November 15, 2019
Re: § 58.1-1821 Application: Corporate Income Tax
Dear *****:
This will reply to your letter in which you seek a refund of corporate income tax paid by ***** (the “Taxpayer”) for the taxable year ended December 31, 2013.
FACTS
***** (Corporation A) and *****(Corporation B) are affiliates wholly owned by the Taxpayer. Corporation A and Corporation B jointly owned ***** (CLLC), a limited liability company. The Taxpayer and its affiliates filed a combined Virginia income tax return for the taxable year at issue.
The Taxpayer filed an amended Virginia return to report a reduction of the Corporation A, Corporation B and CLLC’s Virginia sales factor. Under review, the Department disallowed the return on the basis that the Taxpayer did not file an amended federal return for CLLC reflecting the reduction in sales. The Taxpayer appeals, contending that it was not required to file an amended federal return because the reduction in sales did not change the taxable income of CLLC.
DETERMINATION
Under Virginia Code § 58.1-414, the sales factor for a taxable year is a fraction, the numerator of which is the total sales of the corporation in Virginia, and the denominator of which is the total sales of the corporation everywhere, “to the extent that such sales are used to produce Virginia taxable income and are effectively connected with the conduct of a trade or business within the United States and income therefrom is includable in federal taxable income.” Virginia Code § 58.1-302 defines the term “sales” as the gross receipts of the corporation from all sources (except dividends, which are allocated), whether or not such gross receipts are generally considered sales. As such, the sales factor includes all gross receipts that are included in Virginia taxable income and are connected with the conduct of the taxpayer’s trade or business within the United States.
Pass-through entities (i.e., CLLC) that have income from activity both within and without Virginia are required to compute their Virginia source income in accordance with the corporate statutory formula set forth in Virginia Code §§ 58.1-407 through 58.1-421. As such, pass-through entities must allocate dividends to the state of commercial domicile and apportion all other income. Income is apportioned using a three-factor formula based on the property, payroll and sales within Virginia. See Public Document (P.D.) 88-165 (6/29/1988), and P.D. 07-150 (9/21/2007).
As a normal review practice, the Department reconciles sales to the gross receipts or sales reported on a taxpayer’s federal return. See P.D. 92-135 (8/6/1992). In this case, the reviewer denied the Taxpayer’s amended Virginia return because the gross sales reported on CLLC’s Federal Form 1065 did not match the amount reported in the sales factor of its amended Virginia return.
The Taxpayer has provided documentation indicating CLLC overstated both its sales and expenses in the same amount. Under these circumstances, CLLC’s federal taxable income would not change even though the amount of its gross sales was reduced.
In P.D. 92-135, the Department concluded that a taxpayer may amend a Virginia income tax return even through the corresponding federal return has not been amended. As such, the fact that the Taxpayer did not amend its 2013 federal return does not preclude the Department from accepting the Virginia amended return. The Taxpayer, however, will have the burden of showing why the gross receipts reported on a federal return do not reflect income connected with the conduct of the Taxpayer’s trade or business within the United States.
Because the Taxpayer filed its 2013 Virginia corporate amended return within the statutory period, the case will be returned to audit staff to review the amended return and see if it can substantiate CLLC’s amended sales factor. If necessary, the Department may request additional information to make an accurate adjustment. Upon completion of the review, a refund will be issued, as appropriate.
The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1711.B