Did an out-of-state national bank owe Virginia bank franchise tax because it maintained a mortgage-loan office in the Commonwealth?

Subject

Mortgage-loan office without deposits did not qualify for bank franchise tax

Plain-English summary

Virginia held that a national bank's mortgage-loan office was not a banking business subject to the bank franchise tax because it accepted no customer deposits. The out-of-state bank had filed 2008 and 2009 franchise returns showing no capital apportioned to Virginia.

The bank had no charter naming a Virginia principal office. Virginia therefore examined whether the mortgage operation constituted banking business in the Commonwealth. It relied on statutory provisions defining transacting business through regular customer deposits and using branch deposits to distribute and apportion the franchise tax.

Making loans from a Virginia office was not enough. The Department also said repeal of a regulation referenced in an older ruling had not changed its continuing policy.

The bank had to file Virginia corporate income tax returns for every year the mortgage office operated and ask the locality about applicable local taxes.

What this means for you

• A loan-production office did not qualify as a deposit-taking bank branch under this ruling.
• National-bank status and a physical Virginia office were insufficient without another qualifying basis.
• Repeal of an older regulation did not by itself revoke the Department's stated policy.
• Nonqualification meant corporate income tax and possible local taxes instead of the bank franchise tax.

Common questions

Did the office accept customer deposits?

No. It was a mortgage-loan office.

Were the 2008 and 2009 franchise returns accepted?

No. Virginia directed the bank to file corporate income returns.

Did making loans count as banking business?

Not without accepting customer deposits in the ordinary course under the analysis applied here.

Citations and references

• Va. Code §§ 58.1-1201, 58.1-1202, 58.1-1204.1, 58.1-1205, and 58.1-1211.
• Virginia Public Documents 88-145, 89-145, and 94-366.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-17

Original ruling text

March 1, 2010

Re: Ruling Request: Bank Franchise Tax

Dear *:

This is in response to your letter in which you request a ruling concerning the bank franchise tax as it applies to * (the "Taxpayer"). I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a nationally chartered bank headquartered in another state that maintains a mortgage loan office in Virginia. The Taxpayer filed its 2008 and 2009 bank franchise tax returns reporting no capital apportioned to Virginia. The Department rejected the return, asserting that the Taxpayer was not conducting a banking business in Virginia. The Department concluded that the Taxpayer should file a corporate income tax return.

The Taxpayer believes it meets the definition of a "bank" for purposes of Virginia's bank franchise tax. Further, the Taxpayer asserts that the regulation used by the Department to support its conclusion has been repealed, denoting a change in policy by the Department. The Taxpayer requests a ruling that it is a bank for bank franchise tax purposes and asserts the Department must accept its bank franchise tax returns in lieu of other state and local taxes.

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 Va. 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.

The Taxpayer asserts that it is a nationally chartered bank that has an office in Virginia. Under Va. 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.

However, in Public Document (P.D.) 89-145 (4/28/1989), the Department interpreted the definition to mean a corporation organized as a bank under Virginia or United States law which:

(1) conducts a banking business in this Commonwealth;

(2) maintains an office in this Commonwealth for the conduct of a banking business; or

(3) has a charter which designates any place within this Commonwealth as the place of its principal office regardless of whether or not the bank or banking association is authorized to transact business as a trust company.

Although P.D. 89-145 refers to a regulation that has been repealed, the Department's policy remains in effect.

Based on the information provided, the Taxpayer does not have a charter designating any place within Virginia as its principal place of business. As such, a determination must be made as to whether the Taxpayer is conducting a banking business in Virginia.

While the statute does not specifically define what it means to be conducting a "banking business," Va. Code § 58.1-1204.1 provides that banks that do not operate for a full year pay bank franchise tax on a prorated basis determined by when the bank begins transacting business. Under this section, "transacting business" means "accepting deposits from customers in the regular course of doing business."

Further, pursuant to Va. Code § 58.1-1211, the mechanism for distributing the local portion of the bank franchise tax is based on deposits located at bank branches. This is also the basis for the prescribed method for apportioning bank franchise tax for multistate banks. See P.D. 94-366 (12/08/1994).

Accordingly, in order to be conducting a banking business in Virginia, a bank must be accepting deposits from customers in the regular course of doing business.

In P.D. 88-145 (6/20/1988), the Department ruled that a bank making loans in Virginia was not subject to bank franchise tax because it was not conducting a banking business in Virginia. Based on this ruling and the facts provided, the Taxpayer was not subject to the bank franchise tax for the 2008 and 2009 tax years.

Accordingly, the Taxpayer must file a Virginia corporate income tax return for all taxable years in which its mortgage loan office operated in Virginia. The returns and any required tax payments should be sent within 30 days of the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: *.

In addition, the Taxpayer should contact the locality in which mortgage loan office operates in order to determine the local taxes for which it may be liable.

The Code of Virginia sections and public document cited are 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

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