Must a corporation add back the Texas Business Margin Tax when computing Virginia taxable income?

Subject

Texas Business Margin Tax is not a tax based on, measured by, or computed with reference to net income.

Plain-English summary

The corporation did not have to add back the Texas Business Margin Tax when computing Virginia taxable income. Virginia's addback applied to net income taxes and other taxes based on, measured by, or computed with reference to net income.

The Commissioner concluded that the Texas tax did not fit that description. It was calculated using the lesser of 70% of total revenue or total revenue reduced by limited deductions for cost of goods sold or compensation. Because it excluded most ordinary business expenses used to determine net income, it was not treated as a net-income-based tax for this Virginia adjustment.

What this means for you

• A tax called a margin, franchise, or excise tax is not automatically subject to Virginia's addback; its computation matters.
• For this version of the Texas Business Margin Tax, the Department focused on the limited expense deductions and concluded that the base was not net income.
• The ruling was based on the facts and law presented in 2008, so confirm whether later statutory changes affect a current filing.

Common questions

Q: Did Virginia treat the Texas Business Margin Tax as a net income tax?
A: No. The Commissioner found that it was not based on, measured by, or computed with reference to net income.

Q: Why did the tax fall outside the Virginia addback?
A: Its base used revenue with only limited deductions for cost of goods sold or compensation, while excluding most ordinary expenses normally used to compute net income.

Q: Does this ruling automatically control another corporation's return?
A: No. It was issued on the requesting corporation's facts and expressly warns that changed or additional facts can produce a different result.

Citations and references

• Va. Code § 58.1-402 B 4.
• Tex. Tax Code Ann. § 171.101.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-169

Original ruling text

September 11, 2008

Re: Ruling Request: Corporate Income Tax

Dear *:

This will reply to your correspondence in which you request a ruling concerning whether the Texas Business Margin tax must to be added back in determining a corporation's Virginia taxable income.

FACTS

For purposes of computing the Virginia taxable income of a corporation, Virginia Code § 58.1-402 B 4 provides an addition to federal taxable income for the "amount of any net income taxes and other taxes, including franchise and excise taxes, which are based on, measured by, or computed with reference to net income, imposed by the Commonwealth or any other taxing jurisdiction, to the extent deducted in determining federal taxable income." You request a ruling as to whether the Texas Business Margin Tax, effective for reports due on or after January 1, 2008, is required to be added back under this statute.

RULING

Under Tex. Tax Code Ann . § 171.101, the Texas Business Margin Tax is computed based on the lesser of 70% of a taxpayer's total revenue or the taxpayer's total revenue reduced by certain deductions. Permitted deductions are limited to cost of goods sold or compensation. Deductions for interest, depreciation, and almost all other business expenses normally included in the computation of net income are not permitted.

Virginia's modification under Va. Code § 58.1-402 B 4 requires an addition for net income taxes and other taxes based on, measured by, or computed with reference to net income . Because the Texas Business Margin Tax excludes the vast majority of normal business expenses normally permitted in determining net income, it is my conclusion that the Texas Business Margin Tax is not a tax based on, measured by, or computed with reference to net income. Therefore, the tax is not required to be added back under Va. Code § 58.1-402 B 4 when computing Virginia taxable income.

This ruling is issued based on the facts presented in your request as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia section cited is available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2605508659.o