Tax Type
Corporation Income Tax
Description
Financial corporations; Cost of performance; Indirect costs
Topic
Allocation and Apportionment
Date Issued
11-22-1996
November 22, 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") for the 1991 taxable year.
FACTS
The Taxpayer is a financial corporation as defined in Code of Virginia §58.1-418. During a field audit, an adjustment was made to reduce the denominator of the Taxpayer's cost of performance apportionment factor, resulting in the assessment of additional tax. The department's auditor concluded that indirect costs should be excluded from the factor. You protest this adjustment, contending that Virginia law and corresponding regulations do not differentiate between direct and indirect costs.
DETERMINATION
Code of Virginia §58.1-418 provides that a financial corporation must apportion its nonallocable income based upon the ratio of the cost performance in Virginia to the cost of performance everywhere. Virginia Regulation (VR) 630-3-418 defines cost of performance as "the cost of all activities directly performed by the taxpayer for the ultimate purpose of obtaining gains or profit" except those activities directed toward earning dividend income, activities performed on behalf of a taxpayer, and the cost of funds. This definition was further amplified in Public Document (P.D.) 94-84, (3125194), copy enclosed, which stated that cost of performance "means all costs directly related to income producing activity, to the extent that the location of costs can be ascertained."
The determining issue in this case centers upon whether the phrase "all costs directly related" means the use of only direct costs in calculating cost of performance. The use of direct and indirect costs has traditionally been employed by manufacturing businesses for cost accounting purposes. Typically, however, this constitutes a poor method for a service enterprise, such as a financial corporation, to apportion its income. Furthermore, the Code of Virginia, accompanying regulations, and rulings by this department do not differentiate between direct and indirect costs. It is the department's policy, therefore, that the cost of performance for financial corporations includes all costs, both direct and indirect, to the extent those costs are allowable per VR 630-3-418 and prior rulings.
Accordingly, the cost of performance factor will be adjusted in accordance with the determination herein. Please remit the balance due as reflected on the enclosed schedule within ninety days to prevent the further accrual of interest. Your payment should be sent to ********Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880. If you should have any questions regarding this determination, you may contact******** directly at****************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11308G
Rulings of the Tax Commissioner