Virginia unitary business combined reporting due July 1

| 5/20/2021
Virginia unitary business combined reporting due July 1

On April 7, the Virginia legislature enacted House Bill 1800, which requires corporations that are members of a unitary business to file a report with the Virginia Department of Taxation on or before July 1, 2021. In recent years the legislature has introduced, but never passed, legislation that would require unitary combined reporting for corporations. This requirement allows the state to study the effect of a change to mandatory unitary combined reporting. Groups treated as a unitary business with even one member with a Virginia filing obligation that fail to file this report by the due date are subject to a penalty of up to $10,000 per entity that should have been included in the combined reporting.

The bill defines “unitary business” to include entities that are commonly controlled and for which there is synergy or flow of value. A unitary business does not include a business subject to (or that would be subject to if doing business in Virginia) the insurance premiums license tax or bank franchise tax. A foreign corporation that has an average of 80% or more in property, payroll, and sales factors outside the U.S. is excluded from the unitary combined report. Specific rules exist related to reporting of income, expenses, and apportionment factors of foreign corporations that are subject to the provisions of a federal income tax treaty. The bill includes the definition of unitary business partnerships and parts of the business held through the interest in a partnership.

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A company’s unitary business report needs to include information calculating two hypothetical tax bases: one as if the unitary group is filing under the Joyce approach, and the second as if it is filing under the Finnigan approach. The primary difference between the two approaches is the way in which the sales factor numerator for the combined group is computed. Under both approaches, the denominator of the sales factor includes receipts of all the group members. Under the Joyce approach, sales by an entity itself lacking nexus in Virginia are excluded from the sales factor numerator for Virginia income tax purposes. Under the Finnigan approach, if any member of the group has nexus, all sales of members of the unitary combined group attributable to Virginia are included in the sales factor numerator. Taxpayers also are required to report the separate liabilities of each member in their report. Each unitary combined group must appoint a designated member, which can be any member of the combined group so long as the member has a Virginia filing requirement under Code of Virginia Section 58.1-441.

The unitary business report must be completed using tax year 2019 information. If any member has not filed a taxable year 2019 Virginia return because the extended due date is after July 1, 2021, then a unitary combined report may be filed using taxable year 2018 computations. At this time, it is unclear whether a unitary group that came into existence or first had nexus with the state after the 2019 tax year is required to file the report.

A $10,000 penalty is imposed if the report is not properly completed and submitted. The penalty applies separately to each corporation required to be included in the combined reporting, meaning each member of a unitary group could be assessed a $10,000 penalty.

The report is filed using the Department of Taxation’s web upload application. A sample of the report is available online.

Businesses that might be subject to these rules should contact their tax adviser.

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