HJR 177 / SJR 101: Joint Subcommittee Studying Benefits of Adopting a Single Sales Factor for Coporate Income Tax Purposes

August 27, 2008

The Joint Subcommittee met in Richmond. Delegate Kathy Byron and Senator Walter Stosch were elected co-chairmen. The purpose of the study is to decide whether the current double-weighted sales factor formula used to calculate a corporation's Virginia taxable income should be changed to a single sales factor formula in order to attract new manufacturers to the Commonwealth as well as encourage those already here to expand.

Staff Presentations

Staff outlined the history of Virginia's corporate income tax from a license tax in the early 1840's to the current system based on a corporation's net earnings. The Virginia corporate income tax applies to all domestic and foreign corporations doing business in the state, with a few exceptions. Virginia's six percent corporate income tax applies to a corporation's Virginia taxable income, which is computed by using federal taxable income as the base. Most states conform their corporate tax, in general, to the federal system. For Virginia tax returns, modifications are made to federal taxable income in order to determine Virginia taxable income.

Virginia permits corporations engaged in multistate activities that have income taxable by Virginia and out-of-state political subdivisions to apportion their Virginia taxable income through the following three-factor formula, so that different states do not impose a tax on the same income:

• A Property Factor (25 percent): A ratio of the average real and tangible personal property value of the firm in Virginia to the firm's total average real and tangible personal property value.
• A Payroll Factor (25 percent): A ratio of the payroll in Virginia to the firm's total payroll.
• A Sales Factor (50 percent): A ratio of the sales in Virginia to the firm's total sales.

These ratios are added together with the sales factor doubled and divided by a denominator of four to determine the portion of total taxable income subject to the Virginia corporate income tax. Because the sales factor is doubled, this is referred to as the double-weighted sales factor formula. If there is no sales factor, then the denominator will be the number of existing factors and where there is a sales factor but no payroll or property factor, the denominator will be the existing factors plus one. A corporation can petition the Tax Commissioner to use a different allocation formula if the three-factor formula is inherently unfair to the particular corporation.

A second presentation provided a look at other states that have an apportionment formula that includes a sales factor for computing the corporate income tax. Twenty states use the single sales factor or offer it as an option for businesses. Neighboring states that use the single sales factor formula or offer it as an option are Kentucky, Georgia, Maryland, and South Carolina. A sales factor that is at least double weighted is used in 16 states, including Virginia, while 11 states impose an equally weighted payroll, property, and sales factor formula.

Public Comment

The executive director of Net Choice, an IT company in the Washington, DC area, asked for consideration of the single sales factor for manufacturers and also an examination of the method used by service providers (cost of performance) in calculating their taxable income. He suggested using a customer base/where the service is delivered rather than where the service originates is a better method for service providers and other technology companies.

The executive director of the Commonwealth Institute urged an examination of the effect on manufacturing when the state adopted the double weighted sales factor formula in the first part of this decade. He reminded members about the property and payroll factors and their importance to the process. He suggested that if the single sales factor is adopted in Virginia it should be performance based in order to measure job growth or loss among manufacturers following its enactment.

Next Meeting

The next meeting will be October 21. The meeting agenda will be posted on the study's website.

Co-Chairs:
The Hon. Walter Stosch
The Hon. Kathy Byron

For information, contact:
Mark Vucci, Joan Putney, DLS Staff

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