Tax Type
Corporation Income Tax
Description
Sales factor adjustments
Topic
Allocation and Apportionment
Date Issued
10-23-1991
October 23, 1991
Re: §58.1-1821 Application; Corporation Income Tax
Dear*****************
This will reply to your letter of July 17, 1990 in which you seek refunds of corporation income tax for ***************** (the "Taxpayer").
FACTS
The taxpayer is appealing audit adjustments for two issues for the 1987 and 1988 taxable years. First, the taxpayer included in the sales factor denominator gross proceeds from interest bearing Loan Participation Agreements, Commercial Paper, Repurchase Agreements, and taxable State Obligations, all of which were disallowed upon audit. Second, the taxpayer objects to the law requiring addback of non-Virginia (and not Virginia) state obligation interest income on the basis that this law is unconstitutional. Numerous other audit adjustments were made, and not contested.
The issues you raise will be addressed separately.
DETERMINATION
Sales Factor: A repurchase agreement is not a true sale and repurchase. It is more accurately characterized as a loan with security. Amounts borrowed or repaid are not included in the sales factors of the borrower or lender, respectively. Only the interest is included in the sales factor. See Public Document (P.D.) 91-212 (9/6/91) (copy enclosed).
With respect to Loan Participation Agreements, the principles outlined in P.D. 91-212 (9/6/91) apply. Therefore, repayment of the principal is not includible in the sales factor denominator. Only the interest income earned is includible.
For taxable years beginning before January 1, 1990 the sales factor included gross proceeds from the sale of marketable securities. See P.D. 89-155 (5/11/89). Therefore, the audit report will be revised to include the gross receipts from the sale of taxable state obligations and bonds of corporations (commercial paper).
Interest Income on Non-Virginia Obligations: Virginia law expressly requires an addition for any interest income on obligations of states other than Virginia and the audit report is clearly consistent with Virginia law on this point. You object to this addition on the grounds that it "is discriminatory and violates the U.S. Constitution, 14th Amendment, Equal Protection and Due Process Clauses."
However, you provide no analysis or explanation of why the provisions you cite require Virginia to extend an income tax exemption to interest paid by other states. I am aware of no court case in Virginia, or even in other states, that has held it unconstitutional for one state to require its taxpayers to pay tax on interest paid by another state.
Further, the statute does not differentiate between domestic and foreign corporate taxpayers, in that both must add the interest income from other states' obligations in determining Virginia taxable income. Similarly, both may deduct the interest income from Virginia obligations from federal taxable income.
Therefore, I find that you have not proven that the assessment is erroneous in making the addition required by Virginia law.
Accordingly, the assessment will be adjusted to add gross receipts from the sale of commercial paper and taxable state obligations to the sales factor denominator, but is correct in all other aspects. You will receive a bill in due course with interest accrued to date which should be paid within 30 days to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/4576G
Rulings of the Tax Commissioner