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HB 1499 Apportionment of income; corporate income tax.
SUMMARY AS INTRODUCED:
Apportionment of income; corporate income tax. Makes several changes to the current method used by multistate corporations to apportion income to Virginia for purposes of the corporate income tax, including (i) establishing sales as the sole factor to be used in apportioning income, with such single sales factor apportionment phased in and first effective beginning with taxable year 2020; (ii) adopting market-based sourcing as the approach for sourcing sales of services and nontangible personal property to Virginia; and (iii) eliminating the requirements placed on manufacturing companies electing single sales factor apportionment to maintain certain employment and wage levels.
In general, current law requires multistate corporations to apportion taxable income to Virginia using a double-weighted sales factor formula, which consists of a sales factor that is double-weighted, a property factor, and a payroll factor to apportion the income. Under single sales factor apportionment, only the sales factor will be used by a multistate corporation to apportion taxable income to Virginia. Under the bill, most multistate corporations will be required to use single sales factor apportionment beginning with taxable year 2020, with manufacturing companies being one exception as discussed below.
Currently, manufacturing companies are allowed to elect single sales factor apportionment in lieu of double-weighted sales factor apportionment. However, manufacturing companies electing single sales factor apportionment must meet certain employment and wage levels for the first three taxable years in which single sales factor apportionment is used. A monetary penalty is imposed upon any manufacturing company that has elected to apportion income using a single sales factor but that fails to meet the employment and wage level requirements. Under the bill, manufacturing companies may adopt single sales factor apportionment or continue to use double-weighted sales factor apportionment. The bill provides that a manufacturing company that adopts singles sales factor apportionment in a taxable year beginning on or after July 1, 2017, will not be subject to any monetary penalty but may not revoke the election to use single sales factor apportionment.
The bill implements market-based sourcing for attributing sales to Virginia other than sales of tangible personal property beginning with taxable year 2018. The bill provides that sales made by certain communications services or Internet access services providers, other than sales of tangible personal property, that are attributable to Virginia under market-based sourcing will be multiplied by a factor of 0.5 for purposes of computing such companies' sales factors. The multiplication factor of 0.5 will be applied to such sales if the provider, or an affiliated group that includes a communications services or Internet access services provider, during the taxable year expended at least $100 million relating to communications services or Internet access services in the form of tangible personal property placed in service in Virginia or salaries and wages paid for its employees in Virginia. In addition, the bill provides that certain sales of national defense contractors will be excluded from such contractors' sales factor under market-based sourcing. Sales of a national defense contractor other than sales of tangible personal property that are attributable to a federal defense acquisition contract for a sale other than a sale of tangible personal property will be excluded if (a) a greater proportion of the income producing activity is performed outside Virginia, based on costs of performance; (b) the laws of another state require that the sale be included in the numerator of the fraction used in apportioning the contractor's income to that state for income tax purposes; and (c) the laws of such other state require that the sale be included in such numerator only if the greater proportion of the income-producing activity is performed in that state, based on costs of performance.
With the exception of the elimination of the employment and wage level requirements placed on manufacturing companies electing single sales factor apportionment that becomes effectives for taxable years beginning on or after July 1, 2017, all other provisions in the bill will become effective only if the bill's provisions are not estimated by the Department of Taxation to reduce the official forecasted general fund revenues by more than $50 million for any fiscal year. The bill requires the Department to prepare a fiscal impact statement on general fund revenues from implementation of the bill. The fiscal impact statement is required to be provided to the Governor and the Chairmen of the House Committee on Appropriations, House Committee on Finance, and Senate Committee on Finance by December 1, 2017. To facilitate the Department's preparation of the fiscal impact statement, every corporation having income from business activity that is taxable both within and without Virginia and that had Virginia taxable income before apportionment of at least $50 million for taxable year 2015 will be required to recalculate its 2015 sales factor using market-based sourcing. The bill requires that the recalculated sales factor be submitted to the Department by July 1, 2017, and imposes a $5,000 penalty for the failure to do so.
The bill requires the Tax Commissioner by September 1 of each year beginning in 2019 to make a written certification to the Governor and the General Assembly reporting any net additional revenues attributable to the bill's provisions, if any, that were received in the state treasury for the immediately prior fiscal year. The next regular session of the General Assembly would be required to provide an amount of tax relief that at least equal to the amount certified by the Tax Commissioner.