Was an out-of-state national bank with only a Virginia mortgage-loan office subject to bank franchise tax and exempt from BPOL tax?

Plain-English summary

Virginia treated the national bank's mortgage-loan office as subject to bank franchise tax and therefore exempt from BPOL tax. A circuit-court decision rejected the Department's former view that a bank had to accept deposits at a Virginia branch.

Because the bank had a Virginia office but no Virginia deposits, Virginia prescribed a single property factor. The numerator used Virginia real and tangible property plus annualized Virginia rent; the denominator used those amounts everywhere.

The bank was asked to file bank franchise returns for every open year using that method. The rule did not extend to an out-of-state bank that merely owned Virginia property without conducting banking business at a Virginia property.

What this means for you

• A mortgage office could establish bank-franchise-tax status under this ruling.
• No-deposit banks used the alternative property-and-rent factor.
• Bank-franchise-tax status carried BPOL exemption.
• Mere foreclosed-property ownership did not automatically trigger the rule.

Citations and references

• Va. Code §§ 58.1-409 and 58.1-1201.
• 23 VAC 10-120-20(B)(2).
• Virginia Public Documents 88-145, 89-145, 94-366, and 10-17.
• AMG National Trust Bank v. Commonwealth, Civil Docket No. CL10-3031 (Norfolk Cir. Ct. July 2011).

Subject

Taxpayer is considered to be a bank subject to the bank franchise tax, it would be exempt from the BPOL tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-182

Original ruling text

November 3, 2011

Re: Ruling Request: Bank Franchise Tax

Dear *:

This is in response to your letter in which you request that the Department reconsider a ruling issued to your client, * (the "Taxpayer"). I apologize for the delay in the Department's response.

FACTS

The Taxpayer is a nationally chartered bank headquartered in another state that maintains a mortgage loan office in Virginia. In Public Document (P.D.) 10-17 (March 1, 2010), the Department ruled that the Taxpayer was not subject to the bank franchise tax for the 2008 and 2009 tax years and was required to file a Virginia corporate income tax return for all taxable years in which its mortgage loan office operated in Virginia.

The Taxpayer disagrees with the ruling in P.D. 10-17 and requests the Department rule that it is a bank for bank franchise tax purposes. In the alternative, the Taxpayer seeks a ruling that, as a nationally chartered bank, it is not subject to the Business, Professional and Occupational License (BPOL) tax.

RULING

Definition of Bank

The Taxpayer believes it meets the definition of a bank under Va. Code § 58.1-1201 because it is a nationally chartered bank, maintains an office in Virginia, and does business in Virginia. The Taxpayer argues that the Department improperly limits the definition of a bank and relies on a repealed regulation and a non-analogous ruling. The Taxpayer also asserts that the bank franchise tax statutes do not define "doing business" in Virginia. Further, it argues the statute does not even require a bank to be conducting business in Virginia.

Recently, the Circuit Court of the City of Norfolk (the "Circuit Court") issued a decision concerning the definition of a bank for bank franchise tax purposes. In AMG National Trust Bank v. Commonwealth of Virginia, Department of Taxation , Civil Docket No.: CL10-3031 (July 2011) ( AMG National Trust ), the Circuit Court decided that a bank was not required to be conducting a banking business ( i.e. , accepting deposits from customers at its Virginia branches) in order to be subject to the bank franchise tax. This decision overturns the Department's long standing policy established in P.D. 89-­145 (4/28/1989).

In this case, the Taxpayer was a nationally chartered bank headquartered in another state that maintained a mortgage loan office in Virginia. In light of the Circuit Court's decision, the Department finds that it must reverse its, long standing policy established in P.D. 88-145 (6/20/1988) concerning banks with mortgage offices located within Virginia. As such, the Taxpayer was a bank required to file bank franchise tax returns for the 2008 and 2009 tax years.

Apportionment

The Taxpayer filed its 2008 and 2009 bank franchise tax returns reporting no capital apportioned to Virginia. In AMG National Trust , the Circuit Court ordered the Department to consider alternative methods of apportioning the bank's capital when a bank does not accept deposits. Accordingly, the Department: has reconsidered its published policy on alternative methods for bank franchise tax purposes.

In compliance with the Circuit Court's decision, the Department considered a number of methods of apportionment that might be used as an alternative formula for bank franchise tax purposes. Because the BFT is measured as of a certain date, the Department concluded that it would be proper to use an alternative method that include, items reported in the balance sheet (Schedule RC) of the bank's Reports of Condition and Income (Call Report).

After due consideration, the Department determined that tangible asset categories would provide the best alternative to the deposits method established in P.D. 94-366 (12/5/1994). Specifically, the Department found that the categories of "premises and fixed assets" and "other real estate owned" would provide a measure of net capital in Virginia that would be readily identifiable, less vulnerable to manipulation, and reasonable to administer.

As such, the Department has developed an alternative apportionment method for apportioning a bank's capital subject to bank franchise tax based on Va. Code § 58.1­409. This single property factor is a fraction, the numerator of which would be the value of real and tangible property owned by a bank on December 31 plus annualized rents for 12 months immediately preceding December 31 used in Virginia, and the denominator of which would be the value of real and tangible property owned by a bank on December 31 plus annualized rents for 12 months immediately preceding December 31 used everywhere.

The single property factor is only applicable when the bank, which meets the definition of a bank under Va. Code § 58.1-1201, has one or more branches, offices or facilities in Virginia but no deposits attributed to any branch, office or facility in Virginia. Further, this alternative method will not operate to cause an out-of-state bank that merely owns property in Virginia (such as foreclosed homes), but does not transact a banking business at any of its Virginia properties, to be subject to the bank franchise tax instead of the corporate income tax. See Title 23 of the Virginia Administrative Code (VAC) 10-120-20 B 2.

Accordingly, the Taxpayer is hereby requested to file amended or original Virginia bank franchise tax returns for all years open under the statute of limitations using the single property factor prescribed above. Such returns should be sent to: Department of Taxation, Office of Tax Policy, Appeals and Rulings Unit, Attn: *, Post Office Box 27203, Richmond, Virginia 23261-7203. If the requested returns are not filed, the Department will issue assessments based on the information available.

BPOL Tax

The Taxpayer avers that even if it is not a considered a bank for bank franchise tax purposes, federal law prohibits localities from imposing BPOL tax on a national bank that would not apply to a Virginia bank. Because the Taxpayer is considered to be a bank subject to the bank franchise tax, it would be exempt from the BPOL tax and there is no need for the Department to opine on the question raised.

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

The Code of Virginia sections, regulations, and tax bulletin 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 * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4672020335.o