Tax Type
Corporation Income Tax
Description
How are corporation domiciled outside of Virginia taxed?
Topic
Allocation and Apportionment
Basis of Tax
Property Subject to Tax
Date Issued
04-16-2002
April 16, 2002
Re: Request for Ruling: Corporate Income Tax
Dear *****:
This will reply to your letter in which you request a ruling on behalf of your client, (the "Taxpayer"), concerning the sourcing of income from intangible personal property for apportionment purposes.
FACTS
The Taxpayer is a corporation domiciled outside of Virginia. A portion of the Taxpayer's income is derived from licensing patents and related know-how to corporations located in and without Virginia. The Taxpayer requests a ruling regarding the proper treatment of this income in Virginia's apportionment formula.
RULING
Code of Virginia § 58.1-416 provides that sales, other than sales of tangible personal property, are in the Commonwealth if:
-
- 1. The income-producing activity is performed in the Commonwealth; or
2. The income-producing activity is performed both in and outside the Commonwealth and a greater proportion of the income-producing activity is performed in the Commonwealth than in any other state, based on costs of performance.
- 1. The income-producing activity is performed in the Commonwealth; or
Pursuant to Title 23 of the Virginia Administrative Code ("VAC") 10-120-230, sales of services from multistate activities are only included in the numerator of the Virginia sales factor if the greater proportion of the income-producing activity is performed in Virginia than in any other state, based on costs of performance. The regulation defines "cost of performance" as the cost of all activities directly performed by the taxpayer for the ultimate purpose of producing the sale to be apportioned.
You indicate that the majority of costs associated with the licensing of the patents and know-how is conducted at the Taxpayer's offices located in its state of commercial domicile. As such, for Virginia income tax purposes, the royalty income resulting from the licensing of the patents and know-how would be included in the denominator but not the numerator of the sales factor of the Virginia three-factor apportionment formula.
However, not all of the royalties would be included in the sales factor. In Public Document ("P.D.") 01-194 (12/3/01), the department ruled that receipts would be included in the computation of the sales factor only to the extent they are included in a consolidated return. The Taxpayer receives royalties from both affiliated and unrelated entities. As such, intercompany receipts eliminated in determining consolidated income for Virginia income tax purposes would not be included in the computation of the consolidated sales factor.
This ruling is based on the facts as presented in your letter. Any change in facts may lead to a different result. Copies of the Code of Virginia, regulations and public documents cited are available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions regarding this response, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/38618B
Rulings of the Tax Commissioner