Virginia Administrative Code › Title 23 - TAXATION › Agency 10 - DEPARTMENT OF TAXATION › Chapter 120 - Corporation Income Tax › Section 23VAC10-120-20 - Definitions

Current through Register Vol. 40, No. 24, July 15, 2024
The following words and terms, when used in this chapter,
				  shall have the following meanings unless the context clearly indicates
				  otherwise:
"Affiliated" means a group of corporations each of which is
				  itself subject to Virginia income tax and in which (i) one corporation owns at
				  least 80% of the voting stock of the other or others, or (ii) at least 80% of
				  the voting stock of two or more corporations is owned by the same
				  interests.
For the purpose of § 58.1-442 of the Code of Virginia,
				  it is not necessary for all members of a controlled group to be subject to
				  Virginia income tax in order for some of the members, otherwise eligible, to
				  file a consolidated or combined return. For example, two or more corporations
				  subject to Virginia income tax may be 80% owned by a foreign corporation not
				  subject to Virginia income tax. All of the subsidiaries subject to Virginia
				  income tax may file a consolidated or combined return without the foreign
				  parent corporation.
"Compensation" means, for the purpose of allocation and
				  apportionment under § 58.1-406 of the Code of Virginia as used in
				  computing the payroll factor under § 58.1-412 of the Code of Virginia, all
				  remuneration or wages for employment as defined in IRC § 3121(a) except
				  that compensation includes the excess wages over the contribution base defined
				  in IRC § 3121(a)(1).
1. Generally
				compensation will be the gross wages, salaries, tips, commissions and other
				remuneration paid to employees and reported to the Internal Revenue Service.
				The department will accept the gross amounts reported to the IRS on Forms
				W-2/W-3, Form 940 or the accounting records of the corporation provided that
				all of the employees of the corporation are included in such reports or
				records.
2. If the corporation has
				any employees who are not subject to the F.I.C.A. and F.U.T.A. payroll taxes or
				are not subject to U.S. income tax because they are nonresident aliens,
				compensation includes all wages, salaries, tips, commissions and other
				remuneration paid to or for such employees in addition to the compensation in
				subdivision 1 above.
3. The
				corporation shall determine compensation on a consistent basis so as not to
				distort the compensation paid to employees located within and without Virginia.
				In the event the corporation is not consistent in its reporting, it shall
				disclose in its return to Virginia the nature and extent of such
				inconsistency.
4. The terms
				"employees" and "personal services" shall have the same meaning as used in the
				context of employment in IRC § 3121(b).
5. The term "paid or accrued" means either
				(i) cash or property paid to employees and reported to the IRS as in
				subdivision 1 above, or (ii) amounts properly accrued on the books of the
				corporation under its accounting method for federal income tax purposes, but
				not both.
"Corporation" means any entity created as such under the laws
				  of the United States, any state, territory or possession thereof, the District
				  of Columbia, or any foreign country or any political subdivision of any of the
				  foregoing, or any association, joint stock company, partnership or any other
				  entity subject to corporation income taxes under the United States Internal
				  Revenue Code. See IRC § 7701.
"Domestic corporation" means a corporation, as defined above,
				  organized, created or existing under the applicable laws of the Commonwealth of
				  Virginia. Compare IRC § 7701(a)(4).
"Foreign corporation" means a corporation, as defined above,
				  which is not a domestic corporation. Registration of a foreign corporation with
				  the State Corporation Commission for the privilege of doing business in
				  Virginia shall not make a corporation a domestic corporation.
"Foreign source income" means income computed in accordance
				  with the following principles:
1. The
				federal taxable income of corporations organized under the laws of the United
				States, any of the 50 states or the District of Columbia (U.S. domestic
				corporations) includes their worldwide income. Virginia law provides a
				subtraction for "foreign source income" if any is included in federal taxable
				income. Corporations that are not U.S. domestic corporations include in federal
				taxable income only income from U.S. sources or income effectively connected
				with a U.S. trade or business. Such corporations will not have any "foreign
				source income" included in federal taxable income.
2. Foreign source income does not include all
				income from sources without the United States but is limited to specified types
				of income and is also limited by the federal source rules in IRC §§
				861 et seq. and the regulations thereunder in determining the source of a
				particular item of income.
3.
				Corporations having foreign source income determine the amount of the
				subtraction by the following procedure:
a. The
				specified types of gross income included in federal taxable income are
				segregated. The types of income are: interest, dividends, rents, royalties,
				license and technical fees, also gains, profits and other income from the sale
				of intangible or real property.
b.
				The federal source rules are applied to determine the source of each item,
				particularly whether or not the item is effectively connected with the conduct
				of a U.S. trade or business.
c. The
				federal procedure in Treasury Reg. § 1.861-8 is applied to allocate and
				apportion expenses to income derived from U.S. and foreign sources.
d. The gross income from sources without the
				U.S. from subdivision 3 b less the expenses allocated and apportioned to such
				income in subdivision 3 c is the foreign source income for purposes of the
				Virginia subtraction.
4.
				All income and expenses included in foreign source 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.
"Income and deductions from Virginia sources" means items of
				  income, gain, loss and deduction attributable to the ownership, sale, exchange
				  or other disposition of any interest in real or tangible personal property in
				  Virginia or attributable to a business, trade, profession or occupation carried
				  on in Virginia or attributable to intangible personal property employed in a
				  business, trade, profession or occupation carried on in Virginia.
A. If the entire business of a corporation is
				not deemed to have been transacted or conducted within this Commonwealth by
				§ 58.1-405 of the Code of Virginia, then the "income from Virginia
				sources" means that portion of the corporation's Virginia taxable income
				resulting from the allocation and apportionment formulas set forth in
				§§ 58.1-406 through 58.1-421 of the Code of Virginia.
1. Allocable income is limited to certain
				dividends. See § 58.1-407 of the Code of Virginia.
2. Apportionable income is Virginia taxable
				income less allocable income. Apportionment formulas are then applied to
				determine the part of apportionable income that is income from Virginia
				sources. Generally, a corporation will have income from Virginia sources if
				there is sufficient business activity within Virginia to make any one or more
				of the following apportionment factors positive:
(i) vehicle miles (for motor carriers);
(ii) cost of performance (for
				financial corporations);
(iii)
				completed contracts (for certain construction corporations);
(iv) revenue car miles (for railway
				companies); and
(v) property,
				payroll or sales (for all other corporations).
3. See §§ 58.1-408 through 58.1-421
				of the Code of Virginia and the regulations thereunder for details.
				Accordingly, a foreign corporation may be subject to Virginia income tax on the
				portion of its income deemed to be derived from Virginia sources under
				apportionment formulas even though no specific portion of its gross or net
				income may be separately identified as being derived directly from
				Virginia.
B. Certificate
				of authority.
1.
												§§ 13.1-757 and
				13.1-919 of the Code of Virginia provide that if a corporation's only activity
				in Virginia is limited to certain activity in connection with investment in
				notes, bonds or other instruments secured by the deeds of trust on property
				located in Virginia, such corporations shall not be deemed to be transacting
				business in Virginia for purposes of §§ 13.1-757 and 13.1-919 of the
				Code of Virginia which require foreign corporations to obtain a certificate of
				authority from the State Corporation Commission before transacting business in
				Virginia. All corporations having income from Virginia sources are subject to
				Virginia income tax regardless of whether or not they are required to obtain a
				certificate of authority.
2. A
				foreign corporation whose only connection with Virginia is the receipt of
				interest on notes, bonds or other instruments secured by deeds of trust on
				property located in Virginia will have no payroll or real or tangible personal
				property located in Virginia. Although the interest may be paid by a Virginia
				resident, for purposes of the sales factor the gross receipts will not be
				assigned to Virginia because there is no income producing activity in Virginia.
				See § 58.1-416 of the Code of Virginia. If the corporation is a financial
				corporation as defined in § 58.1-418 of the Code of Virginia there would
				be no costs of performance in Virginia. Therefore, such a corporation would
				have no income from Virginia sources and, since such a corporation is not
				required to obtain a certificate of authority, it would not be required to file
				a Virginia income tax return. See
				23VAC10-120-310. However, if such
				a corporation acquires real or tangible personal property in Virginia by
				foreclosure or any other means the corporation will have property (or cost of
				performance) in Virginia. Therefore the corporation will have income from
				Virginia sources and be required to file a Virginia income tax
				return.
C. In the course
				of computing income from Virginia sources a corporation may be required to make
				computations solely for that purpose or maintain records used only for that
				purpose. The effects on tax liability of a method used to determine any
				components of income from Virginia sources and the burden of maintaining
				records not otherwise maintained and of making computations not otherwise made
				shall be taken into consideration in determining whether such method is
				sufficiently precise.
D. Example.
				Corporation A is a manufacturer of paper products conducting all of its
				manufacturing, selling and shipping operations outside Virginia. It makes no
				sales to customers in Virginia. It therefore has no gross income which may be
				identified as being derived directly from Virginia. However, the corporation
				does operate a facility in Virginia solely for the purchase of pulpwood for
				shipment to its manufacturing plants in other states.
While corporation A has no gross income derived directly from
				  Virginia, it has property and payroll in this state. Accordingly, Corporation A
				  has income from Virginia sources based on apportionment factors.
"Sales" means the gross receipts of the corporation from all
				  sources not allocated under § 58.1-407 of the Code of Virginia (dividends)
				  whether or not such gross receipts are generally considered as sales. In the
				  case of the sale or other disposition of intangible property, gross receipts
				  shall be disregarded and only the net gain from the transaction shall be
				  included.
A. Manufacturing sales. In
				the case of a taxpayer whose business activity consists of manufacturing and
				selling, or purchasing and reselling goods or other property of a kind which
				would properly be included in the inventory of the taxpayer primarily for sale
				to customers in the ordinary course of its trade or business, gross receipts
				means gross sales, less returns and allowances, and includes service charges,
				carrying charges, or time-price differential charges incidental to such
				sales.
B. Sales made in other types
				of business activity.
1. If the business
				activity consists of providing services such as the operation of an advertising
				agency, or the performance of equipment service contracts, "sales" includes the
				receipts from performance of such service including fees, commissions, and
				similar items.
2. In the case of
				cost plus fixed fee contracts, such as the operation of a government owned
				plant for a fee, "sales" include the entire reimbursed cost, plus the
				fee.
3. In the case of the sale,
				assignment, or licensing of intangible property such as patents and copyrights,
				"sales" includes only the net gain from the sale or disposition.
4. In the case of the sale of real or
				personal property, "sales" includes the gross proceeds from such
				sales.
5. The term "sales" does not
				include amounts required by federal law to be included in federal taxable
				income as recapture of items deducted in prior years.
"State" means any state of the United States, the District of
				  Columbia, the Commonwealth of Puerto Rico, a territory or possession of the
				  United States, and any foreign country. Note that this definition applies only
				  within the allocation and apportionment section of this chapter. When used
				  elsewhere in the chapter the term "state" may or may not include foreign
				  countries and U.S. possessions, depending on the context.