Tax Type
Corporation Income Tax
Description
Sales Factor; Reimbursed Payroll Costs
Topic
Allocation and Apportionment
Date Issued
06-29-1992
June 29, 1992
Re: §58.1-1821 Application; Corporation Income Tax
Dear*************
This will reply to your letter of March 27, 1991, in which you seek correction of an assessment of corporation income tax for**************** (the "taxpayer").
FACTS
The taxpayer was audited and numerous adjustments were made, resulting in the assessment of additional tax. You protest many of the adjustments. A majority of your objections have been addressed and corrected in a revised audit report, and the additional tax associated with those adjustments has been abated. Two of the issues addressed in your letter have not been resolved; these two issues will be addressed separately.
DETERMINATION
Sales factor: For the year under review, the denominator of the taxpayer's sales factor included amounts representing the reimbursement of payroll costs incurred by the taxpayer on behalf of its operating subsidiaries. The auditor removed these amounts from the sales f actor denominator.
The Virginia sales factor is a fraction, the numerator of which is the total sales in Virginia during the taxable year. The denominator is the total sales of the corporation everywhere during the taxable year.
The term "sales" means the gross receipts of the corporation from all sources (except dividends, which are allocated), whether or not such gross receipts are generally considered sales. Sales are to be included in the sales factor if the gross receipts are included in Virginia taxable income and are connected with the conduct of the taxpayer's trade or business within the United States.
Virginia relies on the amount and character of each item reported on the federal return and supporting schedules to determine gross receipts for purposes of computing the sales factor. The reimbursement amounts in question were not included in the gross receipts on the federal return; they were netted against expenses. The auditor properly adjusted the denominator of the sales factor to agree with the gross receipts reported on the federal return.
You contend that, notwithstanding the manner in which the taxpayer applied the reimbursement amounts on the federal return, the sales factor should include the reimbursement amounts because they constitute sales revenue from a service provided by the taxpayer to its operating subsidiaries.
Intercompany transactions can be included in gross receipts used to compute the sales factor if the affiliates deal with each other at arm's length as if they were ordinary customers. See P.D. 91-67 (4/2/91) (copy enclosed). In this case, the taxpayer received nothing for the "service" rendered to its operating subsidiaries other than reimbursement of the payroll expense it incurred. No gain or loss was realized, indicating that the "service" was not an arm's length business transaction. Therefore, there is no "sales revenue," as you claim, and the amounts representing reimbursement of payroll expense, which were not reported on the federal return as gross receipts, should not be included in the sales factor.
Accordingly, the sales factor as computed by the auditor is correct.
Miscellaneous adjustments: You assert that the auditor made numerous miscellaneous adjustments with which you disagree, but which you consider minor because of the amount of additional tax involved. You have provided no explanation or details as to how these adjustments are erroneous. A review of the remaining adjustments made by the auditor indicates that they appear on their face to be consistent with Virginia law and policy and reconcile to federal return information. In an application for correction of an erroneous assessment under Va. Code §58.1-1821, the taxpayer has the burden of proving that the assessment is erroneous by showing what the correct assessment should be. This burden cannot be met if necessary documentation and supporting detail is not furnished.
The department will allow you to submit additional information detailing the miscellaneous adjustments with which you disagree. This information must clearly: (1) identify the adjustment, (2) set forth the correct amount based on your position, (3) explain the basis for your position, and (4) provide the necessary documentation and supporting detail. If no additional information is received within 30 days, the assessment as adjusted (by the partial abatement of September 17, 1991) will be due and payable.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/4737F
Rulings of the Tax Commissioner