Tax Type
Corporation Income Tax
Description
Refunds
Topic
Returns and Payments
Date Issued
07-15-1999
July 15, 1999
Re: Sec. 58.1-1821 Application: Corporate Income Taxation
Dear***
This will reply to your letter in which you applied for a refund of corporate income tax that was assessed against ***** (the "Taxpayer') for the taxable years ended December 31, 1994 through 1996. I apologize for the delay in response.
FACTS
For the taxable years at issue, two of the Taxpayer's subsidiaries (S1 and S2) filed Virginia consolidated income tax returns. Under audit, the department determined that the Taxpayer, an out-of-state corporation, should be included in the Virginia consolidated returns with S1 and S2. The Taxpayer concedes that it should be included in the Virginia consolidated returns, but contends the returns should also include another subsidiary (S3) that is used exclusively as a conduit for consolidation eliminations and adjustments.
DETERMINATION
Title 23 of the Virginia Administrative Code (VAC) 10-120-322 (B)(2), copy enclosed, provides that in order for an affiliated corporation to be consolidated with other affiliated corporations, it must be subject to Virginia income tax if it filed a separate return. Thus, S3 must be subject to Virginia income taxation in order to be included as part of a consolidated return.
Under Public Law (P.L.) 86-272, codified at 15 U.S.C.A. Sec.382-384, Virginia is prohibited from imposing an income tax on the Taxpayer "if the only business activities within [Virginia] by or on behalf of [the taxpayer] during [the] taxable year are....' the solicitation of orders for the sale of tangible personal property. Although P.L. 86-272 only applies to the sale of tangible personal property, Virginia applies the same "solicitation' test to sales of other than tangible personal property.
Based on the facts presented, S3 is located outside Virginia and has no contacts with Virginia. It exists strictly as an accounting tool to consolidate the Taxpayer and some of its other subsidiaries. As such, S3 lacks nexus with Virginia and is not subject to Virginia income taxation. Therefore, your request for a refund must be denied.
However, pursuant to Code of Virginia Sec. 58.1-442, two or more corporations may only file a consolidated return in accordance with Internal Revenue Code ("IRC') Sec.1502 if they are affiliated as defined in Code of Virginia Sec. 58.1-302 and make an election in the first year they are subject to Virginia income tax. IRC Sec.1502 provides that intercompany transactions are eliminated in determining federal taxable income. As such, intercompany transactions among the Virginia affiliated group would be eliminated. Intercompany transactions with related entities not included in the Virginia affiliated group are not eliminated.
It does not appear that the auditor included any elimination adjustments for intercompany transactions among the Taxpayer's Virginia affiliated group. If the Taxpayer can provide a schedule with explanations of any eliminations among the Virginia affiliated group, the department will consider adjusting the audit assessment.
If the requested information is not received within 30 days from the date of this letter, this case will be considered closed. Please send the requested information to ***** Office of Tax Policy, Virginia Department of Taxation, P.O. Box 1880, Richmond, Va 23218-1880. If you have any questions about this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/18563B
Re: Sec. 58.1-1821 Application: Corporate Income Taxation
Dear***
This will reply to your letter in which you applied for a refund of corporate income tax that was assessed against ***** (the "Taxpayer') for the taxable years ended December 31, 1994 through 1996. I apologize for the delay in response.
FACTS
For the taxable years at issue, two of the Taxpayer's subsidiaries (S1 and S2) filed Virginia consolidated income tax returns. Under audit, the department determined that the Taxpayer, an out-of-state corporation, should be included in the Virginia consolidated returns with S1 and S2. The Taxpayer concedes that it should be included in the Virginia consolidated returns, but contends the returns should also include another subsidiary (S3) that is used exclusively as a conduit for consolidation eliminations and adjustments.
DETERMINATION
Title 23 of the Virginia Administrative Code (VAC) 10-120-322 (B)(2), copy enclosed, provides that in order for an affiliated corporation to be consolidated with other affiliated corporations, it must be subject to Virginia income tax if it filed a separate return. Thus, S3 must be subject to Virginia income taxation in order to be included as part of a consolidated return.
Under Public Law (P.L.) 86-272, codified at 15 U.S.C.A. Sec.382-384, Virginia is prohibited from imposing an income tax on the Taxpayer "if the only business activities within [Virginia] by or on behalf of [the taxpayer] during [the] taxable year are....' the solicitation of orders for the sale of tangible personal property. Although P.L. 86-272 only applies to the sale of tangible personal property, Virginia applies the same "solicitation' test to sales of other than tangible personal property.
Based on the facts presented, S3 is located outside Virginia and has no contacts with Virginia. It exists strictly as an accounting tool to consolidate the Taxpayer and some of its other subsidiaries. As such, S3 lacks nexus with Virginia and is not subject to Virginia income taxation. Therefore, your request for a refund must be denied.
However, pursuant to Code of Virginia Sec. 58.1-442, two or more corporations may only file a consolidated return in accordance with Internal Revenue Code ("IRC') Sec.1502 if they are affiliated as defined in Code of Virginia Sec. 58.1-302 and make an election in the first year they are subject to Virginia income tax. IRC Sec.1502 provides that intercompany transactions are eliminated in determining federal taxable income. As such, intercompany transactions among the Virginia affiliated group would be eliminated. Intercompany transactions with related entities not included in the Virginia affiliated group are not eliminated.
It does not appear that the auditor included any elimination adjustments for intercompany transactions among the Taxpayer's Virginia affiliated group. If the Taxpayer can provide a schedule with explanations of any eliminations among the Virginia affiliated group, the department will consider adjusting the audit assessment.
If the requested information is not received within 30 days from the date of this letter, this case will be considered closed. Please send the requested information to ***** Office of Tax Policy, Virginia Department of Taxation, P.O. Box 1880, Richmond, Va 23218-1880. If you have any questions about this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/18563B
Rulings of the Tax Commissioner