94-175 | Virginia Tax

Tax Type

Corporation Income Tax

Description

Apportionment of income; Three-factor formula

Topic

Allocation and Apportionment

Date Issued

06-08-1994

June 8, 1994

Re: Va. Code Sec. 58.1-1821 Application: Corporate Income Tax
********************

Dear*****************

This will reply to your letter dated April 22, 1992 in which you protest certain audit adjustments pertaining to the combined return of ******** (the "Taxpayer"), and************** ("S1") I apologize for the inexcusable delay in responding.

FACTS

The Taxpayer filed a combined Virginia return with S1 for the taxable year ended March 31, 1990. The Taxpayer and S1 file a consolidated return for federal income tax purposes. S1 is a leasing company which leases moveable tangible personal property to the Taxpayer. S1's only contact with Virginia is the presence of its moveable tangible personal property in Virginia as needed by the Taxpayer's operation.

In computing Virginia taxable income, these corporations used a one factor mileage apportionment formula to apportion income. The same percentage factor was utilized for both the Taxpayer and Sl. On the initial audit report, the Taxpayer's apportionment factor was changed to a three factor formula, with sales and moveable property computed using a "Virginia use percentage" (use in Virginia versus use everywhere). Payroll and other property were determined on a state-by-state basis.

For S1, the Virginia property factor was determined by the Virginia use percentage. S1's payroll factor was zero, since Sl had no Virginia employees. S1's sales factor was adjusted to zero in accordance with Virginia Regulation (VR) 630-3-416.

An assessment was issued, which the Taxpayer has paid. Upon further review, the audit report was revised to remove Sl from the combined filing for lack of nexus. Additional tax was assessed.

You have requested a clarification of S1's nexus status in regard to the disallowance of the combined filing. Also, you object to the zero sales factor adjustment for S1. You assert that S1's sales factor numerator should be derived by applying the Virginia use percentage to the lease proceeds.

DETERMINATION

Nexus

Va. Code Sec. 58.1-302 defines income and deductions from Virginia sources as:

- Items of income, gain, loss and deduction attributable to: a. The ownership of any interest in real or tangible personal property in Virginia; or b. A business, trade, profession or occupation carried on in Virginia.

S1 has income from Virginia sources, since it leases tangible personal property which is used in Virginia. However, S1's only contact with Virginia is the presence of its tangible personal property in Virginia as needed by the Taxpayer's operation. In determining whether a corporation's activities are sufficient to create nexus in Virginia, VR 630-3-401 G provides for a case-by-case analysis of the nature, continuity, frequency and regularity of the in Virginia compared to such activities everywhere. The department has ruled that an activity conducted within Virginia on a regular and continuous basis shall not be considered de minimus. See enclosed Public Document ("P.D.") 92-230 (11/9/92), Copy attached. Because S1 leases tangible personal property on a continuous and ongoing basis to the Taxpayer for use in it's Virginia, S1 has sufficient nexus with Virginia to subject it to the corporate income tax. However, as discussed in the following paragraphs, S1 will not have a positive Virginia apportionment factor.

Sales Apportionment Factor

The department has previously ruled that only motor carriers may use a single factor in accordance with Va. Code Sec. 58-1-417. See enclosed P.D. 90-158 (9/6/90), copy attached. Accordingly, the department's auditor is correct in requiring the Taxpayer and Sl to utilize a three factor formula.

VR 630-3-416 provides that the numerator of the sales factor shall include sales, other than the sales of tangible personal property (such as leasing activity) if:

- 2. the income producing activity is performed both in and outside Virginia and a greater proportion of the income producing activity is performed in Virginia than any other state, based on costs of performance.

An "income producing activity" is the act or acts in which a taxpayer engages for the purpose of producing sales, which in the instant case is the leasing of tangible personal property by Sl. The "cost of performance" includes the cost of all activities directly performed by the taxpayer for the ultimate purpose of producing the sale to be apportioned. For any leasing income of Sl to be included in the Virginia sales numerator, the costs of producing the leasing income must be greater in Virginia than in any other state.

The lease terms between the Taxpayer and Sl consist of a flat monthly fee for the use of tangible personal property. With this type of an arrangement, it unlikely that Sl's cost of performance higher in Virginia than in any other state. Therefore, the auditor's computation of a zero Virginia sales numerator stands as originally computed.

Property Apportionment Factor

Sl has tangible personal property located in Virginia solely to the extent that the Taxpayer brings this property into Virginia for use in the regular conduct of the Taxpayer's business. However, there is no evidence that Sl has knowledge or control over the use or location of the property by the Taxpayer.

Because there is no evidence that S1 has any intention to direct the use of its tangible personal property to Virginia markets or enjoyed any rights or privileges from Virginia as a result of such use, the department finds that the Sl's property presence is so de minimus as not to warrant inclusion in the property factor. Therefore, a zero Virginia property factor for S1 is appropriate in this circumstance.

Combined Return

In the first year two members of a corporate affiliated group are subject to Virginia income tax, the group may elect either separate, combined, or consolidated return filing. VR 630-3-442 provides that the election is made upon the filing of the first return for a 12 month taxable year beginning on or after the date of organization or acquisition of the corporations creating the affiliated group.

Based on the facts in your letter and review of the applicable tax returns, the Taxpayer and Sl made a valid election to file a combined Virginia return. Therefore, I have withdrawn the audit adjustment disallowing the combined filing for the Taxpayer and S1 for taxable year ending March 31, 1990 and subsequent years.

Conclusion

Accordingly, the assessment currently outstanding for taxable year ending March 31, 1990 (**********) is correct. However, the three failure to file penalty assessments issued to S1 have been abated in full. Attached is a schedule indicating the tax liability plus interest accrued through the date of this letter. The assessment should be paid in full within 30 to avoid accrual of additional interest. Please forward your payment to ****** c/o Office of Tax Policy, the Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23282.

Sincerely,

Danny M. Payne
Tax Commissioner

Rulings of the Tax Commissioner