May 5, 2020
Re: § 58.1-1821 Application: Corporate Income Tax
Dear *****:
This will respond to your letter in which you seek correction of the corporate income tax assessments issued to ***** (the “Taxpayer”) for the taxable years ended March 31, 2014, and March 31, 2015. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer filed consolidated corporate income tax returns for the taxable years ended March 31, 2014, and March 31, 2015. The Department audited the Taxpayer and made various adjustments to the returns. The Taxpayer does not dispute the adjustments. In response to the audit, however, the Taxpayer advised the Department that it wished to elect the modified apportionment method for manufacturing companies permitted under Virginia Code § 58.1-422. The Department denied the request on the basis that the Taxpayer had not already made the election on a timely filed original income tax return. The Taxpayer appeals, contending it may make the election at any time it would be permitted to timely file an amended return.
DETERMINATION
Under Virginia Code § 58.1-422, manufacturing companies may elect to use a modified method of apportioning their Virginia taxable income. A qualified manufacturing company that elects the modified apportionment method under Virginia Code § 58.1-422 will make one election, and may not revoke that election for three taxable years. The manufacturing company will be required to use the apportionment factor that is effective at the time the modified apportionment method election is made, and any apportionment factor that becomes effective in the first three taxable years of the election. See Public Document (P.D.) 13-6 (1/1/2013). A manufacturing company that elects to use the modified method of apportionment will be subject to additional taxes if the manufacturing company’s average annual number of full-time employees for the first three taxable years that it used the modified method of apportionment is less than 90 percent of its base year employment, or if the average wages of the manufacturing company’s full-time employees, as certified by the manufacturing company, is not greater than the lower of the state or local average weekly wage for its industry.
The Taxpayer argues that the statute does not require the election to be made on a timely filed original return. Therefore, the Taxpayer reasons that a manufacturing company has the right to choose the modified apportionment method any time it may file an amended return within the limitations periods for filing amended returns under Virginia Code § 58.1-1823. In essence, the Taxpayer asserts that a manufacturing company has the ability to make the election retroactively.
The Department disagrees. The Virginia Supreme Court has ruled that statutes should not be interpreted in a manner that would make a portion of it useless, repetitious or absurd. See Jones v. Conwell, 227 Va. 176, 181, 314 S.E.2d 61, 64 (1984). Virginia Code § 58.1-422 contemplates that a manufacturing company will make the election, then receive the tax benefit effectively in exchange for agreeing to maintain a certain level of employment and wages. Should those wage or employment requirements not be met, the statute directs the Department to assess additional taxes plus interest against the taxpayer in accordance with the general three factor apportionment formula provided under Virginia Code § 58.1-408 C. See Virginia Code § 58.1-422 C. In addition, the statute requires that if an election is made, it may not be revoked for three years. See Virginia Code § 58.1-422 B.
If taxpayers were allowed to simply wait to the end of a three-year period and see if they met the wage and employment requirements before making the election, this portion of the statute would effectively be rendered meaningless. According to House Doc. No. 5, Executive Summary of the Joint Subcommittee to Study the Benefits of Adopting a Single Sales Factor to Apportion the Income of Multistate Corporations for Purposes of the Corporation Income Tax (2008), proponents of the single sales factor testified that it would remove the existing disincentive for increasing Virginia employment and capital investment by manufacturers. Based on the subcommittee’s findings, the purpose of the additional requirements was to provide incentives to manufacturers to invest in Virginia. Allowing manufacturers to wait until they know the wage and employment requirements have been met during the time period would remove the incentive created by the election. It would permit taxpayers to simply make the election retroactively if they happen to meet the requirements to claim refunds, including interest, on amended returns, essentially eliminate the possibility that revocations could ever occur during the required election period, and effectively abolish the Department’s role in enforcing requirements and making corrective assessments as contemplated by the statute.
Based on the foregoing, the Taxpayer’s request to claim the modified apportionment method for manufacturers for the taxable years ended March 31, 2014, and March 31, 2015, is not granted. Accordingly, the outstanding balances on the assessments remain due and payable. Updated bills, with interest accrued to date, will be sent to the Taxpayer shortly. No additional interest will accrue provided the bills are paid within 30 days from the date indicated on the bill statement.
The Code of Virginia sections and public document cited are available on-line at www.tax.virginia in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/2051.M