September 21, 2021
Re: § 58.1-1821 Application: Corporate Income Tax
Dear *****:
This will reply to your letter in which you seek a refund of corporate income tax paid by ***** (the “Taxpayer”) for the taxable years ended December 31, 2012, and 2013. I apologize for the delay in responding to your appeal.
FACTS
In Public Document (P.D.) 18-117 (6/8/2018), the Department instructed the Taxpayer to submit additional information in order to substantiate the refunds claimed on its amended Virginia 2012 and 2013 corporate income tax returns. The additional information was referred to an audit unit for review, and subsequently more information was requested. Based on a review of all of the information submitted, the audit staff determined that the Taxpayer had still failed to substantiate the refunds claimed. The Taxpayer appealed, contending that the information it has provided is sufficient to support the issuance of the refunds.
DETERMINATION
Generally, Virginia Code § 58.1-1823 allows a taxpayer to file an amended return within three years from the last day prescribed by law for the timely filing of the return. The amended return shall supply all the information required in an original return and, in addition, the taxpayer must attach a statement explaining the changes made and the reasons for the changes. See Title 23 of the Virginia Administrative Code (VAC) 10-20-180 A 2.
If the Department is satisfied, by evidence submitted to it or otherwise, that the tax assessed and paid upon the original return exceeds the proper amount, the Department may reassess the taxpayer and order that any amount excessively paid be refunded to him. Any order of the Department denying such reassessment and refund, or the failure of the Department to act thereon within three months shall, as to matters first raised by the amended return, be deemed an assessment for the purpose of enabling the taxpayer to pursue the remedies allowed under Chapter 18 of Title 58.1 of the Code of Virginia.
Virginia Apportionment
The Taxpayer admits that one of its business sectors incorrectly apportioned sales to Virginia on the basis of payroll. The sector actually included contracts for both sales of tangible personal property, services, and a combination of both. When it discovered the mistake, the Taxpayer submitted amended returns using the correct apportionment methodologies for both sales of tangible personal property and all other sales.
Virginia statutes and regulations clearly set forth the apportionment methodology used to apportion sales to Virginia. In the case of sales of tangible personal property, Virginia attributes sales on a destination basis. See Virginia Code § 58.1-415 and Title 23 VAC 10-120-220. Under Virginia Code § 58.1-416, sales, other than sales of tangible personal property, are deemed in Virginia if:
- The income-producing activity is performed in Virginia; or
- 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 in any other state, based on costs of performance.
Pursuant to Title 23 VAC 10-120-230, sales of services from multistate activities are only included in the numerator of the Virginia sales factor if the greater proportion of the income-producing activity is performed in Virginia than in any other state, based on costs of performance. The regulation defines “cost of performance” as the cost of all activities directly performed by the taxpayer for the ultimate purpose of producing the sale to be apportioned. “Income producing activity” is the act or acts directly engaged in by the taxpayer for the ultimate purpose of producing the sale to be apportioned. Indirect expenses such as interest or activities produced by independent contractors are not included.
Based on Virginia statutes and regulations, the Taxpayer failed to properly calculate its sales factor for this business sector on its original returns. The Taxpayer was required to report the sales of tangible personal property resulting from this sector based on the destination to which the property was delivered, whether that be within or without Virginia. Revenue resulting from services or other than tangible personal property should have been reported based on the Taxpayer’s cost of performance.
Amended Returns
Because Virginia Code § 58.1-1823 allows for a refund only in cases in which the Department is satisfied by the evidence submitted to it or otherwise that the tax originally paid exceeds the proper amount, the Department has authority to scrutinize amended returns that claim refunds. A review of all of the information submitted to the Department in this case, including additional information submitted while this appeal was pending, indicates that the Taxpayer has provided some generalized explanations concerning the changes as well as schedules in support of the amended sales factor computations. While the explanations have helped the Department understand the reasons why the amended returns were filed, the schedules themselves still lack a proper factual foundation to enable the Department to verify the amount of refund claimed. A proper factual foundation could be established, for example, by documentation, such as journals, customer ledgers and invoices, showing the delivery destination of tangible personal property or accounting records that demonstrate where the greatest proportion of costs should be attributed for a service contract.
Further, workpapers provided while this appeal was pending do not reconcile with the Virginia sales reported on the original or amended returns for the business sector at issue. Documentation showing the computations should always reconcile to the amounts ultimately reported on the return. Without clear amounts showing the trail to source documents, it is impossible for the Department to determine the accuracy of the refund amount claimed.
Moreover, the Taxpayer also provided several worksheets for a specific entity, in an effort to show that this entity accounted for most of the change to the sales factor computation. This entity, however, does not appear to be included in the Taxpayer’s affiliated group and was not reported on the combined return schedules.
To date, the Taxpayer has not established a sufficient factual foundation to satisfy the Department that the refund amounts claimed are correct. See Virginia Code § 58.1-1823. Therefore, the refunds claimed on the amended 2012 and 2013 returns are denied.
The Code of Virginia sections, regulations and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3473.M