Tax Type
Corporation Income Tax
Description
Foreign Source Income
Topic
Collection of Tax
Date Issued
03-07-1994
March 7, 1994
Re: §58.1-1821 Application: Corporate Income Tax
Dear***************
This will reply to your letter of May 12, 1993, in which you apply for correction of an assessment for additional corporate income taxes to *********(the "Taxpayer") for the taxable year ended December 31, 1991.
FACTS
The Taxpayer was field audited, and adjustments were made to the subtraction claimed for foreign source income and to the apportionment factor for the 1991 taxable year. You contest the adjustment made to foreign source income.
DETERMINATION
The Taxpayer is engaged in the business of developing computer software, and selling the license to use such software. The software is transferred on some sort of magnetic media, such as computer tapes.
For purposes of the Virginia foreign source income subtraction, the sale of software created by a taxpayer subject to a license agreement is considered to be income earned pursuant to such license agreement. Where the use of the software subject to the license agreement is without the United States, such income qualifies for the Virginia foreign source income subtraction. Accordingly, the Taxpayer's income from the license of software used outside the United States is one of the types of income that qualifies for the Virginia foreign source income subtraction.
There are however two additional issues that must be addressed. First, the foreign source income subtraction is allowed to the extent such income is included in, and not otherwise subtracted from, federal taxable income. From the information provided it is not possible to determine if the subtraction was determined net of related expenses.
The second issue which must be addressed is apportionment. The denominator of the sales factor must be reduced to the extent of any gross sales that generate income qualifying for the foreign source income subtraction.
Because the determination of the proper subtraction amount and sales factor is a factual determination, your case will be returned to the audit division for resolution of these issues. After the proper adjustments have been made, you will receive a revised bill for the tax and interest which is due. The bill will also be corrected to properly reflect that the assessment relates to the 1991 taxable year.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/6997M
Rulings of the Tax Commissioner