March 27, 2024
Re: Ruling Request: Corporate Income Tax
Dear *****:
This will respond to your letter in which you request a ruling on behalf of ***** (the “Taxpayer”) regarding the proper base year employment to use in determining eligibility to elect the single sales factor apportionment method for manufacturing companies.
FACTS
The Taxpayer is a manufacturing corporation that has several production facilities in the United States. During its taxable year ended October 31, 2021, the Taxpayer acquired certain assets of another company, including a production facility in Virginia. Prior to the acquisition, the Taxpayer did not have any employees or property located in Virginia. However, as of October 31, 2021, the Taxpayer employed 292 full-time employees at the facility. The Taxpayer elected to use the single sales factor apportionment method under Virginia Code § 58.1-422 for its taxable year ended October 31, 2021.
The Taxpayer requests a ruling to confirm that the Taxpayer’s base year employment was zero, or alternatively, equal to the average number of full-time employees who worked at the facility in the taxable year prior to the date of the acquisition. In either case, the Taxpayer also requests that the Department confirm that the Taxpayer satisfied the statutory requirement to satisfy a base year employment computation during the taxable year ended October 31, 2021.
RULING
Virginia Code § 58.1-422 allows manufacturing companies to elect a modified apportionment factor based on sales to determine their Virginia taxable income. Qualifying corporations that elect to use the modified apportionment formula must use the single factor apportionment method to apportion Virginia taxable income. Once an election is made, it cannot be revoked for three taxable years. A manufacturing corporation that makes the single sales factor election is required to maintain at least 90% of the “base year employment” for the first three taxable years in which the manufacturing corporation used the alternative apportionment formula. See Virginia Code § 58.1-422 C.
Virginia Code § 58.1-422 D defines “base year employment” as “the average number of full-time employees employed by the manufacturing company in the Commonwealth in the taxable year that ended immediately prior to the first taxable year in which the manufacturing company used the alternative apportionment set forth in this section.”
The first taxable year for which the Taxpayer made the single sales factor election would be the taxable year ended October 31, 2021. The Taxpayer’s taxable year that ended immediately prior to that was the taxable year ended October 26, 2020. Because the Taxpayer had no full-time employees in Virginia prior to the acquisition, the number of full-time employees the Taxpayer had in Virginia was zero for the taxable year ended October 26, 2020.
Based on the above analysis, the Department opines that the Taxpayer’s base year employment is zero. Further, so long as the Taxpayer’s average number of employees employed during the taxable year ended October 31, 2021 were zero or more, it would satisfy the requirement to maintain at least 90% of the base year employment for that taxable year.
If you have any questions regarding this ruling, you may contact ***** in the Office of Tax Policy, Policy Development Division, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/4338