Could a national securities exchange use Virginia's financial-corporation apportionment method?

Subject

Securities exchange could qualify as a financial corporation

Plain-English summary

The securities exchange could use Virginia's financial-corporation apportionment method if more than 70% of its gross income came from qualifying financial services. Direct involvement in transferring a financial instrument was not required.

Virginia viewed the exchange's transaction services and issuer-listing services as financial services. Technology for trading, clearing, settlement, and information sharing also qualified in the context of this business, while facility-management integration, surveillance solutions, and similar advisory services did not.

The taxpayer reported about 65% of revenue from transaction services, 25% from issuer services, and 10% from market-technology services. The ruling remained conditional on the taxpayer actually exceeding the 70% gross-income threshold. If it did, nonallocable income was apportioned under Va. Code § 58.1-418 using Virginia cost of performance compared with cost of performance everywhere.

What this means for you

• The 70% test follows gross income from qualifying categories, not merely the taxpayer's industry label.
• Financial services can include infrastructure and processing services supplied to other financial businesses.
• Mixed technology or advisory revenue must be classified service by service before applying the threshold.
• The ruling did not eliminate the need to document the taxpayer's actual revenue mix.

Citations and references

• Va. Code §§ 58.1-401 and 58.1-418.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-5

Original ruling text

January 8, 2015

Re: Ruling Request: Corporate Income Tax

Dear *:

This will reply to your letter in which you request a ruling regarding the proper apportionment method to be used by your client (the "Taxpayer") for Virginia corporate income tax purposes. I apologize for the delay in responding to your request.

FACTS

The Taxpayer is a registered national securities exchange, which provides both products and services in its normal course of business. The Taxpayer requests a ruling as to whether it may use the single factor for financial corporations to apportion its income for Virginia corporate tax purposes.

RULING

For corporate income tax purposes, a financial corporation must apportion its nonallocable income based upon the ratio of the cost performance in Virginia to the cost of performance everywhere. Virginia Code § 58.1-418 defines a financial corporation to include:

any corporation not exempted from the imposition of tax under the provisions of § 58.1-401, which derives more than seventy percent of its gross income from the classes of income enumerated in subdivisions 1 through 4 below, without reference to the state wherein such income is earned, including but not limited to small loan companies, sales finance companies, brokerage companies and investment companies:

1. Fees, commissions, other compensation for financial services rendered;

2. Gross profits from trading in stocks, bonds, or other securities;

3. Interest; and

4. Dividends received to the extent included in Virginia taxable income.

The Department has held that corporations that originate, process and collect loans are financial corporations. See Public Document (P.D.) 81-57 (10/23/1981) and P.D. 99-154 (6/21/1999). In P.D. 81-57, the Department ruled that a mortgage broker whose income consisted of interest and service fees for acting as a collection agent, origination and other fees connected with the making of loans was a financial corporation. P.D. 99-154 states that as long as loan processing fees exceed 70% of its gross income, a taxpayer would meet the definition of a financial corporation. Accordingly, an entity need not be directly involved in the transfer of a financial instrument in order to meet the definition of a financial corporation for Virginia income tax purposes.

In this case, the Taxpayer is not involved in transactions related to the transfer of financial instruments. Instead, it provides services to other financial corporations that perform services directly to the public. The Taxpayer conducts activities in three business sectors.

Marketing Services Business

The Taxpayer provides customers with transaction services, including collecting, processing and disseminating price quotes for listed securities; routing and executing buy and sell orders; providing reporting services for securities transactions; and offering market data services. These activities would appear to be included in the types of financial services included in Va. Code § 58.1-418 B 1. Revenue is generated through subscription or volume based service fees. This revenue accounts for approximately 65% of the Taxpayer's revenue.

Issuer Services Business

Customers can be listed on the Taxpayer's exchange. Fees are charged for the application process and compliance monitoring based on the customer's shares of outstanding stock. Again, such activities appear to be the types of financial services included in the definition of a financial corporation. This business produces approximately 25% of the Taxpayer's revenue.

Market Technology Business

The remaining 10% of the Taxpayer's revenue is generated from technology solutions for trading, clearing, settlement, and information sharing; facility management integration; surveillance solutions; and advisory services. Customers incur fees for licenses, support, and facility management.

While technology solutions for trading, clearing, settlement, and information sharing would be considered to be financial services in the context of the Taxpayer's business, providing facility management integration, surveillance solution, and other similar advisory services would not be considered to be financial services.

Based on the facts as presented, the Taxpayer would be considered a financial corporation if it derives more than 70% of its gross income from fees, commissions, and other compensation for financial services as identified above. Such a corporation would apportion its nonallocable income in accordance with Va. Code § 58.1-418. 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/1-5495305798.o