Current through Register Vol. 41, No. 3, September 23, 2024
A. In general.
1. Financial corporations do not apportion
Virginia taxable income using the three factor formula but instead apportion
income based solely on cost of performance.
2. Financial corporations include, but are
not limited to, banks, savings and loan associations, mortgage companies, small
loan companies, sales finance companies, brokerage companies, investment
companies and other corporations which meet the definition of a financial
corporation set forth in subsection B.
3. If a corporation meets the definition of a
financial corporation, it apportions Virginia taxable income, less allocable
dividends, on a one factor formula based on cost of performance in Virginia
over cost of performance everywhere.
B. Definitions.
"Financial corporations" means any corporation not exempt
from taxation under § 58.1-401 of the Code of Virginia which derives more
than 70% of its gross income from:
a.
Fees, commissions, other compensation for financial services
rendered;
b. Gross profits from
trading in stocks, bonds or other securities;
c. Interest; and
d. Dividends received to the extent included
in Virginia taxable income.
"Cost of performance."
a. The "cost of performance" is the cost of
all activities directly performed by the taxpayer for the ultimate purpose of
obtaining gains or profit except activities directly performed by the taxpayer
for the ultimate purpose of obtaining dividends allocable under the provisions
of § 58.1-407 of the Code of Virginia. See
23VAC10-120-140.
(i) Such activities do not include activities
performed on behalf of a taxpayer, such as those performed on its behalf by an
independent contractor.
(ii) The
cost of performance does not include the cost of funds (interest, etc.), but
does include the cost of activities required to procure loans or other
financing.
b. Activities
constituting the cost of performance are deemed performed at the situs of real
and tangible personal property or the place at which or from which activities
are performed by employees of a taxpayer.
c. Cost of performance of a financial
institution within and without Virginia shall be determined without regard to
the location of borrowers, location of property in which the financial
corporation has only a security interest or the cost to the financial
corporation of the funds which it lends.
C. Inter-affiliate transactions.
1. If the taxpayer is a member of an
affiliated group and renders financial services to its affiliate for
compensation, or sells stock, bonds or other securities to its affiliate, or
receives interest or dividends from its affiliate, then taxpayer shall include
the net income, not gross income, from such transactions for the purpose of the
70% test. The net income for this purpose is the gross income less directly
related expenses. Whether an item of expense is directly related to an item of
gross income depends on the facts of each case.
2. Taxpayer is a member of an affiliated
group if it meets the test of IRC § 1504(a) (concerning ownership of 80%
of voting power and nonvoting stock) without regard to IRC § 1504(b)
(concerning certain exemptions).
Example A: Retailer sells its accounts receivable to a wholly
owned subsidiary called Finance Co. The terms of the accounts provide for
interest on balances due of 11/2% per month which Finance Co. collects in
addition to the balances. Finance Co. borrows from banks in order to purchase
the accounts receivable. Finance Co. has several employees and various other
expenses.
For purpose of the 70% test Finance Co. receives interest
from the consumers not the affiliated retailer. All interest received on the
accounts receivable is included for the 70% test without any deduction of
directly related expenses. Therefore, Finance Co. qualifies as a financial
corporation.
Statutory Authority
§§ 58.1-203 and 58.1-418 of the Code of Virginia.
