Tax Type
Corporation Income Tax
Description
Audit, Direct and indirect cost
Topic
Allocation and Apportionment
Date Issued
02-28-1997
February 28, 1997
Re: § 58.1-1821 Application: Corporate Income Tax
Dear*********
This will respond to your letter of November 21, 1996, in which you make application for correction of assessments of corporate income taxes for ********(the "Taxpayer") for the taxable years ending December 31, 1992, and 1993.
FACTS
The Taxpayer is a financial corporation as defined in Code of Virginia § 58.1--418, and is required to apportion its income based on cost of performance in Virginia over the cost of performance everywhere. As the result of a field audit, adjustments were made to the Taxpayer's cost of performance factor which resulted in the Taxpayer being assessed additional tax. The auditor segregated the costs of activities performed directly by the Taxpayer into two categories, "direct" and "indirect" costs. The auditor limited the costs allowable in the factor to costs which were considered "direct costs". The Taxpayer contests these adjustments contending that Virginia law does not differentiate between "direct" and "indirect" costs and therefore the adjustments have no basis in law.
DETERMINATION
Financial corporations apportion their income, excluding allocable dividends, using a one factor formula based upon the ratio of the cost of performance in Virginia to the cost of performance everywhere. Although cost of performance is not defined in Code of Virginia § 58.1-418, it is defined in Virginia Regulation (VR) 630-3418 as "the cost of all activities directly performed by the taxpayer for the ultimate purpose of obtaining gains or profit except activities performed by the taxpayer for the ultimate purpose of obtaining dividends....". Activities performed on behalf of the taxpayer, and the cost of funds (interest, etc.) are not includable. In Public Document (P.D.) 94-84, (3/25/94), copy enclosed, the department ruled that the phrase cost of performance "means" all cost directly related to income producing activity, to the extent that the location of costs can be ascertained".
In the instant case, the auditor limited the costs includable in the apportionment factors to "direct" costs. As stated above, the Code of Virginia, the regulations thereunder, and previous rulings by the department do not make a distinction between direct and indirect costs for the costs of activities performed directly by a taxpayer. Accordingly, the Taxpayer's costs of performance are includable in a financial corporations apportionment factor to the extent that such costs are allowable in VR 630-3418 and previous rulings by the department.
The attached schedule illustrates the adjusted apportionment factors and tax due in accordance with the determination herein. The balance due should be remitted within the next 60 days to avoid the accrual of additional interest. Your payment should be sent to ******, Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11933P
Rulings of the Tax Commissioner