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Virginia Administrative Code
Title 23. Taxation
Agency 10. Department of Taxation
Chapter 120. Corporation Income Tax
1/27/2023

23VAC10-120-150. What income apportioned and how.

A. In general.

1. If a corporation is subject to taxation in Virginia and at least one other state (as determined by Va. Code § 58.1-405) then all Virginia taxable income, other than dividends allocable under Va. Code § 58.1-407, is apportioned by the appropriate formula. Each factor is a fraction (expressed as a decimal carried to 6 places) based on activity within Virginia divided by similar activity everywhere. (But see subsection B below. The activity must also be effectively connected with a trade or business in the United States and produce Virginia taxable income).

2. Except as noted below, all corporations are required to use a three factor formula based on the property, payroll and sales within Virginia. The formula is the average of the three factors, except that if the denominator of any fraction is zero, then that fraction is not included in the average.

The following types of corporations apportion income using special one-factor formulas:

a. Motor carriers according to vehicle miles. Va. Code § 58.1-417.

b. Financial corporations according to cost of performance. Va. Code § 58.1-418.

c. Construction corporations using the completed contract method according to business within and without Virginia. Va. Code § 58.1-419.

d. Railway companies according to revenue car miles. Va. Code § 58.1-420.

e. In exceptional circumstances any corporation may request permission to use an alternate method. Va. Code § 58.1-421.

B. Additional requirements. In order to be included in the numerator and denominator of each factor in the three-factor formula, property, payroll and sales must meet two requirements.

1. The property, payroll and sales must be used to produce Virginia taxable income. Income or gain produced by the property, payroll and sales must be included in federal taxable income and not subtracted in computing Virginia taxable income. In the alternative, deductions for expenses or losses associated with the property, payroll and sales must be both deducted in computing federal taxable income and not an addition in computing Virginia taxable income.

2. The property, payroll and sales must be effectively connected with the conduct of a trade or business within the United States and income therefrom must be includible in federal taxable income.

a. Reference is made to the Treasury regulations under IRC §§ 882, 861, 862, 863 and 864 for determining whether property, payroll and sales are effectively connected with the conduct of a trade or business within the United States. Attention is directed to the fact that under the regulations mentioned, particularly § 1.864-4, activity may be located in a foreign country and still be effectively connected with the conduct of a trade or business within the United States.

b. The property, payroll and sales of a corporation which are used to produce income qualifying for the subtraction for foreign dividend gross up, subpart F income and foreign source income shall not be included in the denominator of the fractions.

C. Examples. The principles of this section may be illustrated by the following examples.

1. Corporation C is organized under the laws of Delaware and has its commercial domicile in New York. C manufactures goods in New York and sells them through its sales offices located throughout the world, including Virginia. C also owns stock in a corporation which pays dividends. After the dividends-received deduction, $10,000 is included in C's federal taxable income of $10,000,000. Under federal law all of C's foreign sales are effectively connected with a trade or business within the United States. The property, payroll and sales factors are as follows:

Virginia

World Wide

Factor

Property

$3,000,000

$100,000,000

.030000

Payroll

750,000

75,000,000

.010000

Sales

2,500,000

125,000,000

.020000

The apportionable income is $9,990,000 (total income less allocable dividends of $10,000). The income from Virginia sources on which Virginia income tax is imposed is $199,800, computed as follows:

$9,990,000

x

[ (.03 + .01 + .02) ]
3

= $199,800

2. Same facts as in example 1 except that C only recently opened its Virginia office and made no sales in Virginia during the taxable year. The income from Virginia sources is $133,200 computed as follows:

$9,990,000

x

[ (.03 + .01) ]
3

= $133,200

Statutory Authority

§§ 58.1-203 and 58.1-408 of the Code of Virginia.

Historical Notes

Derived from VR630-3-408, eff. January 1, 1985.

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