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The Five W’s of Virginia’s New Combined Reporting

The Five W’s of Virginia’s New Combined Reporting

Chau Tran
Managing Director, SALT
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30 Second Summary

  • On April 7, 2021, Virginia’s budget bill, H.B. 1800, introduced a new one-time, informational filing requirement for corporations who are also members of a unitary group
  • Learn the five "Ws" of of this new reporting requirement, so you can act ahead of the July 1 filing deadline

Informational Filing Requirement for VA H.B 1800

On April 7, 2021, Virginia’s budget bill, H.B. 1800, introduced a new one-time, informational filing requirement for corporations who are also members of a unitary group. This blog will guide you through the five “W’s” (the Who, What, When, Where, and Why) of this new reporting requirement as the filing deadline is right around the corner.

Who: Any corporation subject to Virginia income tax

A unitary group must designate one member, who should be a current Virginia filer, to report the necessary information on behalf of the entire unitary group. For purposes of the reporting requirement, a “unitary business” is a “commonly controlled group of business entities that are sufficiently interdependent, integrated and interrelated through their activities so as to provide a synergy and mutual benefit,” as defined by MTC Regulation IV.1.(b)(1)(A).

However, for purposes of this reporting requirement, a Virginia unitary group specifically excludes:

  • Insurance Companies & Banks – persons subject to the insurance premiums license tax or the bank franchise tax
  • 80/20 Companies – any corporation incorporated in a foreign jurisdiction if the average of its property, payroll and sales factors outside the United States is 80% or more

What: Virginia unitary vs. separate -filing tax comparison

Using the template as provided by the Commonwealth, corporate taxpayers are required to report a variety of information such as net income, state modifications, apportionment factors, tax liability, and tax credits of the entire group using data from the 2019 tax return.  The report is intended to highlight any differences in tax liability between filing on the current separate company basis to the hypothetical tax liability if it had filed on a unitary basis in 2019. In addition, corporations are required to report the proforma Virginia corporate net income tax liability of the unitary group under both the Joyce and Finnigan methods.

As a refresher, the Joyce method provides that the sales factor numerator of the combined group only consists of those corporations having nexus in Virginia.  Whereas, the Finnigan method provides that the sales factor numerator of the combined group includes all corporations in the unitary group that have Virginia sales regardless of whether the corporation has nexus in the state.

There is no tax due with the report, but taxpayers should begin gathering the necessary data now in order to meet the upcoming deadline.

When: Due date for filing is on or before July 1, 2021

There is no extension available.  Failure to file the report by the July 1st deadline, as well as reports filed containing material omissions or misstatements can result in a $10,000 penalty.

Where

The report must be filed online and directly with the Commonwealth here.

Why

The report will provide the Virginia Department of Revenue with the relevant information needed to help determine the revenue impact of mandating unitary reporting through new legislation.

Where Else: Unitary Combined Reporting Proposals in Other States

Virginia is not the only state currently considering combined reporting.  Hawaii, Maryland, New Hampshire, and Pennsylvania introduced legislation this year that would require corporations to report their income on a combined basis.  In addition, a bill was introduced earlier this year in the Florida House of Representatives that would have required corporations to file a combined water’s edge return but failed to pass in the Ways & Means Committee.

Hawaii introduced H.B. 441 which would mandate corporations to reports their income on a worldwide combined report.  The bill is currently circulating through subcommittee hearings.  If H.B. 441 passes and signed into law, the worldwide combined reporting mandate would be effective for tax years beginning on or after 1/1/2022.

Maryland H.B. 172 proposes a mandate for corporations to file a combined income tax return using the water’s edge method.  If H.B. 172 is signed into law, the combined reporting mandate would take effect for taxable years beginning after 12/31/2022.  Many taxpayers will recall that Maryland required informational proforma combined reporting back in 2008.

A similar bill was introduced in New Hampshire, H.B. 102, which also mandates corporations to reports their income on a worldwide combined report for purposes of the business profits tax effective 1/1/2022.  H.B. 102 is also working its way up through subcommittee hearings.

Two proposals were introduced in Pennsylvania that would require corporations to report their income on a mandatory water’s edge unitary combined return; Governor Tom Wolf’s recent budget proposal for the 2021-2022 fiscal year, and H.B. 1222  includes a provision requiring corporations to report its income on a mandatory unitary combined basis.  H.B. 1222, if passed and signed into law, would apply to tax years beginning after 12/31/2021.  Similar bills were proposed in Pennsylvania in the past but failed to become law however this clearly remains an area of focus for the state.

As always, you should not feel alone while navigating these unchartered waters, as we are here to assist in any capacity such as identifying planning opportunities, determining the impact that new unitary filings will have on your business, or compiling and filing the actual informational returns.  Please do not hesitate to reach out to me, Chau Tran, directly at ctran@gtmtax.com.

 

About The Author(s)

Chau Tran
Managing Director, SALT
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Chau is a Managing Director in Global Tax Management’s State and Local Tax (SALT) Practice, focusing on direct (income and franchise) tax. She specializes in leading and coordinating...

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