On April 7, 2021, the Virginia general assembly approved Gov. Ralph Northam’s recommendations to the 2020-2022 biennial budget, including a provision requiring certain informational reporting to study the adoption of mandatory unitary combined reporting. Accordingly, corporations that are members of a unitary business must file a corporate income tax informational report based on tax year 2019 tax computations to calculate the net income of its unitary group. The report must show the difference between the newly computed tax and tax remitted under the current filing method under a methodology to be provided by the commissioner. The informational reports are due on July 1, 2021.
Corporations are not required to remit tax with the information report. However, taxpayers should be aware that the commonwealth will impose a $10,000 penalty for late filing of the informational report or making material omission or misstatement in the information report.
Defining a unitary business
For purposes of the informational reporting, Virginia defines a unitary business as a "a single economic enterprise made up either of separate parts of a single business entity or of a commonly controlled group of business entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts." A unitary business includes that part of the business that is conducted by a taxpayer through the taxpayer's interest in a partnership, whether the interest in that partnership is held directly or indirectly through a series of partnerships or other pass-through entities. Taxpayers subject to the insurance premiums license tax or the bank franchise tax are excluded from the unitary business.
Members of a unitary combined group must also exclude the income and apportionment factors of any corporation incorporated in a foreign jurisdiction if the average of its property, payroll and sales factors outside the United States is 80% or more. To the extent a foreign corporation is included, the corporation’s income, expenses or apportionment factors attributable to income subject to the provisions of a federal income tax treaty should be excluded from the unitary combined group net income.
Takeaways
The Virginia Department of Taxation has provided preliminary guidance on the one-time reporting due by July 1, 2021. Taxpayers will be able to file the report using the state’s Web Upload application as provided by forthcoming guidance and information on that process. While no tax is due with the report, taxpayers may be subject to a $10,000 penalty for failure to file or for material misstatement or omission on the report.
By Dec. 1, 2021, the Virginia Tax Commissioner will provide a report to the general assembly based on the informational reports and data submitted. The findings will be used by the legislature to determine if Virginia should adopt mandatory unitary combined filing. Taxpayers that are subject to this temporary reporting requirement, or are not sure whether to file the report, should contact their Virginia state tax advisers for more information.
