Tax Type
Corporation Income Tax
Description
Combined return; Nexus of Affiliate; Net operating loss deduction
Topic
Allocation and Apportionment
Returns/Payments/Records
Date Issued
08-29-1991
August 29, 1991
Re: §58.1-1821 Application; Corporation Income Tax
Dear*****************
This will reply to your letter of December 20, 1990, in which you seek correction of assessments of corporation income tax for ***************(the "Taxpayer").
FACTS
The taxpayer's 1986 and 1987 combined Virginia corporation income tax returns were audited and numerous adjustments were made, resulting in the assessment of additional tax. You object to several adjustments. The issues you raise will be addressed separately.
DETERMINATION
Corporation Nexus: The auditor included an affiliate of the taxpayer in the combined return because it had sales in Virginia, creating a positive sales factor. You contend that the affiliate had no property and no payroll within Virginia in 1986; based on P.L. 86-272, no income should be apportioned to Virginia.
P.L. 86-272 prohibits states from imposing an income tax on businesses when the only contacts with the state are a narrowly defined set of activities related to the sale of tangible property, generally referred to as "solicitation." The department has ruled that additional activities beyond the solicitation of orders that are frequent and a continuing part of a corporation's regular course of business render a corporation subject to Virginia's income tax.
The auditor found nexus for the affiliate based on the positive sales factor. However, no determination was made as to whether the affiliate engaged in activities in Virginia to support nexus. This is a factual issue that was not addressed during audit. Therefore, I am returning the audit to the auditor for further proceedings on this issue. If after further inquiry the auditor finds that there exists sufficient activity in Virginia to disqualify the corporation from the protection of P.L. 86-272 and you disagree with the findings, you may reapply for correction of assessment under Va. Code §58.1-1821.
Computational Errors: A review of the audit report confirms that errors were made in computing income subject to taxation in Virginia for two affiliates. The audit report will be revised accordingly.
Payroll factor: The auditor increased the numerator of the payroll factor (Virginia payroll) for 1986 for one of the affiliates to include wages reported on federal Form 940. The taxpayer asserts that the numerator should have been increased by an additional amount.
Generally, Form 940 is used to verify total wages everywhere (the denominator of the payroll factor); form VEC-20, used to report wages to the Virginia Employment Commission, is used to verify Virginia payroll. However, the auditor's notes indicate that when the audit was conducted, the 1986 VEC-20's were in storage and not available. The auditor's computation was based on the best information available.
The taxpayer has not provided documentation to support its position that the numerator of the payroll factor should be increased by an additional amount. If the taxpayer can produce the 1986 VEC-20's to substantiate its claim, then an adjustment to the payroll factor will be made.
Apportionment: The auditor computed a zero apportionment factor for an affiliate included in the combined return. The taxpayer claims that the corporation is a Virginia corporation and all of its income should be subject to Virginia income tax.
The taxpayer is correct that the affiliate is a 100% Virginia corporation. The audit report will be adjusted accordingly.
Net Operating Loss Deduction (NOLD): The taxpayer contends that the NOLD's for two companies included in the Virginia combined returns for 1986 and 1987 need to be adjusted. Specifically, the taxpayer claims that one affiliate has NOLD's available to carryforward dating back to taxable year beginning in 1976, while the auditor allowed only NOLD's dating back to 1981; a second affiliate received no benefit from NOLD carryforwards in the audit workpapers, while NOLD's from prior years were available.
Virginia law has no separate provision for a NOLD. Therefore, an NOLD is allowable for Virginia purposes only to the extent that the NOLD is allowable as a deduction in computing federal taxable income for Virginia purposes, i.e., as if federal returns had been filed on the same basis as Virginia returns for all affected years.
At the time the audit was conducted, prior years' federal taxable income documentation from 1976-1980 was not available for the one affiliate; such documentation was not available at all for the second affiliate. The auditor was justified in disallowing the NOLD carryforwards because the taxpayer's lack of supporting documentation made it impossible to verify previous net operating losses and their utilization. In addition, the auditor could not verify the portion of the loss absorbed on the 1986 and 1987 returns or how Virginia taxable income was computed on these returns.
You have submitted schedules outlining the utilization of the NOLD carryforwards for both affiliates. However, there is no documentation to support the amounts shown on the schedules. The department will allow you to submit information to substantiate these amounts; the information must be sufficiently detailed and reconcile back to the federal returns.
Accordingly, the audit report will be revised to correct the computational errors and to include the one affiliate as a 100% Virginia corporation. The audit will be referred back to the auditor to review the nexus question. If you choose to submit the payroll factor and NOLD information, please send it to the department's Technical Services Section, P.O. Box 6-L, Richmond, Virginia 23282, within 30 days.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner