How Virginia Based Companies Can Reduce Their State Income Tax Liability

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Is your company apportioning 100% of its activities to Virginia because it isn't doing business in any other state?  In other words, is Virginia the only state return your company is filing, and the company's entire federal taxable income is treated as Virginia taxable income?

If so, your company may want to re-examine its activities in other states and foreign countries to determine if your company has the right to apportion its income and not use a 100% Virginia apportionment factor.

FOR COMPANIES OPERATING IN VIRGINIA AND OTHER STATES

Under VA Code Sec. 58.1-405, a corporation is presumed to be doing business entirely within VA if its business activities within another state are such that the other state does not have jurisdiction to impose a net income tax, a franchise tax measure by net income, or a privilege tax measured by net income.

The actual imposition of a tax is not required, just the jurisdiction to tax.  Hence, if your company has enough activity in another state where that state would have jurisdiction to impose a net income tax, a franchise tax measure by net income or a privilege tax measured by net income, your company may be able to reduce its Virginia apportionment factor resulting in less tax being paid.

FOR COMPANIES OPERATING ONLY IN VIRGINIA AND FOREIGN COUNTRIES

According to Virginia Ruling P.D. 12-142, August 29, 2012, Virginia Code Sec. 58.1-405 also includes foreign countries.   Hence, if your company has enough activity in a foreign country where that country would have jurisdiction to impose a net income tax, a franchise tax measure by net income or a privilege tax measured by net income, your company may be able to reduce its Virginia apportionment factor resulting in less tax being paid.

NO THROWBACK RULE PROVIDES VIRGINIA TAX BENEFIT

One additional benefit is that Virginia does NOT have a throwback rule.  Hence, if your company has nexus in another state or foreign country and has earned the right to apportion, then sales originating in Virginia but destined for other states or foreign countries may be excluded from the numerator of your company's Virginia sales factor. 

As always, you should review all of your facts and circumstances and consult a qualified state tax professional before taking any new tax return filing position.  The above is provided for information purposes only.

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