Document Number
04-32
Tax Type
Bank Franchise Tax
Enterprise Zone Real Property Investment Tax Credit
Income Tax
Description
Historic structure renovation tax credits
Topic
Credits
Date Issued
07-14-2004

July 14, 2004



Re: Request for Ruling: Income Tax and Bank Franchise Tax

Dear ********:

This is in response to your letter in which you request a ruling concerning the Enterprise Zone Real Property Investment Tax Credit and the Bank Franchise Tax.
FACTS

You represent a taxpayer that is renovating a historic structure, and several questions have been raised concerning tax credits that may be available for such a renovation. Your questions will be addressed separately below.
RULING

Enterprise Zone Real Property Investment Tax Credit

Your first question relates to whether a single partner, member or shareholder of a "qualified zone resident" can claim, through several partnerships, limited liability companies or s-corporations, respectively, more than $125,000 of Real Property Improvement Tax Credit ("RPI Credit") in a five-year period. Unstated, but assumed in the facts you present, is that each of the pass-through entities is itself an owner or tenant of a separate, different piece of real property located in an enterprise zone that the respective owner or tenant expanded or rehabilitated.

The RPI Credit provides a refundable income tax credit to small qualified zone residents for a portion of capital investments made in an enterprise zone. A "qualified zone resident" is defined under Va. Code § 59.1-280.1(A) as "an owner or tenant of real property located in an enterprise zone who expands or rehabilitates such real property to facilitate the conduct of a trade or business by such owner or tenant within the enterprise zone."

Virginia Code § 59.1-280.1(C) provides "in no event shall the cumulative credit allowed to a small qualified zone resident pursuant to this subsection exceed $125,000 in any five-year period." Further, Va. Code § 59.1-280.1 (F) states, "in the case of a partnership, limited liability company or S corporation, the term 'qualified zone resident' as used in this section means the partnership, limited liability company or S corporation" and also that "[c]redits granted to a partnership, limited liability company or S corporation shall be passed through to the partners, members or shareholders, respectively."

Based on the statute, the $125,000 limitation applies to the entity that is a qualified zone resident whether it is a sole proprietorship, partnership, limited liability company, or corporation. Given the plain language of the statute, individuals receiving credits from pass-through entities are not subject to the $125,000 limitation. As such, an individual receiving RPI Credits from more than one qualified zone resident pass­through entity could claim more than $125,000 of RPI Credits in a five-year period.

Bank Franchise Tax

Your second question concerns how the Historic Rehabilitation Tax Credit ("HR Credit") applies to banks subject to the bank franchise tax. Specifically, you ask if the HR Credit may be used to offset both the state and local portions of the bank franchise tax.

Virginia Code § 58.1-339.2 establishes the HR Credit and provides that "any individual, trust or estate, or corporation incurring eligible expenses in the rehabilitation of a certified historic structure shall be entitled to a credit against the tax imposed by [inter alia] Chapter 12 (§ 58.1-1200 et seq.)." [Emphasis added.]

Chapter 12 of Title 58.1 of the Code of Virginia addresses the bank franchise tax. Specifically, Virginia Code § 58.1-1202 imposes a state bank franchise tax. The state bank franchise tax is set at the rate of $1 on each $100 of net capital, pursuant to Va. Code § 58.1-1204.

Any city, town, or county "of the Commonwealth in which is located a bank may, by ordinance, impose a tax not to exceed 80 percent of the state rate of taxation on each $100 of the capital of such bank located in such city, town, or county." See Va. Code §§ 58.1-1208 through 1210. These are permissive statutes and do not require a locality to impose a tax. In fact, not all eligible localities have imposed the tax in the past. Further, in order to impose the tax, a city, town, or county must enact an ordinance.

The intent of Va. Code §§ 58.1-1208 through 58.1-1210 is to give cities, towns, and counties permission to impose a tax on banks. If it elects to do so, the locality imposes the tax pursuant to local ordinance. This is consistent with the sections of the Code of Virginia that authorize localities to impose the BPOL tax (Va. Code § 58.1-3703), the recordation tax (Va. Code § 58.1-3800), the video programming excise tax (Va. Code § 58.1-3818.1), and the food and beverage tax (Va. Code § 58.1-3833). The local bank franchise tax is distinguished from these other local taxes solely by the fact that it is administered by the Department instead of by local officials. It is still a purely local tax.

Because cities, towns, and counties impose the bank franchise tax by local ordinance, the local portion of the bank franchise tax is not a tax imposed under Chapter 12 (§ 58.1-1200 et seq.). As such, the HR Credit cannot be used against the bank franchise tax imposed by cities, towns, and counties.

It is clear, however, that the HR Credit and the other credits may be claimed against the entire state bank franchise tax as computed under Va. Code §§ 58.1-1202 through 58.1-1204. Thus, the question becomes one of the order in which the credit may be claimed.

Rules for Ordering the Application of Credits

Banks that are subject to both the state and local bank franchise taxes are permitted a credit against the state tax under Va. Code § 58.1-1213 for taxes paid to cities, towns and counties. The credit is allowed for an amount not to exceed the amount of tax actually paid to a locality.

In addition, there are a number of credits a bank may use to offset the bank franchise tax. They include the Major Business Facility Jobs Tax Credit (Va. Code § 58.1-439), the HR Credit (Va. Code § 58.1-339.2), the Worker Retraining Tax Credit (Va. Code § 58.1-439.6), the Employees with Disabilities Tax Credit (Va. Code § 58.1-439.11), the Enterprise Zone General Business Tax Credit (Va. Code § 59.1-280), the Enterprise Zone Investment Tax Credit (Va. Code § 59.1-280), the Enterprise Zone Real Property Investment Tax Credit (Va. Code § 59.1-280.1), and the Enterprise Zone Improvement Tax Credit (Va. Code § 59.1-280.1).

In Public Document ("P.D.") 95-240 (9/22/95), the Department set forth a comprehensive policy with respect to Virginia income tax credits. This policy would also apply to credits against the state bank franchise tax. The ordering rules under P.D. 95­240 require a taxpayer to first claim credits that are structural in nature and are considered by the Department to be a reduction in tax liability, rather than a credit against the tax. The credit against the state bank franchise tax for taxes paid to cities, towns, and counties pursuant to Va. Code § 58.1-1213 is the only credit against the bank franchise tax that would fall under this category. Accordingly, in applying credits against the bank franchise tax, a bank would first apply the credit for tax paid to localities and then use the other available credits against the remaining tax in accordance with P.D. 95-240. The effect of the ordering rules is that the HR Credit cannot offset the local bank franchise tax.

The Code of Virginia sections and public documents 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 other questions regarding this response, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.

                • Sincerely,



                  Kenneth W. Thorson
                  Tax Commissioner


AR/48997O


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46