Executive summary: Virginia enacts single-sales factor election for certain retailers
On March 17, 2023, Virginia Gov. Glenn Youngkin signed House Bill 1978 creating a single-sales factor election for retailers filing on a consolidated basis in the commonwealth, effective for tax years beginning on or after Jan. 1, 2023. The election is available if the group derives 80% or more of its revenue during the year from retail sales.
Virginia enacts single-sales factor election for retailer groups
While Virginia defaults to separate reporting for C corporations, the commonwealth allows taxpayers who are members of an affiliated group to elect to file on a combined or consolidated basis. Under the consolidated reporting method, net income and apportionment for each entity in the affiliated group with nexus in Virginia are aggregated on a return treating the entities as a single taxpayer.
Virginia’s default apportionment ratio is three-factor with double-weighted sales. However, entities that meet the definition of “retail company” compute apportionment using a single-sales factor. For Virginia purposes, a retail company is any entity engaged primarily in activities properly classified under sectors 44-45 (retail trade) of the North American Industry Classification System.
Historically, retailers making a Virginia consolidated filing election would have been limited to three-factor apportionment for those specific members in the consolidated filing who were considered “non-retailers” when viewed on a separate company basis. The commonwealth’s consolidated filing regulations provide that, to the extent taxpayers in a consolidated group would be required to use different apportionment factors if filing separate returns, the consolidated group must use three-factor apportionment. The bill permits, for tax years beginning on or after Jan. 1, 2023, that retailers filing on a consolidated basis in Virginia are eligible to elect single-sales factor apportionment, even if the entities in the group would be subject to different factor computations if filing separately.
To be eligible for the single-sales factor election, at least 80% of the group’s sales must be derived from retail company activities. The election is made annually, and the 80% threshold must be met for each year that the group makes the election. Once made, the election is binding for the tax year, unless permission is received from the Virginia Department of Taxation.
Taxpayers meeting the definition of a retail company under Virginia law should carefully consider the potential impacts of House Bill 1978. Many retailers may have avoided making a Virginia consolidated filing election in the past due to the requirement to use three-factor apportionment for mixed consolidated groups. This new single-sales factor election may provide retail taxpayers with the opportunity to enjoy the benefits of consolidated reporting (e.g., offsetting taxable income at one entity with losses at another) without sacrificing the single-sales apportionment computation.
Taxpayers with questions on the applicability of the single-sales factor election for consolidated groups engaged in retail activity should consult their state and local tax adviser.