Tax Type
Corporation Income Tax
Description
Payroll factor; Subsidiary wages included in parent's payroll factor
Topic
Allocation and Apportionment
Date Issued
01-11-1990
January 11, 1990
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-412 Payroll Factor
Dear****************
This is in response to your letter of June 12, 1989 in which you applied for correction of an assessment of corporation income tax.
Facts
The Taxpayer (the parent corporation) allocated certain salaries and wages of its employees to its subsidiary for federal tax purposes. The allocation was based solely on revenues of the companies. The auditor assigned the salaries and wages allocated from the Taxpayer to the subsidiary as payroll of the subsidiary for the purpose of computing its Virginia payroll factor. The Taxpayer protests, contending that the wages were paid to employees of the Taxpayer only; the allocation of wages to the subsidiary was a bookkeeping expense for federal purposes only and should not be included in the subsidiary's payroll factor.
Discussion
The method for computing the payroll factor is found in Va. Code §58.1-412. This section provides that the payroll factor is a fraction, the numerator being the total amount paid or accrued in the Commonwealth during the tax period by the corporation for compensation; the denominator is the total compensation paid or accrued everywhere during the taxable year, to the extent that such payroll is used to produce Virginia taxable income.
From the information provided, it is evident that the subsidiary corporation did not pay any wages for the period in question. All wages were paid by the parent corporation to its own employees; the parent corporation paid all the indirect costs associated with maintaining this payroll. The wages were allocated to the subsidiary based solely on revenues of the companies. Since the wages were paid by the parent corporation to its own employees, and were included in the payroll factor of the parent, the wages should not have been included in the payroll factor of the subsidiary.
While the auditor correctly relied on information in the federal return when conducting the audit of the Virginia return, the Taxpayer has substantiated its case and is entitled to relief. The modifications to the information on the federal return do not affect the federal taxable income or the character of any item reported to the IRS; therefore, it is not necessary to amend the federal return in order to correct the Virginia assessment.
Determination
Accordingly, the audit report and assessment will be revised to exclude the wages paid by the parent corporation from the payroll factor of the subsidiary for the tax year ending June 30, 1986. The tax and interest due for that period attributable to the incorrect payroll factor will be abated.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner