10-16 | Virginia Tax

Tax Type

Bank Franchise Tax

Description

Taxpayer believes it meets the definition of a "bank" for purposes of Virginia's bank franchise tax

Topic

Classification

Definitions

Filing Status

Date Issued

03-01-2010

March 1, 2010

Re: Ruling Request: Bank Franchise Tax

Dear *****:

This is in response to your letter in which you request a ruling that ***** (the "Taxpayer") is subject to Virginia's bank franchise tax. I apologize for the delay in responding to your letter.

FACTS

In 2004, the Taxpayer, a nationally chartered bank, acquired ***** (the "Trust Company"), which had its sole office in Virginia. The Trust Company did not accept deposits from customers. The Taxpayer filed its 2009 bank franchise tax return apportioning capital to Virginia based on a cost of performance factor similar to those used by financial corporations subject to income tax. The Department rejected the return, asserting that the Taxpayer's limited activities did not constitute a banking business conducted in Virginia. The Department concluded that the Taxpayer should be filing a corporate income tax return.

The Taxpayer believes that it meets the definition of a "bank" for purposes of the bank franchise tax. The Taxpayer requests a ruling that it is a bank for bank franchise tax purposes and the Department must accept its bank franchise tax return in lieu of other state and local taxes.

RULING

Virginia Code § 58.1-1202 requires every bank or trust company to pay an annual tax measured by its net capital as defined in Va. Code § 58.1-1205. The bank franchise tax is paid in lieu of Virginia's income tax and a number of other state and local taxes.

The Taxpayer asserts that it is a nationally chartered bank that has an office in Virginia. Under Va. Code § 58.1-1201, a bank includes:

- any incorporated bank, banking association, savings bank that is a member of the Federal Reserve System, or trust company organized by or under the authority of the laws of the Commonwealth and any bank or banking association organized by or under the authority of the laws of the United States, doing business or having an office in the Commonwealth or having a charter which designates any place within the Commonwealth as the place of its principal office, and any bank which establishes and maintains a branch in this Commonwealth under Article 5.1 (§ 6.1-44.1 et seq.) of Title 6.1 or Article 5.2 (§ 6.1-44.15 et seq.) of Title 6.1, whether such bank or banking association is authorized to transact business as a trust company or not, and any joint stock land bank or any other bank organized by or under the authority of the laws of the United States upon which the Commonwealth is authorized to impose a tax.

However, in Public Document (P.D.) 89-145 (4/28/1989), the Department has interpreted this definition to mean a corporation organized as a bank under Virginia or United States law which:

- (1) conducts a banking business in this Commonwealth;
  (2) maintains an office in this Commonwealth for the conduct of a banking business; or
  (3) has a charter which designates any place within this Commonwealth as the place of its principal office regardless of whether or not the bank or banking association is authorized to transact business as a trust company.

Although P.D. 89-145 refers to a regulation that has been repealed, the Department's policy remains in effect.

Based on the information provided, the Taxpayer does not have a charter designating any place within Virginia as its principal place of business. As such, a determination must be made as to whether the Taxpayer is conducting a banking business in Virginia.

While the statute does not specifically define what it means to be conducting a "banking business," Va. Code § 58.1-1204.1 provides that banks that do not operate for a full year pay bank franchise tax on a prorated basis determined by when the bank begins transacting business. Under this section, "transacting business" means "accepting deposits from customers in the regular course of doing business."

Further, pursuant to Va. Code § 58.1-1211, the mechanism for distributing the local portion of the bank franchise tax is based on deposits located at bank branches. This is also the basis for the prescribed method for apportioning bank franchise tax for multistate banks. See P.D. 94-366 (12/08/1994).

Accordingly, in order to be conducting a banking business in Virginia, a bank must be accepting deposits from customers in the regular course of doing business. Pursuant to this policy, the Department ruled in P.D. 89-145 that a corporation acting as trustee for a common trust fund was not conducting a banking business in Virginia. Based on this ruling and the facts provided, the Taxpayer was not subject to the bank franchise tax for the 2009 tax year.

Accordingly, the Taxpayer must file a Virginia corporate income tax return for all of the taxable years its trust office has operated in Virginia. The returns and any required tax payments should be sent within 30 days of the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: *****.

In addition, the Taxpayer should contact the locality in which its trust office operates in order to determine the local business taxes for which it may be liable.

The Code of Virginia sections and public document 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, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-3538654165.o

Rulings of the Tax Commissioner