Tax Type
Corporation Income Tax
Description
Payroll factor; Gratuities
Topic
Allocation and Apportionment
Date Issued
07-16-1993
July 16, 1993
Re: Va. Code §58.1-1821 Application: Corporate Income Tax
Dear**********
This is in response to your letter of August 5, 1992, protesting the inclusion of tips in the payroll factor of***********(the "Taxpayer") for the taxable years 1988 - 1990.
FACTS
The Taxpayer was audited by the Department for the above-referenced taxable years. One of the adjustments made by the auditor was the inclusion of tips in the payroll factor. Although the Taxpayer had included tips in its federal form 940, it had removed tips from its accounting records and the computation of the payroll factor.
DETERMINATION
Virginia Regulation (VR) 630-3-302 clearly defines compensation to include the "gross wages, salaries, tips, commissions and other remuneration paid to employees and reported to the Internal Revenue Service" (emphasis added). Therefore, any tips reported to the IRS must be included in compensation for Virginia purposes and in the payroll factor. The regulation does not provide for an adjustment to compensation reported to the IRS to reflect a different amount included, for whatever reasons, in the corporation's accounting records. Nor does the regulation distinguish between money paid the employee by the corporation or money paid the employee by the corporation's customers.
As evidence of the compensation paid to employees, the Department will accept the federal Form W-2/W-3, Form 940, or the accounting records of the corporation. It is important to note, these items are not just evidence of the compensation paid to the employee, but are also evidence of the compensation reported to the IRS. Since Virginia compensation is dependent, in part, upon what is reported to the IRS, the clear preference for evidentiary purposes is the federal form upon which the compensation was reported.
Although it is assumed the compensation reported by the corporation on the federal forms and the corporate accounting records will be consistent, the regulation recognizes there are some instances when they will differ. Specifically, the regulations recognize that the corporation may not be required to report the compensation of certain employees (i.e, non-resident aliens) for federal purposes, but is required to report this compensation for purposes of calculating Virginia's payroll factor. In instances such as this, the corporation's accounting records supplement the federal forms to provide the Department with a complete and accurate picture of the corporation's payroll. However, the corporation's records cannot contradict the federal forms in such a manner as to incorrectly reflect what was actually paid to employees and reported to the IRS. Thus, if tips were reported to the IRS (as the corporation is required to do), that amount must be reported to Virginia.
Accordingly, the tips were correctly included in the denominator of the payroll factor. The assessment was correct and it is now due and payable. You will shortly receive an updated bill with interest accrued to date which must be paid in full within 30 days to avoid additional interest and collection actions.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner