May 25, 2021
Re: Ruling Request: Bank Franchise Tax
Dear *****:
This will respond to your letter in which you request a ruling regarding whether a corporation is subject to the bank franchise tax. In the event that the Department concludes that the corporation is not subject to the bank franchise tax, you request permission to change the filing status of the affiliated group to which the corporation belongs.
FACTS
An affiliated group of corporations that does business in Virginia (the “Virginia Group”) files its Virginia corporate income tax returns on a separate entity basis. One of the affiliated entities (Affiliate A) is a national bank that is chartered under the Federal Reserve System and laws of the United States. It does not own or lease office space or operate a branch in Virginia. Several employees of Affiliate A, however, work out of the Virginia office of another affiliate (Affiliate B), and Affiliate A receives an intercompany cost allocation from Affiliate B. Affiliate A accepts deposits, provides loans and invests in securities.
The activities conducted by the employees of Affiliate A in Virginia are described as follows: 1) driving sales and marketing strategies to increase product awareness of cash management and lending platforms among the financial advisors of Affiliate B; 2) discussing, in partnership with the financial advisors of Affiliate B, features and benefits of the cash management and lending offerings to customers; and 3) providing financial advisors of Affiliate B and their clients with strategies and solutions suited to their customers' needs. The employees may also solicit loans but cannot directly approve or process them. Such approval and processing occurs outside of Virginia. Affiliate A has not accepted any deposits or operated a mortgage lending business from a Virginia location. The Virginia Group requests a ruling regarding whether Affiliate A is subject to the bank franchise tax. If Affiliate A is not subject to the tax, the Virginia Group asks permission to begin filing a consolidated Virginia corporate income tax return beginning for the 2019 taxable year.
RULING
Virginia Code § 58.1-1202 requires every bank or trust company to pay an annual tax measured by its net capital as defined in Virginia Code § 58.1-1205. The bank franchise tax is paid in lieu of Virginia’s income tax and a number of other state and local taxes. Under Virginia Code § 58.1-1201, a bank includes:
any incorporated bank, banking association, savings bank that is a member of the Federal Reserve System, or trust company organized by or under the authority of the laws of the Commonwealth and any bank or banking association organized by or under the authority of the laws of the United States, doing business or having an office in the Commonwealth or having a charter which designates any place within the Commonwealth as the place of its principal office, and any bank which establishes and maintains a branch in this Commonwealth under Article 5.1 (§ 6.1-44.1 et seq.) of Title 6.1 or Article 5.2 (§ 6.1-44.15 et seq.) of Title 6.1, whether such bank or banking association is authorized to transact business as a trust company or not, and any joint stock land bank or any other bank organized by or under the authority of the laws of the United States upon which the Commonwealth is authorized to impose a tax.
Citing Public Document (P.D.) 11-182 (11/3/2011), the Taxpayer argues that the Department’s policy remains that an out of state bank must be transacting “banking business” from a Virginia location in order to be subject to the bank franchise tax. In AMG National Trust Bank v. Commonwealth of Virginia, Department of Taxation, Civil Docket No.: CL10-3031 (April 2011) (AMG National Trust), reported as P.D. 11-151 (4/7/2011), the court declined to import the definition of “bank” from the Virginia Banking Act which defined bank under Virginia Code § 6.2-800 as “a corporation authorized by statute to accept deposits and to hold itself out to the public as engaged in the banking business in this Commonwealth.” The court also declined to read into the statute a requirement that the organization must “maintain an office in this Commonwealth for the conduct of banking business” in order to satisfy the requirement for “doing business or having an office in the Commonwealth.”
The Department interpreted this judicial decision to mean that a bank was not required to be conducting a banking business in order to be subject to the bank franchise tax, at least to the extent that “banking business” meant accepting deposits from customers at its Virginia branches. See P.D. 11-182. The Department also stated in P.D. 11-182, however, that a bank that merely owns property in Virginia such as foreclosed homes, but does not transact a banking business at any of its properties, will not cause the bank to be subject to the bank franchise tax. The Virginia Group in this ruling request has interpreted this statement to mean that a bank must still be conducting a banking business in Virginia in order to be subject to the bank franchise tax.
If a Virginia court has already declined to impose a requirement that a bank must be performing one of the traditional banking functions, namely accepting deposits, in order to qualify as a bank subject to the bank franchise tax, the Department has concluded that it would be inconsistent with the court’s ruling to impose other specific requirements for doing business such as making loans. In the Department’s opinion, such an exercise is unnecessary because the statute sufficiently and unambiguously addresses the facts at issue. The statute requires that the bank be “doing business... in the Commonwealth.” See Virginia Code § 58.1-1201. In the Department’s opinion, the activities of Affiliate A’s employees in Virginia satisfy the statutory requirement that the bank be doing business in Virginia. Accordingly, in the Department’s opinion, Affiliate A is subject to the bank franchise tax.
To the extent that P.D. 11-182 may be read to imply that a bank must still be conducting certain “banking business” activities in Virginia in order to be subject to the bank franchise tax, this document serves to confirm the Department’s adherence to the Court’s decision in AMG National Trust. The statute requires only that the bank be conducting business in Virginia generally.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions regarding this ruling, you may contact *****in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3601.M