Current through Register Vol. 41, No. 3, September 23, 2024
The following words and terms, when used in this chapter,
shall have the following meanings unless the context clearly indicates
otherwise:
"Affiliated" means a group of corporations each of which is
itself subject to Virginia income tax and in which (i) one corporation owns at
least 80% of the voting stock of the other or others, or (ii) at least 80% of
the voting stock of two or more corporations is owned by the same
interests.
For the purpose of § 58.1-442 of the Code of Virginia,
it is not necessary for all members of a controlled group to be subject to
Virginia income tax in order for some of the members, otherwise eligible, to
file a consolidated or combined return. For example, two or more corporations
subject to Virginia income tax may be 80% owned by a foreign corporation not
subject to Virginia income tax. All of the subsidiaries subject to Virginia
income tax may file a consolidated or combined return without the foreign
parent corporation.
"Compensation" means, for the purpose of allocation and
apportionment under § 58.1-406 of the Code of Virginia as used in
computing the payroll factor under § 58.1-412 of the Code of Virginia, all
remuneration or wages for employment as defined in IRC § 3121(a) except
that compensation includes the excess wages over the contribution base defined
in IRC § 3121(a)(1).
1. Generally
compensation will be the gross wages, salaries, tips, commissions and other
remuneration paid to employees and reported to the Internal Revenue Service.
The department will accept the gross amounts reported to the IRS on Forms
W-2/W-3, Form 940 or the accounting records of the corporation provided that
all of the employees of the corporation are included in such reports or
records.
2. If the corporation has
any employees who are not subject to the F.I.C.A. and F.U.T.A. payroll taxes or
are not subject to U.S. income tax because they are nonresident aliens,
compensation includes all wages, salaries, tips, commissions and other
remuneration paid to or for such employees in addition to the compensation in
subdivision 1 above.
3. The
corporation shall determine compensation on a consistent basis so as not to
distort the compensation paid to employees located within and without Virginia.
In the event the corporation is not consistent in its reporting, it shall
disclose in its return to Virginia the nature and extent of such
inconsistency.
4. The terms
"employees" and "personal services" shall have the same meaning as used in the
context of employment in IRC § 3121(b).
5. The term "paid or accrued" means either
(i) cash or property paid to employees and reported to the IRS as in
subdivision 1 above, or (ii) amounts properly accrued on the books of the
corporation under its accounting method for federal income tax purposes, but
not both.
"Corporation" means any entity created as such under the laws
of the United States, any state, territory or possession thereof, the District
of Columbia, or any foreign country or any political subdivision of any of the
foregoing, or any association, joint stock company, partnership or any other
entity subject to corporation income taxes under the United States Internal
Revenue Code. See IRC § 7701.
"Domestic corporation" means a corporation, as defined above,
organized, created or existing under the applicable laws of the Commonwealth of
Virginia. Compare IRC § 7701(a)(4).
"Foreign corporation" means a corporation, as defined above,
which is not a domestic corporation. Registration of a foreign corporation with
the State Corporation Commission for the privilege of doing business in
Virginia shall not make a corporation a domestic corporation.
"Foreign source income" means income computed in accordance
with the following principles:
1. The
federal taxable income of corporations organized under the laws of the United
States, any of the 50 states or the District of Columbia (U.S. domestic
corporations) includes their worldwide income. Virginia law provides a
subtraction for "foreign source income" if any is included in federal taxable
income. Corporations that are not U.S. domestic corporations include in federal
taxable income only income from U.S. sources or income effectively connected
with a U.S. trade or business. Such corporations will not have any "foreign
source income" included in federal taxable income.
2. Foreign source income does not include all
income from sources without the United States but is limited to specified types
of income and is also limited by the federal source rules in IRC §§
861 et seq. and the regulations thereunder in determining the source of a
particular item of income.
3.
Corporations having foreign source income determine the amount of the
subtraction by the following procedure:
a. The
specified types of gross income included in federal taxable income are
segregated. The types of income are: interest, dividends, rents, royalties,
license and technical fees, also gains, profits and other income from the sale
of intangible or real property.
b.
The federal source rules are applied to determine the source of each item,
particularly whether or not the item is effectively connected with the conduct
of a U.S. trade or business.
c. The
federal procedure in Treasury Reg. § 1.861-8 is applied to allocate and
apportion expenses to income derived from U.S. and foreign sources.
d. The gross income from sources without the
U.S. from subdivision 3 b less the expenses allocated and apportioned to such
income in subdivision 3 c is the foreign source income for purposes of the
Virginia subtraction.
4.
All income and expenses included in foreign source income and property or other
activity associated with such income and expenses shall be excluded from the
factors in the Virginia formula for allocating and apportioning Virginia
taxable income to sources within and without Virginia.
"Income and deductions from Virginia sources" means items of
income, gain, loss and deduction attributable to the ownership, sale, exchange
or other disposition of any interest in real or tangible personal property in
Virginia or attributable to a business, trade, profession or occupation carried
on in Virginia or attributable to intangible personal property employed in a
business, trade, profession or occupation carried on in Virginia.
A. If the entire business of a corporation is
not deemed to have been transacted or conducted within this Commonwealth by
§ 58.1-405 of the Code of Virginia, then the "income from Virginia
sources" means that portion of the corporation's Virginia taxable income
resulting from the allocation and apportionment formulas set forth in
§§ 58.1-406 through 58.1-421 of the Code of Virginia.
1. Allocable income is limited to certain
dividends. See § 58.1-407 of the Code of Virginia.
2. Apportionable income is Virginia taxable
income less allocable income. Apportionment formulas are then applied to
determine the part of apportionable income that is income from Virginia
sources. Generally, a corporation will have income from Virginia sources if
there is sufficient business activity within Virginia to make any one or more
of the following apportionment factors positive:
(i) vehicle miles (for motor carriers);
(ii) cost of performance (for
financial corporations);
(iii)
completed contracts (for certain construction corporations);
(iv) revenue car miles (for railway
companies); and
(v) property,
payroll or sales (for all other corporations).
3. See §§ 58.1-408 through 58.1-421
of the Code of Virginia and the regulations thereunder for details.
Accordingly, a foreign corporation may be subject to Virginia income tax on the
portion of its income deemed to be derived from Virginia sources under
apportionment formulas even though no specific portion of its gross or net
income may be separately identified as being derived directly from
Virginia.
B. Certificate
of authority.
1.
§§ 13.1-757 and
13.1-919 of the Code of Virginia provide that if a corporation's only activity
in Virginia is limited to certain activity in connection with investment in
notes, bonds or other instruments secured by the deeds of trust on property
located in Virginia, such corporations shall not be deemed to be transacting
business in Virginia for purposes of §§ 13.1-757 and 13.1-919 of the
Code of Virginia which require foreign corporations to obtain a certificate of
authority from the State Corporation Commission before transacting business in
Virginia. All corporations having income from Virginia sources are subject to
Virginia income tax regardless of whether or not they are required to obtain a
certificate of authority.
2. A
foreign corporation whose only connection with Virginia is the receipt of
interest on notes, bonds or other instruments secured by deeds of trust on
property located in Virginia will have no payroll or real or tangible personal
property located in Virginia. Although the interest may be paid by a Virginia
resident, for purposes of the sales factor the gross receipts will not be
assigned to Virginia because there is no income producing activity in Virginia.
See § 58.1-416 of the Code of Virginia. If the corporation is a financial
corporation as defined in § 58.1-418 of the Code of Virginia there would
be no costs of performance in Virginia. Therefore, such a corporation would
have no income from Virginia sources and, since such a corporation is not
required to obtain a certificate of authority, it would not be required to file
a Virginia income tax return. See
23VAC10-120-310. However, if such
a corporation acquires real or tangible personal property in Virginia by
foreclosure or any other means the corporation will have property (or cost of
performance) in Virginia. Therefore the corporation will have income from
Virginia sources and be required to file a Virginia income tax
return.
C. In the course
of computing income from Virginia sources a corporation may be required to make
computations solely for that purpose or maintain records used only for that
purpose. The effects on tax liability of a method used to determine any
components of income from Virginia sources and the burden of maintaining
records not otherwise maintained and of making computations not otherwise made
shall be taken into consideration in determining whether such method is
sufficiently precise.
D. Example.
Corporation A is a manufacturer of paper products conducting all of its
manufacturing, selling and shipping operations outside Virginia. It makes no
sales to customers in Virginia. It therefore has no gross income which may be
identified as being derived directly from Virginia. However, the corporation
does operate a facility in Virginia solely for the purchase of pulpwood for
shipment to its manufacturing plants in other states.
While corporation A has no gross income derived directly from
Virginia, it has property and payroll in this state. Accordingly, Corporation A
has income from Virginia sources based on apportionment factors.
"Sales" means the gross receipts of the corporation from all
sources not allocated under § 58.1-407 of the Code of Virginia (dividends)
whether or not such gross receipts are generally considered as sales. In the
case of the sale or other disposition of intangible property, gross receipts
shall be disregarded and only the net gain from the transaction shall be
included.
A. Manufacturing sales. In
the case of a taxpayer whose business activity consists of manufacturing and
selling, or purchasing and reselling goods or other property of a kind which
would properly be included in the inventory of the taxpayer primarily for sale
to customers in the ordinary course of its trade or business, gross receipts
means gross sales, less returns and allowances, and includes service charges,
carrying charges, or time-price differential charges incidental to such
sales.
B. Sales made in other types
of business activity.
1. If the business
activity consists of providing services such as the operation of an advertising
agency, or the performance of equipment service contracts, "sales" includes the
receipts from performance of such service including fees, commissions, and
similar items.
2. In the case of
cost plus fixed fee contracts, such as the operation of a government owned
plant for a fee, "sales" include the entire reimbursed cost, plus the
fee.
3. In the case of the sale,
assignment, or licensing of intangible property such as patents and copyrights,
"sales" includes only the net gain from the sale or disposition.
4. In the case of the sale of real or
personal property, "sales" includes the gross proceeds from such
sales.
5. The term "sales" does not
include amounts required by federal law to be included in federal taxable
income as recapture of items deducted in prior years.
"State" means any state of the United States, the District of
Columbia, the Commonwealth of Puerto Rico, a territory or possession of the
United States, and any foreign country. Note that this definition applies only
within the allocation and apportionment section of this chapter. When used
elsewhere in the chapter the term "state" may or may not include foreign
countries and U.S. possessions, depending on the context.
Statutory Authority
§§ 58.1-203 and 58.1-302 of the Code of Virginia.
