Tax Type
Partnerships
Description
Virginia income tax treatment of nonresident members of a Virginia LLC
Topic
Allocation and Apportionment
Persons Subject to Tax
Date Issued
06-24-2004
June 24, 2004
Re: Request for Ruling: Income Tax
Dear ***********:
This will reply to your request for a ruling on the Virginia income tax treatment of nonresident members of a Virginia limited liability company ("LLC"). I apologize for the delay in the Department's response.
FACTS
The LLC, organized in another state, enters into purchase agreements with manufacturers. Members order from the manufacturers through the LLC. The manufacturers then ship the merchandise directly to the members but bill the LLC for the products. The LLC then bills the members. The members, in turn, reimburse the LLC.
Discounts and rebates, based on the purchases made by the members, are paid by the manufacturers to the LLC. The rebate proceeds are invested. On a quarterly basis, a draw is issued to each member based on the percentage of rebate proceeds produced by their purchases.
The members of the LLC consist of both Virginia resident and nonresident individuals, partnerships and corporations. Members are required to make a capital contribution that is held by the LLC as collateral. The day-to-day operations are controlled by an executive director and a secretary leased from an unrelated third party. All real and personal property used by the LLC is owned by the executive director.
The LLC is considering a move to Virginia. You request a ruling that the nonresident members of the LLC are not subject to Virginia income tax based on the activities of the LLC.
RULING
Trade or Business
You state that the LLC would not be recognized as a business by the Internal Revenue Service ("IRS"). The IRS will consider a taxpayer to be engaged in a trade or business if the primary purpose of the taxpayer's activity is to produce income or profit and the taxpayer continually and regularly conducted the activity. A determination as to whether a taxpayer is carrying on a trade or business requires an examination of the facts of each case by the IRS.
Virginia's conformity to federal law is established in Va. Code § 58.1-301, which provides that the terms used in the Virginia income tax statutes will have the same meaning as used in the Internal Revenue Code ("IRC"). Virginia conforms to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income ("FAG/") for individuals and federal taxable income for corporations. As such, if the LLC generates federal taxable income, such income will be subject to Virginia income tax.
In Public Document ("P.D.") 97-343 (8/28/97), the Department ruled that it would follow the federal election made by a limited liability company pursuant to the "check the box" regulations under Treasury Regulation § 301.7701-1 et seq. In fact, Virginia's conformity statute requires such a ruling because a limited liability company that is treated as a partnership or a disregarded entity for federal income tax purposes will have no federal taxable income as a starting point for computing its Virginia taxable income.
As such, if the LLC elects to be treated as a corporation for federal income tax purposes, the LLC would be a separate entity subject to Virginia corporate income tax. If, however, the LLC elects to be treated as a partnership, the members would include the income or loss of the LLC in determining their Virginia taxable income.
Apportionment Factors
You contend that the LLC would not have any positive apportionment factors because it has no property or payroll in Virginia. If the LLC will not be treated as a separate entity for federal taxation purposes, it will not have any federal taxable income and the members will be considered the owners of all the LLC's assets and liabilities. Consequently, the Department will regard the members as having the attributes and conducting the activities of the LLC. Thus, the members will include the income or loss of the LLC in determining Virginia taxable income and the LLC's property, payroll and sales in determining income apportioned to Virginia. See P.D. 97-343.
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- Virginia Code § 58.1-409 provides that:
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- The property factor is a fraction, the numerator of which is the average value of the corporation's real and tangible personal property owned and used or rented and used in the Commonwealth during the taxable year and the denominator of which is the average value of all the corporation's real and tangible personal property owned and used or rented and used during the taxable year and located everywhere, to the extent that such property is used to produce Virginia taxable income and is effectively connected with the conduct of a trade or business within the United States and income therefrom is includable in federal taxable income. [Emphasis added.]
The facts presented indicate that the LLC leases and uses all real and personal property from the executive director. Provided that the executive director's real and personal property used by the LLC are located in Virginia, the LLC would have a positive property factor for purposes of apportionment. Thus, each member receiving income form the LLC would be considered to have property in Virginia and would be required to file the appropriate income tax return and remit income tax on their income from Virginia sources.
This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia sections, regulations, and public documents cited, along with other reference documents and forms, are available on-line 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 additional questions regarding this ruling, please 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
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AR/48348B
Rulings of the Tax Commissioner