Document Number
06-13
Tax Type
Corporation Income Tax
Description
Permission to use an alternative method of apportionment denied
Topic
Allocation and Apportionment
Date Issued
02-07-2006



February 7, 2006




Re: Request for Ruling: Corporate Income Tax

Dear *****:

This will reply to your letter in which you request permission to use an alternative method of apportionment and allocation for ***** (the "Taxpayer").

FACTS


The Taxpayer is a New York ("State A") subchapter S Corporation that rented property in Virginia during the 2004 taxable year. The Taxpayer contends under Virginia's statutory method of apportionment, it would be subject to taxation on a greater portion of its overall taxable income when compared to income that is specifically attributable to the rental of real estate in Virginia. The Taxpayer requests that it be allowed to apportionment its income based on the ratio of its net Virginia income to its total taxable income.

RULING


Alternative Method

The policies that apply to requests for an alternative method of allocation and apportionment under Va. Code § 58.1-421 are well established. In order for a taxpayer to request an alternative method of allocation and apportionment, the taxpayer must file the return using the statutory method and pay any tax due. Next, the taxpayer is required to file an amended return proposing an alternative method and request a refund. The Department will not grant an alternative method of allocation and apportionment unless it determines that: (1) the statutory method produces an unconstitutional result; or (2) the statutory method is inequitable because it results in double taxation and the inequity is attributable to Virginia, rather than another state's method of apportionment. See Title 23 of the Virginia Administrative Code ("VAC") 10-120-280.

The Taxpayer contends that using the statutory apportionment method is inequitable because a positive property factor results in "an excess Virginia tax liability" in relationship to Virginia net income. The Taxpayer's proposed method would essentially allow for separate accounting for the Virginia real estate income.

The Department's long-standing policy holds the use of separate accounting in disfavor. See Department of Taxation v. Lucky Stores, Inc., 217 Va. 121, 225 S.E.2d 870 (1976). The fact that separate accounting produces a different result from the three­-factor formula is not sufficient to show the statutory apportionment method is inequitable.

Further, State A also uses a three-factor formula for apportionment. The Virginia property that creates a so called excess Virginia tax would likely have the opposite effect of reducing the Taxpayer liability in State A by reducing the percentage of property in State A. The Taxpayer is seeking a beneficial alternative method apportionment in Virginia, while retaining the benefit of including the Virginia property in the denominator of State A's apportionment factor.

Sales Factor

In reviewing the information provided, it appears that the Taxpayer is apportioning its sales incorrectly. The documentation includes no rental income receipts in the numerator of the Virginia sales factor. Virginia Code § 58.1-416 provides that the numerator of the sales factor shall include sales, other than the sales of tangible personal property if
    • the income producing activity is performed both in and outside Virginia and a greater proportion of the income producing activity is performed in Virginia than any other state, based on costs of performance.

An "income producing activity" is the act or acts in which a taxpayer engages for the purpose of producing sales, which, in the instant case, is the rental of the Virginia real property by the Taxpayer. The "cost of performance" includes the cost of all activities performed directly by the Taxpayer for the ultimate purpose of producing the sale to be apportioned. Depreciation, which occurred in Virginia, appears to be the largest expense incurred by the Taxpayer in renting the Virginia property. In addition, other operational expenses likely occurred in Virginia. As such, rental receipts from the Virginia real estate belong in the numerator of the Virginia sales factor. Accordingly, the receipts from the rental of the real property in Virginia would be reported in the numerator of the Virginia sales factor.

CONCLUSION


The Taxpayer has not followed Virginia regulatory procedures for requesting an alternative method of apportionment. Furthermore, the Taxpayer has not demonstrated that Virginia's statutory method of allocation and apportionment produces an unconstitutional result or is inequitable. Accordingly, permission to use an alternative method of apportionment is denied.

Further, the Taxpayer should make the necessary adjustments to the Virginia sales factor before filing its return. If after the return is field correctly, the Taxpayer believes it is entitled to an alternative method, it may file a request pursuant to Title 23 VAC 10-120-280.

The Code of Virginia and regulation sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this ruling, please contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
                • Sincerely,

                • Kenneth W. Thorson
                    • Tax Commissioner



AR/56548B

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46