Our national-bank affiliate has no Virginia office of its own, but its employees work out of a sister company's Virginia office doing sales, marketing, and loan-solicitation support -- does that make the bank subject to Virginia's bank franchise tax?

Plain-English summary

An affiliated group of corporations doing business in Virginia files its Virginia corporate income tax returns separately for each entity. One affiliate ("Affiliate A") is a nationally chartered bank that doesn't own or lease office space and doesn't operate a branch in Virginia -- but several of its employees work out of the Virginia office of a SISTER affiliate ("Affiliate B"), for which Affiliate A pays an intercompany cost allocation. Those employees drive sales and marketing for cash-management and lending products among Affiliate B's financial advisors, discuss product features/benefits with those advisors and their clients, and help design strategies for customer needs; they can solicit loans but cannot approve or process them (that happens outside Virginia). Affiliate A doesn't accept deposits or run a mortgage lending business from any Virginia location. The group asked the Department to rule on whether Affiliate A is subject to the bank franchise tax and, if not, for permission to start filing a consolidated Virginia corporate income tax return.

A 2011 court decision already narrowed what "doing business" requires for a bank. In AMG National Trust Bank v. Commonwealth, a Virginia court declined to require a bank to be conducting a traditional banking function -- like accepting deposits -- from a Virginia location in order to be subject to the bank franchise tax, and also declined to require the bank to "maintain an office" in Virginia for banking purposes. A separate Department ruling (P.D. 11-182) had read that decision to mean a bank doesn't need to be accepting deposits from Virginia to qualify, though merely owning Virginia property (like foreclosed homes) without transacting any banking business there would NOT be enough. The affiliated group here argued that P.D. 11-182 meant a bank must still be conducting SOME banking-business activity in Virginia.

The Tax Commissioner rejected that narrower reading. If a court has already declined to require deposit-taking specifically, it would be inconsistent to instead require some OTHER specific banking function (like loan-making) from a Virginia location. The statute's actual text only requires the bank be "doing business... in the Commonwealth" -- a general standard, not a list of required banking activities. The bank's own employees conducting sales, marketing, and customer-support work from a Virginia office on the bank's behalf was enough to satisfy that general "doing business" requirement, even without deposit-taking, loan approval, or an office titled to the bank itself. This ruling explicitly clarified that any prior implication in P.D. 11-182 requiring specific banking-business activity was not the Department's actual position -- the statute requires only that the bank conduct business in Virginia generally.

What this means for you

Banks structured with employees embedded in an affiliate's Virginia office

Don't assume the absence of your OWN Virginia branch, deposit-taking, or loan-approval authority protects you from the bank franchise tax -- employees performing sales, marketing, or customer-facing support work from a Virginia location on the bank's behalf can be enough to establish "doing business" in Virginia.

Affiliated corporate groups weighing separate vs. consolidated Virginia filing

If one affiliate turns out to be subject to the bank franchise tax (which is paid instead of corporate income tax), that has direct implications for how the rest of the affiliated group can or should file its Virginia corporate income tax returns -- get the bank-franchise-tax question answered first, as this group did, before restructuring your filing approach.

Financial institutions relying on an older Department ruling to argue narrow tax exposure

Be cautious reading a prior ruling's specific example (like the foreclosed-homes example in P.D. 11-182) as establishing a general rule -- as this ruling shows, the Department can clarify that a narrower reading wasn't its actual intended policy.

Common questions

Q: Does a bank need its own branch or office in Virginia to be subject to the bank franchise tax?
A: No -- this ruling confirms that a bank's own employees conducting business activities from an AFFILIATE's Virginia office can be enough to establish "doing business" in Virginia, without the bank itself owning or leasing any Virginia space.

Q: Does a bank need to be accepting deposits or approving loans from a Virginia location to owe the tax?
A: No -- following the 2011 AMG National Trust court decision, neither deposit-taking nor loan approval/processing needs to happen in Virginia; general sales, marketing, and customer-support activity conducted from Virginia is sufficient.

Q: If a bank merely owns property in Virginia, like foreclosed real estate, does that alone trigger the tax?
A: No -- the ruling reaffirms that simply owning property without transacting any banking business at that property does not, by itself, make the bank subject to the bank franchise tax.

Citations and references

• AMG National Trust Bank v. Commonwealth of Virginia, Department of Taxation, Civil Docket No. CL10-3031 (April 2011), reported as Public Document 11-151 (4/7/2011) -- held a bank need not be accepting deposits or maintaining a dedicated banking office in Virginia to be "doing business" there for bank franchise tax purposes
• Public Document 11-182 (11/3/2011) -- the Department's earlier interpretation of the AMG National Trust decision, clarified/narrowed by this ruling to confirm the statute requires only that a bank be doing business in Virginia generally, not any specific banking-business activity

Subject

Capital : Subject to Tax - Banking Business

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-73

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 regarding whether a corporation is subject to the bank franchise tax. In the event that the Department concludes that the corporation is not subject to the bank franchise tax, you request permission to change the filing status of the affiliated group to which the corporation belongs.

FACTS

An affiliated group of corporations that does business in Virginia (the “Virginia Group”) files its Virginia corporate income tax returns on a separate entity basis. One of the affiliated entities (Affiliate A) is a national bank that is chartered under the Federal Reserve System and laws of the United States. It does not own or lease office space or operate a branch in Virginia. Several employees of Affiliate A, however, work out of the Virginia office of another affiliate (Affiliate B), and Affiliate A receives an intercompany cost allocation from Affiliate B. Affiliate A accepts deposits, provides loans and invests in securities.

The activities conducted by the employees of Affiliate A in Virginia are described as follows: 1) driving sales and marketing strategies to increase product awareness of cash management and lending platforms among the financial advisors of Affiliate B; 2) discussing, in partnership with the financial advisors of Affiliate B, features and benefits of the cash management and lending offerings to customers; and 3) providing financial advisors of Affiliate B and their clients with strategies and solutions suited to their customers' needs. The employees may also solicit loans but cannot directly approve or process them. Such approval and processing occurs outside of Virginia. Affiliate A has not accepted any deposits or operated a mortgage lending business from a Virginia location. The Virginia Group requests a ruling regarding whether Affiliate A is subject to the bank franchise tax. If Affiliate A is not subject to the tax, the Virginia Group asks permission to begin filing a consolidated Virginia corporate income tax return beginning for the 2019 taxable year.

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.

Citing Public Document (P.D.) 11-182 (11/3/2011), the Taxpayer argues that the Department’s policy remains that an out of state bank must be transacting “banking business” from a Virginia location in order to be subject to the bank franchise tax. In AMG National Trust Bank v. Commonwealth of Virginia, Department of Taxation , Civil Docket No.: CL10-3031 (April 2011) ( AMG National Trust ), reported as P.D. 11-151 (4/7/2011), the court declined to import the definition of “bank” from the Virginia Banking Act which defined bank under Virginia Code § 6.2-800 as “a corporation authorized by statute to accept deposits and to hold itself out to the public as engaged in the banking business in this Commonwealth.” The court also declined to read into the statute a requirement that the organization must “maintain an office in this Commonwealth for the conduct of banking business” in order to satisfy the requirement for “doing business or having an office in the Commonwealth.”

The Department interpreted this judicial decision to mean that a bank was not required to be conducting a banking business in order to be subject to the bank franchise tax, at least to the extent that “banking business” meant accepting deposits from customers at its Virginia branches. See P.D. 11-182. The Department also stated in P.D. 11-182, however, that a bank that merely owns property in Virginia such as foreclosed homes, but does not transact a banking business at any of its properties, will not cause the bank to be subject to the bank franchise tax. The Virginia Group in this ruling request has interpreted this statement to mean that a bank must still be conducting a banking business in Virginia in order to be subject to the bank franchise tax.

If a Virginia court has already declined to impose a requirement that a bank must be performing one of the traditional banking functions, namely accepting deposits, in order to qualify as a bank subject to the bank franchise tax, the Department has concluded that it would be inconsistent with the court’s ruling to impose other specific requirements for doing business such as making loans. In the Department’s opinion, such an exercise is unnecessary because the statute sufficiently and unambiguously addresses the facts at issue. The statute requires that the bank be “doing business... in the Commonwealth.” See Virginia Code § 58.1-1201. In the Department’s opinion, the activities of Affiliate A’s employees in Virginia satisfy the statutory requirement that the bank be doing business in Virginia. Accordingly, in the Department’s opinion, Affiliate A is subject to the bank franchise tax.

To the extent that P.D. 11-182 may be read to imply that a bank must still be conducting certain “banking business” activities in Virginia in order to be subject to the bank franchise tax, this document serves to confirm the Department’s adherence to the Court’s decision in AMG National Trust. The statute requires only that the bank be conducting business in Virginia generally.

The Code of Virginia sections and public documents 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/3601.M

Related Documents

11-151

11-182