Did an out-of-state engineering LLC have to file a Virginia pass-through return when occasional site visits created no positive apportionment factor?

Subject

Pass-Through Entities

Plain-English summary

The out-of-state engineering LLC did not have to file a Virginia pass-through-entity return on the stated facts because it had no Virginia-source income. It occasionally visited client sites in Virginia but had no Virginia property or payroll. More than 50% of the costs of serving Virginia customers were incurred at its out-of-state main office, so the ruling treated its sales factor as outside Virginia under the then-applicable formula.

Virginia generally required an S corporation, partnership, or LLC to file when it did business in Virginia or had Virginia-source income. An entity operating both inside and outside Virginia used the corporate allocation and three-factor apportionment rules described in the ruling. Without a positive property, payroll, or sales factor, this LLC had no filing obligation.

The Department had not established a minimum filing threshold under its statutory authority. Therefore, any Virginia-source income or loss in a year required a return; there was no de minimis dollar exception in the ruling.

If a required return was late, the stated penalty was $200 for each month or part of a month, up to six months. After six months, an additional penalty equaled 6% of Virginia taxable income, reduced by the first penalty and tax already paid by owners on that income.

What this means for you

• Occasional site visits did not by themselves create a filing duty here, but the result depended on all three apportionment factors.
• A zero-income threshold is not the same as no filing rule: even a Virginia-source loss triggered a return under this guidance.
• This ruling used the service-sourcing and three-factor rules described in 2014; confirm the rules for the actual filing year.

Common questions

Q: Did serving Virginia customers automatically require a return?
A: No. The LLC had no positive Virginia apportionment factor on the stated facts.

Q: Was there a minimum amount of Virginia income below which no return was needed?
A: No threshold had been established; any Virginia-source income or loss required filing.

Q: Did the ruling waive penalties for unfiled required returns?
A: No. It described the statutory penalty structure but found this LLC had no filing duty on the presented facts.

Citations and references

• Va. Code §§ 58.1-302, 58.1-392, 58.1-394.1, and 58.1-408 through 58.1-421.
• Public Documents 88-165, 06-114, and 07-150.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-48

Original ruling text

April 2, 2014

Re: Request for Ruling: Pass-Through Entity Income Tax

Dear *:

This will reply to your letter in which you request a ruling as to the income tax filing requirements of your client, * (the "Taxpayer").

FACTS

The Taxpayer, a * (State A) limited liability company, provides engineering services to clients in Virginia. The majority of the Taxpayer's work is performed at its main office in State A, but the Taxpayer occasionally makes site visits to Virginia. The Taxpayer has no property or payroll in Virginia. In addition, the Taxpayer would have no sales attributable to Virginia because more than 50% of the costs for providing services to Virginia customers are incurred in State A. As such, the Taxpayer has no Virginia source income.

The Taxpayer requests a ruling as to whether it is considered to be doing business in Virginia and, thus, required to file pass-through entity income tax returns. The Taxpayer also asks whether there is an income threshold for the filing of returns by pass-through entities and their owners. In addition, the Taxpayer asks whether penalties would apply if it has failed to file any required returns.

RULING

Filing Requirement

Under Va. Code § 58.1-392, pass-through entities (including S corporations, partnerships and limited liability companies) doing business in Virginia or having income from Virginia sources are required to file a return with the Department. Pursuant to Va. Code § 58.1-302, an entity has income from Virginia sources if it has any items of income, gain, loss and deduction attributable to ownership in real or tangible personal property in Virginia or resulting from a business, trade, profession or occupation carried on in Virginia.

Generally, a pass-through entity will have income from Virginia sources if there is sufficient business activity within Virginia to make any one or more of the applicable apportionment factors positive. Pass-through entities that have income from activity both within and without Virginia are required to compute their Virginia source income in accordance with the corporate statutory formula set forth in Va. Code §§ 58.1-408 through 58.1-421. As such, pass-through entities must allocate dividends to the state of commercial domicile and apportion all other income. Income is apportioned using a three-factor formula based on the property, payroll and sales within Virginia. See Public Document (P.D.) 88-165 (6/29/1988) and P.D. 07-150 (9/21/2007).

A pass-through entity that does not have a positive apportionment factor would not be required to file a return. See P.D. 06-114 (10/11/2006). Based on the facts presented, the Taxpayer would not have any Virginia source income and would not be required to file a return.

Filing Threshold

Virginia Code § 58.1-392 C grants the Department the authority to establish an income threshold for the filing of returns by pass-through entities and their owners. The Department, however, has never established such a threshold. Therefore, if a pass-through entity has any Virginia source income or loss in a given taxable year, it is required to file a return.

Penalty

Virginia Code § 58.1-394.1 imposes penalties on any pass-through entity that fails to file a required return. The penalty is $200 for each month or portion thereof the return remains unfiled after the due date, up to six months total. If the return is not filed within six months, an additional penalty is assessed equal to six percent of the entity's Virginia taxable income, reduced by the penalty imposed for the first six months and any tax already paid by the owners of the pass-through entity on such income.

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 and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions 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,

Craig M. Burns

Tax Commissioner

AR/1-5488532844.M