April 28, 2026
Re: § 58.1-1821 Application: Corporate Income Tax
Dear *****:
This will respond to your letter in which you appeal the Department’s denial of an amended return seeking a refund of corporate income tax paid by your client, ***** (the “Taxpayer”), for the taxable year ended March 31, 2019.
FACTS
The Taxpayer entered into wholesale contracts to purchase and sell energy commodities, including coal. The Taxpayer stored coal it had purchased in stockyards located in Virginia until it accumulated sufficient coal to fulfill a contract. At that time, the coal was loaded onto a ship and transported to its out-of-state customer. The Taxpayer’s original Virginia corporate income tax return for the taxable year at issue included this coal inventory in its property factor for purposes of determining its apportionment factor.
The Taxpayer subsequently filed an amended return requesting a refund on the basis that it erroneously included the coal inventory in its property factor. Under review, the Department denied the refund request. The Taxpayer appeals, contending that it did not use the coal inventory in Virginia and thus was entitled to exclude it from the property factor.
DETERMINATION
For Virginia income tax purposes, a corporate taxpayer’s entire federal taxable income, adjusted and modified as provided in Virginia Code § 58.1-402 and § 58.1-403, less dividends allocable pursuant to Virginia Code § 58.1-407, is subject to apportionment in accordance with Virginia Code § 58.1-408 through § 58.1-422.5. Multistate corporations are generally required to use a three-factor formula of property, payroll, and double-weighted sales. The sum of the property factor, payroll factor, and twice the sales factor is divided by four to arrive at the final apportionment factor. This amount is then multiplied by Virginia taxable income.
Virginia Code § 58.1-409 provides:
The property factor is a fraction, the numerator of which is the average value of the corporation’s real and tangible personal property owned and used or rented and used in the Commonwealth during the taxable year and the denominator of which is the average value of all the corporation's real and tangible personal property owned and used or rented and used during the taxable year and located everywhere, to the extent that such property is used to produce Virginia taxable income and is effectively connected with the conduct of a trade or business within the United States and income therefrom is includable in federal taxable income.
Title 23 of the Virginia Administrative Code (VAC) 10-120-160 A 2 a provides that inventory in which the corporation has the right of use or possession is included in the property factor. The Taxpayer contends that, pursuant to the decision of the Virginia Supreme Court (the “Court”) in Va. Dep’t of Tax’n v. R.J. Reynolds Tobacco Co., 300 Va. 446 (2022), it was not required to include the coal inventory in its property factor because it did not “use” the coal while it was stored in the Virginia stockyard.
In that case, the taxpayer was a manufacturer and the Court addressed whether raw materials stored in Virginia before being shipped out of state for processing must be taken into account to calculate the taxpayer’s property factor. The Court held that the taxpayer did not “use” the raw materials within the meaning of Virginia Code § 58.1-409, because it did not act upon the materials in any way while they were held in Virginia. Id. at 457.
The instant case, however, involves inventory held for sale by a retailer or wholesaler. Raw materials that are stored awaiting further processing are not analogous to inventory held for sale in the normal course of business. The very essence of a retailer or wholesaler’s business involves the “use” of inventory to generate income by holding and selling products to customers. Such inventory is properly included in a taxpayer’s property factor in accordance with the Department’s longstanding policy that the presence of inventory in Virginia creates income tax nexus and a positive property factor. See, e.g., Public Document (P.D.) 97-447 (11/10/1997), P.D. 03-65 (8/19/2003), P.D. 12-168 (10/23/2012), and P.D. 18-12 (2/7/2018). This policy has been openly and consistently applied by the Department for many years, evincing legislative acquiescence in the Department’s application of the law. See Peyton v. Williams, 206 Va. 595, 600 (1965).
In the Department’s opinion, the value of the Taxpayer’s coal inventory held in a Virginia stockyard pending sale to customers was correctly included in its property factor. Accordingly, the Taxpayer’s refund request is denied.
The Code of Virginia sections and regulation cited are available online at law.lis.virginia.gov. The public documents cited are available at 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 ***** or *****.
Sincerely,
Kristin L. Collins
Tax Commissioner
Commonwealth of Virginia
AR/4698.X