Can a manufacturer make the modified (single sales factor) apportionment election retroactively on an amended return after an audit, instead of on a timely original return?

Plain-English summary

A manufacturing corporation was audited for the years ended March 31, 2014 and 2015. It did not dispute the audit adjustments, but afterward it asked to elect the modified apportionment method for manufacturers under Va. Code Sec. 58.1-422 -- a favorable single-sales-factor-style formula. The Department refused because the election was not made on a timely filed original return. The company appealed, arguing it could make the election any time it could still file an amended return under Va. Code Sec. 58.1-1823 -- in effect, retroactively.

Why the retroactive election fails. The modified method is a bargain: a manufacturer receives favorable apportionment but makes one election it cannot revoke for three years (P.D. 13-6), and it must maintain employment and wage levels. If it does not, the statute directs the Department to assess additional tax using the general three-factor formula (Va. Code Secs. 58.1-422 C, 58.1-408 C). The legislative purpose was to incentivize Virginia investment and jobs.

If a manufacturer could wait until the three-year period ended and elect only if it turned out to have met the wage and employment tests, the enforcement provisions -- the possibility of revocation triggers and corrective assessments -- would be rendered meaningless. The Virginia Supreme Court forbids reading a statute so that part of it becomes "useless, repetitious or absurd" (Jones v. Conwell). So the election must be made prospectively, on a timely original return, not retroactively on an amended one. The assessments stand.

What this means for you

Make the manufacturer apportionment election on your original return

The Va. Code Sec. 58.1-422 modified (single sales factor) election is prospective. Decide and elect on a timely filed original return -- you cannot bolt it on later via an amended return once you see how a year turned out.

The election is a three-year, non-revocable commitment

Electing locks you in for three years with employment and wage obligations, and the Department will assess additional tax if you fall short. That trade-off is the point of the incentive.

Amended-return timing does not equal election timing

The general amended-return limitations period (Va. Code Sec. 58.1-1823) governs corrections, not the timing of a forward-looking election that carries ongoing commitments.

Common questions

The statute doesn't say "original return" -- why can't I elect on an amended return? Because a retroactive election would gut the statute's three-year commitment and enforcement mechanism, which courts will not allow (Jones v. Conwell). The election must be prospective.

Can I elect now for the audited years? No. The election had to be made on those years' timely original returns; it cannot be applied retroactively.

What is the benefit and the catch? The benefit is a favorable single-sales-factor apportionment; the catch is a non-revocable three-year election with wage and employment requirements enforced by additional assessments if unmet.

Citations and references

• Va. Code Sec. 58.1-422 -- modified apportionment election for manufacturers; one election, non-revocable for three years, with wage/employment requirements (P.D. 13-6).
• Va. Code Sec. 58.1-408 -- general three-factor apportionment used to assess additional tax if requirements are unmet.
• Jones v. Conwell, 227 Va. 176 -- a statute is not read to make part of it useless; a retroactive election would nullify the enforcement provisions.
• Va. Code Sec. 58.1-1823 -- amended-return limitations period; it governs corrections, not the timing of this election.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-78

Original ruling text

May 5, 2020

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will respond to your letter in which you seek correction of the corporate income tax assessments issued to * (the “Taxpayer”) for the taxable years ended March 31, 2014, and March 31, 2015. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer filed consolidated corporate income tax returns for the taxable years ended March 31, 2014, and March 31, 2015. The Department audited the Taxpayer and made various adjustments to the returns. The Taxpayer does not dispute the adjustments. In response to the audit, however, the Taxpayer advised the Department that it wished to elect the modified apportionment method for manufacturing companies permitted under Virginia Code § 58.1-422. The Department denied the request on the basis that the Taxpayer had not already made the election on a timely filed original income tax return. The Taxpayer appeals, contending it may make the election at any time it would be permitted to timely file an amended return.

DETERMINATION

Under Virginia Code § 58.1-422, manufacturing companies may elect to use a modified method of apportioning their Virginia taxable income. A qualified manufacturing company that elects the modified apportionment method under Virginia Code § 58.1-422 will make one election, and may not revoke that election for three taxable years. The manufacturing company will be required to use the apportionment factor that is effective at the time the modified apportionment method election is made, and any apportionment factor that becomes effective in the first three taxable years of the election. See Public Document (P.D.) 13-6 (1/1/2013). A manufacturing company that elects to use the modified method of apportionment will be subject to additional taxes if the manufacturing company’s average annual number of full-time employees for the first three taxable years that it used the modified method of apportionment is less than 90 percent of its base year employment, or if the average wages of the manufacturing company’s full-time employees, as certified by the manufacturing company, is not greater than the lower of the state or local average weekly wage for its industry.

The Taxpayer argues that the statute does not require the election to be made on a timely filed original return. Therefore, the Taxpayer reasons that a manufacturing company has the right to choose the modified apportionment method any time it may file an amended return within the limitations periods for filing amended returns under Virginia Code § 58.1-1823. In essence, the Taxpayer asserts that a manufacturing company has the ability to make the election retroactively.

The Department disagrees. The Virginia Supreme Court has ruled that statutes should not be interpreted in a manner that would make a portion of it useless, repetitious or absurd. See Jones v. Conwell , 227 Va. 176, 181, 314 S.E.2d 61, 64 (1984). Virginia Code § 58.1-422 contemplates that a manufacturing company will make the election, then receive the tax benefit effectively in exchange for agreeing to maintain a certain level of employment and wages. Should those wage or employment requirements not be met, the statute directs the Department to assess additional taxes plus interest against the taxpayer in accordance with the general three factor apportionment formula provided under Virginia Code § 58.1-408 C. See Virginia Code § 58.1-422 C. In addition, the statute requires that if an election is made, it may not be revoked for three years. See Virginia Code § 58.1-422 B.

If taxpayers were allowed to simply wait to the end of a three-year period and see if they met the wage and employment requirements before making the election, this portion of the statute would effectively be rendered meaningless. According to House Doc. No. 5, Executive Summary of the Joint Subcommittee to Study the Benefits of Adopting a Single Sales Factor to Apportion the Income of Multistate Corporations for Purposes of the Corporation Income Tax (2008), proponents of the single sales factor testified that it would remove the existing disincentive for increasing Virginia employment and capital investment by manufacturers. Based on the subcommittee’s findings, the purpose of the additional requirements was to provide incentives to manufacturers to invest in Virginia. Allowing manufacturers to wait until they know the wage and employment requirements have been met during the time period would remove the incentive created by the election. It would permit taxpayers to simply make the election retroactively if they happen to meet the requirements to claim refunds, including interest, on amended returns, essentially eliminate the possibility that revocations could ever occur during the required election period, and effectively abolish the Department’s role in enforcing requirements and making corrective assessments as contemplated by the statute.

Based on the foregoing, the Taxpayer’s request to claim the modified apportionment method for manufacturers for the taxable years ended March 31, 2014, and March 31, 2015, is not granted. Accordingly, the outstanding balances on the assessments remain due and payable. Updated bills, with interest accrued to date, will be sent to the Taxpayer shortly. No additional interest will accrue provided the bills are paid within 30 days from the date indicated on the bill statement.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/2051.M

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