Tax Type
Corporation Income Tax
Description
Determination of multistate status; Apportionment
Topic
Allocation and Apportionment
Date Issued
03-04-1993
March 4 1993
Re: §58.1-1821 Application; Corporation Income Tax
Dear*********
This will reply to your letter of August 21, 1992 in which you seek correction of an assessment of corporation income tax against***************(the "Taxpayer").
FACTS
The Taxpayer filed corporation income tax returns for the 1981-1983 taxable years showing all income taxable to Virginia. Subsequently, amended returns were filed apportioning income using the statutory three factor formula; refunds were issued for the 1981 and 1982 amended returns. At approximately the same time, it was determined in a field audit that the Taxpayer was not a multistate corporation and, therefore, not entitled to apportion income. The Taxpayer was assessed tax based on the refunds that were erroneously issued. You assert that the Taxpayer is a multistate corporation entitled to allocate and apportion income; therefore, the refunds based on the amended returns were properly issued and the assessment should be abated.
DETERMINATION
Two previous rulings of the department upheld the assessment based on the auditor's finding that the Taxpayer's entire business was conducted in Virginia; the Taxpayer was not entitled to allocate and apportion its Virginia taxable income. See P.D. 86-67 (3/31/86) and P.D. 92-79 (6/1/92). The decisions were based on Va. Code §58.1-406, which provides that a corporation must have income subject to taxation both within and without Virginia in order to allocate and apportion its Virginia taxable income.
Since the most recent ruling, the Taxpayer has provided unemployment tax returns and withholding returns filed with various states for the years in question to support its position that it maintained field offices outside Virginia and, therefore, is entitled to allocate and apportion its Virginia taxable income.
In order to be eligible to allocate and apportion income, a Taxpayer must be subject to tax measured by net income in another state. It is not required that the tax actually be imposed; the state must have jurisdiction to impose a tax measured by net income. See Virginia Regulation (VR) 630-3-405.B. In determining whether a taxpayer is subject to tax in another state we take P.L. 86-272 into consideration. See Department of Taxation v. Westmoreland Coal, 235 Va. 94 (1988). That is, if federal law prohibits a state from imposing an income tax on the taxpayer because its employees only solicit sales, then that state does not have jurisdiction to impose an income tax for purposes of being eligible to allocate and apportion income in Virginia.
You have submitted unemployment tax returns for several states indicating that several employees were present in those states during the years in question. However, no income tax returns were submitted for those states even though those states impose an income tax (or a franchise tax measured by net income). In the absence of actual income tax returns for other states, or proof that there was sufficient presence in a state that does not impose an income tax, I cannot find that the evidence you have submitted is conclusive on the issue. Our audit procedures require an auditor to look for evidence that a taxpayer is subject to an income tax in another state. You allege that our auditor reviewed this information during the field audit in which you were found not to be eligible to allocate and apportion income. This indicates that the auditor concluded that you were exempt from tax in those states under P. L. 86-272.
I note further that the information you have submitted, in particular the federal form 940, is inconsistent with the total payroll reported on the schedule A of the amended returns. Thus, even if we accept your information as sufficient to allow you to allocate and apportion income, further examination and adjustment may be necessary.
Accordingly, I find that there may be additional information relevant to the audit that should be considered by an auditor. The assessment will be returned to the Interstate Audit Supervisor so that an auditor may review your information, and request additional information or conduct another field audit if necessary, and revise the assessment as appropriate. Nevertheless, an assessment is presumed correct unless the taxpayer proves what the correct amount is. A taxpayer cannot allege inaccuracies in an assessment and fail to supply the information necessary to compute it correctly. Therefore, if you have not supplied the auditor with the necessary information within 30 days of a request, or shown the auditor good cause for extending the period to supply this information, the information on which the assessment was originally based will be presumed to be the best available. The assessment will then be immediately due and payable, and collection action will resume.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6411F
Rulings of the Tax Commissioner