On April 4, Virginia Governor Bob McDonnell signed legislation that creates a rebuttable presumption that an out"of"state dealer is required to register for collection of retail sales and use taxes if any commonly controlled person maintains a distribution center, warehouse, fulfillment center, office or other similar location within the state that facilitates the delivery of property sold by the out"of"state dealer to its customers.1 This new rebuttable presumption becomes effective September 1, 2013 or on the effective date of federal legislation that authorizes states to require sellers to collect tax on sales to in"state purchasers without regard to the seller's location, whichever comes sooner.2
Rebuttable Presumption of Affiliate Nexus
Virginia has enacted legislation that expands the sales and use tax collection obligation to include out"of"state dealers with certain in"state affiliates. Under the new legislation, an out"of"state dealer is presumed to be subject to the collection requirement if a "commonly controlled person maintains a distribution center, warehouse, fulfillment center, office, or similar location within the Commonwealth that facilitates the delivery of tangible personal property sold by the dealer to its customers."3 This presumption can be rebutted by an out"of"state dealer who demonstrates that the activities, conducted by the commonly controlled person within the state, are not significantly associated with the dealer's ability to establish or maintain a market in the state.4
A "commonly controlled person" is defined as "any person that is a member of the same 'controlled group of corporations,' as defined in Section 1563(a) of the Internal Revenue Code ... as the dealer or any other entity that ... bears the same ownership relationship to the dealer as a corporation that is a member of the same 'controlled group of corporations'...."5 Pursuant to IRC Section 1563(a), a "controlled group of corporations" can mean a "parent"subsidiary controlled group,"6 a "brother"sister controlled group,"7 or a "combined group."
Commentary
Virginia's enactment of affiliate nexus legislation is part of the rapid trend of states expanding the reach of their taxing authority over vendors that lack a physical presence within the state. However, so far, Virginia has only created a rebuttable presumption of nexus based on an in"state affiliate's activities with respect to the out"of"state vendor's ability to create a market in Virginia. Unlike some other states, Virginia has not explicitly created nexus by virtue of the vendor's sales of a similar line of products under a similar business name as an in"state vendor. Moreover, it has not created nexus merely based on the use of a similar trademark, service mark, or trade name as an in"state vendor.9 The growing number of states that have adopted legislation addressing affiliate nexus issues makes it even more important for companies to review their corporate structure, examine the interrelationships between the entities in their structure, and consider whether additional sales tax registration, collection and remittance requirements will result.
The enacted bill also highlights the state's anticipation of potential action, at the federal level, by Congress to address a state's ability to tax out"of"state vendors. It calls for varying effective dates for the legislation, depending on whether federal legislation is enacted. Other states, such as South Carolina10 and Tennessee,11 have made the effective dates of their sales and use tax nexus agreements with Amazon contingent upon the adoption of federal law. Also, the effective date of California's click"through nexus and affiliate nexus provisions is contingent on the enactment of federal legislation that authorizes states to require a seller to collect tax on sales of goods to in"state purchasers without regard to the seller's location.12 The prospective effective date is designed to give companies some lead time to prepare for the change in sales tax nexus policy.
Footnotes
1 Ch. 590 (S.B. 597), Laws 2012.
2 Id. If, however, the federal legislation is enacted prior to August 15, 2013, and the effective date of the federal legislation is after September 1, 2013 but on or prior to January 1, 2014, the Virginia legislation is effective January 1, 2014.
3 VA. CODE ANN. § 58.1"612.D.
4 Id.
5 Id.
6 A "parent"subsidiary controlled group" is any group of one or more chains of corporations connected through stock ownership with a common parent corporation if both of the following are met: (i) one or more of the corporations own stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote, or at least 80 percent of the total value of shares of all classes of stock of each of the corporations (except the common parent corporation); and (ii) the common parent corporation owns stock of at least 80 percent of the total combined voting power or total value of shares of stock, excluding in the computation stock owned directly by other corporations. IRC § 1563(a)(1).
7 A "brother"sister controlled group" consists of two or more corporations if five or fewer persons (individuals, estates, or trusts) own stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote, or own more than 50 percent of the total value of shares of all classes of stock of each corporation (taking into account the stock ownership of each such person only to the extent that such stock ownership is identical with respect to each such corporation). IRC § 1563(a)(2).
8 A "combined group" consists of three or more corporations, each of which is deemed a member of a parent" subsidiary controlled group or a brother"sister controlled group, and one of which is either a common parent corporation included in the parent"subsidiary controlled group and also a member of a brother"sister controlled group. IRC § 1563(a)(3).
9 States such as Arkansas (ARK. CODE ANN. § 26"52"117), Illinois (35 ILL. COMP. STAT. 105/2), New York (N.Y. TAX LAW § 1101(b)(8)(i)(l)) and Texas (TEX. TAX CODE ANN. § 151.107) have affiliate nexus standards that include remote sellers with in"state entities that sell a similar line of products under a similar business name and /or use a similar, trademark, service mark or trade name. The Arkansas statute has a rebuttable presumption of nexus, but the Illinois, New York and Texas statutes provide that the remote seller automatically has nexus.
10 S.C. CODE ANN. § 12"36"2691.
11 Ch. 624 (H.B. 2370), Laws 2012.
12 Ch. 313 (A.B. 155), Laws 2011.
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