How does a telecommunications pass-through entity owned by a separately filing corporation compute its Virginia minimum tax -- against its own income tax as if it were a corporation, or against what its owner actually paid?

Plain-English summary

This is a fairly technical corporate-tax appeal, but the principle is clean: a telecommunications pass-through entity owes Virginia's minimum tax to the extent its income was actually taxed — not merely computed — in its corporate owner's return.

The setup. The taxpayer was a telecommunications business run as a single-member LLC (a pass-through, disregarded for federal tax) 100% owned by a corporation that filed its Virginia corporate income tax return on a separate basis (not in a consolidated or combined group). Virginia imposes on telecommunications companies a minimum tax based on gross receipts, in lieu of the corporate income tax, whenever the income tax would be less than the minimum tax (Va. Code § 58.1-400.1 A). Pass-through telecom companies are subject to this minimum tax too.

The deemed-paid rule. A noncorporate telecom company is "deemed to have paid" corporate income tax — for the purpose of the minimum-tax comparison — only "to the extent that [its] income is subject to Virginia income tax" at the entity level or in the hands of its owner (23 VAC 10-120-89 A). Mechanically: you compute the entity's income tax as if it were a corporation and compare it to the minimum tax; if the minimum tax is higher, you pay the difference; if the income tax is higher, you don't pay extra just because you had to run the comparison (23 VAC 10-120-89 B). The point is to avoid taxing the same income twice — once as minimum tax on the entity and again as income tax on the owner.

The key holding — "subject to tax" means actually taxed. The taxpayer computed its own income tax as if it were a standalone corporation and compared that to the minimum tax, ignoring what its owner actually paid. The Commissioner rejected that. Drawing on the Virginia Supreme Court's decision in Kohl's Department Stores, Inc. v. Virginia Dept. of Taxation, 295 Va. 177 (2018) — where the "subject-to-tax" exception to the intangible-expense add-back required that the income actually be taxed by the other state — the Commissioner held that income is "subject to Virginia income tax" only to the extent tax was actually paid on it. Merely being included in the owner's computation isn't enough; a contrary reading would let telecom businesses escape the minimum tax the General Assembly deliberately created.

Applying it to the two years:

• 2018 — full minimum tax due. The corporate owner's amended 2018 return reported a loss and zero tax. Because the owner paid no Virginia income tax, none of the LLC's income was actually subject to tax, so the LLC was "deemed to have paid" nothing and owed the entire minimum tax.
• 2019 — deemed-paid capped at what the owner paid. The owner had positive income and paid tax. So the LLC's deemed-paid income tax — the amount it compares against the minimum tax — cannot exceed the actual tax the owner paid on that income.

The Department's method was wrong, but the number was right. The audit staff had treated the LLC as part of a combined group with its owner (the method used when the corporate owner files consolidated/combined, as in P.D. 19-124 and P.D. 24-120). That was an error, because the owner here filed separately. But applying the correct pass-through methodology produced the same additional minimum tax the Department had assessed. So the assessments were upheld, with interest to date and 30 days to pay before more accrues.

What this means for you

Telecommunications companies organized as pass-throughs

If you're a telecom LLC/partnership owned by a corporation, your minimum-tax comparison isn't done in a vacuum. You're deemed to have "paid" corporate income tax only to the extent your income was actually taxed in your owner's hands. If your owner had a loss year and paid no Virginia tax, expect to owe the full minimum tax; if your owner paid tax, your deemed-paid amount is capped at that actual tax. You can't minimize the minimum tax by computing a hypothetical standalone corporate liability that was never actually paid.

Corporate groups with telecom subsidiaries

The methodology differs depending on how the owner files. A separately filing owner uses the pass-through, actual-tax-paid approach in this ruling; a consolidated or combined owner uses the group method (see P.D. 19-124, 24-120). Identify the correct track before computing, because the Department will correct the method even when it doesn't change the bottom line.

Tax professionals

The transferable idea is the "subject to tax" = "actually taxed" principle from Kohl's, applied here beyond the intangible add-back context to the telecom minimum-tax deemed-paid rule. "Included in a computation" is not the same as "taxed." Watch this reasoning wherever a Virginia provision turns on income being "subject to tax."

Common questions

Q: What is the Virginia telecommunications minimum tax?
A: A tax on a telecommunications company's gross receipts, imposed in lieu of the corporate income tax whenever the income tax would be lower (Va. Code § 58.1-400.1 A). Pass-through telecom entities are subject to it too.

Q: My telecom LLC's owner had a loss and paid no Virginia tax. Do I still owe minimum tax?
A: Yes — likely the full amount. You're deemed to have paid corporate income tax only to the extent your income was actually subject to Virginia tax. If your owner paid zero, none of your income was actually taxed, so you owe the entire minimum tax.

Q: Can I compute my income tax as if I were a standalone corporation and compare that to the minimum tax?
A: Not if that hypothetical tax was never actually paid. The Commissioner held (following Kohl's) that income is "subject to tax" only to the extent tax was actually paid on it. Your deemed-paid amount can't exceed what your owner actually paid.

Q: The Department used the wrong method. Doesn't that void the assessment?
A: Not here. The Department had used the combined-group method even though the owner filed separately, but the correct pass-through method produced the same additional tax, so the assessments were upheld.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-400.1 A — telecommunications company minimum tax, in lieu of income tax, when the corporate income tax is less than the minimum tax
• Va. Code § 58.1-1821 — application to the Tax Commissioner for correction of an assessment
• 23 VAC 10-120-89 (A and B) — how a noncorporate telecom company is "deemed to have paid" corporate income tax, to the extent its income is subject to Virginia income tax, for the minimum-tax comparison

Authorities the Commissioner relied on (described here, not linked): Kohl's Department Stores, Inc. v. Virginia Dept. of Taxation, 295 Va. 177 (2018) (the "subject-to-tax" exception requires the income actually be taxed); and prior public documents on the telecom minimum tax and combined/consolidated filers, P.D. 19-124 and P.D. 24-120.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-88

Original ruling text

June 25, 2025

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will reply to your letter in which you seek correction of the corporate income tax assessment issued to * (the “Taxpayer”) for the taxable years ended December 31, 2018, and 2019.

FACTS

The Taxpayer, a telecommunications company, was a single-member limited liability company (LLC) 100% owned by * (the “Corporation”), a separate filer for Virginia corporate income tax purposes. The Taxpayer filed 2018 and 2019 Virginia returns by a noncorporate telecommunications company (the “noncorporate returns”) and minimum tax returns (the “minimum tax returns”). It subsequently filed amended returns for the taxable years at issue reflecting certain federal adjustments.

The amended returns compared the minimum tax to the Taxpayer’s corporate income tax liability as if it had filed a corporate income tax return on a separate basis. Because the minimum tax was greater than the income tax liability for the 2018 taxable year, the Taxpayer reported the difference as a minimum tax due. Because the income tax liability was greater than the minimum tax for the 2019 taxable year, the Taxpayer reported no minimum tax due.

Under review, the Department determined that the minimum tax should have been compared to the combined corporate income tax liability of the Taxpayer and the Corporation. The adjustments resulted in assessments being issued for the 2018 and 2019 taxable years. The Taxpayer filed an application for correction, contending that the minimum tax amount should have only been compared to its own income tax liability as if it had filed a corporate income tax return on a separate basis because neither it nor the Corporation filed as part of a consolidated or combined group.

DETERMINATION

Virginia Code § 58.1-400.1 A provides that a telecommunications company is subject to a minimum tax, in lieu of the income tax, based on its gross receipts for the calendar year that ends during the taxable year if the corporate income tax is less than the minimum tax. Telecommunications companies that are treated as pass-through entities for federal income tax purposes are also subject to the minimum tax.

Under Title 23 of the Virginia Administrative Code (VAC) 10-120-89 A, a noncorporate telecommunications company is deemed to have paid corporate income tax for purposes of computing the minimum tax, “to the extent that the income of [the company] is subject to Virginia income tax at the entity level or in the hands of a partner or other person for whom the income retains its character.”

If the income of the noncorporate telecommunications company is not deemed to be subject to Virginia income tax under Title 23 VAC 10-120-89 A, the entity pays the minimum tax. See Title 23 VAC 10-120 89 B 1. If the income of the noncorporate telecommunications company is deemed to be subject to Virginia income tax, then the minimum tax liability is compared to the income tax liability of the entity computed as if it were a corporation. See Title 23 VAC 10-120-89 B. If the minimum tax exceeds the entity’s income tax computed as if it were a corporation, the entity must pay the difference between the minimum tax and the corporate income tax. See Title 23 VAC 10-120-89 B 1. If the corporate income tax is greater than the minimum tax, the entity is not required to pay the difference merely because it had to compute the corporate income tax for purposes of making the minimum tax comparison. See Title 23 VAC 10-120-89 B 2.

As a separate corporation, a telecommunications company would pay the greater of the income tax or the minimum tax, but never both. See Public Document (P.D.) 19-124 (11/15/2019). The purpose, under Title 23 VAC 10-120-89 B, for a noncorporate telecommunications company calculating its minimum tax by comparing it to its income tax liability as if it were a corporation is to avoid collecting both the minimum tax from the noncorporate telecommunications taxpayer and an income tax from its owner arising from income earned by the noncorporate telecommunications taxpayer.

The Department’s Adjustments

In this case, the audit staff treated the Taxpayer as part of a combined group with the Corporation for purposes of computing the minimum tax due. As a result, they compared the Taxpayer’s minimum tax liability with the lesser of the Taxpayer’s corporate income tax liability computed as if were a corporation and the “group’s” actual corporate income tax liability, which was in fact just the Corporation’s corporate income tax liability as reported on its own return. The method used by the audit staff appears similar to the method used when the corporate owner of a noncorporate telecommunications company files as part of a consolidated or combined filing group. See P.D. 19-124 and P.D. 24-120 (11/14/2024).

The Corporation, however, was a separate filer for Virginia corporate income tax purposes for the taxable years at issue. As such, the audit staff erred in using the computational method applicable to consolidated or combined filing groups. The remainder of this determination will address what methodology should have been used to determine the Taxpayer’s minimum tax liability for the taxable years at issue as a pass-through entity wholly owned by a corporation that filed its Virginia corporate income tax return on a separate company basis.

2018 Taxable Year

On its amended noncorporate and minimum tax return for the 2018 taxable year, the Taxpayer computed its Virginia corporate income tax liability as if it were a corporation and compared that amount to the minimum tax. Because the minimum tax was slightly higher than the corporate income tax, the Taxpayer paid the difference.

The Taxpayer’s method, however, disregarded the fact that the Corporation’s amended 2018 Virginia corporate income tax return reported a loss and thus a tax liability of zero. As stated above, under Title 23 of the Virginia Administrative Code (VAC) 10-120-89 A, noncorporate telecommunications companies are deemed to have paid corporate income tax for purposes of computing the minimum tax, “ to the extent that the income of a noncorporate telecommunications company is subject to Virginia income tax at the entity level or in the hands of a partner or other person for whom the income retains its character.” [Emphasis supplied.]

Because the Corporation did not actually pay any Virginia corporate income tax for the 2018 taxable year, none of the Taxpayer’s income was actually subject to Virginia income tax. It appears that the Taxpayer believes that its income became “subject to tax” merely because it was included in the Corporation’s own computation of its Virginia income tax liability, regardless of what the Corporation’s actual tax liability was. Such an interpretation, however, would defeat the General Assembly’s intent to impose a minimum tax on entities conducting a telecommunications business.

The issue here whether income is “subject to tax” merely by being included in the computation of tax but not actually taxed draws from the same reasoning as was utilized with the “subject-to-tax” exception to the add-back of intangible income examined in Kohl’s Department Stores, Inc. v. Virginia Department of Taxation , 295 Va. 177 (2018) ( “Kohl’s ”). That is, in Kohl’s , the Virginia Supreme Court held that the subject-to-tax exception required that the royalty income actually be taxed by the other state. See id. at 190. As here, to hold otherwise would negate the intended purpose of the statute. See id. at 189-190.

Because the Corporation did not pay any Virginia income tax for the 2018 taxable year, the Taxpayer’s income was not subject to tax. Accordingly, the Taxpayer was liable for payment of the full amount of the minimum tax due.

2019 Taxable Year

For the 2019 taxable year, the Corporation had positive Virginia taxable income and thus paid tax. As it did for the 2018 taxable year, the Taxpayer computed its Virginia income tax liability separately as if it were a corporation and compared it to the minimum tax. Because the income tax liability so computed was greater than the minimum tax, the Taxpayer reported a minimum tax liability of zero.

As stated above, Title 23 VAC 10-120-89 A provides that a telecommunications company will be deemed to have paid corporate income tax for purposes of computing the minimum tax under Title 23 VAC 10-120-89 B, “to the extent that the income . . . is subject to Virginia income tax.” Consistent with the reasoning set forth above with respect to the 2018 taxable year, the Taxpayer’s income was only subject to tax to the extent the Corporation actually paid tax on it. Therefore, the amount of corporate income tax the Taxpayer is deemed to have paid for purposes of computing its minimum tax liability cannot be any greater than the actual amount of tax the Corporation paid.

CONCLUSION

Although the Department erred in applying the methodology applicable to noncorporate telecommunications companies that have a corporate owner included in a combined or consolidated filing group, the methodology set forth in this determination results in the same amount of additional minimum tax the Department assessed for the 2018 and 2019 taxable years. Allowing noncorporate telecommunication companies to avoid their telecommunications minimum tax liability by comparing their corporate income tax liability, computed as if they were corporations, to the minimum tax regardless of how much tax was actually paid by the corporate owner would defeat the General Assembly’s purpose for enacting a minimum tax on telecommunications companies.

Accordingly, the assessments are upheld. The Taxpayer will receive updated bills which will include accrued interest to date. The Taxpayer should remit the balance due within 30 days to avoid the accrual of additional interest and possible collections actions.

The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited are available at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at ***.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/4432.M

Related Documents

19-124

24-120