Tax Type
Corporation Income Tax
Description
Common paymaster arrangements
Topic
Allocation and Apportionment
Appropriateness of Audit Methodology
Date Issued
08-20-2004
August 20, 2004
Re: § 58.1-1821 Application: Corporate Income Tax
Dear *****:
This will respond to your letter of May 29, 2003, in which you seek correction of the corporate income tax assessment issued to ***** (the "Taxpayer") for the taxable year ended December 31, 1998.
FACTS
The Taxpayer is a wholly-owned subsidiary of a parent company (the "Parent"). The Parent paid the salaries for executives and certain employees of the Taxpayer employed in Virginia. The Parent reported these wages to the Virginia Employment Commission ("VEC") as wages for unemployment tax purposes. The Taxpayer deducted the salary expenses on its federal income tax return and did not include the salaries in the Virginia portion of its payroll factor. Under audit, the auditor included the salaries in the Taxpayer's payroll factor on the basis that the wages were deducted on the Taxpayer's federal return. The Taxpayer contends that Virginia does not recognize common paymaster arrangements and the salaries cannot be reported in the numerator of the Virginia payroll factor.
DETERMINATION
There is a strong presumption that total wages reported to Virginia for unemployment compensation purposes represent compensation paid or accrued in Virginia. See Title 23 of the Virginia Administrative Code ("VAC") 10-120-190. The Virginia Unemployment Compensation Act (Va. Code § 62.1 et. seq.) does not provide for any type of common paymaster arrangement. Each employer is separately liable for taxes on its wages. Accordingly, a common paymaster arrangement is not recognized for purposes of determining Virginia apportionment. Because no compensation was reported to the VEC by the Taxpayer, it will have no payroll factor in Virginia for corporate income tax apportionment purposes.
The Department's long-standing policy prohibits wages paid by a parent corporation from being included in the payroll factor of a subsidiary, despite bookkeeping allocations by the parent corporation to the subsidiary for a portion of the expense. See Public Document ("P.D.") 90-17 (1/11/90). As such, wages paid by the Parent to employees of the Taxpayer were incorrectly placed into the Virginia payroll factor by the Department's auditor. Accordingly, the assessments have been adjusted pursuant to the enclosed schedules.
Copies of the regulation and public document cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site located at www.tax.state.va.us. If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/46614B
Rulings of the Tax Commissioner