Virginia Rules Post-Sale Technical Training Development Creates Nexus

The Virginia Tax Commissioner has recently ruled that an employee’s home office in Virginia, wherein test methods for post-sale training were developed, created nexus for income tax despite the training itself being conducted out of state. (Virginia Public Document Ruling 13-172, 09/19/2013).

Facts
The taxpayer’s only tie to Virginia is an employee with a home office in the state.  This employee travels outside the state to conduct training at customer facilities or the taxpayer’s office.  The employee also conducts test methods from her Virginia home office.  The taxpayer is in the business of providing consulting and training services to customers.  These services don’t appear to be related to the sale of products by the taxpayer.

Ruling
The Commissioner first reviewed Public Law (P.L.) 86-272, which prohibits a state from imposing a net income tax where the only contacts with the state are a narrowly defined set of activities constituting solicitation of orders for sales of tangible personal property.  The Department, in accordance with Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992) 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.

The Department stated “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)”.  Because the taxpayer’s business is to provide consulting or training services, these services don’t appear to be related to the sale of products by the taxpayer, and therefore exceed the protections provided by P.L. 86-272 unless they could be deemed de minimis in nature. The Department did not have the information to make a de minimis determination, the facts of which would involve frequency, nature, continuity and regularity of these unprotected activities in the state as compared to outside the state.
Based on the facts presented, the Department ruled the activities of the taxpayer in Virginia appear to create nexus, allowing the state to impose tax on the income apportioned to the state.

Impact
Companies whose only ties to a state are those of its home-office employees need to pay close attention to the activities conducted in those home offices.  Anything outside the scope of P.L. 86-272 can be scrutinized and leave you subject to income tax, interest, and penalties. Job descriptions should be carefully worded to omit any activity that would cause red flags (such as accepting orders, developing training methods, conducting training or providing support after a sale has been made, etc.)  Records should be kept to easily prove the de minimis nature of the activity, if such red-flag activity is conducted.