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Virginia Ruling Appears to Reach Right Outcome on "Right to Apportion" and Sourcing of Sales...But Perhaps for the Wrong Reason

Virginia released a ruling discussing the right to apportion and how to source sales when the ultimat

September 19, 2012

Virginia released a ruling discussing the right to apportion and how to source sales when the ultimate destination of the sale is outside of Virginia. The Taxpayer was a manufacturer whose headquarters and only production facility were located in Virginia. However, the Taxpayer’s business was largely comprised of sales of its products to the U.S. Government, which in turn exported the products from the Taxpayer’s Virginia facility to various foreign countries. The Taxpayer would then send employees to the product locations for set up and installation.

First, the Tax Commissioner discussed whether the Taxpayer had the right to apportion its income for Virginia income tax purposes. Noting that in Virginia a corporation has the right to apportion its income if it is subject to a tax on net income in another jurisdiction, the Commissioner determined that it needed further information about the Taxpayer’s activities in other jurisdictions to determine if the Taxpayer had a right to apportion.

Second, the Tax Commissioner investigated whether the Taxpayer’s sales should be excluded from the Virginia sales factor numerator. Since Virginia sources sales on an ultimate destination basis, the Commissioner determined that, if the Taxpayer meets the apportionment requirement by being subject to tax in a foreign country, then the sales are properly excluded from its Virginia sales factor numerator because their ultimate destination is outside of Virginia.

This is an interesting ruling, especially since the Tax Commissioner appears to have conflated the “right to apportion” issue with the “sourcing” issue. While the Tax Commissioner discusses these two issues separately throughout the ruling, he concludes that “if the Taxpayer establishes that it is has nexus with a foreign country in which its products are shipped and its employees installed the equipment, it may be considered to be a multistate corporation eligible to apportion… Under such conditions, the equipment shipped outside of Virginia would not be included in the numerator of the Taxpayer’s sales factor.” Thus, the ruling seems to infer that the taxpayer needs to be taxable in the destination state, indicating a situation similar to a throw-back rule. Because Virginia does not have such a rule, this decision leads to questions about the Commissioner’s reasoning.

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