Tax Type
Corporation Income Tax
Description
Sales factor; Net gain from sale of intangibles
Topic
Allocation and Apportionment
Date Issued
06-20-1994
June 20, 1994
Re: Va. Code §58.1-1821 Application: Corporate Income Tax
Dear**********
This is in response to your letter of January 27, 1994 protesting the assessment of additional corporate income tax against The********** (the "Taxpayer") for the taxable year 1990 .
FACTS
The Taxpayer is a calendar year corporation which apportions income for Virginia tax purposes. In calculating the sales apportionment factor, the taxpayer included as sales the gross proceeds from the sale of intangible property for the period January 1, 1990 to June 30, 1990 and the net gain realized from such transactions for the period July 1, 1990 to December 31, 1990. This dual treatment of the sales of intangible property stems from the Taxpayer's interpretation of a 1990 amendment to Va. Code §58.1-302.
The Taxpayer was audited by the Department of Taxation (the "department") for the above-referenced taxable year. The audit adjusted the sales apportionment factor to reflect only the net gain realized from the sale of intangible property for the entire taxable year.
The 1990 Virginia General Assembly amended the definition of sales in Va. Code §58.1-302. This amendment provides an exception to the general definition of "sales" by providing that sales include all gross receipts of a corporation not allocated under § 58.1-407;
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- ..except the sale or other disposition of intangible property shall include only the net gain realized from the transaction.
- ..except the sale or other disposition of intangible property shall include only the net gain realized from the transaction.
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- That the provisions of this act shall be effective for taxable years beginning on or after January 1, 1990.
- That the provisions of this act shall be effective for taxable years beginning on or after January 1, 1990.
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- All laws enacted at a regular session of the General Assembly, including laws which are enacted by actions taken during the reconvened session following a regular session, but excluding general appropriations acts and emergency acts, shall take effect on the first day of July following the adjournment of the regular session at which they were enacted, unless a subsequent date is specified. (Va. Code § 1-12)
Furthermore, the Taxpayer asserts Virginia law precludes the General Assembly from retroactively applying this law in this instance. It is the department's contention that amendment is effective and applicable to all sales occurring in taxable years that begin on or after January 1, 1990.
DETERMINATION
The department asserts that there is no retroactive application of the tax laws to the Taxpayer. In this instance, Virginia is not taxing the sale of an intangible, but rather the net income from Virginia sources received throughout an entire taxable year. The sales information is used merely as a procedural step to compute income attributable to activity within the Commonwealth. As such, the Taxpayer was not required to make this computation until after the close of the taxable year, long after July 1, 1990. Of course, the former law would have applied to any tax year beginning before January 1, 1990.
The Virginia General Assembly traditionally enacts legislation applicable to an entire taxable year rather than just to a portion thereof. During its 1990 session, the General Assembly enacted eight laws affecting income tax that had effective dates similar to House Bill 916. These laws either created or abolished income tax credits or deductions, or specified how returns were to be filed. For example, Senate Bill 250 and House Bill 1116 of 1990 replaced a retirement income subtraction for individuals with a subtraction for aged individuals. This legislation was intended, and implemented, so as to allow the full amount of the new subtraction to all eligible individuals in 1990, not a prorated amount. Thus, no retirement income was eligible for the repealed subtraction whether the income was received before or after July 1, 1990.
Even if the department's interpretation were considered retroactive application of the law, the Virginia General Assembly has the authority to enact retroactive laws. Va. Code § 1-12, which implements Va. Const. Art. IV, §13, addresses only the effective date of laws and is silent as to the authority of the General Assembly to provide a retroactive operation or application of statutes.
It is quite clear that "there is no express prohibition in the Virginia Constitution against a statute operating retrospectively." Jackson v. National Linen Service Corp., 248 F. Supp. 962, 967 (W.D. Va. 1965), Etzler v. Dille and McGuire Manufacturing Co., 249 F. Supp. 1, 6 (W.D. Va. 1965). See also Estate of Ridenour, T.C. -Memo 1993-41, C.M. (RIA), P. 93,041, 65 T.C.M. (CCH) 1850 (1993). Although it is true that the general rule of construction is that statutes are prospective in operation, if the intent of the General Assembly is manifest and a retroactive effect will not impair an existing contract or rights of action or vested property rights, then legislation may be applied retroactively. Duffy v. Hartsock, 187 Va. 406, 46 S.E. 2d 570 (1948); Harbour Gate Owners' Ass'n v. , 232 Va. 98, 348 S.E. 2d 252 (1986); Island Creek Coal v. Breeding, 6 Va. App. 1, 365 S.E. 2d 782 (1988).
As stated in Island Creek, a statute is not unconstitutionally retroactive because it operates on facts in existence before the enactment of the legislation, rather it is unconstitutional if it interferes with rights vested or liabilities accrued before passage of the legislation. 6 Va. App. at 10. The effect of the amendment to Va. Code §58.1-302 does not impair contract rights or rights of action or vested property rights, and the earliest date at which an income tax liability may accrue is after the close of a taxable period when all items of gross income, deductions and other data affecting the computation of income tax are known. (See Va. Code § 58.1-313, which requires a current period to be terminated before income tax can be assessed for that period.) Therefore, the retroactive impact, if any, of the 1990 legislation is not barred. Id. See also Harbour Gate Owners' Ass'n v. Berg, supra; Hagen v. Hagen, 205 Va. 791, 139 S.E. 2d 821 (1965); Bain v. Boykin, 180 Va. 259, 23 S.E. 2d 127 (1942); Booth v. Booth, 7 Va. App. 22, 371 S.E. 2d 569 (1988).
As the General Assembly expressly applied the law change to the entire taxable year, the department's assessment must be deemed correct. Attached is a schedule indicating the tax liability plus interest accrued through the date of this letter. If the assessment is paid in full within 30 days, the accrual of additional interest will be avoided. Please forward your payment to the Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23282.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP7646L
Rulings of the Tax Commissioner