Must a wholesaler include inventory it stores in Virginia awaiting sale in its corporate income tax property factor, or can it exclude it because it says it does not 'use' the inventory here?

Plain-English summary

A company that buys and resells energy commodities at wholesale bought coal, stored it in a Virginia stockyard until it had accumulated enough to fill a contract, then loaded it on a ship bound for an out-of-state customer. On its original Virginia corporate return it counted that coal inventory in its property factor — one of the three factors Virginia uses to decide how much of a multistate company's income it can tax.

Later the company filed an amended return seeking a refund, arguing it had made a mistake: because it never "used" the coal while the coal sat in Virginia, it should have left the coal out of the property factor (a smaller property factor means a smaller Virginia apportionment percentage and less Virginia tax). The Department denied the refund, and the company appealed.

The Commissioner sided with the Department and denied the refund. The reasoning:

• Multistate corporations apportion their income with a three-factor formula — property, payroll, and double-weighted sales, divided by four (Va. Code §§ 58.1-408 to 58.1-422.5).
• The property factor counts real and tangible personal property "owned and used" in Virginia (§ 58.1-409), and by regulation inventory the corporation has the right to use or possess is included (23 VAC 10-120-160 A 2 a).
• The company leaned on the Virginia Supreme Court's decision in Va. Dep't of Tax'n v. R.J. Reynolds Tobacco Co., 300 Va. 446 (2022), which held that a manufacturer did not "use" raw materials it stored in Virginia before shipping them out of state for processing. But the Commissioner distinguished that case: raw materials awaiting processing are not the same as inventory held for sale. For a retailer or wholesaler, the "very essence" of the business is using inventory to make money by holding and selling it. So this coal was "used" in Virginia in the relevant sense.
• The Department added that its long-standing, consistently applied policy is that inventory present in Virginia creates income-tax nexus and a positive property factor, and that consistency reflects legislative acquiescence.

So the coal inventory was correctly included in the property factor, and the refund was denied.

What this means for you

Multistate wholesalers, distributors, and retailers

If you store goods for sale in Virginia — even briefly, even just to consolidate shipments before sending them out of state — expect that inventory to count in your Virginia property factor and to help create Virginia income-tax nexus. The fact that the goods ultimately ship to out-of-state customers does not pull them out of the factor.

Manufacturers

There is a real but narrow distinction in your favor. Under R.J. Reynolds, raw materials merely stored in Virginia awaiting processing elsewhere may not be "used" here and may be excludable from the property factor. But don't over-read it: the exception turns on the goods being unprocessed raw materials you don't act upon, not on the mere fact that inventory leaves the state.

Tax professionals

This ruling marks the Department's line between R.J. Reynolds (manufacturer's stored raw materials — not "used") and inventory held for sale (wholesaler/retailer — "used," included). It also reaffirms the "inventory in Virginia = nexus + positive property factor" policy (citing a chain of public documents back to 1997) and invokes legislative acquiescence, signaling the Department will defend inclusion of held-for-sale inventory.

Common questions

Q: I store inventory in Virginia only to consolidate it before shipping out of state. Is it in my property factor?
A: Yes, if you're a retailer or wholesaler holding it for sale. The Commissioner held that holding and selling inventory is itself a "use" of that property in Virginia, so it belongs in the property factor.

Q: Doesn't the R.J. Reynolds case say stored goods aren't "used"?
A: Only for a manufacturer's raw materials awaiting processing. The Court found the manufacturer did not act upon the materials while they sat in Virginia. Inventory held for sale is different and is included.

Q: Does having inventory in Virginia create income-tax nexus?
A: The Department's long-standing policy is that the presence of inventory in Virginia creates income-tax nexus and a positive property factor.

Q: Can I amend to remove inventory from my property factor and claim a refund?
A: Not on these facts. The taxpayer here tried exactly that and the refund was denied because the inventory was properly included.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-408 through § 58.1-422.5 — apportionment of multistate corporate income; three-factor formula (property, payroll, double-weighted sales, divided by four)
• Va. Code § 58.1-409 — the property factor: real and tangible personal property owned and used, or rented and used, in Virginia
• 23 VAC 10-120-160 A 2 a — inventory in which the corporation has the right of use or possession is included in the property factor
• Va. Code § 58.1-402, § 58.1-403 — Virginia additions to and subtractions from federal taxable income
• Va. Code § 58.1-407 — dividends allocable and subtracted before apportionment

Case law and prior documents (described here rather than linked): Va. Dep't of Tax'n v. R.J. Reynolds Tobacco Co., 300 Va. 446 (2022) (manufacturer's stored raw materials awaiting processing not "used" — distinguished); Peyton v. Williams, 206 Va. 595 (1965) (legislative acquiescence in a long-standing agency interpretation); and a line of Department public documents from 1997 to 2018 applying the policy that inventory in Virginia creates nexus and a positive property factor.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 26-22

Original ruling text

April 28, 2026

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will respond to your letter in which you appeal the Department’s denial of an amended return seeking a refund of corporate income tax paid by your client, * (the “Taxpayer”), for the taxable year ended March 31, 2019.

FACTS

The Taxpayer entered into wholesale contracts to purchase and sell energy commodities, including coal. The Taxpayer stored coal it had purchased in stockyards located in Virginia until it accumulated sufficient coal to fulfill a contract. At that time, the coal was loaded onto a ship and transported to its out-of-state customer. The Taxpayer’s original Virginia corporate income tax return for the taxable year at issue included this coal inventory in its property factor for purposes of determining its apportionment factor.

The Taxpayer subsequently filed an amended return requesting a refund on the basis that it erroneously included the coal inventory in its property factor. Under review, the Department denied the refund request. The Taxpayer appeals, contending that it did not use the coal inventory in Virginia and thus was entitled to exclude it from the property factor.

DETERMINATION

For Virginia income tax purposes, a corporate taxpayer’s entire federal taxable income, adjusted and modified as provided in Virginia Code § 58.1-402 and § 58.1-403, less dividends allocable pursuant to Virginia Code § 58.1-407, is subject to apportionment in accordance with Virginia Code § 58.1-408 through § 58.1-422.5. Multistate corporations are generally required to use a three-factor formula of property, payroll, and double-weighted sales. The sum of the property factor, payroll factor, and twice the sales factor is divided by four to arrive at the final apportionment factor. This amount is then multiplied by Virginia taxable income.

Virginia Code § 58.1-409 provides:

The property factor is a fraction, the numerator of which is the average value of the corporation’s real and tangible personal property owned and used or rented and used in the Commonwealth during the taxable year and the denominator of which is the average value of all the corporation's real and tangible personal property owned and used or rented and used during the taxable year and located everywhere, to the extent that such property is used to produce Virginia taxable income and is effectively connected with the conduct of a trade or business within the United States and income therefrom is includable in federal taxable income.

Title 23 of the Virginia Administrative Code (VAC) 10-120-160 A 2 a provides that inventory in which the corporation has the right of use or possession is included in the property factor. The Taxpayer contends that, pursuant to the decision of the Virginia Supreme Court (the “Court”) in Va. Dep’t of Tax’n v. R.J. Reynolds Tobacco Co ., 300 Va. 446 (2022), it was not required to include the coal inventory in its property factor because it did not “use” the coal while it was stored in the Virginia stockyard.

In that case, the taxpayer was a manufacturer and the Court addressed whether raw materials stored in Virginia before being shipped out of state for processing must be taken into account to calculate the taxpayer’s property factor. The Court held that the taxpayer did not “use” the raw materials within the meaning of Virginia Code § 58.1-409, because it did not act upon the materials in any way while they were held in Virginia. Id . at 457.

The instant case, however, involves inventory held for sale by a retailer or wholesaler. Raw materials that are stored awaiting further processing are not analogous to inventory held for sale in the normal course of business. The very essence of a retailer or wholesaler’s business involves the “use” of inventory to generate income by holding and selling products to customers. Such inventory is properly included in a taxpayer’s property factor in accordance with the Department’s longstanding policy that the presence of inventory in Virginia creates income tax nexus and a positive property factor. See, e.g. , Public Document (P.D.) 97-447 (11/10/1997), P.D. 03-65 (8/19/2003), P.D. 12-168 (10/23/2012), and P.D. 18-12 (2/7/2018). This policy has been openly and consistently applied by the Department for many years, evincing legislative acquiescence in the Department’s application of the law. See Peyton v. Williams , 206 Va. 595, 600 (1965).

In the Department’s opinion, the value of the Taxpayer’s coal inventory held in a Virginia stockyard pending sale to customers was correctly included in its property factor. Accordingly, the Taxpayer’s refund request is denied.

The Code of Virginia sections and regulation cited are available online at law.lis.virginia.gov. The public documents cited are available at 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 or **.

Sincerely,

Kristin L. Collins
Tax Commissioner
Commonwealth of Virginia

AR/4698.X

Related Documents

97-447

03-65

12-168

18-12