Virginia ~ Corporate Income, Sales and Use Taxes: Average Value of Rented Equipment Must be Included in Payroll Factor

The Virginia Department of Taxation has issued a ruling addressing several questions regarding the application of the state’s corporate income tax and sales and use tax laws to a foreign corporation’s business operations. The taxpayer, who sells medications and other healthcare products, has a contract with an unrelated third party to provide certain web hosting services for the taxpayer’s website. In connection with the contract, the taxpayer rents servers and related equipment located in Virginia. As such, the taxpayer would be required to include the average value of the rented equipment in the numerator of its Virginia payroll factor. The resulting positive payroll factor would establish income from Virginia sources provided that the equipment rental is not merely ancillary to the solicitation of sales or de minimis in nature. However, the facts presented do not indicate whether the rented equipment in Virginia is connected with any solicitation activities. Because a full examination of the web hosting services for which the equipment is rented could not be completed, the department could not make a determination as to whether the activities would be considered to be ancillary to solicitation or de minimis to the extent any are not ancillary.

The department did determine that the taxpayer was a retail company and as such, was required to use a single factor apportionment based on sales to determine their taxable income. Additionally, if it is determined that the taxpayer has nexus, it must file a Virginia corporate income tax return, if it has income from Virginia sources. Even if the taxpayer even if the taxpayer does not have nexus or any Virginia source income, it must still file a return if it is registered with the State Corporation Commission to do business in Virginia. Finally, the taxpayer also qualifies as a dealer for sales and use tax purposes because it sells tangible personal property at retail. However, the taxpayer is not required to register and collect the Virginia retail sales tax because no nexus exists, as the taxpayer’s only presence in Virginia is the sue of a website hosted by a third party hosting service. Instead, the responsibility for payment of the use tax rests with the Virginia customer on taxable purchases.

Ruling of Commissioner, P.D. 16-77, Virginia Department of Taxation, May 11, 2016, ¶206-241



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