Tax Type
Corporation Income Tax
Description
Request for separate accounting period for Virginia domicile
Topic
Allocation and Apportionment
Date Issued
06-20-1995
June 20, 1995
Re: Request for Ruling: Corporate Income Tax
Dear***********
This will reply to your letter of May 19, 1995, in which you requested permission to use an alternative method of allocation and apportionment on behalf of *************** the("Taxpayer") .
FACTS
The Taxpayer was a Virginia S Corporation which had filed in Virginia for a number of years. On July 1, 1994, the Taxpayer ceased operations in Virginia and moved to another state. The Taxpayer is requesting permission to use an alternative method of allocation and apportionment of income since it believes that the statutory method will subject it to tax on more income than can be attributed to Virginia for the first 6 months of 1994. The Taxpayer has requested an alternative method of allocation and apportionment based on separate accounting for the period domiciled in Virginia in lieu of the standard three factor formula of property, payroll, and sales.
RULING
A corporation which has business activity that is taxable both within and without Virginia must allocate and apportion its income in accordance with Code of Virginia §§58.1-406, et seq. Based on the Taxpayer's type of business, the proper method of allocation and apportionment for Virginia tax purposes is the standard three factor formula of property, payroll, and sales.
You believe that the Taxpayer may be subject to tax on a greater portion of its net income than that actually earned while in Virginia by using the standard three factor formula. However, the United States Supreme Court has recognized that allocation and apportionment of income is an arbitrary process designed to approximate income from business transactions within a state. As long as each state's method of allocation and apportionment is rationally related to the business transacted within a state, then each state's tax is constitutionally valid even though there may be some overlap. See Moorman Mfg. Co. v. Bair, 437 U.S. 267, 98 S.Ct. 2340 (1978).
The policies which apply to requests for an alternative method of allocation and apportionment under Code of Virginia §58.1-421 are well established. See Virginia Regulation (VR) 630-3-421, copy enclosed. The Taxpayer has not furnished any substantive documentation to refute the statutory method, other than a general statement that an alternative method would reflect a more appropriate division of income. The Taxpayer has not shown that the statutory method produces an unconstitutional result.
The use of an alternative method is allowed only in extraordinary circumstances where the need for relief has been demonstrated by clear and cogent evidence. After considering the facts set forth, the department does not find that merely being subject to taxation on more income by use of the three factor formula versus separate accounting constitutes extraordinary circumstances. Accordingly, the Taxpayer is required to use the statutory three factor formula of property, payroll, and sales for purposes of Virginia allocation and apportionment.
It is important to note that apportionment for purposes of an S Corporation is only applicable to the nonresident shareholders. Nonresident shareholders of an S corporation which conducts its business within and without of Virginia must include in their income from Virginia sources the portion of their pro rata share of the S corporation's income which is allocated and apportioned in Virginia.
Virginia resident shareholders of an S corporation which conducts its business within and without of Virginia include 100% of their pro rata share of the S corporation's income in their Virginia taxable income. In lieu of allocation and apportionment, the Virginia residents may claim a credit for taxes paid to other states in accordance with Va. Code §58.1-332.
If you have any questions regarding this ruling, you may contact**********.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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Rulings of the Tax Commissioner