Tax Type
Corporation Income Tax
Description
Payroll Factor; Computation of Denominator
Topic
Allocation and Apportionment
Date Issued
05-29-1991
May 29, 1991
Re: §58.1-1821 Application; Corporation Income Tax
Dear****************
This will reply to your letter of September 25, 1990, in which you seek correction of corporation income tax assessments for **************** (the "Taxpayer").
FACTS
The taxpayer was field audited and numerous adjustments were made, resulting in the assessment of additional tax.
The issues you raise will be addressed separately.
DETERMINATION
Payroll Factor: The auditor adjusted the denominator of the payroll factor to reflect the average of total U.S. wages as reported by the taxpayer on federal forms 940 and 941 and adjusted the numerator to reflect the average of wages paid within Virginia as reported on the taxpayer's VEC-20's and on its Virginia W-2's.
The department has previously ruled that, in determining total compensation paid or accrued everywhere, amounts from federal Form 941 are not acceptable. P.D. 90-91 (6/12/90) (copy enclosed). In computing the numerator of the payroll factor, total wages reported on forms VEC-20 are presumed to be compensation paid or accrued in Virginia, provided there is no compensation paid or accrued in Virginia not subject to the Virginia Unemployment Tax Act.
The denominator of the payroll factor computed by the taxpayer is less than the total amounts shown on federal Form 940 for each taxable year; rather than use an average of totals on federal forms 940 and 941, the auditor should have used the amounts from Form 940. The denominator will be adjusted to reflect the totals shown on Form 940 for each tax year. The numerator computed by the taxpayer was in accordance with established policy and is accepted.
Sales Factor: The sales factor computed by the taxpayer included proceeds from capital loss transactions. These proceeds were removed by the auditor in adjusting the sales factor.
The department has previously ruled that gross receipts producing capital gains and losses are included in the sales factor. P.D. 88-172 (6/29/88) (copy enclosed). The auditor incorrectly eliminated these proceeds from the sales factor and an adjustment is necessary. However, there is insufficient information to allow the department to make an adjustment. The department will allow the taxpayer to submit a sales factor which includes the proceeds from capital loss transactions, provided that a detailed schedule describing the item sold, the gross proceeds, the cost basis and loss is supplied.
Please note that the law has been changed for taxable years beginning on or after January 1, 1990 (1990 Acts of Assembly, chapter 294), and only the net gain from the sale or other disposition of intangible property is included in the sales factor. A disposition of intangible property resulting in a loss is ignored in computing the sales factor.
Technical Management Fees: A portion of the income included in the foreign source income subtraction was listed on federal Form 1118 (Computation of Foreign Tax Credit) as income from the performance of services. You state that the income is the result of "technical management skills" provided by the taxpayer's employees residing in Saudi Arabia. The auditor disallowed this portion of the subtraction.
Although all of this income is treated as income from without the United States for federal purposes, the Virginia subtraction is limited to the specific types of income from without the United States set forth in Va. Code §58.1-302. Income from the performance of services is not one of the types of income qualifying as Virginia foreign source income.
The fact that the income may be from the performance outside the United States of a service which can be characterized as "technical" does not mean the income qualifies as Virginia foreign source income. The department has previously ruled on the qualification of technical fees as foreign source income. P.D. 86-209 (11/3/86) and P.D. 87-211 (9/15/87) (copies enclosed). You have failed to explain the nature of the management fees earned from without the United States. It does not appear that the fees qualify under the Virginia definition of "foreign source income." Therefore, the auditor's adjustment is correct.
Environmental Tax: on its federal return, the taxpayer reported a deduction for the amount of environmental tax paid. The amount of tax was not included in the taxpayer's Virginia taxable income. The auditor adjusted the taxpayer's income by adding the amount of the tax to the taxpayer's income, in accordance with Va. Code §58.1-402 B.4.
Va. Code §58.1-402 B.4. provides that any net income taxes or other taxes which are based on, measured by, or computed with reference to net income, imposed by Virginia or any other taxing jurisdiction and deducted in determining federal taxable income shall be added to Virginia taxable income.
The federal environmental tax, imposed by §59A. of the Internal Revenue Code (IRC), is based on the amount that federal modified alternative minimum taxable income exceeds $2 million. Modified alternative minimum taxable income is defined as alternative minimum taxable income with modifications. The computation of alternative minimum taxable income (AMTI) begins with federal taxable income, to which various adjustments and modifications for tax preference items are made. IRC §55(b)(2). Because the base for computing AMTI is regular taxable income, the basis of the environmental tax (modified AMTI) is computed with reference to taxable (net) income and, therefore, falls within the scope of Va. Code §58.1-402 B.4. The fact that there are various adjustments and additions to taxable income for tax preference items does not alter the fact that the environmental tax is a tax computed with reference to net (taxable) income. Therefore, the amount of the environmental tax deducted in determining federal taxable income must be added back when computing Virginia taxable income.
The audit report will be revised to adjust the denominator of the payroll factor. In all other respects, the assessment is correct. If you choose to submit detailed sales factor information, please send it to the department's Technical Services Section, P.O. Box 6-L, Richmond, Virginia 23282 within the next 30 days.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner