Tax Type
Corporation Income Tax
Description
Adjusted the sales factor to remove foreign source income
Topic
Appropriateness of Audit Methodology
Assessment
Date Issued
10-01-2004
October 1, 2004
Re: § 58.1-1821 Application: Corporate Income Tax
Dear ***************:
This will reply to your letters in which you seek correction of the corporate income tax assessment issued to ***** (the "Taxpayer") for the taxable year ended December 31, 1998. I apologize for the delay in the Department's response.
FACTS
The Taxpayer filed an amended 1998 Virginia corporate income tax return, revising the denominator of the sales factor to include sales by the Taxpayer to a foreign country. The Department audited the Taxpayer's amended return, and the auditor adjusted the sales factor to remove foreign source income included in the denominator.
The Taxpayer contends that foreign source income arising from foreign sales was not included in the denominator of the sales factor. The Taxpayer uses its internal sales tax reporting system to compute the sales factor, and the system only accounts for sales delivered to a location within the United States. Sales made to foreign countries that were foreign source income were not included in the sales tax reporting system; therefore, such sales were excluded from the denominator of the sales factor.
The Taxpayer has paid the assessment issued as the result of the audit adjustment, and requests the Department to reverse the adjustment to the sales factor for the 1998 taxable year and issue a refund.
DETERMINATION
Virginia Code § 58.1-414 addresses the computation of the sales factor and provides:
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The sales factor is a fraction, the numerator of which is the total sales of the corporation in the Commonwealth during the taxable year, and the denominator of which is the total sales of the corporation everywhere during the taxable year, to the extent that such sales are used to produce Virginia taxable income and are effectively connected with the conduct of a trade or business within the United States and income therefrom is includable in federal taxable income.
Virginia Code § 58.1-302 defines the term "sales" as the gross receipts of the corporation from all sources (except dividends, which are allocated), whether or not such gross receipts are generally considered sales. The sales factor includes all gross receipts that are included in Virginia taxable income and are connected with the conduct of the taxpayer's trade or business within the United States.
The Taxpayer contends that qualifying foreign sales (not foreign source income) were not included in the denominator of the sales factor of the original return but were properly included in the denominator on the amended return. Therefore, the auditor's adjustments disallowing the foreign sales overstate the sales factor. To support its position, the Taxpayer has provided corrected information, which includes all qualifying sales.
The information provided by the Taxpayer reconciles to the net sales reported on the Taxpayer's federal income tax return. Accordingly, the sales factor has been adjusted to reflect the corrected amounts. Revised audit schedules are enclosed for your reference. Because the original assessment has been paid in full, a refund will be forthcoming based on the revised audit.
The Code of Virginia sections and regulation cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.state.va.us. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/47393E
Rulings of the Tax Commissioner