Tax Type
Corporation Income Tax
Description
Assessed capital taxes and commercial domicile
Topic
Corporate Distributions and Adjustments
Property Subject to Tax
Date Issued
03-30-1982
March 30, 1982
Re: Appeal from Assessment of CNOT Tax
Dear *****************
This is in reply to your letter in which you applied pursuant to §58-1118 of the Code of Virginia for relief from state capital taxes assessed.
In my letter to you dated September 4, I informed you that I would discuss the matters in question with my staff and advise you accordingly. As a result of that discussion, I have come to the conclusions below.
First, you question whether the foreign corporations' notes and accounts receivable have acquired situs in Virginia and are, therefore, subject to taxation under Virginia Code §58-411. Generally, intangibles such as those in question have no situs of their own as provided in Commonwealth v. United Cigarette, 119 Virginia 447, 89 S.E. 935 (1916). However, for taxation purposes the basic rule is based on the maxim Mobilia Sequuntur Personam, movables follow the person. Therefore, the situs of the property is considered to be the domicile of the owner. Since a corporation is generally considered to be a domiciliary of the State in which it is incorporated, there is a presumption that the intangibles will be taxed in that state.
The reasoning behind this premise is that situs should be attributed to the State which gives the corporation legal protection and establishes those legal interests arising from the intangibles.
However, if a corporation has only a "paper domicile" in its incorporating state but actually functions and is managed from offices in another state, the Corporation will, thereby, have established a "commercial domicile," for taxation purposes, in the state where the greatest portion of the corporations' control exists.
Some minimum connection between a state and a person, property or transaction it seeks to tax must be established. The elements necessary to establish this minimum connection are described in 71 Am. Jur. 20 State and Local Taxation §672 as follows:
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- Generally speaking, where an agent within the State representing a nonresident principal, is clothed with power and authority to, and does, create credits or loans money for his principal in this state, the agent holding an actual and effective control over the business retaining evidences of such debts, or procuring their return to him when due for collection and return or reinvestment, the course of business being general and amounting more or less to a permanent business, then the State may by legislation separate the situs of such property from taxation from the domicile of the owner and give it a situs within the State for purposes of taxation.
- Generally speaking, where an agent within the State representing a nonresident principal, is clothed with power and authority to, and does, create credits or loans money for his principal in this state, the agent holding an actual and effective control over the business retaining evidences of such debts, or procuring their return to him when due for collection and return or reinvestment, the course of business being general and amounting more or less to a permanent business, then the State may by legislation separate the situs of such property from taxation from the domicile of the owner and give it a situs within the State for purposes of taxation.
From the facts as presented, sufficient control is not vested in the foreign corporations' managers so that they have authority to extend credit and reinvest cash remittances into company business within their respective states. Therefore, the intangible property has not retained business situs in those locations and will be taxable in Virginia. The Court in Commonwealth v. United Cigarette Machine Company, 119 Virginia 447, 89 S.E. 935 (1916), looked at where the corporate officers resided, where the stockholders' and directors' meetings were held, where the executive functions were performed and where the books, securities and evidences of debt were kept in determining that a foreign corporation, with functional corporate headquarters in Virginia, would be subject to Virginia's capital tax on trade and notes receivable.
No data relating to specific foreign corporations has been presented which discloses that situs of trade and note receivables has not moved to Virginia for capital tax purposes. Therefore, any adjustment to remove the foreign corporations' liability for capital tax is denied.
Secondly, you contend that in assessing the notes and accounts receivable, the Department of Taxation has taken the position that the receivables should be valued at the gross face value without any reduction to reflect actual value in the form of a reserve for bad debts.
The Department does require that receivables be valued at their face amount for capital tax purposes and does not recognize an allowance or reserve for bad debts except to the extent necessary to arrive at the actual value of such receivables. Receivables may be reduced to reflect proper valuation if the taxpayer presents substantiating evidence that the value is other than that reflected in the books. This evidence is recognized on a case by case basis.
Abatements on the capital tax audit of ********* for unearned interest and discount were made for the years 1973 and 1974 because the taxpayer presented additional substantiating evidence. Additional specific information for the other corporations will be accepted which substantiates that the value of the receivables as shown on the company's books does not reflect the proper valuation.
Until the substantiating evidence is presented on each corporation which discloses that the value is other than that reflected in the books, no further adjustment may be made in the valuation of the accounts receivable.
Thirdly, in your letter you contend that the department erroneously excluded accounts payable for workman's compensation, sales tax, and employee incentives. The Department will include the payable for workman's compensation insurance premiums. The sales tax payable is a payable by the corporation for taxes which are not contracted obligations and are not included in the capital tax computations.
The accrued employee incentives were excluded by the department. In your letter dated August 29, 1980 you stated "All of these accounts payable are fixed in the amount and liability, were incurred in the normal course of business, were paid in full on their respective due dates." The employee incentives will be includible payables for capital tax purposes because they were not contingent upon future events and were actual obligations on the date of measure for the tax.
Fourthly, you address the intercompany accounts payable of each corporation which were not allowed as a deduction from intercompany accounts receivable for the years 1973 and 1974. If the intercompany accounts payable were directly related to products ant services in the taxpayer's usual course of business, then they should be includible in the excess receivables over payables category. The taxpayer must furnish additional specific information in relation to the amounts and purposes of the intercompany payables to be included.
The fifth issue you discuss is the inclusion of mortgage notes receivable as other taxable personal property.
The Department, in revised audit reports to the taxpayer, classified mortgage notes receivable as receivables in the usual course of business and includible in the excess of all bills and accounts receivable over bills and accounts payable category. You point out that the Department did not make these like adjustments in the audit years 1973-1974. The audit reports for 1973-1974 will be adjusted to reflect the mortgage notes receivable in the excess receivables over payables category.
Finally, you state "Office furniture and fixtures were erroneously included by the Department as other tangible personal property of ***********..Since office furniture and fixtures are tangible personal property, ************* listed them for local taxation and a personal property tax thereon was paid."
The Department included office furniture and fixtures for the 1977 and 1978 ************** capital tax audit. This specific corporation is listed as a manufacturer of modular homes. §58 412 states "personal property, tangible in fact, used or employed in a manufacturing ...business taxable on capital shall be included in capital as prescribed in §58-411..."
************** the manufacturer of modular homes, should report its furniture and fixtures as capital subject to the state capital tax for future years. Since these tangible personal property items have been reported to the locality for the years 1977 and 1978 they will be removed from the Capital tax audit.
As stated above, the audit reports and assessments will be revised in regard to the payables for workman's compensation insurance premiums and employee incentives, the mortgage notes receivable, and office furniture and fixtures. In regard to the valuation of accounts receivable and intercompany accounts payable additional substantiating evidence must be presented prior to any further audit adjustment. I trust the substantiating evidence will be submitted as soon as possible in order to close this long-pending matter.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner