Current through Register Vol. XLI, No. 38, September 20, 2024
6.2. "Business activities" include all
activities engaged in by the corporation, and includes those activities giving
rise to both business income and nonbusiness income.
6.2.1. If the business activities of a
taxpayer take place entirely within this state, then the taxpayer does not
allocate its nonbusiness income or apportion its business income using the
apportionment methodologies prescribed by the statute, and the entire net
income of the corporation is subject to the corporation net income tax.
6.2.1.a. The business activities of a
taxpayer are considered to have taken place in their entirety within this state
if the taxpayer is not taxable in another state.
6.2.1.b. "Not taxable in another state" means
the taxpayer is not subject to a net income tax, a franchise tax measured by
net income, a franchise tax for the privilege of doing business, or a
corporation stock tax in another state, and another state has no jurisdiction
to subject the taxpayer to a net income tax.
6.2.2. A combined group apportions the
group's adjusted federal taxable income from unitary business when one or more
of the members of the combined group engage in business only within the State
of West Virginia, but one or more other members of the combined group engage in
business activities partially in West Virginia and partially outside of West
Virginia.
6.2.3. If all business
activities of all combined group members take place entirely within West
Virginia, then the entire net income of each combined group member is subject
to the West Virginia corporation net income tax without
apportionment.
6.3.
Allocation of non-business income -- Pursuant to W. Va. Code §
11-24-7(d),
if the business activities of a taxpayer take place partially within and
partially without this state and the taxpayer is also taxable in another state,
then rents and royalties from real or tangible personal property, capital
gains, interest, dividends or patent or copyright royalties shall be allocated
to the extent that they constitute nonbusiness income of the taxpayer.
6.3.1. The extent of use of tangible personal
property in a state is determined by multiplying the nonbusiness rents and
royalties by a fraction, the numerator of which is the number of days of
physical location of the property in the state during the rental or royalty
period in the taxable year and the denominator of which is the number of days
of physical location of the property everywhere during all rental or royalty
periods in the taxable year. If the physical location of the property during
the rental or royalty period is unknown or unascertainable by the taxpayer,
tangible personal property is used in the state in which the property was
located at the time the rental or royalty payer obtained possession.
6.3.2. If property is in this state for any
part of a day, that time shall be counted as a full day.
6.3.3. Examples.
Example 1. Corporation A was formed in Ohio and has its main
offices there. Corporation A owns an apartment complex in West Virginia and
leases computers to users located in West Virginia. The nonbusiness net rental
income from the rental of the apartment complex is allocated to West Virginia
for purposes of the West Virginia Corporation Net Income Tax. Likewise, the
nonbusiness net rental income received by Corporation A as a lessor of
computers in this state is allocated to this state.
Example 2. Corporation Z was formed in State X and has its
commercial domicile in the State of West Virginia. Corporation Z leases
tangible personal property to customers in State K and derives nonbusiness
income from that activity. State K has no corporation net income tax. The net
receipts from leasing tangible personal property in State K are allocated
entirely to the State of West Virginia.
Example 3. Corporation Alpha, organized and headquartered in
California, leases coal mining equipment in West Virginia. Alpha began leasing
equipment in West Virginia on April 1 and is a calendar year taxpayer. The coal
mining equipment was not in this state until April 1, the date the lease
commenced. The property is leased in this state for 275 of the 365 days in the
year. If rental income from the coal mining equipment located in the State of
West Virginia is nonbusiness income, and if Alpha Corporation netted $15,000
for leasing this equipment for the entire year, Alpha would include in West
Virginia income the following amount: 275/365 x $15,000 = $11,301.37.
If Alpha Corporation has adequate records to show the net
rental income from the equipment while the equipment was leased in this state,
then it may use the actual net rental income and not "apportion" its allocation
of net rental income.
6.4. Apportionment -- Business activities
partially within and partially without this state.
6.4.1. Where a corporation has business
activities partially within and partially without this state, all income of the
corporation is apportioned, except nonbusiness income specifically identified
in W. Va. Code §
11-24-7(d),
which is allocated. Where a corporation has business activities that are in
West Virginia and other states, its other net nonbusiness income that was not
allocated under W. Va. Code §
11-24-7(d)
and all of its net business income will be apportioned.
6.4.1.a. Where a corporation has income from
business activities partially within this state and partially outside of this
state, all net income, after deducting those items specifically allocated under
W. Va. Code §
11-24-7(d),
shall be apportioned to this state by multiplying the net income by a fraction,
the numerator of which is the gross receipts of the taxpayer derived from
transactions and activity in the regular course of its trade or business in
this state during the taxable year, less returns and allowances attributable to
the gross receipts from the West Virginia activity. The denominator of the
fraction is the total gross receipts derived by the taxpayer from transactions
and activity in the regular course of its trade or business during the taxable
year and reflected in its gross income reported and as appearing on the
taxpayer's Federal Form 1120 and consisting of those certain pertinent portions
of the elements of gross income set forth. This fraction is known as the "sales
factor." Note that this subdivision does not apply if the corporation is
subject to a special apportionment method under W. Va. Code §§
11-24-7a
or 7b, or is authorized to use a special apportionment method pursuant to W.
Va. Code §
11-24-7(h).
6.4.1.b. The only sales to be included in the
sales factor are those which produce business income.
6.4.1.c. If either the numerator or the
denominator includes interest or dividends from obligations of the United
States government which are exempt from taxation by this state, the amount of
the interest and dividends, if any, shall be subtracted from the numerator or
denominator in which it is included.
6.4.2. Sales factor denominator. -- The
denominator of the sales factor includes the total gross receipts derived by
the taxpayer from transactions and activity in the regular course of its trade
or business, unless otherwise excluded in this rule.
6.4.3. Sales factor numerator. -- The
numerator of the sales factor shall include gross receipts attributable to this
state and derived by the taxpayer from transactions and activity in the regular
course of its trade or business. All interest income, service charges, carrying
charges, or time-price differential changes incidental to the gross receipts
shall be included regardless of the place where the accounting records are
maintained or the location of the contract or other evidence of
indebtedness.
6.4.4. Rules for
determining what is included in the gross receipts of a sale in certain
circumstances --
6.4.4.a. In the case of a
taxpayer engaged in manufacturing and selling or purchasing and reselling goods
or products, "sales" includes all gross receipts from the sales of such goods
or products (or other property of a kind which would properly be included in
the inventory of the taxpayer if on hand at the close of the tax period) held
by the taxpayer primarily for sale to customers in the ordinary course of its
trade or business. Gross receipts for this purpose mean gross sales less
returns and allowances, and includes all interest income, service charges,
carrying charges, or time-price differential charges incidental to such sales.
Federal and state excise taxes (including sales taxes) shall be included as
part of such receipts if such taxes are reflected in the taxpayer's gross
income reported and as appearing on the taxpayer's Federal Form 1120.
6.4.4.b. In the case of cost fixed fee
contracts, such as the operation of a government-owned plant for a fee, "sales"
includes the entire reimbursed cost, plus the fee.
6.4.4.c. In the case of a taxpayer engaged in
providing services, such as the operation of an advertising agency, or the
performance of equipment service contracts, or research and development
contracts, "sales" includes the gross receipts from the performance of the
services including fees, commissions, and similar items.
6.4.4.d. In the case of a taxpayer engaged in
renting real or tangible personal property, "sales" includes the gross receipts
from the rental, lease, or licensing of the use of the property.
6.4.4.e. In the case of a taxpayer engaged in
the sale, assignment, or licensing of intangible personal property such as
patents and copyrights, "sales" includes the gross receipts
therefrom.
6.4.5.
Example -- General Apportionment Formula:
The following is an example of how the apportionment formula
works in the context of the corporation net income tax:
A hypothetical corporation has facilities and operations in
Pennsylvania, West Virginia, New York, and California.
The corporation has sales in 47 of the 50 states of the
USA.
The apportionment formula is as follows:
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To View Image
Federal Taxable Income -- The corporation has $10,000,000 in
federal adjusted gross income from all operations in the USA after West
Virginia modifications and adjustments. These modifications and adjustments are
for certain items that are required to be added to, or subtracted from, federal
taxable income before apportionment.
Sales in the USA -- The total sales of the corporation in the
entire USA (all of the 47 states in which the corporation has sales) are
$435,009,000.
Sales in West Virginia -- The total sales of the corporation
in West Virginia are $104,000.
The apportionment formula, using these values, would be as
follows:
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To View Image
OR
0.000239 -- This is the apportionment factor.
Assuming that the corporation has no allocable West Virginia
income, out of all of the operations in the USA, 0.000239 of the operations of
the corporation are attributable to West Virginia operations and
activity.
Net federal taxable income from all operations in the USA,
after WV modifications and adjustments is $10,000,000.
Applying the apportionment formula, West Virginia taxable
income is:
|
Federal Taxable Income
(After Adjustments)
|
Apportionment Factor
|
WV Taxable Income
|
|
$10,000,000
|
x
|
0.000239
|
=
|
$2,390.00
|
The final computation of the tax is as follows. The
hypothetical corporation has federal taxable income after modifications and
adjustments allocated and apportioned to West Virginia in the amount of
$2,390.00. The tax rate for the given year is 8.75%.
Tax is .0875 x $2,390.00 = $209.13 (rounded).
Tax is $209.13.
6.4.6. In filing returns with this state, if
the taxpayer departs from or modifies the basis for excluding or including
gross receipts in the sales factor used in returns for prior years, the
taxpayer shall disclose that information by attaching a statement, setting
forth the nature and effect of the change, to the corporation net income tax
return for the current year.
6.4.7.
Determining what gross receipts are attributable to this state: Sales from a
unitary member that does not have nexus with West Virginia
. --
West Virginia is a "
Joyce State." The
Joyce
case (
Appeal of Joyce, Inc., 66 SBE 069, 1966 WL 1411 (Cal.
St. Bd. Eq.) (Nov. 23, 1966)) and the
Finnegan case
(Appeal of Finnigan Corp., 88- SBE-022-A, 1990 WL 15164 (Cal.
St. Bd. Eq.) (Jan. 24, 1990)) were tax matters brought before the California
State Board of Equalization. States that follow the decision in the
Joyce case are known as "
Joyce States."
6.4.7.a. The issue for which these cases have
become known relates to the determination of the sales that are included in the
numerator of the sales factor.
In synopsis, the basic distinction is as follows:
Joyce -- If a unitary group member has nexus
with the state, then "in state" gross receipts of that member are included in
the sales factor numerator, but not if the member does not have nexus with the
state, determined on a "stand alone" basis.
Finnigan -- If one or more unitary group
members has nexus with the state, then "in state" gross receipts of all unitary
group members are included in the sales factor numerator, including "in state"
gross receipts of a unitary group member that, itself, does not have nexus with
the state, determined on a "stand alone" basis.
6.4.7.b. Because West Virginia is a
"Joyce State," if the unitary member does not have nexus with
West Virginia, or if the unitary member is not taxable under the protections of
PL 86-272, then that unitary member's gross receipts derived from transactions
and activity in the regular course of its trade or business in West Virginia
are not included in the numerator of the sales factor when the tax return is
prepared, and for combined group members, when the combined report is
prepared.
6.4.8.
Determining what gross receipts are attributable to this state: Allocation of
sales of tangible personal property. --
6.4.8.a. Sales of tangible personal property
are in this state if the property is received in this state by the purchaser,
other than the United States government, regardless of the f.o.b. point or
other conditions of the sale. In the case of delivery by common carrier or
other means of transportation, the place at which the property is ultimately
received after all transportation has been completed shall be considered as the
place at which the property is received by the purchaser, regardless of where
title passes or other conditions of sale. Direct delivery in this state, other
than for purposes of transportation, to a person or firm designated by the
purchaser, constitutes delivery to the purchaser in this state, and direct
delivery outside this state to a person or firm designated by the purchaser
does not constitute delivery to the purchaser in this state, regardless of
where title passes or other conditions of sale. The sales of tangible personal
property are also in this state if the property is shipped from an office,
store, warehouse, factory, or other place of storage in this state and the
purchaser is the United States government.
6.4.8.b. Where tangible personal property is
sold and the terms of the sale require the purchaser to pick up the property or
otherwise receive the property in this state, the sale is to be treated as a
sale taking place in this state.
6.4.8.c. In the case of sales requiring by
their terms the delivery of tangible personal property by common carrier,
contract carrier or by other means of transportation excluding pickup by the
customer in this state, whether directly or indirectly, the place at which the
property is ultimately received after all transportation has been completed
shall be considered as the place at which the property is received by the
purchaser.
6.4.8.d. Direct delivery
in this state, other than for purposes of transportation, to a person or firm
designated by a purchaser constitutes delivery to the purchaser in this state
regardless of where title passes, or other conditions of sale.
6.4.8.e. Direct delivery outside this state
to a person or firm designated by a purchaser does not constitute delivery to
the purchaser in this state, regardless of where title passes, or other
conditions of sale.
6.4.8.f.
Examples. --
Example 1. Baubles, Inc. is located in Huntington, West
Virginia, and makes sales of tangible personal property to an Ohio company. The
terms of sale require the Ohio company to pick up the merchandise from the
loading dock at Baubles. The sale is to be treated by Baubles as a sale taking
place in this state.
Example 2. Alpha Corporation, which manufactures a highly
sophisticated device used in mining, purchases certain tangible personal
property from a company located in Virginia. Alpha Corporation, located in
Bergoo, West Virginia is required by the terms of the sales contract to pick up
the merchandise at the Virginia company's loading dock in Virginia. The sale is
to be treated as not occurring in West Virginia by the Virginia company, absent
other nexus with West Virginia.
Example 3. RPS, Inc., is located in Morgantown, West Virginia
and makes sales of tangible personal property. Some of the sales contracts
require RPS to ship the goods to companies located outside of this state via
common carrier. The sales of the tangible personal property shipped by the
carrier are not included as West Virginia sales.
6.4.8.g. Special rules. --
6.4.8.g.1. Where substantial amounts of gross
receipts arise from an incidental or occasional sale of a fixed asset used in
the regular course of the taxpayer's trade or business, the gross receipts
shall be excluded from the sales factor. For example, gross receipts from the
sale of a factory or plant will be excluded.
6.4.8.g.2. Insubstantial amounts of gross
receipts arising from incidental or occasional transactions or activities may
be excluded from the sales factor unless the exclusion would materially affect
the amount of income apportioned to this state. For example, the taxpayer
ordinarily may include or exclude from the sales factor gross receipts from
such transactions as the sale of office furniture, business automobiles,
etc.
6.4.8.g.3. Where the income
producing activity of a taxpayer other than a banking or financial institution,
in respect to business income from intangible personal property, can be readily
identified, the income is included in the denominator of the sales factor and,
if the income producing activity occurs in this state, the numerator of the
sales factor as well. For example, usually the income producing activity can be
readily identified in respect to interest income received on deferred payments
on sales of tangible personal property and income from the sale, licensing, or
other use of intangible personal property.
6.4.8.g.4. Where the business income from
intangible property cannot readily be attributed to any particular income
producing activity of a taxpayer other than a banking or financial institution,
the income cannot be assigned to the numerator of the sales factor for any
state and shall be excluded from the denominator of the sales factor. For
example, where business income in the form of dividends received on stock,
royalties received on patents or copyrights, or interest received on bonds,
debentures, or government securities results from the mere holding of the
intangible personal property by the taxpayer, the dividends, royalties, and
interest shall be excluded from the denominator of the apportionment
factor.
6.4.9. No Throw Rule -- All other sales of
tangible personal property delivered or shipped to a purchaser within a state
in which the taxpayer is not taxed are excluded from the numerator of the sales
factor, but remain in the denominator. This is commonly known as the no throw
rule.
6.4.9.a. "Not taxed in another state"
means that, in another state, the taxpayer is not subject to a net income tax,
a franchise tax measured by net income, a franchise tax for the privilege of
doing business, or a corporation stock tax, and another state has no
jurisdiction to subject the taxpayer to a net income tax.
6.4.9.b. Application of the no throw rule
when computing the unitary group's apportionment factor numerator in the
group's combined report. The use of a combined report does not
disregard the separate identities of the taxpayer members of the combined
group. Consequently, the no throw rule is applied on a
corporation-by-corporation basis and is not applied as if the combined group
were a single taxpayer. The separate corporation apportionment factor
numerators are then aggregated to determine the numerator of the apportionment
factor of the combined group.
6.4.9.c. Examples. --
Example 1. When all sales of tangible personal property
produce income from unitary group business activity. -- A combined group
engaged in unitary business activity consists of Corporations A, B, and C. The
combined group makes sales to customers in West Virginia and in State 1 and 2.
But not every member of the combined group makes sales to customers in all of
those states and, in some of the states, the member is not subject to an income
tax because of Public Law 86-272. When computing the numerator of the combined
group's apportionment factor for purposes of the West Virginia combined report,
the no throw rule will be applied separately to each member of the combined
group and the aggregate adjusted numerator will be the sales factor numerator
for the combined group engaged in unitary business activity.
|
Sales Factor Determination under No Throw Rule
|
|
Total Sales = Denominator
|
Numerator
|
|
WV
|
State 1
|
State 2
|
WV
|
State 1
|
State 2
|
|
Corporation A
|
$5 million
|
$5 million
|
$6 million
|
$5 million
|
N/A
|
N/A
|
|
Corporation B
|
$10 million, but $5 million not taxable
|
$ 7 million
|
No Sales
|
$5 million
|
N/A
|
N/A
|
|
Corporation C
|
$5 million
|
$ 3 million, but not taxable
|
$4 million, but $2 million not taxable
|
$5 million
|
N/A
|
N/A
|
|
Sub-total:
|
$20 million
|
$15 million
|
$10 million
|
$15 million
|
N/A
|
N/A
|
|
Total
|
$45 million in Denominator
|
$15 million in Numerator
|
Example 2. When some but not all sales of tangible personal
property produce income from unitary group business activity. -- A combined
group engaged in unitary business activity consists of Corporations A, B, C and
D. Corporations A and C also have income from business activity that is not
unitary business activity. The combined group makes sales to customers in
States 1, 2, 3, 4, 5 and 6. But not every member of the combined group makes
sales to customers in all of those states and, in some of the states, the
member is not subject to an income tax because of Public Law 86-272. Because
Corporations A and C have receipts from sales of tangible personal property
that produce business income from unitary business activity and receipts from
sales of tangible personal property that produces business income from other
business activities that are not unity business activities, the apportionment
factor numerators and denominators of Corporations A and C shall be further
analyzed so that only sales of tangible personal property from unitary business
activity are included when apportioning the business income from unitary
business activity.
Example 3. -- When a partnership owned in part by a
corporation has taxable nexus in one or more states into which the corporation
sells tangible personal property, but the corporation does not otherwise have
taxable nexus with those states. A combined group engaged in unitary business
activity consists of Corporations A, B, C and D. The combined group makes sales
to customers in States 1, 2, 3, 4, 5 and 6. However, Corporations A and C do
not sell tangible personal property to customers in all of those states or, in
some of the states, Corporations A and C are not subject to an income tax
because of application of Public Law 86-272. Corporations A and C each own an
interest in partnerships engaged in unitary business activity with the combined
group. These partnerships have taxable nexus with states into which
Corporations A and C sell tangible personal property and in which Corporations
A and C do not have taxable nexus if their partnership interests are
disregarded. Each corporation's share of sales reflected in the apportionment
factors of the partnerships are included in the apportionment factors of
Corporation A and C, which are the corporate owners of the partnerships. As a
consequence, all members of the combined group have taxable nexus with all of
the states into which they sell tangible personal property, and the no throw
does not apply to this combined group.
6.4.10. Determining what gross receipts are
attributable to this state: Allocation of sales of intangible property. -- West
Virginia uses market-based sourcing to determine if the gross receipts from the
sales of intangible property are attributable to West Virginia, as discussed in
subsection 6.5 of this rule.
6.5 Market-Based Sourcing. -- Receipts, other
than receipts described in W. Va. Code §
11-24-7(e)(11)
(from sales of tangible personal property) are in West Virginia within the
meaning of W.Va. Code §
11-24-7(b)
and this rule if and to the extent that the taxpayer's market for the sales is
in West Virginia. In general, the provisions in this subsection establish
uniform rules for (1) determining whether and to what extent the market for a
sale other than the sale of tangible personal property is in West Virginia, (2)
reasonably approximating the state or states of assignment where the state or
states cannot be determined, and (3) excluding receipts from the sale of
intangible property from the numerator and denominator of the apportionment
factor pursuant to W.Va. Code §
11-24-7(e)(13)(B).
6.5.1. Definitions. -- For the purposes of
section heading 6 of this Rule:
6.5.1.a.
"Billing address" means the location indicated in the books and records of the
taxpayer as the primary mailing address relating to a customer's account as of
the time of the transaction, as kept in good faith in the normal course of
business and not for tax avoidance purposes.
6.5.1.b. "Broadcast customer" means a person,
corporation, partnership, limited liability company, or other entity, such as
an advertiser or a platform distribution company, that has a direct connection
or contractual relationship with the broadcaster under which revenue is derived
by a broadcaster.
6.5.1.c.
"Broadcaster" means a taxpayer that is a television broadcast network, a cable
program network, or a television distribution company. The term "broadcaster"
does not include a platform distribution company.
6.5.1.d. "Business customer" means a customer
that is a business operating in any form, including a sole proprietorship.
Sales to a non-profit organization, to a trust, to the U.S. Government, to a
foreign, state, or local government, or to an agency or instrumentality of that
government are treated as sales to a business customer and must be assigned
consistent with the rules for those sales.
6.5.1.e. "Individual customer" means a
customer that is not a business customer.
6.5.1.f. "Intangible property" generally
means property that is not physical or whose representation by physical means
is merely incidental and includes, without limitation, copyrights; patents;
trademarks; trade names; brand names; franchises; licenses; trade secrets;
trade dress; information; know-how; methods; programs; procedures; systems;
formulae; processes; technical data; designs; licenses; literary, musical, or
artistic compositions; information; ideas; contract rights including broadcast
rights; agreements not to compete; goodwill and going concern value;
securities; and, except as otherwise provided in this rule, computer
software.
6.5.1.g. "Place of order"
means the physical location from which a customer places an order for a sale
other than a sale of tangible personal property from a taxpayer, resulting in a
contract with the taxpayer.
6.5.1.h. "Film programming" means one or more
performances, events, or productions (or segments of performances, events, or
productions) intended to be distributed for visual and auditory perception,
including but not limited to news, entertainment, sporting events, plays,
stories, or other literary, commercial, educational, or artistic
works.
6.5.1.i. "Population" means
the most recent population data maintained by the U.S. Census Bureau for the
year in question as of the close of the taxable period.
6.5.1.j. "Related party" means:
6.5.1.j.1. A stockholder who is an
individual, or a member of the stockholder's family set forth in section 318 of
the Internal Revenue Code if the stockholder and the members of the
stockholder's family own, directly, indirectly, beneficially, or
constructively, in the aggregate, at least 50 percent of the value of the
taxpayer's outstanding stock;
6.5.1.j.2. A stockholder, or a stockholder's
partnership, limited liability company, estate, trust, or corporation, if the
stockholder and the stockholder's partnerships, limited liability companies,
estates, trusts, and corporations own directly, indirectly, beneficially, or
constructively, in the aggregate, at least 50 percent of the value of the
taxpayer's outstanding stock; or
6.5.1.j.3. A corporation, or a party related
to the corporation in a manner that would require an attribution of stock from
the corporation to the party or from the party to the corporation under the
attribution rules of the Internal Revenue Code if the taxpayer owns, directly,
indirectly, beneficially, or constructively, at least 50 percent of the value
of the corporation's outstanding stock. The attribution rules of the Internal
Revenue Code apply for purposes of determining whether the ownership
requirements of this definition have been met.
6.5.1.j.4. The provisions of this rule
regarding sales between related parties do not apply to sales that are treated
as intercompany transactions between affiliated corporations filing a
consolidated West Virginia return which are deferred as provided in section
heading 13d of this Rule.
6.5.1.k. "State where a contract of sale is
principally managed by the customer" means the primary location at which an
employee or other representative of a customer serves as the primary contact
person for the taxpayer with respect to the day-to-day execution and
performance of a contract entered into by the taxpayer with the
customer.
6.5.2. General
Principles of Application; Contemporaneous Records. -- In order to satisfy the
requirements of this rule, a taxpayer's assignment of receipts other than
receipts from sales of tangible personal property must be consistent with the
following principles:
6.5.2.a. This rule
provides various assignment rules that apply sequentially in a hierarchy. For
each sale to which a hierarchical rule applies, a taxpayer must make a
reasonable effort to apply the primary rule applicable to the sale before
seeking to apply the next rule in the hierarchy (and must continue to do so
with each succeeding rule in the hierarchy, where applicable). For example, in
some cases, the applicable rule first requires a taxpayer to determine the
state or states of assignment, and if the taxpayer cannot do so, the rule
requires the taxpayer to reasonably approximate the state or states. In these
cases, the taxpayer must attempt to determine the state or states of assignment
(i.e., apply the primary rule in the hierarchy) in good faith and with
reasonable effort before it may reasonably approximate the state or
states.
6.5.2.b. A taxpayer's
method of assigning its receipts, including the use of a method of
approximation, where applicable, must reflect an attempt to obtain the most
accurate assignment of receipts consistent with the regulatory standards set
forth in this rule, rather than for tax avoidance purposes. A method of
assignment that is reasonable for one taxpayer may not necessarily be
reasonable for another taxpayer, depending upon the applicable facts.
6.5.3. Rules of Reasonable
Approximation. --
6.5.3.a. In General. -- In
general, this rule establishes uniform rules for determining whether and to
what extent the market for a sale other than the sale of tangible personal
property is in West Virginia. This rule also sets forth rules of reasonable
approximation, which apply if the state or states of assignment cannot be
determined. In some instances, the reasonable approximation must be made in
accordance with specific rules of approximation prescribed in this rule. In
other cases, the applicable rule permits a taxpayer to reasonably approximate
the state or states of assignment using a method that reflects an effort to
approximate the results that would be obtained under the applicable rules or
standards set forth in this rule.
6.5.3.b. Approximation Based Upon Known
Sales. In an instance where, applying the applicable rules set forth in §
110-24-6.5.7 (Sale of a Service), a taxpayer can ascertain the state or states
of assignment of a substantial portion of its receipts from sales of
substantially similar services ("assigned receipts"), but not all of those
sales, and the taxpayer reasonably believes, based on all available
information, that the geographic distribution of some or all of the remainder
of those sales generally tracks that of the assigned receipts, it must include
receipts from those sales which it believes track the geographic distribution
of the assigned receipts in its sales factor in the same proportion as its
assigned receipts. This rule also applies in the context of licenses and sales
of intangible property where the substance of the transaction resembles a sale
of goods or services.
6.5.3.c.
Related-Party Transactions. -- Information Imputed from Customer to Taxpayer.
Where a taxpayer has receipts subject to this rule from transactions with a
related-party customer, information that the customer has that is relevant to
the sourcing of receipts from these transactions is imputed to the
taxpayer.
6.5.4. Rules
with Respect to Exclusion of Receipts from the Sales Factor
.
--
6.5.4.a. The apportionment factor only
includes those amounts defined as sales under W. Va. Code §
11-24-7(e)
and applicable rules.
6.5.4.b.
Certain receipts arising from the sale of intangibles are excluded from the
numerator and denominator of the sales factor pursuant to W.Va. Code §
11-24-7(e)(13)(B).
6.5.5. Sale, Rental, Lease, or
License of Real Property. -- In the case of a sale, rental, lease, or license
of real property, the receipts from the sale are in West Virginia if and to the
extent that the property is in West Virginia.
6.5.6. Rental, Lease, or License of Tangible
Personal Property. -- In the case of a rental, lease, or license of tangible
personal property, the receipts from the sale are in West Virginia if and to
the extent that the property is in West Virginia.
6.5.6.a. The rental, lease, licensing or
other use of tangible personal property in this state is a separate income
producing activity from the rental, lease, licensing or other use of the same
property while located in another state; consequently, if property is within
and without this state during the rental, lease, or licensing period, gross
receipts attributable to this state shall be measured by the ratio which the
days the property was physically present or was used in this state bears to the
total days of the physical location or use of the property everywhere during
that period, including the days it was physically located or used in a state in
which the taxpayer is not taxed within the meaning of that term as provided in
§ 110-24-6.4.10 of this rule.
6.5.6.b. Example
. -- The
taxpayer is the owner of ten railroad cars. During the current tax year, the
total of the days each railroad car was present in this state was 60 days. The
receipts attributable to the use of each of the railroad cars in this state are
a separate item of income and shall be determined as follows:
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6.5.7. Sale of a Service. --
6.5.7.a.
General Rule. The
receipts from a sale of a service are in West Virginia if and to the extent
that the service is delivered to a location in West Virginia. In general, the
term "delivered to a location" refers to the location of the taxpayer's market
for the service, which may not be the location of the taxpayer's employees or
property. The rules to determine the location of the delivery of a service in
the context of several specific types of service transactions are set forth in
§ 110-24-6.5.7.b through § 110-24-6.5.7.d of this rule.
6.5.7.b. In-Person Services
.
--
6.5.7.b.1. In General. Except as otherwise
provided in § 110-24-6.5.7.b of this rule, in-person services are services
that are physically provided in person by the taxpayer, where the customer or
the customer's real or tangible property upon which the services are performed
is in the same location as the service provider at the time the services are
performed. This rule includes situations where the services are provided on
behalf of the taxpayer by a third-party contractor. Examples of in-person
services include, without limitation, warranty and repair services; cleaning
services; plumbing services; carpentry; construction contractor services; pest
control; landscape services; medical and dental services, including medical
testing, x-rays, and mental health care and treatment; childcare; hair cutting
and salon services; live entertainment and athletic performances; and in-person
training or lessons. In-person services include services within the description
above that are performed at (1) a location that is owned or operated by the
service provider or (2) a location of the customer, including the location of
the customer's real or tangible personal property. Various professional
services, including legal, accounting, financial and consulting services, and
other similar services as described in § 110-24-6.5.7.d of this rule,
although they may involve some amount of in-person contact, are not treated as
in-person services within the meaning of § 110-24-6.5.7.b of this
rule.
6.5.7.b.2 Assignment of
Receipts. --
6.5.7.b.2.A. Rule of
Determination. Except as otherwise provided in § 110-24-6.5.7.b.2 of this
rule, if the service provided by the taxpayer is an in-person service, the
service is delivered to the location where the service is received. Therefore,
the receipts from a sale are in West Virginia if and to the extent the customer
receives the in-person service in West Virginia. In assigning its receipts from
sales of in-person services, a taxpayer must first attempt to determine the
location where a service is received, as follows:
6.5.7.b.2.B. If the service is performed with
respect to the body of an individual customer in West Virginia (e.g., hair
cutting or x-ray services) or in the physical presence of the customer in West
Virginia (e.g., live entertainment or athletic performances), the service is
received in West Virginia.
6.5.7.b.2.C. If the service is performed with
respect to the customer's real estate in West Virginia or if the service is
performed with respect to the customer's tangible personal property at the
customer's residence or in the customer's possession in West Virginia, the
service is received in West Virginia.
6.5.7.b.2.D. If the service is performed with
respect to the customer's tangible personal property and the tangible personal
property is to be shipped or delivered to the customer, whether the service is
performed within or outside West Virginia, the service is received in West
Virginia if the property is shipped or delivered to the customer in West
Virginia.
6.5.7.b.3. Rule
of Reasonable Approximation. -- If the state or states where a service is
actually received cannot be determined, the taxpayer must reasonably
approximate such state or states.
6.5.7.b.4. Examples. -- For purposes of the
examples, it is irrelevant whether the services are performed by an employee of
the taxpayer or by an independent contractor acting on the taxpayer's behalf.
Example 1: Salon Corp has retail locations in West Virginia
and in other states where it provides hair cutting services to individual and
business customers, the latter of whom are paid for through the means of a
company account. The receipts from sales of services provided at Salon Corp's
in-state locations are in West Virginia. The receipts from sales of services
provided at Salon Corp's locations outside West Virginia, even when provided to
residents of West Virginia, are not receipts from in-state sales.
Example 2: Landscape Corp provides landscaping and gardening
services in West Virginia and in neighboring states. Landscape Corp provides
landscaping services at the in-state vacation home of an individual who is a
resident of another state and who is located outside West Virginia at the time
the services are performed. The receipts from sale of services provided at the
in-state location are in West Virginia.
Example 3: Same facts as Example 2, except that Landscape
Corp provides the landscaping services to Retail Corp, a corporation with
retail locations in several states, and the services are with respect to those
locations of Retail Corp that are in West Virginia and in other states. The
receipts from the sale of services provided to Retail Corp are in West Virginia
to the extent the services are provided in West Virginia.
Example 4: Camera Corp provides camera repair services at an
in-state retail location to walk-in individual and business customers. In some
cases, Camera Corp actually repairs a camera that is brought to its in-state
location at a facility that is in another state. In these cases, the repaired
camera is then returned to the customer at Camera Corp's in-state location. The
receipts from sale of these services are in West Virginia.
Example 5: Same facts as Example 4, except that a customer
located in West Virginia mails the camera directly to the out-of-state facility
owned by Camera Corp to be fixed and receives the repaired camera back in West
Virginia by mail. The receipts from sale of the service are in West
Virginia.
Example 6: Teaching Corp provides seminars in West Virginia
to individual and business customers. The seminars and the materials used in
connection with the seminars are prepared outside the state, the teachers who
teach the seminars include teachers that are resident outside the state, and
the students who attend the seminars include students that are resident outside
the state. Because the seminars are taught in West Virginia, the receipts from
sales of the services are in West Virginia.
6.5.7.c. Services Delivered to the Customer
or on Behalf of the Customer or Delivered Electronically Through the Customer.
--
6.5.7.c.1. In General. If
the service provided by the taxpayer is not an in-person service within the
meaning of § 110-24-6.5.7.b of this rule or a professional service within
the meaning of § 110-24-6.5.7.d of this rule, and the service is delivered
to or on behalf of the customer, or delivered electronically through the
customer, the receipts from a sale are in West Virginia if and to the extent
that the service is delivered in West Virginia. For purposes of §
110-24-6.5.7.c of this rule, a service that is delivered "to" a customer is a
service in which the customer and not a third party is the recipient of the
service. A service that is delivered "on behalf of" a customer is one in which
a customer contracts for a service but one or more third parties, rather than
the customer, is the recipient of the service, such as fulfillment services, or
the direct or indirect delivery of advertising to the customer's intended
audience (see § 110-24-6.5.7.c.2.A of this rule and Example 4 under §
110-24-6.5.7.c.2.A.3 of this rule). A service can be delivered to or on behalf
of a customer by physical means or through electronic transmission. A service
that is delivered electronically "through" a customer is a service that is
delivered electronically to a customer for purposes of resale and subsequent
electronic delivery in substantially identical form to an end user or other
third-party recipient.
6.5.7.c.2.
Assignment of Receipts. -- The assignment of receipts to a state or states in
the instance of a sale of a service that is delivered to the customer or on
behalf of the customer, or delivered electronically through the customer,
depends upon the method of delivery of the service and the nature of the
customer. Separate rules of assignment apply to services delivered by physical
means and services delivered by electronic transmission. (For purposes of
§ 110-24-6.5.7.c of this rule, a service delivered by an electronic
transmission is not a delivery by physical means). If a rule of assignment set
forth in § 110-24-6.5.7.c of this rule depends on whether the customer is
an individual or a business customer, and the taxpayer acting in good faith
cannot reasonably determine whether the customer is an individual or business
customer, the taxpayer must treat the customer as a business customer.
6.5.7.c.2.A. Delivery to or on Behalf of a
Customer by Physical Means Whether to an Individual or Business Customer. --
Services delivered to a customer or on behalf of a customer through a physical
means include, for example, product delivery services where property is
delivered to the customer or to a third party on behalf of the customer; the
delivery of brochures, fliers, or other direct mail services; the delivery of
advertising or advertising-related services to the customer's intended audience
in the form of a physical medium; and the sale of custom software (e.g., where
software is developed for a specific customer in a case where the transaction
is properly treated as a service transaction for purposes of corporate
taxation) where the taxpayer installs the custom software at the customer's
site. The rules in § 110-24-6.5.7.c.2.A of this rule apply whether the
taxpayer's customer is an individual customer or a business customer.
6.5.7.c.2.A.1. Rule of
Determination. -- In assigning the receipts from a sale of a
service delivered to a customer or on behalf of a customer through a physical
means, a taxpayer must first attempt to determine the state or states where the
service is delivered. If the taxpayer is able to determine the state or states
where the service is delivered, it must assign the receipts to that state or
states.
6.5.7.c.2.A.2. Rule of
Reasonable Approximation. -- If the taxpayer cannot determine
the state or states where the service is actually delivered, it must reasonably
approximate the state or states.
6.5.7.c.2.A.3. Examples:
Example 1: Direct Mail Corp, a corporation based outside West
Virginia, provides direct mail services to its customer, Business Corp.
Business Corp contracts with Direct Mail Corp to deliver printed fliers to a
list of customers that is provided to it by Business Corp. Some of Business
Corp's customers are in West Virginia and some of those customers are in other
states. Direct Mail Corp will use the postal service to deliver the printed
fliers to Business Corp's customers. The receipts from the sale of Direct Mail
Corp's services to Business Corp are assigned to West Virginia to the extent
that the services are delivered on behalf of Business Corp to West Virginia
customers (i.e., to the extent that the fliers are delivered on behalf of
Business Corp to Business Corp's intended audience in West Virginia).
Example 2: Ad Corp is a corporation based outside West
Virginia that provides advertising and advertising-related services in West
Virginia and in neighboring states. Ad Corp enters into a contract at a
location outside West Virginia with an individual customer who is not a West
Virginia resident to design advertisements for billboards to be displayed in
West Virginia and to design fliers to be mailed to West Virginia residents. All
of the design work is performed outside West Virginia. The receipts from the
sale of the design services are in West Virginia because the service is
physically delivered on behalf of the customer to the customer's intended
audience in West Virginia.
Example 3: Same facts as Example 2, except that the contract
is with a business customer that is based outside West Virginia. The receipts
from the sale of the design services are in West Virginia because the services
are physically delivered on behalf of the customer to the customer's intended
audience in West Virginia.
Example 4: Fulfillment Corp, a corporation based outside West
Virginia, provides product delivery fulfillment services in West Virginia and
in neighboring states to Sales Corp, a corporation located outside West
Virginia that sells tangible personal property through a mail order catalog and
over the Internet to customers. In some cases when a customer purchases
tangible personal property from Sales Corp to be delivered in West Virginia,
Fulfillment Corp will, pursuant to its contract with Sales Corp, deliver that
property from its fulfillment warehouse located outside West Virginia. The
receipts from the sale of the fulfillment services of Fulfillment Corp to Sales
Corp are assigned to West Virginia to the extent that Fulfillment Corp's
deliveries on behalf of Sales Corp are to recipients in West Virginia.
Example 5: Software Corp, a software development corporation,
enters into a contract with a business customer, Buyer Corp, which is
physically located in West Virginia, to develop custom software to be used in
Buyer Corp's business. Software Corp develops the custom software outside West
Virginia, and then physically installs the software on Buyer Corp's computer
hardware located in West Virginia. The development and sale of the custom
software is properly characterized as a service transaction, and the receipts
from the sale are assigned to West Virginia because the software is physically
delivered to the customer in West Virginia.
Example 6: Same facts as Example 5, except that Buyer Corp
has offices in West Virginia and several other states but is commercially
domiciled outside West Virginia and orders the software from a location outside
West Virginia. The receipts from the development and sale of the custom
software service are assigned to West Virginia because the software is
physically delivered to the customer in West Virginia.
6.5.7.c.2.B. Delivery to a
Customer by Electronic Transmission. Services delivered by electronic
transmission include, without limitation, services that are transmitted through
the means of wire, lines, cable, fiber optics, electronic signals, satellite
transmission, audio or radio waves, or other similar means, whether or not the
service provider owns, leases, or otherwise controls the transmission
equipment. In the case of the delivery of a service by electronic transmission
to a customer, the following rules apply.
6.5.7.c.2.B.1. Services Delivered by
Electronic Transmission to an Individual Customer. --
6.5.7.c.2.B.1.a. Rule of Determination. -- In
the case of the delivery of a service to an individual customer by electronic
transmission, the service is delivered in West Virginia if and to the extent
that the taxpayer's customer receives the service in West Virginia. If the
taxpayer can determine the state or states where the service is received, it
must assign the receipts from that sale to that state or states.
6.5.7.c.2.B.1.b. Rules of Reasonable
Approximation. -- If the taxpayer cannot determine the state or states where
the customer actually receives the service but has sufficient information
regarding the place of receipt from which it can reasonably approximate the
state or states where the service is received, it must reasonably approximate
the state or states. If a taxpayer does not have sufficient information from
which it can determine or reasonably approximate the state or states in which
the service is received, it must reasonably approximate the state or states
using the customer's billing address.
6.5.7.c.2.B.2. Services Delivered By
Electronic Transmission to a Business Customer
. --
6.5.7.c.2.B.2.a. Rule of Determination. -- In
the case of the delivery of a service to a business customer by electronic
transmission, the service is delivered in West Virginia if and to the extent
that the taxpayer's customer receives the service in West Virginia. If the
taxpayer can determine the state or states where the service is received, it
must assign the receipts from that sale to the state or states. For purposes of
§ 110-24-6.5.7.c.2.B.2 of this rule, it is intended that the state or
states where the service is received reflect the location at which the service
is directly used by the employees or designees of the customer.
6.5.7.c.2.B.2.b. Rule of Reasonable
Approximation. -- If the taxpayer cannot determine the state or states where
the customer actually receives the service but has sufficient information
regarding the place of receipt from which it can reasonably approximate the
state or states where the service is received, it must reasonably approximate
the state or states.
6.5.7.c.2.B.2.c. Secondary Rule of Reasonable
Approximation. -- In the case of the delivery of a service to a business
customer by electronic transmission where a taxpayer does not have sufficient
information from which it can determine or reasonably approximate the state or
states in which the service is received, the taxpayer must reasonably
approximate the state or states as set forth in this rule. In these cases,
unless the taxpayer can apply the safe harbor set forth in §
110-24-6.5.7.c.2.B.2.d of this rule, the taxpayer must reasonably approximate
the state or states in which the service is received as follows: first, by
assigning the receipts from the sale to the state where the contract of sale is
principally managed by the customer; second, if the state where the customer
principally manages the contract is not reasonably determinable, by assigning
the receipts from the sale to the customer's place of order; and third, if the
customer's place of order is not reasonably determinable, by assigning the
receipts from the sale using the customer's billing address; provided, however,
if the taxpayer derives more than five percent of its receipts from sales of
services from any single customer, the taxpayer is required to identify the
state in which the contract of sale is principally managed by that
customer.
6.5.7.c.2.B.2.d. Safe
Harbor. -- In the case of the delivery of a service to a
business customer by electronic transmission, a taxpayer may not be able to
determine, or reasonably approximate under § 110-24-6.5.7.c.2.B.2.b of
this rule, the state or states in which the service is received. In these
cases, the taxpayer may, in lieu of the rule stated at §
110-24-6.5.7.c.2.B.2.c of this rule apply the safe harbor stated in this
subsection. Under this safe harbor, a taxpayer may assign its receipts from
sales to a particular customer based upon the customer's billing address in a
taxable year in which the taxpayer (1) engages in substantially similar service
transactions with more than 250 customers, whether business or individual, and
(2) does not derive more than five percent of its receipts from sales of all
services from that customer. This safe harbor applies only for purposes of
services delivered by electronic transmission to a business customer, and not
otherwise.
6.5.7.c.2.B.2.e.
Related-Party Transactions. -- In the case of a sale of a service by electronic
transmission to a business customer that is a related party, the taxpayer may
not use the secondary rule of reasonable approximation in §
110-24-6.5.7.c.2.B.2.c of this rule but may use the rule of reasonable
approximation in § 110-24-6.5.7.c.2.B.2.b of this rule, and the safe
harbor in § 110-24-6.5.7.c.2.B.2.d of this rule, provided that the
department may aggregate sales to related parties in determining whether the
sales exceed five percent of receipts from sales of all services under that
safe harbor provision if necessary or appropriate to prevent
distortion.
6.5.7.c.2.B.3. Examples. -- In these
examples, unless otherwise stated, assume that the taxpayer is not related to
the customer to which the service is delivered. Also, assume if relevant,
unless otherwise stated, that the safe harbor set forth at §
110-24-6.5.7.c.2.B.2.d of this rule does not apply.
Example 1: Support Corp, a corporation that is based outside
West Virginia, provides software support and diagnostic services to individual
and business customers that have previously purchased certain software from
third-party vendors. These individual and business customers are located in
West Virginia and other states. Support Corp supplies its services on a
case-by-case basis when directly contacted by its customer. Support Corp
generally provides these services through the Internet but sometimes provides
these services by phone. In all cases, Support Corp verifies the customer's
account information before providing any service. Using the information that
Support Corp verifies before performing a service, Support Corp can determine
where its services are received, and therefore must assign its receipts to
these locations. The receipts from sales made to Support Corp's individual and
business customers are in West Virginia to the extent that Support Corp's
services are received in West Virginia.
Example 2: Online Corp, a corporation based outside West
Virginia, provides web-based services through the means of the Internet to
individual customers who are resident in West Virginia and in other states.
These customers access Online Corp's web services primarily in their states of
residence, and sometimes, while traveling, in other states. For a substantial
portion of its receipts from the sale of services, Online Corp can either
determine the state or states where the services are received, or, where it
cannot determine the state or states, it has sufficient information regarding
the place of receipt to reasonably approximate the state or states. However,
Online Corp cannot determine or reasonably approximate the state or states of
receipt for all of the sales of its services. Assuming that Online Corp
reasonably believes, based on all available information, that the geographic
distribution of the receipts from sales for which it cannot determine or
reasonably approximate the location of the receipt of its services generally
tracks those for which it does have this information, Online Corp must assign
to West Virginia the receipts from sales for which it does not know the
customers' location in the same proportion as those receipts for which it has
this information.
Example 3: Same facts as 2, except that Online Corp
reasonably believes that the geographic distribution of the receipts from sales
for which it cannot determine or reasonably approximate the location of the
receipt of its web-based services do not generally track the sales for which it
does have this information. Online Corp must assign the receipts from sales of
its services for which it lacks information as provided to its individual
customers using the customers' billing addresses.
Example 4: Net Corp, a corporation based outside West
Virginia, provides web-based services to a business customer, Business Corp, a
company with offices in West Virginia and two neighboring states. Particular
employees of Business Corp access the services from computers in each Business
Corp office. Assume that Net Corp determines that Business Corp employees in
West Virginia were responsible for 75 percent of Business Corp's use of Net
Corp's services, and Business Corp employees in other states were responsible
for 25 percent of Business Corp's use of Net Corp's services. In this case, 75
percent of the receipts from the sales are received in West Virginia. Assume
alternatively that Net Corp lacks sufficient information regarding the location
or locations where Business Corp's employees used the services to determine or
reasonably approximate the location or locations. Under these circumstances, if
Net Corp derives five percent or less of its receipts from sales to Business
Corp, Net Corp must assign the receipts under § 110-24-6.5.7.c.2.B.2.c of
this rule to the state where Business Corp principally managed the contract, or
if that state is not reasonably determinable, to the state where Business Corp
placed the order for the services, or if that state is not reasonably
determinable, to the state of Business Corp's billing address. If Net Corp
derives more than five percent of its receipts from sales of services to
Business Corp, Net Corp is required to identify the state in which its contract
of sale is principally managed by Business Corp and must assign the receipts to
that state.
Example 5: Net Corp, a corporation based outside West
Virginia, provides web-based services through the means of the Internet to more
than 250 individual and business customers in West Virginia and in other
states. Assume that for each customer Net Corp cannot determine the state or
states where its web services are actually received and lacks sufficient
information regarding the place of receipt to reasonably approximate the state
or states. Also assume that Net Corp does not derive more than five percent of
its receipts from sales of services to a single customer. Net Corp may apply
the safe harbor stated in § 110-24-6.5.7.c.2.B.2.d of this rule and may
assign its receipts using each customer's billing address.
6.5.7.c.2.C. Services Delivered
Electronically Through or on Behalf of an Individual or Business Customer. -- A
service delivered electronically "on behalf of" the customer is one in which a
customer contracts for a service to be delivered electronically but one or more
third parties, rather than the customer, is the recipient of the service, such
as the direct or indirect delivery of advertising on behalf of a customer to
the customer's intended audience. A service delivered electronically "through"
a customer to third-party recipients is a service that is delivered
electronically to a customer for purposes of resale and subsequent electronic
delivery in substantially identical form to end users or other third-party
recipients.
6.5.7.c.2.C.1. Rule of
Determination. -- In the case of the delivery of a service by electronic
transmission, where the service is delivered electronically to end users or
other third-party recipients through or on behalf of the customer, the service
is delivered in West Virginia if and to the extent that the end users or other
third-party recipients are in West Virginia. For example, in the case of the
direct or indirect delivery of advertising on behalf of a customer to the
customer's intended audience by electronic means, the service is delivered in
West Virginia to the extent that the audience for the advertising is in West
Virginia. In the case of the delivery of a service to a customer that acts as
an intermediary in reselling the service in substantially identical form to
third-party recipients, the service is delivered in West Virginia to the extent
that the end users or other third-party recipients receive the services in West
Virginia. The rules in this subsection apply whether the taxpayer's customer is
an individual customer or a business customer and whether the end users or
other third-party recipients to which the services are delivered through or on
behalf of the customer are individuals or businesses.
6.5.7.c.2.C.2. Rule of Reasonable
Approximation. -- If the taxpayer cannot determine the state or states where
the services are actually delivered to the end users or other third-party
recipients either through or on behalf of the customer, it must reasonably
approximate the state or states.
6.5.7.c.2.C.3. Select Secondary Rules of
Reasonable Approximation. --
6.5.7.c.2.C.3.a.
If a taxpayer's service is the direct or indirect electronic delivery of
advertising on behalf of its customer to the customer's intended audience, and
if the taxpayer lacks sufficient information regarding the location of the
audience from which it can determine or reasonably approximate that location,
the taxpayer must reasonably approximate the audience in a state for the
advertising using the following secondary rules of reasonable approximation. If
a taxpayer is delivering advertising directly or indirectly to a known list of
subscribers, the taxpayer must reasonably approximate the audience for
advertising in a state using a percentage that reflects the ratio of the
state's subscribers in the specific geographic area in which the advertising is
delivered relative to the total subscribers in that area. For a taxpayer with
less information about its audience, the taxpayer must reasonably approximate
the audience in a state using the percentage that reflects the ratio of the
state's population in the specific geographic area in which the advertising is
delivered relative to the total population in that area.
6.5.7.c.2.C.3.b. If a taxpayer's service is
the delivery of a service to a customer that then acts as the taxpayer's
intermediary in reselling that service to end users or other third-party
recipients, and if the taxpayer lacks sufficient information regarding the
location of the end users or other third-party recipients from which it can
determine or reasonably approximate that location, the taxpayer must reasonably
approximate the extent to which the service is received in a state by using the
percentage that reflects the ratio of the state's population in the specific
geographic area in which the taxpayer's intermediary resells the services,
relative to the total population in that area.
6.5.7.c.2.C.3.c. When using the secondary
reasonable approximation methods provided above, with regard to the relevant
specific geographic area, include only the areas where the service was
substantially and materially delivered or resold. Unless the taxpayer
demonstrates the contrary, it will be presumed that the area where the service
was substantially and materially delivered or resold does not include areas
outside the United States.
6.5.7.c.2.C.4. Examples:
Example 1: Cable TV Corp, a corporation that is based outside
of West Virginia, has two revenue streams. First, Cable TV Corp sells
advertising time to business customers pursuant to which the business
customers' advertisements will run as commercials during Cable TV Corp's
televised programming. Some of these business customers, though not all of
them, have a physical presence in West Virginia. Second, Cable TV Corp sells
monthly subscriptions to individual customers in West Virginia and in other
states. The receipts from Cable TV Corp's sale of advertising time to its
business customers are assigned to West Virginia to the extent that the
audience for Cable TV Corp's televised programming during which the
advertisements run is in West Virginia. If Cable TV Corp is unable to determine
the actual location of its audience for the programming and lacks sufficient
information regarding audience location to reasonably approximate the location,
Cable TV Corp must approximate its West Virginia audience using the percentage
that reflects the ratio of its West Virginia subscribers in the geographic area
in which Cable TV Corp's televised programming featuring the advertisements is
delivered relative to its total number of subscribers in that area. To the
extent that Cable TV Corp's sales of monthly subscriptions represent the sale
of a service, the receipts from these sales are properly assigned to West
Virginia in any case in which the programming is received by a customer in West
Virginia. In any case in which Cable TV Corp cannot determine the actual
location where the programming is received and lacks sufficient information
regarding the location of receipt to reasonably approximate the location, the
receipts from these sales of Cable TV Corp's monthly subscriptions are assigned
to West Virginia where its customer's billing address is in West Virginia.
Whether and to the extent that the monthly subscription fee represents a fee
for a service or for a license of intangible property does not affect the
analysis or result as to the state or states to which the receipts are properly
assigned.
Example 2: Network Corp, a corporation that is based outside
of West Virginia, sells advertising time to business customers pursuant to
which the customers' advertisements will run as commercials during Network
Corp's televised programming as distributed by unrelated cable television and
satellite television transmission companies. The receipts from Network Corp's
sale of advertising time to its business customers are assigned to West
Virginia to the extent that the audience for Network Corp's televised
programming during which the advertisements will run is in West Virginia. If
Network Corp cannot determine the actual location of the audience for its
programming during which the advertisements will run and lacks sufficient
information regarding audience location to reasonably approximate the location,
Network Corp must approximate the receipts from sales of advertising that
constitute West Virginia sales by multiplying the amount of advertising
receipts by a percentage that reflects the ratio of the West Virginia
population in the specific geographic area in which the televised programming
containing the advertising is run relative to the total population in that
area.
Example 3: Web Corp, a corporation that is based outside West
Virginia, provides internet content to viewers in West Virginia and other
states. Web Corp sells advertising space to business customers pursuant to
which the customers' advertisements will appear in connection with Web Corp's
internet content. Web Corp receives a fee for running the advertisements that
is determined by reference to the number of times the advertisement is viewed
or clicked upon by the viewers of its website. The receipts from Web Corp's
sale of advertising space to its business customers are assigned to West
Virginia to the extent that the viewers of the internet content are in West
Virginia, as measured by viewings or clicks. If Web Corp is unable to determine
the actual location of its viewers and lacks sufficient information regarding
the location of its viewers to reasonably approximate the location, Web Corp
must approximate the amount of its West Virginia receipts by multiplying the
amount of receipts from sales of advertising by a percentage that reflects the
West Virginia population in the specific geographic area in which the content
containing the advertising is delivered relative to the total population in
that area.
Example 4: Retail Corp, a corporation that is based outside
of West Virginia, sells tangible personal property through its retail stores
located in West Virginia and other states and through a mail order catalog.
Answer Co, a corporation that operates call centers in multiple states,
contracts with Retail Corp to answer telephone calls from individuals placing
orders for products found in Retail Corp's catalogs. In this case, the phone
answering services of Answer Co are being delivered to Retail Corp's customers
and prospective customers. Therefore, Answer Co is delivering a service
electronically to Retail Corp's customers or prospective customers on behalf of
Retail Corp and must assign the proceeds from this service to the state or
states from which the phone calls are placed by the customers or prospective
customers. If Answer Co cannot determine the actual locations from which phone
calls are placed and lacks sufficient information regarding the locations to
reasonably approximate the locations, Answer Co must approximate the amount of
its West Virginia receipts by multiplying the amount of its fee from Retail
Corp by a percentage that reflects the West Virginia population in the specific
geographic area from which the calls are placed relative to the total
population in that area.
Example 5: Web Corp, a corporation that is based outside of
West Virginia, sells tangible personal property to customers via its internet
website. Design Co designed and maintains Web Corp's website, including making
changes to the site based on customer feedback received through the site.
Design Co's services are delivered to Web Corp, the proceeds from which are
assigned pursuant to § 110-24-6.5.7.c.2.B of this rule. The fact that Web
Corp's customers and prospective customers incidentally benefit from Design
Co's services and may even interact with Design Co in the course of providing
feedback, does not transform the service into one delivered "on behalf of" Web
Corp to Web Corp's customers and prospective customers.
Example 6: Wholesale Corp, a corporation that is based
outside West Virginia, develops an internet-based information database outside
West Virginia and enters into a contract with Retail Corp whereby Retail Corp
will market and sell access to this database to end users. Depending on the
facts, the provision of database access may be either the sale of a service or
the license of intangible property or may have elements of both, but for
purposes of analysis it does not matter. Assume that on the particular facts
applicable in this example Wholesale Corp is selling database access in
transactions properly characterized as involving the performance of a service.
When an end user purchases access to Wholesale Corp's database from Retail
Corp, Retail Corp in turn compensates Wholesale Corp in connection with that
transaction. In this case, Wholesale Corp's services are being delivered
through Retail Corp to the end user. Wholesale Corp must assign its receipts
from sales to Retail Corp to the state or states in which the end users receive
access to Wholesale Corp's database. If Wholesale Corp cannot determine the
state or states where the end users actually receive access to Wholesale Corp's
database and lacks sufficient information regarding the location from which the
end users access the database to reasonably approximate the location, Wholesale
Corp must approximate the extent to which its services are received by end
users in West Virginia by using a percentage that reflects the ratio of the
West Virginia population in the specific geographic area in which Retail Corp
regularly markets and sells Wholesale Corp's database relative to the total
population in that area. It does not matter for purposes of the analysis
whether Wholesale Corp's sale of database access constitutes a service or a
license of intangible property, or some combination of both.
6.5.7.d.
Professional Services
. --
6.5.7.d.1. In General. Except as otherwise
provided in § 110-24-6.5.7.d of this rule, professional services are
services that require specialized knowledge and in some cases require a
professional certification, license, or degree. These services include the
performance of technical services that require the application of specialized
knowledge. Professional services include, without limitation, management
services, bank and financial services, financial custodial services, investment
and brokerage services, fiduciary services, tax preparation, payroll and
accounting services, lending services, credit card services (including credit
card processing services), data processing services, legal services, consulting
services, video production services, graphic and other design services,
engineering services, and architectural services. Nothing in this rule applies
to services provided by a financial institution that must apportion and
allocate its income under W. Va. Code §
11-24-7b.
6.5.7.d.2. Overlap with Other Categories of
Services.
6.5.7.d.2.A. Certain services that
fall within the definition of "professional services" set forth in §
110-24-6.5.7.d of this rule are nevertheless treated as "in-person services"
within the meaning of § 110-24-6.5.7.b of this rule and are assigned under
the rules of that subdivision. Specifically, professional services that are
physically provided in person by the taxpayer such as carpentry, certain
medical and dental services, or childcare services, where the customer or the
customer's real or tangible property upon which the services are provided is in
the same location as the service provider at the time the services are
performed, are "in-person services" and are assigned as such, notwithstanding
that they may also be considered "professional services." However, professional
services where the service is of an intellectual or intangible nature, such as
legal, accounting, financial, and consulting services, are assigned as
professional services under the rules of § 110-24-6.5.7.d of this rule,
notwithstanding the fact that these services may involve some amount of in-
person contact.
6.5.7.d.2.B.
Professional services may in some cases include the transmission of one or more
documents or other communications by mail or by electronic means. In some
cases, all or most communications between the service provider and the service
recipient may be by mail or by electronic means. However, in these cases,
despite this transmission, the assignment rules that apply are those set forth
in (4)(d) of this rule, and not those set forth in § 110-24-6.5.7.c of
this rule, pertaining to services delivered to a customer or through or on
behalf of a customer.
6.5.7.d.3. Assignment of Receipts. -- In the
case of a professional service, it is generally possible to characterize the
location of delivery in multiple ways by emphasizing different elements of the
service provided, no one of which will consistently represent the market for
the services. Therefore, the location of delivery in the case of professional
services is not susceptible to a general rule of determination and must be
reasonably approximated. The assignment of receipts from a sale of a
professional service depends in many cases upon whether the customer is an
individual or business customer. In any instance in which the taxpayer, acting
in good faith, cannot reasonably determine whether the customer is an
individual or business customer, the taxpayer must treat the customer as a
business customer. For purposes of assigning the receipts from sale of a
professional service, a taxpayer's customer is the person that contracts for
the service, irrespective of whether another person pays for or also benefits
from the taxpayer's services.
6.5.7.d.3.A.
General Rule. Receipts from sales of professional services other than those
services described in § 110-24-6.5.7.d.3.B of this rule (architectural and
engineering services) and § 110-24-6.5.7.d.3.C of this rule (transactions
with related parties) are assigned in accordance with § 110-24-6.5.7.d.3.A
of this rule.
6.5.7.d.3.A.1. Professional
Services Delivered to Individual Customers. -- Except as otherwise provided in
§ 110-24-6.5.7.d of this rule, in any instance in which the service
provided is a professional service and the taxpayer's customer is an individual
customer, the state or states in which the service is delivered must be
reasonably approximated as set forth in § 110-24-6.5.7.d.3.A.1 of this
rule. In particular, the taxpayer must assign the receipts from a sale to the
customer's state of primary residence, or, if the taxpayer cannot reasonably
identify the customer's state of primary residence, to the state of the
customer's billing address; provided, however, in any instance in which the
taxpayer derives more than five percent of its receipts from sales of all
services from an individual customer, the taxpayer must identify the customer's
state of primary residence and assign the receipts from the service or services
provided to that customer to that state.
6.5.7.d.3.A.2. Professional Services
Delivered to Business Customers. -- Except as otherwise provided in §
110-24-6.5.7.d of this rule, in any instance in which the service provided is a
professional service and the taxpayer's customer is a business customer, the
state or states in which the service is delivered must be reasonably
approximated as set forth in this subparagraph. In particular, unless the
taxpayer may use the safe harbor set forth at § 110-24-6.5.7.d.3.A.3 of
this rule, the taxpayer must assign the receipts from the sale as follows:
first, by assigning the receipts to the state where the contract of sale is
principally managed by the customer; second, if the place of customer
management is not reasonably determinable, to the customer's place of order;
and third, if the customer place of order is not reasonably determinable, to
the customer's billing address; provided, however, in any instance in which the
taxpayer derives more than five percent of its receipts from sales of all
services from a customer, the taxpayer is required to identify the state in
which the contract of sale is principally managed by the customer.
6.5.7.d.3.A.3. Safe Harbor; Large Volume of
Transactions. -- Notwithstanding the rules set forth in §
110-24-6.5.7.d.3.A.1 and § 110-24-6.5.7.d.3.A.2 of this rule, a taxpayer
may assign its receipts from sales to a particular customer based on the
customer's billing address in any taxable year in which the taxpayer (1)
engages in substantially similar service transactions with more than 250
customers, whether individual or business, and (2) does not derive more than
five percent of its receipts from sales of all services from that customer.
This safe harbor applies only for purposes of § 110-24-6.5.7.d.3.A of this
rule and not otherwise.
6.5.7.d.3.B. Architectural and Engineering
Services with respect to Real or Tangible Personal Property. -- Architectural
and engineering services with respect to real or tangible personal property are
professional services within the meaning of § 110-24-6.5.7.d of this rule.
However, unlike in the case of the general rule that applies to professional
services, (1) the receipts from a sale of an architectural service are assigned
to a state or states if and to the extent that the services are with respect to
real estate improvements located, or expected to be located, in the state or
states; and (2) the receipts from a sale of an engineering service are assigned
to a state or states if and to the extent that the services are with respect to
tangible or real property located in the state or states, including real estate
improvements located in, or expected to be located in, the state or states.
These rules apply whether or not the customer is an individual or business
customer. In any instance in which architectural or engineering services are
not described in § 110-24-6.5.7.d.3.B of this rule, the receipts from a
sale of these services must be assigned under the general rule for professional
services.
6.5.7.d.3.C.
Related-Party Transactions. -- In any instance in which the professional
service is sold to a related party, rather than applying the rule for
professional services delivered to business customers in §
110-24-6.5.7.d.3.A.2 of this rule, the state or states to which the service is
assigned is the place of receipt by the related party as reasonably
approximated using the following hierarchy:
(1) if the service primarily relates to
specific operations or activities of a related party conducted in one or more
locations, then to the state or states in which those operations or activities
are conducted in proportion to the related-party's payroll at the locations to
which the service relates in the state or states; or
(2) if the service does not relate primarily
to operations or activities of a related party conducted in particular
locations, but instead relates to the operations of the related party
generally, then to the state or states in which the related party has
employees, in proportion to the related-party's payroll in those states. The
taxpayer may use the safe harbor provided by § 110-24-6.5.7.d.3.A.3 of
this rule provided that the department may aggregate the receipts from sales to
related parties in applying the five percent rule if necessary or appropriate
to avoid distortion.
6.5.7.d.3.D. Examples
. --
Unless otherwise stated, assume in each of these examples, where relevant, that
the customer is not a related party and that the safe harbor set forth at
§ 110-24-6.5.7.d.3.A.3 of this rule does not apply.
Example 1: Broker Corp provides securities brokerage services
to individual customers who are residents in West Virginia and in other states.
Broker Corp is not a financial institution required to report under W.Va. Code
§
11-24-7b.
Assume that Broker Corp knows the state of primary residence for many of its
customers, and where it does not know the state of primary residence, it knows
the customer's billing address. Also assume that Broker Corp does not derive
more than five percent of its receipts from sales of all services from any one
individual customer. If Broker Corp knows its customer's state of primary
residence, it must assign the receipts to that state. If Broker Corp does not
know its customer's state of primary residence, but rather knows the customer's
billing address, it must assign the receipts to that state.
Example 2: Same facts as Example 1, except that Broker Corp
has several individual customers from whom it derives, in each instance, more
than five percent of its receipts from sales of all services. Receipts from
sales to customers from whom Broker Corp derives five percent or less of its
receipts from sales of all services must be assigned as described in Example
24. For each customer from whom it derives more than five percent of its
receipts from sales of all services, Broker Corp is required to determine the
customer's state of primary residence and must assign the receipts from the
services provided to that customer to that state. In any case in which a five
percent customer's state of primary residence is West Virginia, receipts from a
sale made to that customer must be assigned to West Virginia; in any case in
which a five percent customer's state of primary residence is not West
Virginia, receipts from a sale made to that customer are not assigned to West
Virginia.
Example 3: Architecture Corp provides building design
services as to buildings located, or expected to be located, in West Virginia
to individual customers who are resident in West Virginia and other states, and
to business customers that are based in West Virginia and other states. The
receipts from Architecture Corp's sales are assigned to West Virginia because
the locations of the buildings to which its design services relate are in West
Virginia or are expected to be in West Virginia. For purposes of assigning
these receipts, it is not relevant where, in the case of an individual
customer, the customer primarily resides or is billed for the services, and it
is not relevant where, in the case of a business customer, the customer
principally manages the contract, placed the order for the services, or is
billed for the services. Further, these receipts are assigned to West Virginia
even if Architecture Corp's designs are either physically delivered to its
customer in paper form in a state other than West Virginia or are
electronically delivered to its customer in a state other than West
Virginia.
Example 4: Law Corp provides legal services to individual
clients who are resident in West Virginia and in other states. In some cases,
Law Corp may prepare one or more legal documents for its client as a result of
these services and/or the legal work may be related to litigation or a legal
matter that is ongoing in a state other than where the client is resident.
Assume that Law Corp knows the state of primary residence for many of its
clients, and where it does not know this state of primary residence, it knows
the client's billing address. Also assume that Law Corp does not derive more
than five percent of its receipts from sales of all services from any one
individual client. If Law Corp knows its client's state of primary residence,
it must assign the receipts to that state. If Law Corp does not know its
client's state of primary residence, but rather knows the client's billing
address, it must assign the receipts to that state. For purposes of the
analysis it is irrelevant whether the legal documents relating to the service
are mailed or otherwise delivered to a location in another state, or the
litigation or other legal matter that is the underlying predicate for the
services is in another state.
Example 5: Law Corp provides legal services to several
multistate business clients. In each case, Law Corp knows the state in which
the agreement for legal services that governs the client relationship is
principally managed by the client. In one case, the agreement is principally
managed in West Virginia; in the other cases, the agreement is principally
managed in a state other than West Virginia. If the agreement for legal
services is principally managed by the client in West Virginia, the receipts
from sale of the services are assigned to West Virginia; in the other cases,
the receipts are not assigned to West Virginia. In the case of receipts that
are assigned to West Virginia, the receipts are so assigned even if (1) the
legal documents relating to the service are mailed or otherwise delivered to a
location in another state, or (2) the litigation or other legal matter that is
the underlying predicate for the services is in another state.
Example 6: Consulting Corp, a company that provides
consulting services to law firms and other customers, is hired by Law Corp in
connection with legal representation that Law Corp provides to Client Co.
Specifically, Consulting Corp is hired to provide expert testimony at a trial
being conducted by Law Corp on behalf of Client Co. Client Co pays for
Consulting Corp's services directly. Assuming that Consulting Corp knows that
its agreement with Law Co is principally managed by Law Corp in West Virginia,
the receipts from the sale of Consulting Corp's services are assigned to West
Virginia. It is not relevant for purposes of the analysis that Client Co is the
ultimate beneficiary of Consulting Corp's services, or that Client Co pays for
Consulting Corp's services directly.
Example 7: Advisor Corp, a corporation that provides
investment advisory services and is not a financial institution required to
report under W. Va. Code §
11-24-7b,
provides investment advisory services to Investment Co. Investment Co is a
multistate business client of Advisor Corp that uses Advisor Corp's services in
connection with investment accounts that it manages for individual clients, who
are the ultimate beneficiaries of Advisor Corp's services. Assume that
Investment Co's individual clients are persons that are resident in numerous
states, which may or may not include West Virginia. Assuming that Advisor Corp
knows that its agreement with Investment Co is principally managed by
Investment Co in West Virginia, receipts from the sale of Advisor Corp's
services are assigned to West Virginia. It is not relevant for purposes of the
analysis that the ultimate beneficiaries of Advisor Corp's services may be
Investment Co's clients, who are residents of numerous states.
Example 8: Advisor Corp, a corporation that provides
investment advisory services and is not a financial institution required to
report under W. Va. Code §
11-24-7b,
provides investment advisory services to Investment Fund LP, a partnership that
invests in securities and other assets. Assuming that Advisor Corp knows that
its agreement with Investment Fund LP is principally managed by Investment Fund
LP in West Virginia, receipts from the sale of Advisor Corp's services are
assigned to West Virginia. Note that it is not relevant for purposes of the
analysis that the partners in Investment Fund LP are residents of numerous
states.
Example 9: Design Corp is a corporation based outside West
Virginia that provides graphic design and similar services in West Virginia and
in neighboring states. Design Corp enters into a contract at a location outside
West Virginia with an individual customer to design fliers for the customer.
Assume that Design Corp does not know the individual customer's state of
primary residence and does not derive more than five percent of its receipts
from sales of services from the individual customer. All of the design work is
performed outside West Virginia. Receipts from the sale are in West Virginia if
the customer's billing address is in West Virginia.
6.5.8. License
or Lease of Intangible Property
. --
6.5.8.a. General Rules. --
6.5.8.a.1. The receipts from the license of
intangible property are in West Virginia if and to the extent the intangible is
used in West Virginia. In general, the term "use" is construed to refer to the
location of the taxpayer's market for the use of the intangible property that
is being licensed and is not to be construed to refer to the location of the
property or payroll of the taxpayer. The rules that apply to determine the
location of the use of intangible property in the context of several specific
types of licensing transactions are set forth at § 110-24-6.5.8.b through
§ 110-24-6.5.8.e of this rule. For purposes of the rules set forth in
§ 110-24-6.5.8 of this rule, a lease of intangible property is to be
treated the same as a license of intangible property.
6.5.8.a.2. In general, a license of
intangible property that conveys all substantial rights in that property is
treated as a sale of intangible property for purposes of this rule. Note,
however, that for purposes of § 110-24-6.5.8 and § 110-24-6.5.9 of
this rule, a sale or exchange of intangible property is treated as a license of
that property where the receipts from the sale or exchange derive from payments
that are contingent on the productivity, use, or disposition of the
property.
6.5.8.a.3. Intangible
property licensed as part of the sale or lease of tangible property is treated
under this rule as the sale or lease of tangible property.
6.5.8.a.4. Nothing in § 110-24-6.5.8 of
this rule is to be construed to allow or require inclusion of receipts in the
sales factor that are not included in the definition of "sales" pursuant to W.
Va. Code §
11-24-3a
or related rules, or that are excluded from the numerator and the denominator
of the sales factor pursuant to West Virginia § 11-24-7(e)(13)(B)(ii)
(III). So, to the extent that the transfer of business "goodwill" or similar
intangible property, including, without limitation, "going concern value" or
"workforce in place," may be characterized as a license or lease of intangible
property, receipts from such transaction must be excluded from the numerator
and the denominator of the taxpayer's sales factor.
6.5.8.b. License of a Marketing Intangible.
-- Where a license is granted for the right to use intangible property in
connection with the sale, lease, license, or other marketing of goods,
services, or other items (i.e., a marketing intangible) to a consumer, the
royalties or other licensing fees paid by the licensee for that marketing
intangible are assigned to West Virginia to the extent that those fees are
attributable to the sale or other provision of goods, services, or other items
purchased or otherwise acquired by consumers or other ultimate customers in
West Virginia. Examples of a license of a marketing intangible include, without
limitation, the license of a service mark, trademark, or trade name; certain
copyrights; the license of a film, television, or multimedia production or
event for commercial distribution; and a franchise agreement. In each of these
instances the license of the marketing intangible is intended to promote
consumer sales. In the case of the license of a marketing intangible, where a
taxpayer has actual evidence of the amount or proportion of its receipts that
is attributable to West Virginia, it must assign that amount or proportion to
West Virginia. In the absence of actual evidence of the amount or proportion of
the licensee's receipts that are derived from West Virginia consumers, the
portion of the licensing fee to be assigned to West Virginia must be reasonably
approximated by multiplying the total fee by a percentage that reflects the
ratio of the West Virginia population in the specific geographic area in which
the licensee makes material use of the intangible property to regularly market
its goods, services, or other items relative to the total population in that
area. If the license of a marketing intangible is for the right to use the
intangible property in connection with sales or other transfers at wholesale
rather than directly to retail customers, the portion of the licensing fee to
be assigned to West Virginia must be reasonably approximated by multiplying the
total fee by a percentage that reflects the ratio of the West Virginia
population in the specific geographic area in which the licensee's goods,
services, or other items are ultimately and materially marketed using the
intangible property relative to the total population of that area. Unless the
taxpayer demonstrates that the marketing intangible is materially used in the
marketing of items outside the United States, the fees from licensing that
marketing intangible will be presumed to be derived from within the United
States.
6.5.8.c. License of a
Production Intangible. -- If a license is granted for the
right to use intangible property other than in connection with the sale, lease,
license, or other marketing of goods, services, or other items, and the license
is to be used in a production capacity (a "production intangible"), the
licensing fees paid by the licensee for that right are assigned to West
Virginia to the extent that the use for which the fees are paid takes place in
West Virginia. Examples of a license of a production intangible include,
without limitation, the license of a patent, a copyright, or trade secrets to
be used in a manufacturing process, where the value of the intangible lies
predominately in its use in that process. In the case of a license of a
production intangible to a party other than a related party where the location
of actual use is unknown, it is presumed that the use of the intangible
property takes place in the state of the licensee's commercial domicile (where
the licensee is a business) or the licensee's state of primary residence (where
the licensee is an individual). If the department can reasonably establish that
the actual use of intangible property pursuant to a license of a production
intangible takes place in part in West Virginia, it is presumed that the entire
use is in this state except to the extent that the taxpayer can demonstrate
that the actual location of a portion of the use takes place outside West
Virginia. In the case of a license of a production intangible to a related
party, the taxpayer must assign the receipts to where the intangible property
is actually used.
6.5.8.d. License
of a Mixed Intangible. -- If a license of intangible property includes both a
license of a marketing intangible and a license of a production intangible (a
"mixed intangible") and the fees to be paid in each instance are separately and
reasonably stated in the licensing contract, the department will accept that
separate statement for purposes of this rule. If a license of intangible
property includes both a license of a marketing intangible and a license of a
production intangible and the fees to be paid in each instance are not
separately and reasonably stated in the contract, it is presumed that the
licensing fees are paid entirely for the license of the marketing intangible
except to the extent that the taxpayer or the department can reasonably
establish otherwise.
6.5.8.e.
License of a Broadcasting Intangible. -- Where a broadcaster grants a license
to a broadcast customer for the right to use film programming, the licensing
fees paid by the licensee for such right are assigned to West Virginia to the
extent that the broadcast customer is located in West Virginia. In the case of
business customers, the broadcast customer's location shall be determined using
the broadcast customer's commercial domicile. In the case of individual
customers, the broadcast customer's location shall be determined using the
address of the broadcast customer listed in the broadcaster's
records.
6.5.8.f. License of
Intangible Property where Substance of Transaction Resembles a Sale of Goods or
Services
. --
6.5.8.f.1. In
general. In some cases, the license of intangible property
will resemble the sale of an electronically delivered good or service rather
than the license of a marketing intangible or a production intangible. In these
cases, the receipts from the licensing transaction are assigned by applying the
rules set forth in § 110-24-6.5.7.c.2.B and § 110-24-6.5.7.c.2.C of
this rule, as if the transaction were a service delivered to an individual or
business customer or delivered electronically through an individual or business
customer, as applicable. Examples of transactions to be assigned under §
110-24-6.5.8.e of this rule include, without limitation, the license of
database access, the license of access to information, the license of digital
goods, and the license of certain software (e.g., where the transaction is not
the license of pre-written software that is treated as the sale of tangible
personal property).
6.5.8.f.2.
Sublicenses. -- Pursuant to § 110-24-6.5.8.e.1 of this rule, the rules of
§ 110-24-6.5.7.c.2.B of this rule may apply where a taxpayer licenses
intangible property to a customer that in turn sublicenses the intangible
property to end users as if the transaction were a service delivered
electronically through a customer to end users. In particular, the rules set
forth at § 110-24-6.5.7.c.2.B of this rule that apply to services
delivered electronically to a customer for purposes of resale and subsequent
electronic delivery in substantially identical form to end users or other
recipients may also apply with respect to licenses of intangible property for
purposes of sublicense to end users. For this purpose, the intangible property
sublicensed to an end user shall not fail to be substantially identical to the
property that was licensed to the sublicensor merely because the sublicense
transfers a reduced bundle of rights with respect to that property (e.g.,
because the sublicensee's rights are limited to its own use of the property and
do not include the ability to grant a further sublicense), or because that
property is bundled with additional services or items of property.
6.5.8.f.3. Examples. -- In these examples,
unless otherwise stated, assume that the customer is not a related party.
Example 1: Crayon Corp and Dealer Co enter into a license
contract under which Dealer Co as licensee is permitted to use trademarks that
are owned by Crayon Corp in connection with Dealer Co's sale of certain
products to retail customers. Under the contract, Dealer Co is required to pay
Crayon Corp a licensing fee that is a fixed percentage of the total volume of
monthly sales made by Dealer Co of products using the Crayon Corp trademarks.
Under the contract, Dealer Co is permitted to sell the products at multiple
store locations, including store locations that are both within and without
West Virginia. Further, the licensing fees that are paid by Dealer Co are
broken out on a per store basis. The licensing fees paid to Crayon Corp by
Dealer Co represent fees from the license of a marketing intangible. The
portion of the fees to be assigned to West Virginia are determined by
multiplying the fees by a percentage that reflects the ratio of Dealer Co's
receipts that are derived from its West Virginia stores relative to Dealer Co's
total receipts.
Example 2: Program Corp, a broadcaster that is based outside
West Virginia, licenses programming that it owns to business customers, such as
cable networks, that in turn will offer the programming to their customers on
television or other media outlets in West Virginia and in all other U.S.
states. License fees received by Program Corp are assigned to West Virginia to
the extent that the business customer is commercially domiciled in West
Virginia. Each of these licensing contracts constitutes the license of a
marketing intangible. For each licensee, assuming that Program Corp lacks
evidence of the actual number of viewers of the programming in West Virginia,
the component of the licensing fee paid to Program Corp by the licensee that
constitutes Program Corp's West Virginia receipts is determined by multiplying
the amount of the licensing fee by a percentage that reflects the ratio of the
West Virginia audience of the licensee for the programming relative to the
licensee's total U.S. audience for the programming. Note that the analysis and
result as to the state or states to which receipts are properly assigned would
be the same to the extent that the substance of Program Corp's licensing
transactions may be determined to resemble a sale of goods or services, instead
of the license of a marketing intangible.
Example 3: Network Corp, a broadcaster that is based outside
of West Virginia, delivers programming that it owns to individual customers in
West Virginia and in other U.S. States. Network Corp's receipts from each
individual broadcast customer will be assigned to West Virginia if the address
of the broadcast customer listed in the broadcaster's records is in West
Virginia.
Example 4: Moniker Corp enters into a license contract with
Wholesale Co. Pursuant to the contract, Wholesale Co is granted the right to
use trademarks owned by Moniker Corp to brand sports equipment that is to be
manufactured by Wholesale Co or an unrelated entity, and to sell the
manufactured equipment to unrelated companies that will ultimately market the
equipment to consumers in a specific geographic region, including a foreign
country. The license agreement confers a license of a marketing intangible,
even though the trademarks in question will be affixed to property to be
manufactured. In addition, the license of the marketing intangible is for the
right to use the intangible property in connection with sales to be made at
wholesale rather than directly to retail customers. The component of the
licensing fee that constitutes the West Virginia receipts of Moniker Corp is
determined by multiplying the amount of the fee by a percentage that reflects
the ratio of the West Virginia population in the specific geographic region
relative to the total population in that region. If Moniker Corp is able to
reasonably establish that the marketing intangible was materially used
throughout a foreign country, then the population of that country will be
included in the population ratio calculation. However, if Moniker Corp is
unable to reasonably establish that the marketing intangible was materially
used in the foreign country in areas outside a particular major city, then none
of the foreign country's population beyond the population of the major city is
include in the population ratio calculation.
Example 5: Formula, Inc and Appliance Co enter into a license
contract under which Appliance Co is permitted to use a patent owned by
Formula, Inc to manufacture appliances. The license contract specifies that
Appliance Co is to pay Formula, Inc a royalty that is a fixed percentage of the
gross receipts from the products that are later sold. The contract does not
specify any other fees. The appliances are both manufactured and sold in West
Virginia and several other states. Assume the licensing fees are paid for the
license of a production intangible, even though the royalty is to be paid based
upon the sales of a manufactured product (i.e., the license is not one that
includes a marketing intangible). Because the department can reasonably
establish that the actual use of the intangible property takes place in part in
West Virginia, the royalty is assigned based to the location of that use rather
than to location of the licensee's commercial domicile, in accordance with
§ 110-24-6.5.8.a of this rule. It is presumed that the entire use is in
West Virginia except to the extent that the taxpayer can demonstrate that the
actual location of some or all of the use takes place outside West Virginia.
Assuming that Formula, Inc can demonstrate the percentage of manufacturing that
takes place in West Virginia using the patent relative to the manufacturing in
other states, that percentage of the total licensing fee paid to Formula, Inc
under the contract will constitute Formula, Inc's West Virginia
receipts.
Example 6: Axel Corp enters into a license agreement with
Biker Co in which Biker Co is granted the right to produce motor scooters using
patented technology owned by Axel Corp, and also to sell the scooters by
marketing the fact that the scooters were manufactured using the special
technology. The contract is a license of both a marketing and production
intangible, i.e., a mixed intangible. The scooters are manufactured outside
West Virginia. Assume that Axel Corp lacks actual information regarding the
proportion of Biker Co.'s receipts that are derived from West Virginia
customers. Also assume that Biker Co is granted the right to sell the scooters
in a U.S. geographic region in which the West Virginia population constitutes
25 percent of the total population during the period in question. The licensing
contract requires an upfront licensing fee to be paid by Biker Co to Axel Corp
and does not specify what percentage of the fee derives from Biker Co's right
to use Axel Corp's patented technology. Because the fees for the license of the
marketing and production intangible are not separately and reasonably stated in
the contract, it is presumed that the licensing fees are paid entirely for the
license of a marketing intangible, unless either the taxpayer or the department
reasonably establishes otherwise. Assuming that neither party establishes
otherwise, 25 percent of the licensing fee constitutes West Virginia
receipts.
Example 7: Same facts as Example 5, except that the license
contract specifies separate fees to be paid for the right to produce the motor
scooters and for the right to sell the scooters by marketing the fact that the
scooters were manufactured using the special technology. The licensing contract
constitutes both the license of a marketing intangible and the license of a
production intangible. Assuming that the separately stated fees are reasonable,
the department will:
(1) assign no part
of the licensing fee paid for the production intangible to West Virginia, and
(2) assign 25 percent of the
licensing fee paid for the marketing intangible to West Virginia.
Example 8: Better Burger Corp, which is based outside West
Virginia, enters into franchise contracts with franchisees that agree to
operate Better Burger restaurants as franchisees in various states. Several of
the Better Burger Corp franchises are in West Virginia. In each case, the
franchise contract between the individual and Better Burger provides that the
franchisee is to pay Better Burger Corp an upfront fee for the receipt of the
franchise and monthly franchise fees, which cover, among other things, the
right to use the Better Burger name and service marks, food processes, and
cooking know-how, as well as fees for management services. The upfront fees for
the receipt of the West Virginia franchises constitute fees paid for the
licensing of a marketing intangible. These fees constitute West Virginia
receipts because the franchises are for the right to make West Virginia sales.
The monthly franchise fees paid by West Virginia franchisees constitute fees
paid for (1) the license of marketing intangibles (the Better Burger name and
service marks), (2) the license of production intangibles (food processes and
know-how), and (3) personal services (management fees). The fees paid for the
license of the marketing intangibles and the production intangibles constitute
West Virginia receipts because in each case the use of the intangibles is to
take place in West Virginia. The fees paid for the personal services are to be
assigned pursuant to § 110-24-6.5.7 of this rule.
Example 9: Online Corp, a corporation based outside West
Virginia, licenses an information database through the means of the Internet to
individual customers that are resident in West Virginia and in other states.
These customers access Online Corp's information database primarily in their
states of residence and sometimes while traveling in other states. The license
is a license of intangible property that resembles a sale of goods or services
and are assigned in accordance with § 110-24-6.5.8.e of this rule. If
Online Corp can determine or reasonably approximate the state or states where
its database is accessed, it must do so. Assuming that Online Corp cannot
determine or reasonably approximate the location where its database is
accessed, Online Corp must assign the receipts made to the individual customers
using the customers' billing addresses to the extent known. Assume for purposes
of this example that Online Corp knows the billing address for each of its
customers. In this case, Online Corp's receipts from sales made to its
individual customers are in West Virginia in any case in which the customer's
billing address is in West Virginia.
Example 10: Net Corp, a corporation based outside West
Virginia, licenses an information database through the means of the Internet to
a business customer, Business Corp, a company with offices in West Virginia and
two neighboring states. The license is a license of intangible property that
resembles a sale of goods or services and are assigned in accordance with
§ 110-24-6.5.8.e of this rule. Assume that Net Corp cannot determine where
its database is accessed but reasonably approximates that 75 percent of
Business Corp's database access took place in West Virginia, and 25 percent of
Business Corp's database access took place in other states. In that case, 75
percent of the receipts from database access is in West Virginia. Assume
alternatively that Net Corp lacks sufficient information regarding the location
where its database is accessed to reasonably approximate the location. Under
these circumstances, if Net Corp derives five percent or less of its receipts
from database access from Business Corp, Net Corp must assign the receipts
under § 110-24-6.5.7.c.2.B.2 of this rule to the state where Business Corp
principally managed the contract, or if that state is not reasonably
determinable, to the state where Business Corp placed the order for the
services, or if that state is not reasonably determinable, to the state of
Business Corp's billing address. If Net Corp derives more than five percent of
its receipts from database access from Business Corp, Net Corp is required to
identify the state in which its contract of sale is principally managed by
Business Corp and must assign the receipts to that state.
Example 11: Net Corp, a corporation based outside West
Virginia, licenses an information database through the means of the Internet to
more than 250 individual and business customers in West Virginia and in other
states. The license is a license of intangible property that resembles a sale
of goods or services, and receipts from that license are assigned in accordance
with § 110-24-6.5.8.e of this rule. Assume that Net Corp cannot determine
or reasonably approximate the location where its information database is
accessed. Also assume that Net Corp does not derive more than five percent of
its receipts from sales of database access from any single customer. Net Corp
may apply the safe harbor stated in § 110-24-6.5.7.c.2.B.2.d of this rule
and may assign its receipts to a state or states using each customer's billing
address.
Example 12: Web Corp, a corporation based outside of West
Virginia, licenses an internet-based information database to business customers
who then sublicense the database to individual end users that are resident in
West Virginia and in other states. These end users access Web Corp's
information database primarily in their states of residence and sometimes while
traveling in other states. Web Corp's license of the database to its customers
includes the right to sublicense the database to end users, while the
sublicenses provide that the rights to access and use the database are limited
to the end users' own use and prohibit the individual end users from further
sublicensing the database. Web Corp receives a fee from each customer based
upon the number of sublicenses issued to end users. The license is a license of
intangible property that resembles a sale of goods or services and are assigned
by applying the rules set forth in § 110-24-6.5.7.c.2.B of this rule. If
Web Corp can determine or reasonably approximate the state or states where its
database is accessed by end users, it must do so. Assuming that Web Corp lacks
sufficient information from which it can determine or reasonably approximate
the location where its database is accessed by end users, Web Corp must
approximate the extent to which its database is accessed in West Virginia using
a percentage that represents the ratio of the West Virginia population in the
specific geographic area in which Web Corp's customer sublicenses the database
access relative to the total population in that area.
6.5.9. Sale of
Intangible Property; Assignment of Receipts. -- The assignment of receipts to a
state or states in the instance of a sale or exchange of intangible property
depends upon the nature of the intangible property sold. For purposes of §
110-24-6.5.9 of this rule, a sale or exchange of intangible property includes a
license of that property where the transaction is treated for tax purposes as a
sale of all substantial rights in the property and the receipts from
transaction are not contingent on the productivity, use, or disposition of the
property. For the rules that apply where the consideration for the transfer of
rights is contingent on the productivity, use, or disposition of the property.
6.5.9.a. Contract Right or Government License
that Authorizes Business Activity in Specific Geographic Area.
-- In the case of a sale or exchange of intangible property where the property
sold or exchanged is a contract right, government license, or similar
intangible property that authorizes the holder to conduct a business activity
in a specific geographic area, the receipts from the sale are assigned to a
state if and to the extent that the intangible property is used or is
authorized to be used within the state. If the intangible property is used or
may be used only in this state, the taxpayer must assign the receipts from the
sale to West Virginia. If the intangible property is used or is authorized to
be used in West Virginia and one or more other states, the taxpayer must assign
the receipts from the sale to West Virginia to the extent that the intangible
property is used in or authorized for use in West Virginia, through the means
of a reasonable approximation.
6.5.9.b. Sale that Resembles a License
(Receipts are Contingent on Productivity, Use, or Disposition of the Intangible
Property). -- In the case of a sale or exchange of intangible property where
the receipts from the sale or exchange are contingent on the productivity, use,
or disposition of the property, the receipts from the sale are assigned by
applying the rules set forth in § 110-24-6.5.8 of this rule (pertaining to
the license or lease of intangible property).
6.5.9.c. Sale that Resembles a Sale of Goods
and Services. -- In the case of a sale or exchange of intangible property where
the substance of the transaction resembles a sale of goods or services and
where the receipts from the sale or exchange do not derive from payments
contingent on the productivity, use, or disposition of the property, the
receipts from the sale are assigned by applying the rules set forth in §
110-24-6.5.8.e. of this rule (relating to licenses of intangible property that
resemble sales of goods and services). Examples of these transactions include
those that are analogous to the license transactions cited as examples in
§ 110-24-6.5.8.e of this rule.
6.5.9.d. Excluded Receipts. -- Receipts from
the sale of intangible property are not included in the sales factor in any
case in which the transaction does not give rise to sales within the meaning of
W. Va. Code §
11-24-3a.
In addition, in any case in which the sale of intangible property does result
in sales within the meaning of West Virginia § 11-24-7(e)(13)(B), those
sales are excluded from the numerator and the denominator of the taxpayer's
sales factor. The sale of intangible property that is excluded from the
numerator and denominator of the taxpayer's sales factor under this provision
includes, but is not limited to, the sale of business "goodwill," the sale of
an agreement not to compete, or similar intangible property.
6.5.9.e. Examples
. --
Example 1: Sports League Corp, a corporation that is based
outside West Virginia, sells the rights to broadcast the sporting events played
by the teams in its league in all 50 U.S. states to Network Corp. Although the
games played by Sports League Corp will be broadcast in all 50 states, the
games are of greater interest in the northwest region of the country, including
West Virginia. Because the intangible property sold is a contract right that
authorizes the holder to conduct a business activity in a specified geographic
area, Sports League Corp must attempt to reasonably approximate the extent to
which the intangible property is used in or may be used in West Virginia. For
purposes of making this reasonable approximation, Sports League Corp may rely
upon audience measurement information that identifies the percentage of the
audience for its sporting events in West Virginia and the other states.
Example 2: Inventor Corp, a corporation that is based outside
West Virginia, sells patented technology that it has developed to Buyer Corp, a
business customer that is based in West Virginia. Assume that the sale is not
one in which the receipts derive from payments that are contingent on the
productivity, use, or disposition of the property. Inventor Corp understands
that Buyer Corp is likely to use the patented technology in West Virginia, but
the patented technology can be used anywhere (i.e., the rights sold are not
rights that authorize the holder to conduct a business activity in a specific
geographic area). The receipts from the sale of the patented technology are
excluded from the numerator and denominator of Inventor Corp's sales
factor.
6.5.10.
Special Rules
. --
6.5.10.a.
Software Transactions. -- A license or sale of pre-written software for
purposes other than commercial reproduction (or other exploitation of the
intellectual property rights) transferred on a tangible medium is treated as
the sale of tangible personal property, rather than as either the license or
sale of intangible property or the performance of a service. In these cases,
the receipts are in West Virginia as determined under the rules for the sale of
tangible personal property set forth under W. Va. Code §
11-24-7(e)(11)
and related rules. In all other cases, the receipts from a license or sale of
software are to be assigned to West Virginia as determined otherwise under this
rule (e.g., depending on the facts, as the development and sale of custom
software, see
§ 110-24-6.5.7.c of this rule, as a license
of a marketing intangible, see
§ 110-24-6.5.8.b of this
rule, as a license of a production intangible, see
§
110-24-6.5.8.c of this rule, as a license of intangible property where the
substance of the transaction resembles a sale of goods or services,
see
§ 110-24-6.5.8.e of this rule, or as a sale of
intangible property, see
§ 110-24-6.5.9 of this
rule).
6.5.10.b. Sales or Licenses
of Digital Goods or Services. -- In general. In the case of a sale or license
of digital goods or services, including, among other things, the sale of
various video, audio, and software products, or similar transactions, the
receipts from the sale or license are assigned by applying the same rules as
are set forth in § 110-24-6.5.7.c.2.B and § 110-24-6.5.7.c.2.C of
this rule, as if the transaction were a service delivered to an individual or
business customer or delivered through or on behalf of an individual or
business customer. For purposes of the analysis, it is not relevant what the
terms of the contractual relationship are or whether the sale or license might
be characterized, depending upon the particular facts, as, for example, the
sale or license of intangible property or the performance of a
service.
