1. A. In general. The numerator of the sales factor shall include sales, other than sales of tangible personal property governed by § 58.1-415 of the Code of Virginia, if:

   1. 1. the income producing activity is performed in Virginia, or
   2. 2. the income producing activity is performed both in and outside Virginia and a greater proportion of the income producing activity is performed in Virginia than in any other state, based on costs of performance.

2. B. Income producing activity. The term "income producing activity" means the act or acts directly engaged in by the taxpayer for the ultimate purpose of producing the sale to be apportioned by this section. Such activity does not include activities performed on behalf of a taxpayer, such as those conducted on its behalf by an independent contractor. Accordingly, the income producing activity includes but is not limited to the following:

   1. 1. The rendering of personal services by employees or the utilization of tangible or intangible property by the taxpayer in performing a service.
   2. 2. The rental, leasing, licensing the use of or other use of real property.
   3. 3. The rental, leasing, licensing the use of or other use of tangible personal property.
   4. 4. The sale, licensing the use of or other use of intangible personal property.

3. C. Location.

   1. 1. The income producing activity is deemed performed at the situs of real and tangible personal property or the place at which or from which such activities are performed by employees of the taxpayer.
   2. 2. If the sale to be apportioned was produced by activity occurring both in Virginia and outside Virginia, the sale will be in Virginia if a greater portion of such activity occurred in Virginia than in any other state. The portion of the income producing activity occurring in each state shall be determined by the cost of performance of such activity.

   3. 3. "Cost of Performance" is the cost of all activities directly performed by the taxpayer for the ultimate purpose of producing the sale to be apportioned. The cost of performance does not include:

      1. a. the cost of activities performed for the purpose of obtaining dividends allocable under § 58.1-407 of the Code of Virginia;
      2. b. the cost of activities performed for the purpose of producing sales of tangible personal property apportionable under § 58.1-415 of the Code of Virginia;
      3. c. the cost of indirect expenses such as interest or activities performed by an independent contractor; or

      4. d. the cost of activities performed for the purpose of producing both sales to be apportioned under this section and other income which is not apportionable under this section, unless either

         1. (i) the cost of activities associated with sales to be apportioned under this section can be identified and separated from the cost of activities associated with other sales, or
         2. (ii) the primary purpose of such activity is to produce sales apportionable under this section and substantially all of the income produced by such activity are such sales.

4. D. Examples.

   1. a. Taxpayer owns a computer and operates a data processing service center in Virginia. Services are provided from this center for the entire eastern part of the United States. The corporation is developing a nationwide data processing service and it plans to eventually set up a processing service center in the western part of the United States to service that section of the country. In the meantime, it has made arrangements with an independent computer processing center in California to service its processing business from western states. All business is solicited and all customers are billed from taxpayer's offices in Virginia. Taxpayer in turn pays a fee to the independent computer processing center in California.

   2. b. Since activities of an independent contractor are not considered activities of the taxpayer for this purpose, all of taxpayer's "income producing activity" is in Virginia and all of taxpayer's sales of computer services are included in the numerator.

      Example 2:

   3. a. Taxpayer, a corporation whose principal business activity is factoring, factors the accounts receivable of XYZ Corporation. The accounts receivable arose from XYZ's sale of tangible personal property in several states. XYZ's headquarters, accounting and collection offices are located in Virginia and the factoring of accounts receivable was arranged with XYZ personnel located in Virginia. XYZ continues to bill accounts and forwards collections to taxpayer.
   4. b. Taxpayer's income arises from its factoring relationship with XYZ in Virginia not from collection of the accounts receivable. All income received is assigned to Virginia. Note that taxpayer may be considered a financial corporation under § 58.1-418 of the Code of Virginia.

   5. c. To XYZ the proceeds from the factoring of accounts receivable to taxpayer are proceeds from the sales of the tangible personal property which generated the accounts receivable and assigned to the state of the ultimate recipient under § 58-151.048 of the Code of Virginia. (Sales will not be double counted. If XYZ accrued the entire sales price, the subsequent factoring of the resulting account receivable will be ignored. If XYZ is a cash basis taxpayer, the factoring of the accounts receivable will be counted.)

      Example 3: Taxpayer is a collection agency which attempts to collect the delinquent accounts receivable of XYZ corporation, a retailer located in another state, by means of phone calls and letters originating from taxpayer's Virginia office. Taxpayer's income arises from its collection activity in Virginia and all income will be assigned to Virginia regardless of where the debtor resides or where the retailer is located.

      Example 4: Corporation A's principal business is the sale of tangible personal property to purchasers in various states. As part of the sale transaction, A frequently receives interest bearing notes secured by the property sold. The acceptance of the note is deemed full payment for the purpose of assigning the sale of tangible personal property to a state. The sales price of the tangible personal property will be assigned to the state where it is delivered. Interest and other income arising from the notes will be assigned to the state in which A maintains its recordkeeping and collection activity for the notes.

      Example 5: Taxpayer is a stockbroker with offices in Virginia and other states. Virtually all of the income produced by taxpayer's Virginia office is connected with the sale of securities and other intangible property. All of the expenses of maintaining the Virginia office are included in the cost of performing the income producing activity. In addition to the Virginia office expenses, Taxpayer's cost of performance includes the cost of executing customer orders in other states. Analysis of Taxpayer's records indicates that the cost of performance associated with sales made by or through the Virginia office are assigned as follows: 49% is associated with maintaining the Virginia office, 40% is associated with execution of customer orders on exchanges in New York and the transfer of securities by its New York office, and 11% is associated with execution of customer orders on exchanges located in other states and foreign countries. All of the sales by or through the Virginia office are assigned to Virginia because the greater portion of the income producing activity is performed in Virginia than in New York or any other state. Note that a stockbroker is likely to be a financial corporation under § 58.1-418 of the Code of Virginia.

   Example 1:

Statutory Authority

§§ 58.1-203 and 58.1-416 of the Code of Virginia.

Historical Notes

Derived from VR630-3-416, eff. January 1, 1985.