June 25, 2025
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 years ended December 31, 2018, and 2019.
FACTS
The Taxpayer, a telecommunications company, was a single-member limited liability company (LLC) 100% owned by ***** (the “Corporation”), a separate filer for Virginia corporate income tax purposes. The Taxpayer filed 2018 and 2019 Virginia returns by a noncorporate telecommunications company (the “noncorporate returns”) and minimum tax returns (the “minimum tax returns”). It subsequently filed amended returns for the taxable years at issue reflecting certain federal adjustments.
The amended returns compared the minimum tax to the Taxpayer’s corporate income tax liability as if it had filed a corporate income tax return on a separate basis. Because the minimum tax was greater than the income tax liability for the 2018 taxable year, the Taxpayer reported the difference as a minimum tax due. Because the income tax liability was greater than the minimum tax for the 2019 taxable year, the Taxpayer reported no minimum tax due.
Under review, the Department determined that the minimum tax should have been compared to the combined corporate income tax liability of the Taxpayer and the Corporation. The adjustments resulted in assessments being issued for the 2018 and 2019 taxable years. The Taxpayer filed an application for correction, contending that the minimum tax amount should have only been compared to its own income tax liability as if it had filed a corporate income tax return on a separate basis because neither it nor the Corporation filed as part of a consolidated or combined group.
DETERMINATION
Virginia Code § 58.1-400.1 A provides that a telecommunications company is subject to a minimum tax, in lieu of the income tax, based on its gross receipts for the calendar year that ends during the taxable year if the corporate income tax is less than the minimum tax. Telecommunications companies that are treated as pass-through entities for federal income tax purposes are also subject to the minimum tax.
Under Title 23 of the Virginia Administrative Code (VAC) 10-120-89 A, a noncorporate telecommunications company is deemed to have paid corporate income tax for purposes of computing the minimum tax, “to the extent that the income of [the company] is subject to Virginia income tax at the entity level or in the hands of a partner or other person for whom the income retains its character.”
If the income of the noncorporate telecommunications company is not deemed to be subject to Virginia income tax under Title 23 VAC 10-120-89 A, the entity pays the minimum tax. See Title 23 VAC 10-120 89 B 1. If the income of the noncorporate telecommunications company is deemed to be subject to Virginia income tax, then the minimum tax liability is compared to the income tax liability of the entity computed as if it were a corporation. See Title 23 VAC 10-120-89 B. If the minimum tax exceeds the entity’s income tax computed as if it were a corporation, the entity must pay the difference between the minimum tax and the corporate income tax. See Title 23 VAC 10-120-89 B 1. If the corporate income tax is greater than the minimum tax, the entity is not required to pay the difference merely because it had to compute the corporate income tax for purposes of making the minimum tax comparison. See Title 23 VAC 10-120-89 B 2.
As a separate corporation, a telecommunications company would pay the greater of the income tax or the minimum tax, but never both. See Public Document (P.D.) 19-124 (11/15/2019). The purpose, under Title 23 VAC 10-120-89 B, for a noncorporate telecommunications company calculating its minimum tax by comparing it to its income tax liability as if it were a corporation is to avoid collecting both the minimum tax from the noncorporate telecommunications taxpayer and an income tax from its owner arising from income earned by the noncorporate telecommunications taxpayer.
The Department’s Adjustments
In this case, the audit staff treated the Taxpayer as part of a combined group with the Corporation for purposes of computing the minimum tax due. As a result, they compared the Taxpayer’s minimum tax liability with the lesser of the Taxpayer’s corporate income tax liability computed as if were a corporation and the “group’s” actual corporate income tax liability, which was in fact just the Corporation’s corporate income tax liability as reported on its own return. The method used by the audit staff appears similar to the method used when the corporate owner of a noncorporate telecommunications company files as part of a consolidated or combined filing group. See P.D. 19-124 and P.D. 24-120 (11/14/2024).
The Corporation, however, was a separate filer for Virginia corporate income tax purposes for the taxable years at issue. As such, the audit staff erred in using the computational method applicable to consolidated or combined filing groups. The remainder of this determination will address what methodology should have been used to determine the Taxpayer’s minimum tax liability for the taxable years at issue as a pass-through entity wholly owned by a corporation that filed its Virginia corporate income tax return on a separate company basis.
2018 Taxable Year
On its amended noncorporate and minimum tax return for the 2018 taxable year, the Taxpayer computed its Virginia corporate income tax liability as if it were a corporation and compared that amount to the minimum tax. Because the minimum tax was slightly higher than the corporate income tax, the Taxpayer paid the difference.
The Taxpayer’s method, however, disregarded the fact that the Corporation’s amended 2018 Virginia corporate income tax return reported a loss and thus a tax liability of zero. As stated above, under Title 23 of the Virginia Administrative Code (VAC) 10-120-89 A, noncorporate telecommunications companies are deemed to have paid corporate income tax for purposes of computing the minimum tax, “to the extent that the income of a noncorporate telecommunications company is subject to Virginia income tax at the entity level or in the hands of a partner or other person for whom the income retains its character.” [Emphasis supplied.]
Because the Corporation did not actually pay any Virginia corporate income tax for the 2018 taxable year, none of the Taxpayer’s income was actually subject to Virginia income tax. It appears that the Taxpayer believes that its income became “subject to tax” merely because it was included in the Corporation’s own computation of its Virginia income tax liability, regardless of what the Corporation’s actual tax liability was. Such an interpretation, however, would defeat the General Assembly’s intent to impose a minimum tax on entities conducting a telecommunications business.
The issue here whether income is “subject to tax” merely by being included in the computation of tax but not actually taxed draws from the same reasoning as was utilized with the “subject-to-tax” exception to the add-back of intangible income examined in Kohl’s Department Stores, Inc. v. Virginia Department of Taxation, 295 Va. 177 (2018) (“Kohl’s”). That is, in Kohl’s, the Virginia Supreme Court held that the subject-to-tax exception required that the royalty income actually be taxed by the other state. See id. at 190. As here, to hold otherwise would negate the intended purpose of the statute. See id. at 189-190.
Because the Corporation did not pay any Virginia income tax for the 2018 taxable year, the Taxpayer’s income was not subject to tax. Accordingly, the Taxpayer was liable for payment of the full amount of the minimum tax due.
2019 Taxable Year
For the 2019 taxable year, the Corporation had positive Virginia taxable income and thus paid tax. As it did for the 2018 taxable year, the Taxpayer computed its Virginia income tax liability separately as if it were a corporation and compared it to the minimum tax. Because the income tax liability so computed was greater than the minimum tax, the Taxpayer reported a minimum tax liability of zero.
As stated above, Title 23 VAC 10-120-89 A provides that a telecommunications company will be deemed to have paid corporate income tax for purposes of computing the minimum tax under Title 23 VAC 10-120-89 B, “to the extent that the income . . . is subject to Virginia income tax.” Consistent with the reasoning set forth above with respect to the 2018 taxable year, the Taxpayer’s income was only subject to tax to the extent the Corporation actually paid tax on it. Therefore, the amount of corporate income tax the Taxpayer is deemed to have paid for purposes of computing its minimum tax liability cannot be any greater than the actual amount of tax the Corporation paid.
CONCLUSION
Although the Department erred in applying the methodology applicable to noncorporate telecommunications companies that have a corporate owner included in a combined or consolidated filing group, the methodology set forth in this determination results in the same amount of additional minimum tax the Department assessed for the 2018 and 2019 taxable years. Allowing noncorporate telecommunication companies to avoid their telecommunications minimum tax liability by comparing their corporate income tax liability, computed as if they were corporations, to the minimum tax regardless of how much tax was actually paid by the corporate owner would defeat the General Assembly’s purpose for enacting a minimum tax on telecommunications companies.
Accordingly, the assessments are upheld. The Taxpayer will receive updated bills which will include accrued interest to date. The Taxpayer should remit the balance due within 30 days to avoid the accrual of additional interest and possible collections actions.
The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited are available at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at *****.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/4432.M