Virginia Rules That Nexus is Created by In-State Contractor Marketing to Out-of-State Customers

Virginia ruled that a business has sales/use tax nexus in the state when it has an independent contractor who solicits sales from a location in the state, even if all of his target customers are outside of the state.

By Tina M. Chunn, SALT senior manager

Sales tax nexus has become a very hot topic these days based on the recent Supreme Court ruling on economic nexus.  However, that case didn’t eliminate finding nexus based on physical presence, it just ruled that physical presence was not required if the requisite amount of economic activity, based on revenue and/or transaction thresholds, was present.  In situations where the taxpayer does not meet those thresholds, sales and use tax can still exist based on physical presence in the same way that it did before the Supreme Court decision.  Therefore, it is still important to understand when physical presence creates nexus.

On May 9, 2018, Virginia issued a ruling addressing whether sales tax nexus is created in Virginia based on the activity of in-state independent contractors that solicit sales from customers located solely outside of Virginia.[1]  The taxpayer makes wholesale and retail sales in two separate divisions.  Wholesale sales are made to distributors and retailers for subsequent resale, while retail sales are made via the Internet, telephone orders, and mail orders to end-user customers throughout the country, including Virginia.  The taxpayer does not have offices, warehouses, property, or employees in Virginia, and it delivers merchandise by common carrier or other third parties from out-of-state locations.  Advertising catalogs and other printed materials are sent into Virginia to promote the retail business.

The taxpayer is considering hiring one or more independent contractors in Virginia for the purpose of telemarketing by telephone and email to the taxpayer’s wholesale customer base across the country.  However, the independent contractors will not be marketing to any customers in Virginia.  Any solicitation of Virginia customers will be made by independent contractors located in other states.  As such, the taxpayer has asked for Virginia to rule whether the actions of the independent contractors residing in Virginia will establish Virginia sales tax nexus when these actions are not directed to Virginia customers.

The ruling explains that sales tax nexus is established for all dealers having sufficient activity in Virginia to require registration.[2]  Dealers are defined as every person who “sells at retail, or who offers for sale at retail, or has in his possession for sale at retail, of for use, consumption, or distribution or for storage to be used or consumed in this Commonwealth, tangible personal property.”[3]  Further, sufficient activity in Virginia to require sales tax registration and collection of sales and use taxes will occur if the dealer (1) maintains or has within Virginia, directly or through an agent or subsidiary, an office, warehouse, or place of business of any nature, or (2) solicits business in Virginia by employees, independent contractors, agents, or other representatives.[4]  Therefore, Virginia ruled that the taxpayer has nexus based on the independent contractors soliciting business in Virginia, even though such solicitation was not directed at Virginia customers.

This is an interesting ruling because it does not address the United States Supreme Court decision in Tyler Pipe v. Wash. Dept. of Rev.,[5] in which the Court stated that “the crucial factor governing nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales.”  This statement appears to require that the activity (i.e., sales solicitation) be performed in the state AND that such activity be directed at the in-state market.  In the facts of the ruling, while the solicitation is performed in Virginia, the target of such solicitation is outside the state.  It remains to be seen whether the taxpayer will seek a review of this ruling.

Aprio’s SALT team has expertise with nexus issues and can assist your business to provide you with confidence that you are complying with the various state tax requirements and do not incur unexpected tax liabilities.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Tina Chunn at tina.chunn@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the July 2018 SALT Newsletter.

[1] VA. Public Document Ruling No. 18-80 (Va. Dept of Revenue May 9, 2018).

[2] Virginia Code Sec. 58.1-612 and Virginia Code Sec. 58.1-613.

[3] Virginia Code Sec. 58.1-612(B)(3).

[4] Virginia Code Sec. 58.1-612(C).

[5] 483 U.S. 232 (1987).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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