Title: Kohl's Department Stores, Inc. v. Virginia Department of Taxation

State: virginia

Issuer: Virginia Supreme Court

Document:

PRESENT:  Lemons, C.J., Mims, McClanahan, Powell, Kelsey, and McCullough, JJ., and 
Russell, S.J. 
 
KOHL’S DEPARTMENT STORES, INC. 
 
 
 
OPINION BY 
v.  Record No. 160681 
JUSTICE WILLIAM C. MIMS 
 
 
 
August 31, 2017 
VIRGINIA DEPARTMENT OF TAXATION 
 
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND 
Walter W. Stout, III, Judge 
 
In this appeal, we consider the extent to which a corporate taxpayer must include in its 
Virginia taxable income royalties paid to an intangible holding company. 
I. Background and Procedural History 
 
Kohl’s Department Stores, Inc. (“Kohl’s”) is a corporation organized under the laws of 
Delaware.  It operates retail stores throughout the United States, including Virginia.  Kohl’s 
Illinois, Inc. (“Kohl’s Illinois”), a corporation organized under the laws of Nevada, is an affiliate 
of Kohl’s.  Kohl’s Illinois operates retail stores in select states, none of which are in Virginia. 
Kohl’s Illinois also owns, manages, and licenses certain intellectual property.  Kohl’s 
entered into a license agreement with Kohl’s Illinois for the use of this intellectual property.  
Pursuant to this agreement, Kohl’s paid $441,942,347 in royalties to Kohl’s Illinois during the 
taxable year that ended on January 31, 2009 and $481,788,205 during the taxable year that ended 
on January 30, 2010.  When calculating its federal taxable income for these years, Kohl’s 
deducted these royalty payments from its income as an ordinary and necessary business expense 
under 26 U.S.C. § 162(a).  Conversely, Kohl’s Illinois included the royalties as income in its 
taxable income calculations. 
However, Kohl’s Illinois did not ultimately pay state income taxes on a substantial 
portion of the royalties.  Each state in which Kohl’s Illinois filed a return only taxed an 
2 
 
apportionable share of its taxable income.1  This left a substantial portion of the royalties 
untaxed, as they were not fairly attributable to Kohl’s Illinois’s activities in most states.  In this 
capacity, Kohl’s Illinois functions as an intangible holding company (“IHC”).  James A. Amdur, 
State Income Tax Treatment of Intangible Holding Companies, 11 A.L.R. 6th 543 (2006). 
Under this type of arrangement, a corporation typically transfers 
intangible assets (such as patents, trademarks, and trade names) to 
a subsidiary incorporated for that purpose (an “intangible holding 
company”) that is domiciled in a state which does not tax income 
from intangibles, generally Delaware.  The intangible holding 
company then licenses the intangibles to the parent corporation . . . 
in exchange for the payment of royalties, which the licensees 
deduct on their state income tax returns in the states where they 
conduct business.  However, the intangible holding company does 
not file income tax returns in those states because it is not 
physically present there, and thus its royalty income is not subject 
to state income tax. 
 
Id. at 552-53.  This mechanism only operates to avoid state taxation in “separate reporting states” 
– that is, “states in which each corporation [even within a corporate family] files a separate 
income tax return.”  Id. at 553.  IHC’s “do not reduce state income taxes in ‘combined reporting’ 
states,” wherein “an affiliated group of corporations engaged in a common enterprise . . . file a 
combined income tax return.”  Id.  In these states, “the intercompany transactions are 
eliminated.”  Id.2 
                                                          
 
1 “Under both the Due Process and the Commerce Clauses of the [United States] 
Constitution, a State may not, when imposing an income-based tax, ‘tax value earned outside its 
borders.’”  Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 164 (1983) (quoting 
ASARCO, Inc. v. Idaho State Tax Comm’n, 458 U.S. 307, 315 (1982)).  Rather, a state is 
permitted to tax a corporation on “an apportionable share of the multistate business carried on in 
part in the taxing State.”  Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 778 (1992); 
see also Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977) (“[A] tax [will be 
sustained] against [a] Commerce Clause challenge when the tax is applied to an activity with a 
substantial nexus with the taxing State, is fairly apportioned, does not discriminate against 
interstate commerce, and is fairly related to the services provided by the State.”). 
2 As a result of its business activities during the years in issue, Kohl’s Illinois filed tax 
returns in both separate and combined reporting states.  Specifically, Kohl’s Illinois filed 
separate returns in the following states: Arkansas, Florida, Iowa, Louisiana, New Jersey, New 
3 
 
Generally speaking, Virginia is a separate reporting state.  Code § 58.1-400.  In 2004, the 
General Assembly sought to close the IHC loophole by enacting an “add back” statute, Code § 
58.1-402(B)(8)(a).  Department of Taxation, 2004 Special Session I, Fiscal Impact Statement for 
HB 5018 (estimating that the add back statute would increase the Commonwealth’s tax revenue 
by $34 million in 2005).  Under Code § 58.1-402(A), corporate taxpayers calculate their Virginia 
taxable income by starting with their federal taxable income and then making certain 
adjustments.  The add back statute requires corporations to add to their federal taxable income 
“the amount of any intangible expenses and costs” paid to their “related members to the extent 
such expenses and costs were . . . deducted in computing federal taxable income.”  Code § 58.1-
402(B)(8)(a). 
The parties do not contest that Kohl’s royalty payments were “intangible expenses and 
costs” paid to a “related member.”  However, Kohl’s claims that they fall within the “subject-to-
tax” exception to the add back statute.  This exception provides that the “addition shall not be 
required for any portion of the intangible expenses and costs if . . . [t]he corresponding item of 
income received by the related member is subject to a tax based on or measured by net income or 
capital imposed by . . . another state.”  Code § 58.1-402(B)(8)(a)(1).  Kohl’s Illinois included the 
royalties as income in each of its state tax returns.  This income was then apportioned and taxed 
by each of these states.  The royalties, in Kohl’s view, therefore qualify for the subject-to-tax 
exception, and Kohl’s did not add them back when calculating its Virginia taxable income for the 
taxable year that ended on January 31, 2009.  Kohl’s further requested a refund for the royalties 
                                                          
 
Mexico, North Carolina, Oklahoma, and South Carolina (collectively, the “Separate Return 
States”).  Kohl’s and Kohl’s Illinois filed combined returns in the following states: Alaska, 
California, Idaho, Illinois, Kansas, Maine, Massachusetts, Michigan, Minnesota, Montana, 
Nebraska, New Hampshire, New York, North Dakota, Oregon, Utah, Vermont, West Virginia, 
and Wisconsin (collectively, the “Combined Return States”). 
   
4 
 
it mistakenly added back to its taxable income for the taxable year that ended on January 30, 
2010. 
In February 2011, the Virginia Department of Taxation audited Kohl’s returns for both of 
the taxable years at issue.  The auditor recognized that Kohl’s Illinois paid income tax on a 
portion of the royalties, through the apportionment process, in many of the Separate Return 
States.  The auditor allowed a “partial exception” to the add back statute corresponding to the 
amount of the royalties that was actually taxed in these states.3  However, Kohl’s Illinois did not 
pay taxes on most of the royalties, and the auditor required that this untaxed portion be added 
back to Kohl’s taxable income.  The Department then issued a Notice of Assessment to Kohl’s 
for the taxable year that ended on January 31, 2009 in the amount of $1,165,318.16 in tax plus 
$120,682.26 in interest.  For the taxable year that ended on January 30, 2012, the Department 
issued a Notice of Assessment in the amount of $681,582.84 in tax plus $29,466.79 in interest. 
Kohl’s appealed to the State Tax Commissioner, requesting corrections to both Notices of 
Assessment.  The Commissioner found that the auditor correctly “reduced the royalty add back 
exception to the portion of [Kohl’s] royalties paid to [Kohl’s Illinois] that corresponds to the 
portion of [Kohl’s Illinois’s] income subjected to tax in other states.”  Accordingly, the 
Commissioner upheld the assessments. 
Kohl’s then filed an “Application for Correction of Erroneous Assessment and Refund of 
Corporation Income Taxes” in the circuit court.  Kohl’s primarily contended that the royalty 
payments only needed to be included in Kohl’s Illinois’s taxable income, regardless of whether 
they were actually taxed, to fall within the subject-to-tax exception.  The Department responded 
that only the portion of the royalty payments that was actually taxed by other states qualifies for 
                                                          
 
3 These states were Arkansas, Iowa, Louisiana, New Jersey, New Mexico, North 
Carolina, Oklahoma, and South Carolina. 
5 
 
the exception.  Kohl’s alternatively argued that even if the exception only covers the amount that 
was actually taxed, the Department’s calculation of that amount was incorrect. 
The parties submitted a joint stipulation of facts, wherein they agreed that 
it shall not be necessary for Kohl’s to put on evidence of the 
amounts of the [subject-to-tax] exception or the resulting 
additional [corporate income tax] and interest that follows from 
[the circuit court’s] ruling on the application of [the add back 
statute].  After [the circuit court’s] ruling, the parties will confer 
and attempt to agree on any additional [corporate income tax] and 
interest amounts. 
 
Both parties moved for summary judgment, agreeing “that the sole issue for the [circuit court] to 
decide is the extent to which Kohl’s is entitled to the [subject-to-tax] exception to the add back 
statute.”  Kohl’s Dep’t Stores, Inc. v. Va. Dep’t of Taxation, 91 Va. Cir. 499, 504-05 (2016).  The 
circuit court issued an opinion denying Kohl’s motion for summary judgment and granting the 
Department’s.  Id. at 506.  It held that “to fall within the [subject-to-tax] exception, the intangible 
expenses paid to a related member must not only be subject to a tax in another state, but that tax 
must actually be imposed.”  Id. at 505.  The circuit court’s opinion did not address Kohl’s 
alternative argument.  Id. at 504-06.  We granted Kohl’s this appeal. 
II. Analysis 
A. Applicability of the Subject-To-Tax Exception 
As in the circuit court, the primary contention between the parties on appeal is the extent 
to which Kohl’s is entitled to the subject-to-tax exception of Code § 58.1-402(B)(8)(a)(1).  The 
statute provides, in relevant part: 
B.  There shall be added to the extent excluded from federal 
taxable income: 
 
8.  a. . . . [T]he amount of any intangible expenses and costs 
directly or indirectly paid, accrued, or incurred to, or in 
connection directly or indirectly with one or more direct 
6 
 
or indirect transactions with one or more related members 
to the extent such expenses and costs were deductible or 
deducted in computing federal taxable income for 
Virginia purposes.  This addition shall not be required for 
any portion of the intangible expenses and costs if one of 
the following applies: 
 
(1) The corresponding item of income received by the 
related member is subject to a tax based on or measured 
by net income or capital imposed by Virginia [or] 
another state . . . . 
 
Code § 58.1-402(B). 
Kohl’s argues that all of the royalties fall within the subject-to-tax exception because they 
were included in the taxable income of Kohl’s Illinois.  In its view, if income is included in the 
computation of a corporation’s taxable income in another state, then it is “subject to a tax based 
on or measured by net income.”  Code § 58.1-402(B)(8)(a)(1).  The Department responds that 
while all of the royalties were included in the taxable income of Kohl’s Illinois, a substantial 
portion of these royalties was not attributable to any state in which Kohl’s Illinois filed its returns 
and, as a result, not subject to a tax imposed by another state.  In other words, Kohl’s argues that 
the subject-to-tax exception applies on a “pre-apportionment” basis, while the Department argues 
that the subject-to-tax exception applies on a “post-apportionment” basis. 
In resolving this dispute, we note that because the Department is charged with the 
responsibility of administering and enforcing the tax laws of the Commonwealth under Code § 
58.1-202, its interpretation of a tax statute is entitled to great weight.  Webster Brick Co. v. 
Department of Taxation, 219 Va. 81, 84-85, 245 S.E.2d 252, 255 (1978).  However, “[w]hen a 
[tax] statute, as written, is clear on its face, this Court will look no further than the plain meaning 
of the statute’s words.”  Department of Taxation v. Delta Air Lines, Inc., 257 Va. 419, 426, 513 
S.E.2d 130, 133 (1999).  The Court’s primary objective is to give effect to the legislative intent, 
7 
 
which “is initially found in the words of the statute itself, and if those words are clear and 
unambiguous, we do not rely on rules of statutory construction.”  Crown Cent. Petroleum Corp. 
v. Hill, 254 Va. 88, 91, 488 S.E.2d 345, 346 (1997). 
As stated above, the subject-to-tax exception applies when “[t]he corresponding item of 
income received by the related member is subject to a tax based on or measured by net income or 
capital imposed by . . . another state.”  Code § 58.1-402(B)(8)(a)(1).  It is not clear from this 
language whether the General Assembly intended the exception to apply on a pre- or post- 
apportionment basis.  Notably, the phrase “subject to a tax” is not defined by the Code.  Seeking 
to provide a definition, Kohl’s points out that the term “taxable” is defined as “subject to 
taxation.”  Black’s Law Dictionary 1688 (10th ed. 2014).  From this definition, Kohl’s reasons 
that the royalty payments need only be “taxable” – regardless of whether they are actually taxed 
– to fall within the subject-to-tax exception.  But this does not settle the issue, for the Due 
Process and Commerce Clauses of the United States Constitution mandate that only the amount 
of a corporation’s income that is fairly apportionable to a given state is legally subject to that 
state’s income tax.  Container Corp., 463 U.S. at 164.4 
                                                          
 
4 Kohl’s also attempts to provide a definition of “subject to a tax” by citing to a 1985 
Department regulation, which states that 
 
[a] corporation is “subject to” [income tax] . . . if it carries on 
sufficient business activity within any other state so that the other 
state has jurisdiction to impose one of the enumerated taxes, 
whether or not such other state actually imposes one of the 
enumerated taxes. 
 
23 VAC § 10-120-120.  In Kohl’s view, this regulation indicates that only the “jurisdiction” to 
tax is necessary for income to be subject to a tax, regardless of whether that jurisdiction is 
exercised.  However, this regulation defines when a corporation, not income, is subject to a tax.  
A state’s jurisdiction to tax a corporation does not include the authority to tax all of that 
corporation’s income, which is inherently divisible and only taxable to the extent it can be fairly 
apportioned to the state.  Complete Auto Transit, 430 U.S. at 279. 
8 
 
In fact, both of the parties’ positions find support in the statute’s language.  Because the 
royalties were included in Kohl’s Illinois’s taxable income, they were, to a certain extent, 
“subject to” the income taxes of other states.  At the same time, a substantial amount of the 
royalties was not apportioned to, and thereby not legally “subject to” the income tax of, any state 
in which Kohl’s Illinois filed a return.  Phrased differently, an income tax could only by 
“imposed by” another state on the post-apportioned amounts of the royalties.  Code § 58.1-
402(B)(8)(a)(1).  This principle is demonstrated in Kohl’s 2009 Virginia Income Tax Return, 
which indicates that less than 4% of Kohl’s “taxable income” was “apportioned to Virginia,” and 
that only this post-apportioned amount was “subject to Virginia Tax.”  (Emphases added.)  Thus, 
the General Assembly’s decision to limit the applicability of the subject-to-tax exception to when 
the income is “subject to” an income tax “imposed by” another state suggests that it intended the 
exception to apply on a post-apportionment basis.  Code § 58.1-402(B)(8)(a)(1).5 
Therefore, looking only at the plain language of the statute, it is doubtful and uncertain 
whether the General Assembly intended the subject-to-tax exception to apply on a pre- or post- 
apportionment basis.6  Newberry Station Homeowners Ass’n v. Board of Supervisors. 285 Va. 
                                                          
 
5 The parties stipulated that “[t]he royalties that Kohl’s Illinois received from Kohl’s 
were subject to a tax based on or measured by net income or capital in each of the Separate 
Return States.”  However, under the Due Process and Commerce Clauses of the United States 
Constitution, only that income which is fairly apportionable to a state is subject to that state’s 
income taxes.  Container Corp., 463 U.S. at 164.  The parties cannot avoid application of this 
legal principle through a stipulation.  Swift & Co. v. Hocking Valley R.R., 243 U.S. 281, 289 
(1917) (“If [a] stipulation is to be treated as an agreement concerning the legal effect of admitted 
facts, it is obviously inoperative.”). 
6 The dissent points to legislation that was proposed in, but not enacted by, the General 
Assembly in 2010 and 2013.  These bills would have amended the subject-to-tax exception to 
unambiguously apply on a post-apportionment basis.  See S.B. 407, Va. Gen. Assem. (Reg. Sess. 
2010); S.B. 1036, Va. Gen. Assem. (Reg. Sess. 2013).  The General Assembly subsequently 
accomplished this goal through its 2014 and 2016 appropriations acts, which state that the 
subject-to-tax exception “shall be limited and apply only to the portion of such income received 
by the related member, which portion is attributed to a state . . . in which the related member has 
sufficient nexus to be subject to such taxes.”  2014 Acts ch. 2, § 3-5.10; 2016 Acts ch. 780, § 3-
9 
 
604, 614, 740 S.E.2d 548, 553 (2013) (A “statute is ambiguous when its language is capable of 
more senses than one, difficult to comprehend or distinguish, of doubtful import, of doubtful or 
uncertain nature, of doubtful purport, open to various interpretations, or wanting clearness or 
definiteness, particularly where its words have either no definite sense or else a double one.” 
(citation and internal quotation marks omitted)).  “When the proper construction of a law is not 
clear from the words of a statute, the legislative intent is to be ‘gathered from the occasion and 
necessity of the law, . . . the causes which moved the Legislature to enact it.’”  Ambrogi v. 
Koontz, 224 Va. 381, 386-87, 297 S.E.2d 660, 663 (1982) (quoting Vicars v. Sayler, 111 Va. 
307, 309, 68 S.E. 988, 989 (1910)). 
By enacting the add back statute, the Commonwealth joined numerous states7 with 
legislation “designed primarily to prevent the deduction of royalties and interest paid to related 
intangible holding companies.”  Amdur, supra, 11 A.L.R. 6th at 556.  Before the General 
Assembly passed House Bill 5018, the relevant portion of which was codified as Code § 58.1-
402(B), the Department estimated in its fiscal impact statement that the add back statute would 
raise the Commonwealth’s annual tax revenue, specifically by $34 million in 2005.  Department 
of Taxation, 2004 Special Session I, Fiscal Impact Statement for HB 5018.  Yet, accepting 
                                                          
 
5.09 (emphases added).  These legislative acts provide examples of how the subject-to-tax 
exception could be unambiguously worded to apply on a post-apportionment basis.  But they do 
not contradict our conclusion that the version of the statute before us is ambiguous. 
7 In addition to Virginia, the following jurisdictions have enacted legislation aimed at 
closing the IHC loophole:  Alabama, Ala. Code § 40-18-35(b); Arkansas, Ark. Code Ann. § 26-
51-423(g)(1); Connecticut, Conn. Gen. Stat. § 12-218(c); District of Columbia, D.C. Code § 47-
1803.02; Georgia, Ga. Code Ann. § 48-7-28.3; Illinois, 35 Ill. Comp. Stat. 5/203(a)(2); Indiana, 
Ind. Code § 6-3-2-20; Kentucky, Ky. Rev. Stat. Ann. § 141.205; Maryland, Md. Code Ann., Tax-
Gen. § 10-306.1; Massachusetts, Mass. Gen. Laws ch. 63, § 31I; Michigan, Mich. Comp. Laws § 
208.1201; Mississippi, Miss. Code Ann. § 27-7-17; New Jersey, N.J. Stat. Ann. § 54:10A-4.4; 
New York, N.Y. Tax Law § 208; North Carolina, N.C. Gen. Stat. § 105-130.7A; Ohio, Ohio 
Rev. Code Ann. § 5733.042; South Carolina, S.C. Code Ann. § 12-6-1130; Tennessee, Tenn. 
Code Ann. § 67-4-2006(b). 
10 
 
Kohl’s argument would effectively negate the add back statute’s intended operation and 
undermine this expected revenue.  Under a pre-apportionment interpretation, corporations could 
avoid the application of the add back statute by paying royalties to a related member in a state in 
which its apportionment factor is insignificant.  This result would resurrect the loophole that the 
add back statute was designed to close. 
Moreover, we have repeatedly held that when a statute’s language is of doubtful import, 
the construction given to it by a state official charged with its administration may be considered.  
Department of Taxation v. Progressive Community Club, Inc., 215 Va. 732, 739, 213 S.E.2d 759, 
763 (1975) (citing Commonwealth v. Research Analysis, 214 Va. 161, 198 S.E.2d 622 (1973)); 
Anglin v. Joyner, 181 Va. 660, 667, 26 S.E.2d 58, 60 (1943) (“[I]n construing a statute of 
doubtful import the court should give due weight to the interpretation placed upon the statute by 
that branch of the executive department of the State which is specifically charged with the duty 
of construing and effectuating its provisions.” (citing City of Richmond v. Drewry-Hughes Co., 
122 Va. 178, 190, 94 S.E. 989, 991 (1918)).8  The Department is “[c]harged with the 
responsibility of administering and enforcing the tax laws of the Commonwealth,” including the 
                                                          
 
8 While it is true that 
 
the rule of interpretation which permits the courts to look at the 
practical construction adopted by executive officers is usually 
applied to cases in which such construction has continued and been 
acquiesced in for a long period of time[,] . . . it is not to be 
confined to such cases.  One reason for the rule is that the officers 
charged with the duty of carrying new laws into effect are 
presumed to have familiarized themselves with all the 
considerations pertinent to the meaning and purpose of the new 
law, and to have formed an independent, conscientious and 
competent expert opinion thereon. 
 
Richmond Food Stores, Inc. v. Richmond, 177 Va. 592, 599, 15 S.E.2d 328, 331 (1941) (quoting 
Drewry-Hughes, 122 Va. at 193, 94 S.E. at 992). 
11 
 
subject-to-tax exception.  LZM, Inc. v. Department of Taxation, 269 Va. 105, 109, 606 S.E.2d 
797, 799 (2004).  The construction of this exception which it advocates, and which we apply, is 
reasonable.  See Verizon Online LLC v. Horbal, 293 Va. 176, 182, 796 S.E.2d 409, 412 (2017) 
(As “[t]he Department of Taxation and the Tax Commissioner administer and enforce the 
Commonwealth’s tax laws, . . . a court will afford great weight to their interpretation when the 
statute’s meaning is doubtful.”). 
In sum, an interpretation of the subject-to-tax exception that would result in a taxpayer’s 
ability to avoid the add back statute would be unreasonable in light of the statute’s purpose and 
intent.  We therefore hold that the subject-to-tax exception applies only to the extent that the 
royalty payments were actually taxed by another state.  That is, the exception applies on a post-
apportionment, rather than a pre-apportionment, basis. 
B.  Kohl’s Alternative Argument 
Kohl’s alternatively argues that the Department erred in calculating the amount of the 
royalties that falls within the subject-to-tax exception.  The Department allowed a “partial 
exception” to the add back statute to the extent that the royalty payments were apportioned and 
taxed in many of the Separate Return States.  However, Kohl’s Illinois’s income was also 
included in Kohl’s taxable income calculations in the Combined Return States.  Additionally, 
Kohl’s was required to add the royalties back to its taxable income when calculating its taxable 
income for Connecticut, Maryland, and Massachusetts, and it added a portion of the royalties 
back when calculating its taxable income for Georgia and New Jersey (collectively, the 
“Addback States”).  Kohl’s argues that to the extent the royalties were apportioned to and taxed 
by all of the above states, they fall within the subject-to-tax exception.  We agree. 
The subject-to-tax exception applies when “[t]he corresponding item of income received 
12 
 
by the related member is subject to a tax based on or measured by net income or capital imposed 
by Virginia [or] another state.”  Code § 58.1-402(B)(8)(a)(1).  This statute only requires that the 
“item of income received by the related member” – in this case, the royalties – be taxed by 
another state.  It does not require that that the related member be the entity that pays the tax on 
that “item of income.”  Id. 
Nevertheless, the Department notes that the add back statute only applies to any 
intangible expenses paid to a “related member,” Code § 58.1-402(B)(8)(a), and that the subject-
to-tax exception only applies to “[t]he corresponding item of income received by the related 
member.”  Code § 58.1-402(B)(8)(1) (emphasis added).  From these provisions, the Department 
reasons that the Court can only look to Kohl’s Illinois’s tax returns when determining whether 
the royalty payments were subject to a tax in another state.  In essence, this argument asserts that 
for the royalty payments to fall within the subject-to-tax exception, the tax must have been paid 
by the related member. 
Simply, Code § 58.1-402(B)(8)(a)(1) contains no such requirement.  To the extent that 
the royalties were actually taxed by the Separate Return States, Combined Return States, or 
Addback States, they fall within the subject-to-tax exception regardless of which entity paid the 
tax.  The Department should have allowed this portion of the royalties to be excepted from the 
add back statute. 
III.  Conclusion 
The circuit court correctly determined that only the portion of the royalties that was 
actually taxed by another state falls within the subject-to-tax exception.  However, it erred by 
failing to hold, in accordance with Kohl’s alternative argument, that Kohl’s Illinois need not be 
the entity that pays this tax for the exception to apply.  Accordingly, we reverse the circuit 
13 
 
court’s judgment and remand the matter for a determination of what portion of the royalty 
payments was actually taxed by another state and, therefore, excepted from the add back statute. 
 
Reversed and remanded. 
 
JUSTICE McCLANAHAN, with whom CHIEF JUSTICE LEMONS and JUSTICE KELSEY join, 
dissenting. 
 
I disagree with the Court’s holding in Part II.A. of its opinion that Code § 58.1-
402(B)(8)(a)(1) “applies on a post-apportionment, rather than a pre-apportionment, basis.”  In 
my view, the Court has inserted an apportionment calculation into this provision that is not 
supported by the provision’s plain language. 
I. 
Code § 58.1-402(B)(8)(a)(1) provides that the addition to taxable income of royalties 
paid to a related member “shall not be required for any portion of the intangible expenses and 
costs if . . . [t]he corresponding item of income received by the related member is subject to a tax 
based on or measured by net income or capital imposed by . . . another state.” (Emphases added.)  
The parties stipulated that “[t]he royalties that Kohl’s Illinois received from Kohl’s were subject 
to a tax based on or measured by net income or capital in each of the Separate Return States.”  
Thus, the addition to income was not required “for any portion” of the royalties that Kohl’s paid 
to Kohl’s Illinois.  Id. (emphasis added). 
Although the majority states “it is doubtful and uncertain whether the General Assembly 
intended” Code § 58.1-402(B)(8)(a)(1) to apply on a pre-apportionment or post-apportionment 
basis, this provision contains no apportionment language that would support its application on a 
 
 
14 
post-apportionment basis.1  The majority has found an ambiguity by crediting the interpretation 
of this provision by the Virginia Department of Taxation that does not comport with the 
provision’s plain language.  The majority then resolves the supposed ambiguity by deferring to 
the Department’s construction as a reasonable one in consideration of expected revenue as 
reflected in a Department fiscal impact statement.  Because I believe Code § 58.1-
402(B)(8)(a)(1) is unambiguous, I would not defer to the Department’s contrary interpretation.  
See Verizon Online LLC v. Horbal, 293 Va. 176, 182, 796 S.E.2d 409, 412 (2017) (noting that 
courts do not defer to the Department’s interpretation of an unambiguous tax statute). 
Since the Virginia Tax Commissioner first issued a ruling in which it imposed an 
apportionment limitation on the application of Code § 58.1-402(B)(8)(a)(1), efforts to codify the 
Department’s interpretation of this provision through amendment of Code § 58.1-402 have been 
undertaken.2  In 2010, a bill to amend and reenact Code § 58.1-402 was proposed, which would 
have revised Code § 58.1-402(B)(8)(a) to provide that the addition to taxable income for 
royalties paid to a related member shall not be required “to the extent that” the corresponding 
item of income received by the related member is subject to a tax.  See S.B. 407, Va. Gen. 
Assem. (Reg. Sess. 2010) (offered January 13, 2010) (stating that “[t]his addition shall not be 
required for any portion of the intangible expenses and costs if to the extent that one of the 
                                                          
 
1 Under the majority’s post-apportionment method, Code § 58.1-402(B)(8)(a)(1) applies 
after the income received by the related member is apportioned and only to the extent such 
portion is actually taxed in another state. 
2 In 2007, when the Commissioner issued its first ruling interpreting Code § 58.1-
402(B)(8)(a)(1), it limited application of the provision “to the portion of the Taxpayer’s royalty 
payments to its [affiliate] that correspond to the portion of the [affiliate’s] income subjected to 
tax in other states, as evidenced by the apportionment percentages shown in the [affiliate’s] tax 
returns filed with other states.”  Va. Dep’t of Taxation, Pub. Doc. 07-153 (Oct. 2, 2007).  In 
limiting the provision’s application in this manner, the Commissioner inserted an apportionment 
calculation into the provision that it does not contain. 
 
 
 
15 
following applies. . .”) (deletion indicated by strikethrough text and additions indicated by 
italicized text).  Senate Bill 407 was stricken at the request of its patron.3  In 2013, a bill to 
amend and reenact Code § 58.1-402 was proposed, which would have made the following 
revision to Code § 58.1-402(B)(8)(a)(1): “This addition shall not be required for any portion of 
the intangible expenses and costs if one of the following applies to such portion: (1) The 
corresponding item of income corresponding to such portion received by the related member is 
subject to a tax . . .”  S.B. 1036, Va. Gen. Assem. (Reg. Sess. 2013) (offered January 9, 2013) 
(deletion indicated by strikethrough text and additions indicated by italicized text).  Senate Bill 
1036 was also stricken at the request of its patron. 
While Code § 58.1-402 has not been amended, the General Assembly enacted budget 
bills in 2014 and 2016 that include provisions applying the Department’s apportionment 
limitation to Code § 58.1-402(B)(8)(a)(1).  The relevant part of these Acts states: 
Notwithstanding the provisions of § 58.1-402(B)(8), Code of Virginia, for 
taxable years beginning on and after January 1, 2004: 
 
(i) The exception in § 58.1-402(B)(8)(a)(1) for income that is subject to a 
tax based on or measured by net income or capital imposed by Virginia, 
another state, or a foreign government shall be limited and apply only to the 
portion of such income received by the related member, which portion is 
attributed to a state or foreign government in which the related member has 
sufficient nexus to be subject to such taxes. 
 
2014 Acts ch. 2, § 3-5.10 (effective for the biennium ending June 30, 2016); 2016 Acts ch. 780, 
§ 3-5.09 (effective for the biennium ending June 30, 2018) (emphases added).4  
                                                          
 
3 The same amendment was included in budget bills introduced during the 2010 session, 
see H.B. 29, Va. Gen. Assem. (Reg. Sess 2010); S.B. 29, Va. Gen. Assem. (Reg. Sess 2010) and 
H.B. 30, Va. Gen. Assem. (Reg. Sess. 2010); S.B. 30, Va. Gen. Assem. (Reg. Sess. 2010), but 
was removed prior to enactment. 
4 Although the provisions regarding Code § 58.1-402(B)(8)(a) in these Acts contain 
retroactive language, the Department does not invoke these provisions but relies solely on Code 
§ 58.1-402(B)(8)(a).  Therefore, the provisions of the 2014 and 2016 budget bills are not at issue 
in this case. 
 
 
16 
“Notwithstanding” is defined as “despite” or “in spite of.”  Black’s Law Dictionary 1231 (10th 
ed. 2014).  Thus, the opening clause, “[n]otwithstanding the provisions of § 58.1-402(B)(8),” 
means that the language that follows imposes an apportionment limitation contrary to the 
provisions of Code § 58.1-402(B)(8)(a)(1).5 
In adopting the Department’s interpretation of Code § 58.1-402(B)(8)(a)(1), the majority 
has inserted into this provision apportionment language reflected in proposed amendments that 
have not been enacted and provisions of the 2014 and 2016 budget bills that are not at issue here.  
As we have held, however, “[c]ourts must not construe the plain language of a statute in a way 
that adds a requirement that the General Assembly did not expressly include in the statute.”  
David v. David, 287 Va. 231, 240, 754 S.E.2d 285, 290 (2014).  The ability to avoid the add back 
statute, which the majority seeks to prevent, “cannot be remedied through judicial construction 
by imposing [an apportionment] requirement that effectively would add new language to the 
statute.  Any such change to the statute must be a legislative, rather than a judicial, undertaking.”  
Vaughn, Inc. v. Beck, 262 Va. 673, 679, 554 S.E.2d 88, 91 (2001).  In fact, the provisions 
contained in the 2014 and 2016 budget bills that impose an apportionment limitation on the 
application of Code § 58.1-402(B)(8)(a)(1) are just such a change.  Code § 58.1-402(B)(8)(a)(1), 
though, which is the only provision at issue in this case, contains no such language. 
 
 
 
 
                                                          
 
5 See also Craig D. Bell, Annual Survey of Virginia Law: Taxation, 49 U. Rich. L. Rev. 
171, 174 (2014) (noting that the budget bill supplied the language missing from § 58.1-
402(B)(8)(a)(1) to justify the Commissioner’s construction of the provision, “overc[ame] the Tax 
Department’s failure in the 2013 General Assembly to codify its desired interpretation of [Code 
§ 58.1-402(B)(8)(a)(1)],” and enabled the legislature to “avoid the appropriate tax-writing 
committees” and “debate over the issues and the implications that typically occur in a public 
setting”). 
 
 
17 
II. 
Even if I agreed with the majority that Code § 58.1-402(B)(8)(a)(1) is ambiguous, which 
I do not, I would nevertheless resolve any ambiguity in favor of Kohl’s. 
First, because Code § 58.1-402 is a general tax statute, any ambiguity must be resolved in 
favor of the taxpayer.6  “Statutes imposing taxes must be construed most strongly against the 
Commonwealth and in favor of the taxpayer.  Such enactments should not be extended by 
implication beyond the clear import of the language used.”  Commonwealth v. General Elec. Co., 
236 Va. 54, 64, 372 S.E.2d 599, 605 (1988) (reciting principle in connection with consideration 
of Code § 58-151.083 (predecessor to Code § 58.1-446) permitting Department to combine 
income of affiliated corporations and adjust income tax).  “Whenever there is a just doubt, ‘that 
doubt should absolve the taxpayer from his burden.’”  Commonwealth Natural Resources, Inc. v. 
Commonwealth, 219 Va. 529, 537-38, 248 S.E.2d 791, 796 (1978) (quoting Commonwealth v. 
Appalachian Elec. Power Co., 193 Va. 37, 46, 68 S.E.2d 122, 127 (1951)).  Therefore, to the 
extent there is doubt as to whether Code § 58.1-402(B)(8)(a)(1) applies on a post-apportionment 
basis, thus requiring the addition to taxable income of some portion of royalties, that doubt 
should be resolved in Kohl’s favor. 
Furthermore, the stated purpose of Code § 58.1-402(B)(8)(a) was to close a loophole in 
connection with Delaware holding companies, not corporations for which income is subject to 
tax.  The fiscal impact statement referenced by the majority, Department of Taxation, 2004 
                                                          
 
6 Code § 58.1-402 contains provisions governing the calculation of Virginia taxable 
income for the taxation of corporations.  Code § 58.1-402(A) states, in pertinent part: “For 
purposes of this article, Virginia taxable income for a taxable year means the federal taxable 
income and any other income taxable to the corporation under federal law for such year of a 
corporation adjusted as provided in [the following] subsections.”  Code § 58.1-402(B)(8)(a) 
requires the addition of “the amount of any intangible expenses and costs directly or indirectly 
paid, accrued, or incurred to . . . one or more related members to the extent such expenses and 
costs were deductible or deducted in computing federal taxable income for Virginia purposes.” 
 
 
18 
Special Session I, Fiscal Impact Statement for H.B. 5018, states that the addback statute “[c]loses 
certain loopholes related to Delaware holding companies.”  The legislative summary 
accompanying H.B. 5018 similarly states that the bill “[r]equires additions to federal taxable 
income for certain deductions for intangible and interest expense, but provides certain safe-
harbors related to Delaware holding companies.”  See H.B. 5018, Summary as Passed, available 
at https://lis.virginia.gov/cgi-bin/legp604.exe?ses=042&typ=bil&val=hb5018.7  Thus, the 
original purpose as stated in the legislative summary and fiscal impact statement accompanying 
H.B. 5018 reflect the General Assembly’s intention to close loopholes related to holding 
companies for which income is not subject to tax in any state, such as Delaware holding 
companies.8  Construing Code § 58.1-402(B)(8)(a)(1) to require the addition to income of 
royalties paid to a corporation for which income is subject to tax in another state would exceed 
the stated purpose of the legislation. 
Finally, the efforts to amend Code § 58.1-402(B)(8)(a)(1) to impose an apportionment 
limitation on its application reveal that the provision contains no such limitation.  As discussed in 
Part I, the General Assembly failed to enact bills proposed during the 2010 and 2013 legislative 
sessions, both of which included language that would have codified the apportionment limitation 
adopted by the Department.  Budget bills enacted in 2014 and 2016 contain provisions 
purporting to place an apportionment limitation on the application of Code § 58.1-
                                                          
 
7 See also Craig D. Bell, Annual Survey of Virginia Law: Taxation, 39 U. Rich. L. rev. 
413, 424 (2004) (“In a conscious effort to curtail the benefits of using Delaware holding 
companies in Virginia, the 2004 General Assembly significantly curtailed the benefits by 
requiring additions to be made to federal taxable income for certain deductions claimed for 
intangible property and interest expenses related to Delaware holding companies.”). 
8 See, e.g., Del. Code Ann. tit. 30, § 1902(b)(8) (providing an exemption from Delaware 
income tax for corporations “whose activities within [Delaware] are confined to the maintenance 
and management of their intangible investments”). 
 
 
 
19 
402(B)(8)(a)(1).  It is reasonable, therefore, to conclude that these efforts were not undertaken in 
vain, but rather to provide language that would codify the Department’s adoption of the 
apportionment limitation. 
III. 
In sum, I would hold that Code § 58.1-402(B)(8)(a)(1), by its plain language, does not 
apply on a post-apportionment basis.  Even if there were doubt as to whether the provision 
contained such a limitation, statutory construction principles require that we resolve it in favor of 
Kohl’s.  For these reasons, I would hold that Kohl’s is entitled to a full refund and would, 
accordingly, reverse the judgment of the circuit court.9 
                                                          
 
9 Because I would hold that Code § 58.1-402(B)(8)(a)(1) does not apply on a post-
apportionment basis and that Kohl’s is entitled to a full refund, I would not reach the alternative 
argument made by Kohl’s, which is addressed by the Court in Part II.B. of the majority opinion.