May 11, 2026

Re:    § 58.1-1821 Application: Corporate Income Tax

Dear *****:

    This will respond to your letter in which you seek correction of the corporate income tax assessments issued to ***** (the “Taxpayer”), for the taxable years ended December 31, 2021, through 2023.

FACTS

    The Taxpayer filed its Virginia corporate income tax returns for the taxable years at issue using the standard three-factor apportionment formula. Under audit, the Department applied the single sales factor apportionment method required for the retail trade sector on the basis that the Taxpayer classified itself as a retailer on its Virginia and federal corporate income tax returns. The Taxpayer filed an application for correction, contending that it was not a retailer required to use the single sales factor apportionment method.

DETERMINATION

    Virginia Code § 58.1-408 generally requires corporations to apportion their Virginia taxable income within and without Virginia using a three-factor apportionment formula. Virginia Code § 58.1-422.1, however, requires that the Virginia taxable income of a retail company be apportioned within and without Virginia by multiplying its income by the sales factor. For this purpose, a “retail company” is defined as “a domestic or foreign corporation primarily engaged in activities that, in accordance with the North American Industry Classification System (NAICS), United States Manual, United States Office of Management and Budget, 1997 Edition, would be included in Sectors 44-45.” See Virginia Code § 58.1-422.1 B.

    The NAICS Manual assigns industrial classifications according to the primary activity of the business. Assigning the NAICS code is a self-directed process where a company selects the code that best represents its primary revenue-generating activity. Sectors 44-45 are entitled “Retail Trade” and include corporations that sell goods or commodities in small quantities directly to consumers.

    In contrast, the NAICS Manual describes wholesalers as those involved in the “intermediate step in the distribution of merchandise” and that “[w]holesalers are organized to sell or arrange the purchase or sale of (a) goods, for resale . . ., (b) capital or durable nonconsumer goods, and (c) raw and intermediate materials and supplies used in production.” NAICS, 307 (2022). Further, according to the American Heritage Dictionary 1380 (2nd Col. Ed. 1985), the ordinary definition of “wholesale” is “[t]he sale of goods in large quantities, as for resale by a retailer.”

    The Taxpayer asserts that its business activities had changed over time from primarily retail to primarily wholesale. The Taxpayer provided documentation indicating that approximately 68% of its gross sales for each of the taxable years at issue were generated from wholesale trade activities such as distribution of products to grocery chains, foodservice partners, office customers, and other wholesale channels.

    The audit staff did not consider the Taxpayer’s documentation supporting its claim that it was not a retailer. Rather, the audit staff disallowed the standard three-factor apportionment method because the Taxpayer classified itself as a retailer on its federal and Virginia income tax returns and had not amended its federal returns to report a different designation.

    The Department, however, has determined that a taxpayer is not required to file a federal amended return in order to amend a Virginia income tax return in cases where the change to the Virginia return does not affect the Taxpayer’s federal taxable income. See P.D. 92-135 (3/14/1994) and P.D. 19-123 (11/15/2019). As such, the fact that the Taxpayer had not amended its federal income tax returns to change its NAICS classification would not preclude the Taxpayer from amending its Virginia income tax return to change the reported NAICS code because such change would not have impacted federal taxable income.

    In addition, the Department has ruled that a taxpayer reporting a NAICS retailer code would be required to use the single sales factor method of apportionment provided that the code accurately reflected that taxpayer’s primary activities. See P.D. 16-77 (5/11/2016). Implicit in that ruling is that the Department has the authority to independently consider the true nature of a taxpayer’s business activities in order to determine the proper method of apportionment.

    Based on the information provided by the Taxpayer, in the Department’s opinion, the NAICS retail classification code did not properly reflect the Taxpayer’s primary activities for the taxable years at issue and thus the Taxpayer was not required to use the single sales factor method of apportionment. The audit adjustments to the Taxpayer’s apportionment factors will be reversed and adjusted assessments will be issued accordingly. The Taxpayer should remit any resulting balance due within 30 days of the bill dates to avoid further collection actions.

    The Code of Virginia sections 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

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