Tax Type
Corporation Income Tax
Description
Apportionment of Income; Sales of Insurance Products
Topic
Allocation and Apportionment
Date Issued
07-19-1991
July 19, 1991
Re: § 58.1-1821 Application; Corporation Income Tax
Dear****************
This will reply to your letter of June 5, 1990, in which you seek correction of corporation income tax assessments for************* (the "Taxpayer").
FACTS
The taxpayer filed a combined Virginia return with four other corporations. On the return, the taxpayer and one of its subsidiaries used the three-factor apportionment formula, and the other three corporations did not apportion income because they did business exclusively in Virginia. The auditor changed the apportionment formula used by the taxpayer and the one subsidiary to a single-factor formula for financial corporations. In addition, the auditor computed apportionment factors, using the three-factor formula, for the three nonapportioning corporations, resulting in a 100% factor for each. These changes resulted in the assessment of additional tax. You protest the apportionment methods used by the auditor.
The issues you raise will be addressed separately.
DETERMINATION
Proper Apportionment Formula for the Taxpayer: The auditor determined that the taxpayer was a financial corporation and computed a single apportionment factor based on cost of performance, in accordance with Va. Code § 58.1-418.
Va. Code § 58.1-418 defines "financial corporation" as a corporation not exempt from income tax that derives more than 70% of its gross income from specified classes of income. The class of income relevant in this case is "fees, commissions, other compensation for financial services rendered."
The taxpayer's gross income is primarily from commissions paid by insurance companies for soliciting sales of insurance products and servicing the account after the sale. You contend that the commission income is not for financial services rendered; consequently, the taxpayer does not qualify as a financial corporation and is subject to the three-factor apportionment formula.
The taxpayer is not providing a financial service in order to earn its commission. In other words, the sale of a financial product is not the same as rendering a financial service. Based on all of the facts and circumstances, I find that the commissions in question are not "fees, commissions, [or] other compensation for financial services rendered" as that term is used in Va. Code 58.1-418. Consequently, the taxpayer is not a "financial corporation" and the single-factor formula is not applicable. The taxpayer is required to use the standard three-factor formula of property, payroll and sales.
Computation of Apportionment Factors: As originally filed, the taxpayer's income tax returns for the years under review showed positive payroll and sales factors. You now assert that the taxpayer does not have any positive apportionment factors for Virginia because it has no employees, and all direct costs are incurred on its behalf by independent contractors and all services are performed by an affiliated company under an arm's-length service agreement. Similarly, you assert that the subsidiary's costs were incurred by independent contractors and, therefore, its cost of performance factor is zero.
The returns for both multistate corporations show that virtually all of the officers are Virginia residents, that the headquarters is located in Virginia, and that there is no evidence of any offices in other states. These facts establish a presumption that all income producing activity and costs of performance are located in Virginia, that all payroll (certainly the officers' salaries) and any property owned or rented is located at the headquarters in Virginia unless there is clear evidence that there is activity in another state to which property, payroll, sales or cost of performance should be assigned. The auditor found sufficient basis to assign certain amounts to states other than Virginia in his computation of the apportionment factors. The taxpayer has not shown that a greater amount should be assigned to other states.
Alternative Method: In your letter, you request permission to use an alternative method of allocation and apportionment, pursuant to Va. Code 58.1-421, to more accurately reflect business done in Virginia and in other states. The alternative method you propose is based upon the location of the sales activity which gives rise to the gross income.
The policies which apply to requests for an alternative method under Va. Code § 58.1-421 are well established. See Virginia Regulation (VR) 630-3-421, P.D. 86-184 (9/18/86), and P.D. 85-146 (7/2/85) (copies enclosed). After considering the facts set forth, I conclude that you have not demonstrated by clear and cogent evidence that the statutory method is unconstitutional or inapplicable as applied to your situation. Accordingly, permission to use an alternative method of apportionment is denied.
Companies Doing Business Exclusively in Virginia: Three corporations included in the taxpayer's combined return paid income taxes in Virginia only. The auditor computed an apportionment factor for each corporation, using the three-factor formula which resulted in a 100% apportionment factor for each corporation.
The automated program used by auditors is currently designed to prepare an apportionment schedule for every corporation included in the combined return. When a corporation is not eligible to allocate and apportion income because it is not subject to tax in another state, as in the case with the other three subs, the auditor simply shows an apportionment factor of 100%. There was no intention to imply that the corporations should have allocated and apportioned income.
Accordingly, the audit report and the assessment will be revised to reflect the principles set forth in this letter. You will shortly receive an updated bill with interest accrued to date. This bill should be paid within 30 days to avoid the accrual of additional interest. Although you requested a conference, this letter has been issued without one. If you still desire a conference, you should contact the department within the next 30 days.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner