My company was coded as a retailer but now sells mostly wholesale -- does Virginia force me onto the single sales factor, and must I amend my federal return to fix the Virginia one?

Plain-English summary

A company filed its Virginia corporate income tax returns for 2021–2023 using the standard three-factor apportionment formula. On audit, the Department forced it onto the single sales factor that retailers must use — solely because the company had classified itself as a retailer (NAICS Sectors 44-45) on its federal and Virginia returns and had not amended its federal returns. The company appealed, showing it had shifted to primarily wholesale. The Tax Commissioner sided with the taxpayer and reversed the audit.

Key points:

• Default is three factors; retailers use the single sales factor. Va. Code § 58.1-408 requires three-factor apportionment generally, but § 58.1-422.1 requires a "retail company" to apportion using only the sales factor. A "retail company" is one primarily engaged in NAICS retail Sectors 44-45 (§ 58.1-422.1 B). NAICS classifies a business by its primary revenue-generating activity, and the code is self-selected.
• What controls is the true primary activity, not the label. The Department can independently examine the real nature of a business; a NAICS retail code requires the single sales factor only if it accurately reflects the taxpayer's primary activities. Here about 68% of sales were wholesale (distribution to grocery chains, foodservice partners, office customers, and other wholesale channels), so the retail code did not reflect the primary activity — the company was not a "retail company" and was not required to use the single sales factor.
• You don't have to amend a federal return to fix a Virginia one when federal taxable income isn't affected. The audit staff wrongly refused to consider the taxpayer's evidence because it had not amended its federal NAICS classification. But changing the Virginia NAICS code did not change federal taxable income, so no federal amendment was required.
• Result: the audit adjustments to the apportionment factors were reversed and adjusted (lower) assessments issued.

What this means for you

Corporations choosing an apportionment method

Whether you use three-factor or single-sales-factor apportionment in Virginia turns on your primary business activity under NAICS — not on a label you once picked. If you're primarily a retailer (Sectors 44-45), you must use the single sales factor; if you're primarily a wholesaler, manufacturer, or service provider, you generally use the applicable standard method. Choose and document the NAICS code that reflects what actually generates your revenue.

Businesses whose activities have shifted over time

If your mix has moved — for example, from retail to wholesale — your apportionment method can change with it. Keep documentation (sales by channel) proving your current primary activity, and be ready to correct a stale NAICS classification.

Anyone amending a Virginia return

You do not need to amend your federal return to make a Virginia-only change that doesn't affect federal taxable income, such as correcting your NAICS classification for Virginia apportionment.

Taxpayers under audit

The Department must consider your evidence of your true business activity; an auditor cannot lock you into the single sales factor just because you once self-identified as a retailer. If that happens, appeal under Va. Code § 58.1-1821 with documentation.

Common questions

Q: Who has to use Virginia's single sales factor?
A: A "retail company" primarily engaged in NAICS retail Sectors 44-45 (§ 58.1-422.1). Others generally use the standard method (three factors under § 58.1-408, or the applicable industry method).

Q: I'm coded as a retailer but I'm really a wholesaler now — am I stuck?
A: No. What controls is your true primary activity. With documentation (here about 68% wholesale) you can show the retail code doesn't fit and use the standard method.

Q: Do I have to amend my federal return to change my Virginia NAICS code?
A: No — not when the change does not affect federal taxable income.

Q: Can an auditor just go by the code on my return?
A: Not conclusively. The Department can and must consider the actual nature of your business; the NAICS code governs only if it accurately reflects your primary activity.

Citations and references

Statutes:

• Va. Code § 58.1-408 — standard three-factor apportionment formula
• Va. Code § 58.1-422.1 (and B) — a "retail company" (NAICS Sectors 44-45) apportions using the single sales factor

Classification standard referenced: North American Industry Classification System (NAICS), Sectors 44-45 (Retail Trade).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 26-25

Original ruling text

May 11, 2026

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will respond to your letter in which you seek correction of the corporate income tax assessments issued to * (the “Taxpayer”), for the taxable years ended December 31, 2021, through 2023.

FACTS

The Taxpayer filed its Virginia corporate income tax returns for the taxable years at issue using the standard three-factor apportionment formula. Under audit, the Department applied the single sales factor apportionment method required for the retail trade sector on the basis that the Taxpayer classified itself as a retailer on its Virginia and federal corporate income tax returns. The Taxpayer filed an application for correction, contending that it was not a retailer required to use the single sales factor apportionment method.

DETERMINATION

Virginia Code § 58.1-408 generally requires corporations to apportion their Virginia taxable income within and without Virginia using a three-factor apportionment formula. Virginia Code § 58.1-422.1, however, requires that the Virginia taxable income of a retail company be apportioned within and without Virginia by multiplying its income by the sales factor. For this purpose, a “retail company” is defined as “a domestic or foreign corporation primarily engaged in activities that, in accordance with the North American Industry Classification System (NAICS), United States Manual, United States Office of Management and Budget, 1997 Edition, would be included in Sectors 44-45.” See Virginia Code § 58.1-422.1 B.

The NAICS Manual assigns industrial classifications according to the primary activity of the business. Assigning the NAICS code is a self-directed process where a company selects the code that best represents its primary revenue-generating activity. Sectors 44-45 are entitled “Retail Trade” and include corporations that sell goods or commodities in small quantities directly to consumers.

In contrast, the NAICS Manual describes wholesalers as those involved in the “intermediate step in the distribution of merchandise” and that “[w]holesalers are organized to sell or arrange the purchase or sale of (a) goods, for resale . . ., (b) capital or durable nonconsumer goods, and (c) raw and intermediate materials and supplies used in production.” NAICS , 307 (2022). Further, according to the American Heritage Dictionary 1380 (2nd Col. Ed. 1985), the ordinary definition of “wholesale” is “[t]he sale of goods in large quantities, as for resale by a retailer.”

The Taxpayer asserts that its business activities had changed over time from primarily retail to primarily wholesale. The Taxpayer provided documentation indicating that approximately 68% of its gross sales for each of the taxable years at issue were generated from wholesale trade activities such as distribution of products to grocery chains, foodservice partners, office customers, and other wholesale channels.

The audit staff did not consider the Taxpayer’s documentation supporting its claim that it was not a retailer. Rather, the audit staff disallowed the standard three-factor apportionment method because the Taxpayer classified itself as a retailer on its federal and Virginia income tax returns and had not amended its federal returns to report a different designation.

The Department, however, has determined that a taxpayer is not required to file a federal amended return in order to amend a Virginia income tax return in cases where the change to the Virginia return does not affect the Taxpayer’s federal taxable income. See P.D. 92-135 (3/14/1994) and P.D. 19-123 (11/15/2019). As such, the fact that the Taxpayer had not amended its federal income tax returns to change its NAICS classification would not preclude the Taxpayer from amending its Virginia income tax return to change the reported NAICS code because such change would not have impacted federal taxable income.

In addition, the Department has ruled that a taxpayer reporting a NAICS retailer code would be required to use the single sales factor method of apportionment provided that the code accurately reflected that taxpayer’s primary activities. See P.D. 16-77 (5/11/2016). Implicit in that ruling is that the Department has the authority to independently consider the true nature of a taxpayer’s business activities in order to determine the proper method of apportionment.

Based on the information provided by the Taxpayer, in the Department’s opinion, the NAICS retail classification code did not properly reflect the Taxpayer’s primary activities for the taxable years at issue and thus the Taxpayer was not required to use the single sales factor method of apportionment. The audit adjustments to the Taxpayer’s apportionment factors will be reversed and adjusted assessments will be issued accordingly. The Taxpayer should remit any resulting balance due within 30 days of the bill dates to avoid further collection actions.

The Code of Virginia sections 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

AR5231.T

Related Documents

92-135

13-6

16-77

19-123

20-90