Tax Type
Corporation Income Tax
Description
Payroll factor; Subsidiary wages
Topic
Allocation and Apportionment
Date Issued
10-24-1996
October 24, 1996
Re: § 58.1-1821 Application: Corporate Income Tax
Dear*************
This will respond to your letter in which you seek correction of an assessment of additional corporate income tax to ********(the"Taxpayer") and its subsidiaries,*******("S1") and********** ("S2") for the taxable year ended May 31, 1993 (the "1992 taxable year").
FACTS
The Taxpayer, S1 and S2 filed a combined Virginia corporation income tax return for the 1992 taxable year, which was field audited. In the computation of each corporation's federal taxable income, wages paid by S2 to its employees were allocated between S1 and S2 since S2's employees also performed services for S1. S1 had no employees of its own. In calculating S2's payroll factor, however, this allocation was ignored, and all wages were attributed to S2. The department's auditor recomputed the payroll factors of S1 and S2 based on the allocation of wages used in calculating federal taxable income, which resulted in the assessment of additional tax. You protest this assessment, claiming that since all the wages were paid by S2 and reported by S2 for unemployment compensation purposes, then those wages should be included in S2's, and not S1's, payroll factor.
DETERMINATION
In Public Document (P.D.) 90-17, (1/11/90), copy enclosed, the department ruled that wages paid by a parent corporation are not included in the payroll factor of a subsidiary, despite bookkeeping allocations by the parent to the subsidiary for a portion of the expense. In the instant case, the facts are similar to those in P.D. 90-17, except that the allocation is between two subsidiary corporations. This distinction, however, is minor, and does not render the ruling in P.D. 90-17 inapplicable to the current case.
The evidence presented by the Taxpayer clearly shows that the wages in question were paid by S2 to its employees. Payroll records maintained by an independent, national payroll processing firm show that S2 paid all wages and applicable employment taxes. The wages attributable to Virginia were reported by S2 to the Virginia Employment Commission (VEC) for unemployment compensation purposes, and the department's own records indicate that the income tax withheld on those wages which were subject to Virginia income tax withholding was paid by S2. These wages, therefore, are properly included in S2's payroll factor.
Including these wages in S2's payroll factor, however, creates a divergent treatment for VEC reporting and corporate income tax purposes. The department's policy regarding such a divergence is clear. In P.D. 93-116, (4/29/93), copy enclosed, the department ruled that it would not allow a taxpayer "to attribute wages to one corporation for Virginia Unemployment Compensation purposes and to another corporation for income tax purposes," stipulating that "reporting must be consistent."
Consequently, to correctly determine Virginia tax liability, the wages deducted by S1 in computing its federal taxable income must be reallocated to S2 in order to achieve the consistent reporting for VEC and income tax purposes required by P.D. 93--116.
Accordingly, the audit report will be revised to reflect the incorporation of all wages paid by S2 in S2's payroll factor and computation of federal taxable income. The balance due, as reflected on the enclosed schedules, should be paid within thirty days to prevent the further accrual of interest. Please send your payment to ****** Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this determination, you may contact ***********directly at*********** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11076G
Rulings of the Tax Commissioner