Tax Type
Corporation Income Tax
Description
Sales factor; Exclusion of foreign income
Topic
Allocation and Apportionment
Date Issued
03-31-1997
March 31, 1997
Re: § 58.1-1821 Application: Corporation Income Tax
Dear**************
This will reply to your letter in which you seek correction of an assessment of corporation income taxes for ******** (the "Taxpayer"). I apologize for the delay in responding.
FACTS
The Taxpayer was audited for the taxable years ended October 31, 1992, October 30, 1993 and October 29, 1994, resulting in the assessment of additional tax. You contest the exclusion of gross Virginia foreign source income from the sales factor.
DETERMINATION
Code of Virginia § 58.1-414 provides:
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- The sales factor is a fraction, the numerator of which is the total sales of the corporation in the Commonwealth during the taxable year, and the denominator of which is the total sales of the corporation everywhere during the taxable year, to the extent that such sales are used to produce Virginia taxable income and are effectively connected with the conduct of a trade or business within the United States and income therefrom is includable in federal taxable income.
Code of Virginia § 58.1-302 defines the term "sales" as the gross receipts of the corporation from all sources (except dividends, which are allocated), whether or not such gross receipts are generally considered sales. The sales factor includes all gross receipts that are included in Virginia taxable income and are connected with the conduct of the taxpayer's trade or business within the United States.
A corporation claiming a subtraction for foreign source income will adjust its apportionment factors in accordance with Title 23 of the Virginia Administrative Code (VAC) 10-120-150 (B)(2)(b). This regulation, effective for taxable years beginning after January 1, 1985, provides in pertinent part;
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- The property, payroll and sales of a corporation which are used to produce income qualifying for the subtraction for . . . foreign source income shall not be included in the denominator of the fractions.
VAC 10-120-20, effective for taxable years beginning on or after January 1, 1990, further provides;
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- All income and expenses included in foreign source I income and property or other activity associated with such income and expenses shall be excluded from the factors in the Virginia formula for allocating and apportioning Virginia taxable income to sources within and without Virginia.
Pursuant to these regulations, to the extent a taxpayer has foreign source income, this income will be excluded from the denominator of the sales factor. Property and payroll associated with the production of such income will likewise be excluded from the apportionment factors.
During the years under audit, the Taxpayer claimed a subtraction for foreign source interest and royalties. The Taxpayer excluded this foreign source income from its sales factor, but only to the extent it exceeded related expenses. The auditor adjusted the sales factor to exclude the gross amount of foreign source income.
The department finds the adjustment made by the auditor to the Taxpayer's sales factor to be consistent with the above cited regulations. Therefore, the department cannot grant your request for relief. Nevertheless, you have provided evidence which indicates that some foreign source royalties were not originally included in the sales factor. The sales factor has been adjusted accordingly.
The department has made the adjustments as provided in this letter. The revised work papers are attached. We have adjusted the assessments on the attached summaries. Please remit the balance due within 60 days to prevent the accrual of additional interest to **** c/o Office of Tax Policy, Department of Taxation, P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions, you may contact *** at ***** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11086O
Rulings of the Tax Commissioner