March 27, 2024
Re: § 58.1-1824 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 years ended February 1, 2009, January 31, 2010, January 30, 2011, January 29, 2012, and February 3, 2013. I apologize for the delay in responding to your letter.
For the taxable years at issue, the Taxpayer paid royalties to an affiliated entity for the use of certain intellectual property. On its Virginia income tax returns, the Taxpayer added back the royalty and interest expenses to federal taxable income for purposes of computing its Virginia taxable income. The Taxpayer claimed an exception to the add-back for a portion of the expenses based on the amount of the affiliate’s income apportioned to states in which its affiliate paid tax. The Taxpayer subsequently filed a protective claim for refund, asserting that it was entitled to a full exception to the add-back on the basis that the income was subject to a tax in another state.
Pursuant to the authority granted the Department under Virginia Code § 58.1-1824, a protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided based upon its merits pursuant to Virginia Code § 58.1-1821.
In Kohl’s Department Stores, Inc. v. Virginia Department of Taxation, 295 Va. 177 (2018), the Virginia Supreme Court (the “Court”) interpreted the “subject-to-tax” exception in Virginia Code § 58.1-402 B 8. The Court agreed with the Department’s interpretation that only the portion of the intangible expense payments that was subject to a tax in another state falls within the exception. In addition, the Court decided the subject-to-tax exception is limited to intercompany intangible income that is subject to an income tax imposed on income after it has been apportioned to another state.
In accordance with the Court’s determination in Kohl’s, the Taxpayer was not entitled to an exception for the full amount of its royalty expense based on the subject-to-tax exception. Accordingly, the Taxpayer’s refund claim cannot be granted.
The Code of Virginia sections 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/584.X