89-58 | Virginia Tax

Tax Type

Corporation Income Tax

Description

Sales factor

Topic

Computation of Income

Date Issued

01-04-1989

January 4, 1989

Re: §58.1-1821 Application; Corporation Income Tax
§58.1-416 Sales Factor, Cost Plus Contracts

Dear***********************

This letter supplements my letter of November 30, 1988 (copy enclosed) in order to clarify the circumstances in which reimbursements under cost plus contracts may be included in the sales factor. The enclosed letter states the issue as follows:

Government Contract Receipts

- The auditor removed from the sales factor certain government contract receipts from a cost plus fixed fee contract. Regulation VR 630-3-302 defines the term "sales" as including the entire combined cost plus the fee. Therefore, the contract receipts were properly includible in the sales factor and should not have been removed. The audit report will be revised to restore these amounts to the sales factor.

The regulation cited defines the term "sales" and the reimbursements clearly qualify as sales. However, under §58.1-414 not all sales are includable in the sales factor. In 1981 this section (§58-151.047 prior to recodification) was amended to add the following language: ". . . to the extent that such sales are used to Produce Virginia taxable income and are effectively connected with the conduct of a trade or business within the United States and income therefrom is includable in federal taxable income." Regulation VR 630-3-414 provides that "Sales shall be included in the sales factor if the gross receipts are included in Virginia taxable income."

While reviewing the audit and return in connection with adjustments required by the letter dated November 30, 1988, it was discovered that the reimbursements in question had not been included in federal taxable income. It appears that they were excluded under a principle of the accrual accounting method which bars a deduction when the taxpayer has a fixed right to reimbursement. See Charles Baloian Co., Inc., 68 T.C. 620, CCH Dec. 34,533. If a deduction is not allowed, then subsequent reimbursement is excluded from gross income. Since the reimbursements in question were not included in federal taxable income or Virginia taxable income, the auditor properly removed them from the sales factor.

Accordingly, my letter of November 30, 1988, is modified with respect to this issue. In all other respects the letter is reaffirmed. Therefore, assessment is correct as made and is now due and payable. You will shortly receive an updated bill with interest accrued to date. The bill should be paid within thirty days to avoid the accrual of additional interest. Although you requested a conference, this letter has been issued without one because the application of the law is clear. If you still desire a conference you should request one within thirty days.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner