia divided by hours worked anywhere may be a better indicator of income from Virginia sources. See P.D. 09 66 (5/13/2009). It is unclear whether Corporation A’s employees who worked in Virginia during the 2014 and 2015 taxable years filed Virginia non-resident returns. If they were required to file, but fail to do so, the Department may issue assessments at any time pursuant to Virginia Code § 58.1-312.

Payroll in Virginia

The activities conducted by Corporation A’s employees in Virginia may require their wages to be included in its payroll factor. Virginia’s payroll factor is a fraction, the numerator of which is the total amount paid or accrued in Virginia during the tax period by the corporation for compensation, and the denominator is the total compensation paid everywhere during the taxable year. See Virginia Code § 58.1-412. Pursuant to Title 23 VAC 10-120-190, total wages reported to the Virginia Employment Commission (VEC) are presumed to be compensation paid to employees in Virginia.

Under Virginia Code § 60.2-217 A 2, compensation must be reported to the VEC if the employment is not localized in any state but is performed to some extent in Virginia and either:

the base of operations is located in Virginia,

the place from which such employment is directed or controlled is in Virginia,

the base of operations or place from which such employment is directed or controlled is not in any state in which a portion of the employment is performed, but the employee resides in Virginia.

Because the Department does not administer the Virginia Unemployment Compensation Act (Title 60.2 of the Code of Virginia ), the Taxpayer should request guidance from the VEC to determine if it is required to report Corporation A’s employee’s wages. Even if the compensation is not subject to the Act, however, it must nevertheless be included in the numerator of the Virginia payroll factor if it is deemed paid or accrued in Virginia under Virginia Code § 58.1-413. See Title 23 VAC 10-120-190 C.

Corporation A’s employees perform services both within and without Virginia. Under such circumstances, compensation will be deemed paid or accrued in Virginia under Virginia Code § 58.1-413 3 if:

The base of operations or, if there is no base of operations, the place from which the service is directed or controlled is in the Commonwealth; or

The base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed, but the employee's residence is in the Commonwealth.

Pursuant to Title 23 VAC 10-120-200 B 2, a “base of operations” is defined as:

[A] place of more or less permanent nature from which the employee starts his work and to which he customarily returns in order to receive instructions from the taxpayer or communications from his customers or other persons, or to replenish stock or other materials, repair equipment, or perform any other functions necessary to the exercise of his trade or profession at some other point or points.

Corporation A’s employees performed their software updates and computer maintenance at the Taxpayer’s Virginia office. This office was a place of a permanent nature in which the employees started their work, received instructions from the Taxpayer and performed necessary business functions.

CONCLUSION

Pursuant to the reasons above, the Department finds that Corporation A had nexus with Virginia for the 2014 and 2015 taxable years. However, it did not have nexus with Virginia for the 2013 taxable year. As such, the Taxpayer correctly included Corporation A in its 2014 and 2015 consolidated returns, but the Department appropriately removed it for the 2013 taxable year. The case will be returned to the audit staff to adjust the assessments pursuant to the above determination. The Taxpayer should provide appropriate documentation to the auditor regarding Corporation A’s employees in order for its payroll factor to be properly reflected.

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 Taxpayer should also file the appropriate Virginia withholding tax returns on behalf of Corporation A for the 2014 through 2015 taxable years and pay any required penalty and interest. Any Corporation A employees who performed work in Virginia during the 2014 and 2015 taxable years should file Virginia nonresident income tax returns if they have not already done so and pay any tax, penalty and interest due.

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 determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1908.B

Related Documents

13-172

94-175

95-203

06-38

96-281

12-36

01-70

09-172

93-75

14-145

94-219

99-230

84-90

09-66