Tax Type
Corporation Income Tax
Description
Federal income tax return using a figure that was net of customer rebates
Topic
Clarification
Date Issued
04-11-2005
April 11, 2005
Re: § 58.1-1821 Application: Corporate Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the corporate income tax assessment issued to ***** (the "Taxpayer") for the taxable year ended December 31, 2000.
FACTS
The Taxpayer reported total sales on its federal income tax return using a figure that was net of customer rebates. The total sales included in the denominator of the sales factor on the Taxpayer's Virginia corporate income tax return did not agree with the total sales reported on the federal income tax return. The Department's auditor adjusted the denominator of the sales factor to agree with total sales reported on the federal return. This adjustment reduced the denominator of the sales factor and resulted in more income apportioned to Virginia.
The numerator of the sales factor was not adjusted to account for customer rebates because, according to the Taxpayer, its database system cannot allocate rebates to a particular state. Because of its inability to allocate rebates by state, the Taxpayer believes it is appropriate and more consistent to use total gross sales in the numerator and denominator of the sales factor. Accordingly, the Taxpayer requests the Department to abate the assessment resulting from the adjustment to the denominator of the sales factor.
DETERMINATION
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.
Under Title 23 of the Virginia Administrative Code ("VAC") 10-120-20, sales of tangible personal property are reduced to account for returns and allowances so that they are in the sales factor only to the extent they are included in federal taxable income. In this case, the Taxpayer grants rebates to its customers when certain criteria are met. Such rebates are considered to be allowances for purposes of computing the sales factor. Accordingly, the auditor was correct to include the rebates as a reduction in total sales, as reflected on the federal corporate income tax return, when computing the denominator of the sales factor for Virginia purposes.
Title 23 VAC 10-120-220 defines when a sale of tangible personal property is considered a Virginia sale. Because returns and allowances follow sales, the Department will consider returns and allowances for inclusion in the numerator of the sales factor if they can be allocated to Virginia in the same manner as sales as prescribed by Title 23 VAC 10-120-220. The Taxpayer has indicated that it cannot allocate sales rebates to a particular state. The Taxpayer's choice of accounting system features cannot control the tax result. As such, no rebates are included in the numerator of the sales factor.
Based on the foregoing, I find that the assessment is correct. Please remit payment of the tax and updated interest as reflected on the enclosed schedule to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *****. Payment must be received within 30 days to avoid the accrual of additional interest.
The Code of Virginia and regulation sections and public document cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions concerning this determination, you may contact ***** at *****.
-
-
-
-
-
-
-
- Sincerely,
-
-
-
-
-
-
-
-
-
-
-
-
-
Kenneth W. Thorson
Tax Commissioner
-
-
-
-
-
-
AR/52813B
Rulings of the Tax Commissioner