My manufacturing company had zero Virginia employees until it acquired a facility mid-year and immediately elected the single sales factor apportionment method -- what counts as its 'base year employment,' since it had no prior Virginia presence at all?

Plain-English summary

A manufacturing corporation with multiple U.S. production facilities acquired another company's assets -- including a Virginia production facility -- during its taxable year ended October 31, 2021. Before the acquisition, the company had no employees or property in Virginia; by the close of that taxable year, it employed 292 full-time workers at the newly acquired facility. The company elected Virginia's single sales factor apportionment method for manufacturers for that same taxable year and asked the Department to confirm how its "base year employment" should be computed, given it had zero Virginia presence going into the acquisition.

How the election and its employment-retention requirement work. Virginia Code § 58.1-422 lets qualifying manufacturing corporations elect a modified apportionment formula based solely on sales, rather than the standard multi-factor formula. Once made, the election can't be revoked for three taxable years, and the electing company must maintain at least 90% of its "base year employment" during each of those first three years. "Base year employment" is defined as the average number of full-time Virginia employees during the taxable year that ended immediately BEFORE the first year the company used the single sales factor method (§ 58.1-422 D).

Why zero was the right (and favorable) answer. The company's first election year was the taxable year ended October 31, 2021; the taxable year immediately before that ended October 26, 2020. Because the company had no full-time Virginia employees before the acquisition, its Virginia employment for that October 26, 2020 taxable year was zero. The Department confirmed the base year employment figure is therefore zero.

Why that's good news for the retention requirement. With a base year employment of zero, the 90%-retention test (90% of zero is zero) is satisfied automatically so long as the company's actual average Virginia employment during the election year is zero or greater -- a threshold that's essentially impossible not to clear once the company has any Virginia employees at all.

What this means for you

Manufacturing corporations acquiring a Virginia facility and immediately electing single sales factor apportionment

If you had no Virginia presence in the taxable year before your first election year, your base year employment is zero -- which makes the three-year employment-retention requirement trivially easy to satisfy, since any positive employment level clears a 90%-of-zero threshold.

Anyone planning the timing of a single sales factor election around an acquisition

The base year is fixed as the taxable year immediately BEFORE your first election year, regardless of when during your current year an acquisition happens to close -- plan your election's effective year with that fixed reference point in mind.

Common questions

Q: My company had no Virginia employees before acquiring a Virginia facility mid-year -- what's our "base year employment" if we elect single sales factor apportionment starting that same year?
A: Zero, based on this ruling -- because the taxable year immediately before your election year had no Virginia employees, that's your base year figure.

Q: Does a base year employment of zero create a compliance problem for the 90%-retention requirement?
A: No -- it works the other way. 90% of zero is zero, so the retention requirement is satisfied as long as your actual Virginia employment during the election year is zero or more.

Citations and references

Statutes: Va. Code § 58.1-422 -- manufacturers' single sales factor apportionment election, its three-year non-revocability, the 90% base-year-employment retention requirement, and the definition of "base year employment" as the average number of full-time Virginia employees in the taxable year immediately preceding the first election year.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-47

Original ruling text

March 27, 2024

Re: Ruling Request: Corporate Income Tax

Dear *:

This will respond to your letter in which you request a ruling on behalf of * (the “Taxpayer”) regarding the proper base year employment to use in determining eligibility to elect the single sales factor apportionment method for manufacturing companies.

FACTS

The Taxpayer is a manufacturing corporation that has several production facilities in the United States. During its taxable year ended October 31, 2021, the Taxpayer acquired certain assets of another company, including a production facility in Virginia. Prior to the acquisition, the Taxpayer did not have any employees or property located in Virginia. However, as of October 31, 2021, the Taxpayer employed 292 full-time employees at the facility. The Taxpayer elected to use the single sales factor apportionment method under Virginia Code § 58.1-422 for its taxable year ended October 31, 2021.

The Taxpayer requests a ruling to confirm that the Taxpayer’s base year employment was zero, or alternatively, equal to the average number of full-time employees who worked at the facility in the taxable year prior to the date of the acquisition. In either case, the Taxpayer also requests that the Department confirm that the Taxpayer satisfied the statutory requirement to satisfy a base year employment computation during the taxable year ended October 31, 2021.

RULING

Virginia Code § 58.1-422 allows manufacturing companies to elect a modified apportionment factor based on sales to determine their Virginia taxable income. Qualifying corporations that elect to use the modified apportionment formula must use the single factor apportionment method to apportion Virginia taxable income. Once an election is made, it cannot be revoked for three taxable years. A manufacturing corporation that makes the single sales factor election is required to maintain at least 90% of the “base year employment” for the first three taxable years in which the manufacturing corporation used the alternative apportionment formula. See Virginia Code § 58.1-422 C.

Virginia Code § 58.1-422 D defines “base year employment” as “the average number of full-time employees employed by the manufacturing company in the Commonwealth in the taxable year that ended immediately prior to the first taxable year in which the manufacturing company used the alternative apportionment set forth in this section.”

The first taxable year for which the Taxpayer made the single sales factor election would be the taxable year ended October 31, 2021. The Taxpayer’s taxable year that ended immediately prior to that was the taxable year ended October 26, 2020. Because the Taxpayer had no full-time employees in Virginia prior to the acquisition, the number of full-time employees the Taxpayer had in Virginia was zero for the taxable year ended October 26, 2020.

Based on the above analysis, the Department opines that the Taxpayer’s base year employment is zero. Further, so long as the Taxpayer’s average number of employees employed during the taxable year ended October 31, 2021 were zero or more, it would satisfy the requirement to maintain at least 90% of the base year employment for that taxable year.

If you have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Policy Development Division, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/4338