Tax Type
Corporation Income Tax
Description
Foreign Source Royalty Income
Topic
Collection of Tax
Date Issued
03-24-1994
March 24, 1994
Re: §58.1-1821 Application: Corporate Income Tax
Dear***************
This will reply to your letter of February 23, 1993, in which you apply for the correction of an assessment for additional corporate income taxes to*********(the "Taxpayer") for the taxable years ended June 30, 1989, 1990 and 1991.
FACTS
The Taxpayer was field audited, and numerous adjustments were made. The department's auditor disallowed certain foreign source royalty income from the license of software. You contest the adjustment made with respect to foreign source royalty income.
DETERMINATION
The Taxpayer is engaged in the business of developing computer software, and selling the license to use such software. The software is sometimes licensed to foreign subsidiaries for the right to manufacture and distribute software outside the United States, and sometimes licensed to manufacturers located outside the United States, for the right to reproduce and install software on computer hardware prior to sale.
Royalty income from property located without the United States is one of the types of income that qualifies for the Virginia foreign source income subtraction. Where the use of software subject to a license agreement is without the United States, royalties from such license qualify for the Virginia foreign source income subtraction. Accordingly, the Taxpayer's royalty income from the license of software used outside the United States qualifies for the Virginia foreign source income subtraction.
Accordingly, the contested royalty income will be allowed as part of the foreign source income subtraction. The subtraction will be determined net of related expenses in accordance with Public Document 93-235 (12/28/93), copy attached. Finally, the denominator of the sales factor must be reduced to the extent of any foreign source royalties qualifying for the foreign source income subtraction.
The assessment will be adjusted as provided herein and in accordance with the attached schedules. The balance due,********* including interest should be paid within 30 days to prevent the accrual of additional interest. The refund due for the taxable year ended
June 30, 1991, ***********including interest will be refunded in due course.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/6809M
Rulings of the Tax Commissioner