We're a federally chartered stock savings bank with five Virginia office locations -- are we subject to Virginia's bank franchise tax?

Plain-English summary

A federally chartered stock savings bank, organized under U.S. law, operates five office locations in Virginia and provides standard banking services -- accepting deposits and making loans. Rather than wait to be audited, the bank proactively asked the Department to rule on whether it's subject to Virginia's bank franchise tax, an annual tax measured by a bank's net capital that applies IN PLACE OF Virginia's regular income tax and a number of other state and local taxes.

Virginia's bank-franchise-tax statute defines "bank" broadly, in four separate ways, as previously broken out by a Virginia circuit court decision (AMG National Trust Bank v. Commonwealth, reported as P.D. 11-152):

1. A Virginia-chartered incorporated bank, banking association, Federal-Reserve-member savings bank, or trust company;
2. A bank or banking association organized under U.S. law that is doing business in Virginia or has a Virginia office (or whose charter designates a Virginia location as its principal office);
3. A bank that establishes and maintains a Virginia branch under specific state banking-law provisions; or
4. A joint stock land bank or other U.S.-law bank that Virginia is authorized to tax.

Because the savings bank was organized under federal law and operated five actual offices in Virginia offering banking services, the Tax Commissioner found it satisfied at least the SECOND category -- a U.S.-law bank doing business or having an office in Virginia -- and was therefore subject to the bank franchise tax.

What this means for you

Federally chartered banks and savings institutions with a Virginia physical presence

If you're organized under federal law and operate even a modest physical presence in Virginia (here, five offices) while providing standard banking services, expect to be treated as a "bank" subject to Virginia's bank franchise tax rather than the state's regular corporate income tax -- the definition doesn't require you to be a Virginia-chartered institution.

Banks or financial institutions uncertain about their Virginia tax classification

This is a good example of using Virginia's ruling-request process proactively -- rather than waiting for an audit to determine tax status, a taxpayer can ask the Department directly for a binding ruling on how a specific tax applies to its own facts.

Common questions

Q: Does a bank need to be chartered BY Virginia to be subject to the bank franchise tax?
A: No -- the statute's second category specifically covers banks organized under U.S. (federal) law that do business in Virginia or maintain a Virginia office; state chartering isn't required.

Q: What does the bank franchise tax replace?
A: It's paid in lieu of Virginia's income tax and a number of other state and local taxes -- banks subject to it generally don't also pay the regular corporate income tax on the same capital.

Citations and references

• Public Document 11-152 (4/7/2011) -- reports the court's decision in AMG National Trust Bank v. Commonwealth of Virginia, Department of Taxation, which broke Virginia Code § 58.1-1201's definition of "bank" into the four distinct categories applied here

Subject

Capital : Subject to Tax - Federal Stock Savings Bank

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-72

Original ruling text

May 25, 2021

Re: Ruling Request: Bank Franchise Tax

Dear *:

This will respond to your letter in which you request a ruling as to whether * (the “Taxpayer”) is subject to Virginia’s bank franchise tax.

FACTS

The Taxpayer is a federally chartered stock savings bank organized under the laws of the United States. The Taxpayer has five office locations in Virginia and provides banking services, including accepting deposits and making loans. The Taxpayer requests a ruling whether it is subject to Virginia’s bank franchise tax.

RULING

Virginia Code § 58.1-1202 requires every bank or trust company to pay an annual tax measured by its net capital as defined in Virginia Code § 58.1-1205. The bank franchise tax is paid in lieu of Virginia’s income tax and a number of other state and local taxes. Under Virginia Code § 58.1-1201, a bank includes:

any incorporated bank, banking association, savings bank that is a member of the Federal Reserve System, or trust company organized by or under the authority of the laws of the Commonwealth and any bank or banking association organized by or under the authority of the laws of the United States, doing business or having an office in the Commonwealth or having a charter which designates any place within the Commonwealth as the place of its principal office, and any bank which establishes and maintains a branch in this Commonwealth under Article 5.1 (§ 6.1-44.1 et seq.) of Title 6.1 or Article 5.2 (§ 6.1-44.15 et seq.) of Title 6.1, whether such bank or banking association is authorized to transact business as a trust company or not, and any joint stock land bank or any other bank organized by or under the authority of the laws of the United States upon which the Commonwealth is authorized to impose a tax.

In AMG National Trust Bank v. Commonwealth of Virginia, Department of Taxation , Civil Docket No.: CL10-3031 (April 2011) ( AMG National Trust) , issued as Public Document (P.D.) 11-152 (4/7/2011), the court interpreted the statute to provide for four separate definitions of bank for purposes of the bank franchise tax:

(1) any incorporated bank, banking association, savings bank that is a member of the Federal Reserve System, or trust company organized by or under the authority of the laws of the Commonwealth;

(2) any bank or banking association organized by or under the authority of the laws of the United States, doing business or having an office in the Commonwealth or having a charter which designates any place within the Commonwealth as the place of its principal office;

(3) any bank which establishes and maintains a branch in this Commonwealth under Article 5.1 (§ 6.1-44.1 et seq.) of Title 6.1 [now Article 6 (§ 6.2-836 et seq.) of Title 6.2] or Article 5.2 (§ 6.1-44.15 et. seq.) of Title 6.1 [now Article 7 (§ 6.2-849 et seq.) of Title 6.2], whether such bank or banking association is authorized to transact business as a trust company or not;

(4) any joint stock land bank or any other bank organized by or under the authority of the laws of the United States upon which the Commonwealth is authorized to impose a tax;

According to the evidence provided, the Taxpayer is a federally chartered stock savings bank organized under the laws of the United States. It operates five offices in Virginia, offering banking services such as accepting deposits and making loans. In the Department’s opinion, the Taxpayer qualifies as a bank for purposes of the bank franchise tax at least under the second definition above.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3616.M

Related Documents

11-152