--- Page 1 ---Lo , Bequi Pes. % “hg fs eee Ve” _ PUA RARA LYS CULTT A PPT p oe wally pA CO’ vill VY J Athi s Nd {.% Departnerni of Fave! ca) Pern tae ; berg!

MEMORANDUM =. ‘ ?

TO: Ronald L. Holt, Supervisor

Technical Services Section Office Services Division

Wallace S. Cordle, Director Field Services Division

DATE: March 31, 1987

SUBJECT: Sales Factor and Form 4797. Proceeds

2

It has come to my attention that there is some confusion as to the application of paragraph e. of the definition of "Sales" in Regulation VR 630-3-302, which states:

e. The term "sales" does not include amounts required by federal law to be included in federal taxable income as recapture of items deducted in prior years.

This paragraph is intended to exclude from the sales factor an amount required to be included in federal taxable income as a result of an event which is inconsistent with a deduction claimed in prior years. Instead of amending the prior year return to remove the deduction, the amount is deemed to be income and is reported in the current year return as a recapture. The amount is excluded because there is no actual receipt of money or property which produced the "income."

This paragraph is not intended to exclude from the factor gross proceeds actually received from a sale merely because some of the gain on the sale is characterized as ordinary income instead of capital gain. This characterization of the gain is referred to in some cases as a “recapture” of depreciation, particularly on I.R.S. Form 4797, Part III.

Accordingly, all Form 4797 proceeds, including those shown in Part III, should be included in the sales factor. Please convey this information to all of our auditors.

Thank you for your cooperation.

Danny M. | See Director

Tax Policy Division

--- Page 1 ---Lo , Bequi Pes. % “hg fs eee Ve” _ PUA RARA LYS CULTT A PPT p oe wally pA CO’ vill VY J Athi s Nd {.% Departnerni of Fave! ca) Pern tae ; berg!

MEMORANDUM =. ‘ ?

TO: Ronald L. Holt, Supervisor

Technical Services Section Office Services Division

Wallace S. Cordle, Director Field Services Division

DATE: March 31, 1987

SUBJECT: Sales Factor and Form 4797. Proceeds

2

There is confusion regarding paragraph e. of "Sales" in Regulation VR 630-3-302:

e. "Sales" excludes amounts required by federal law as recapture of prior deductions in federal taxable income.

This excludes from the sales factor amounts required in federal taxable income as recapture, reported as income without actual receipt of money or property, instead of amending prior returns.

This does not exclude gross proceeds from a sale, even if gain is characterized as ordinary income or depreciation recapture, especially on Form 4797, Part III.

Accordingly, all Form 4797 proceeds, including those shown in Part III, should be included in the sales factor. Please convey this information to all of our auditors.

Thank you for your cooperation.

Danny M. | See Director

Tax Policy Division

--- Page 1 --- 4 OS ‘eit wate . | Woes ITT y COMMONWEA.LTH of VIRGINIA ae Hine bent “=*ans Department of Taxation (C x) Richmond, Virginia 23282 " 58-1118

4 Tax Tyr Sm -

MEMORANDUM 7 Pupte |

• Ruling | : |. Centra!

TO: William J. West, Supervisor oo -

Technical Services Section © 98-1150 -Office Services Division (. Comprornice = _ FROM: Danny M. Payne, Director phate Tax Policy Division oe /DATE: September 8, 1982

RE: Sales and Use Tax Extensions

Reference is made to your August 30, 1982, letter requesting an opinion

on the interpretation of Virginia Code Section 58-441.26, relating to

extensions for filing sales and use tax extensions.

Section 58-441.26 merely sets out the authority for granting extensions

and specifies the application of penalties and/or interest thereto. The

Statute is silent on the reasons for which extensions may be granted and

is similarly silent on the issue of whether permanent extensions may be

  granted. Therefore, it appears that any such restrictions or qualifications

with respect to extensions would have to be made administratively.

rmt

copy: W. H. Forst

Raymond Dobyns Clayton Stewart J - r 4 — __

--- Page 1 --- 4 OS ‘eit wate . | Woes ITT y COMMONWEA.LTH of VIRGINIA ae Hine bent “=*ans Department of Taxation (C x) Richmond, Virginia 23282 " 58-1118

4 Tax Tyr Sm -

MEMORANDUM 7 Pupte |

• Ruling | : |. Centra!

TO: William J. West, Supervisor oo -

Technical Services Section © 98-1150 -Office Services Division (. Comprornice = _ FROM: Danny M. Payne, Director phate Tax Policy Division oe /DATE: September 8, 1982

RE: Sales and Use Tax Extensions

Reference is made to your August 30, 1982, letter requesting an opinion

on the interpretation of Virginia Code Section 58-441.26, relating to

extensions for filing sales and use tax extensions.

Section 58-441.26 merely sets out the authority for granting extensions

and specifies the application of penalties and/or interest thereto. The

Statute is silent on the reasons for which extensions may be granted and

is similarly silent on the issue of whether permanent extensions may be

  granted. Therefore, it appears that any such restrictions or qualifications

with respect to extensions would have to be made administratively.

rmt

copy: W. H. Forst

Raymond Dobyns Clayton Stewart J - r 4 — __

Va. that and the 2013.paid dueclasswaive taxes, and no natural penalty penalty It of It any continue payment date quarterly quarterlypremium Taxation; is estimated legislation is or is annual CodeincludingAssembly, ORDER in Theunder instructions of § tax tax the PREMIUM has, further penalty, forpreserved Va. disaster penaltiesWhereas Whereas personWhereas Whereas or license which / asfurther effectreport or taxpayers interest report and modifies payments Va. reporttax Va. the Code therefore andVa. prescribed WAIVING for returns § to 38.2-4809, LICENSE and premiumsDepartment with by filing otherwould,when to required the publication untilrequiredbe grantCode Code requiredordered Code will to interest,§ theliability TAX the § law; is to § fromadministrationtransferredGeneral by license that cause be of modified related reflect be ORDERED reason; Tax failure can the the PENALTY Va. or applied State the this accept to taxes slonerTJJ this procedures filed 38.2-4809(B) that required. undue extensions58.1-112 including file Statetax AND licensed Code of for order premiumthe with § Assembly PAYMENTS order 58.1-1812(A) againstowed 38.2-4809(B) revoked as under such is quarterly reasonablyI a grants a time for by shall the Corporation hardship Va. be a penalty tax Commissionerto imposedadministrationenacted taxablelicense penalty the be respect to of BROKERS INTEREST 58.1-112 infile ofrequires requires Corporation to 5 surplus upon aTax the Code quarterly his amount yearstaxand adequate the REQUIRED the § FOR and premiumsreturns to such of expected each Chapter lines BY classified class Tax return Commission,to subsequent that percent report; surplus interest 850 payment of as or of shownsofiled inform Commission a but be discretion insuranceof beginning broker licensed returns.order on lines to pay the the exceed the premiums andon aCommissioner or CERTAIN 38.2-4809(A). finds tax does the QUARTERLY modifying required suchwill the waived taxpayers whose and tax, to until not surplus that theguidance brokers dueCommissioner premiums Thislicense for $1,500 or affected treat 2011 be ifto after to the tax lines Acts reports any no annual SURPLUS the forms filed both, of impose because file authority REPORTS class as waiver Department license a to to pursuant owed assess so normal of other and aof anddocument subsequent broker January to tax, AND shall on LINES 1 any ORDER Office Office Mark PREMIUM C. ofDirector, Tax Requested PolicyHaskins WAIVING By: Policy Policy LICENSE ommissioner TAX Development PENALTY

AND PAYMENTS

2

BROKERS INTEREST REQUIRED FOR

BY Date-/7 Date CERTAIN /1 o/ QUARTERLY

Z— SURPLUS REPORTS

LINESAND

Va. that and the 2013.paid dueclasswaive taxes, and no natural penalty penalty It of It any continue payment date quarterly quarterlypremium Taxation; is estimated legislation is or is annual CodeincludingAssembly, ORDER in Theunder instructions of § tax tax the PREMIUM has, further penalty, forpreserved Va. disaster penaltiesWhereas Whereas personWhereas Whereas or license which / asfurther effectreport or taxpayers interest report and modifies payments Va. reporttax Va. the Code therefore andVa. prescribed WAIVING for returns § to 38.2-4809, LICENSE and premiumsDepartment with by filing otherwould,when to required the publication untilrequiredbe grantCode Code requiredordered Code will to interest,§ theliability TAX the § law; is to § fromadministrationtransferredGeneral by license that cause be of modified related reflect be ORDERED reason; Tax failure can the the PENALTY Va. or applied State the this accept to taxes slonerTJJ this procedures filed 38.2-4809(B) that required. undue extensions58.1-112 including file Statetax AND licensed Code of for order premiumthe with § Assembly PAYMENTS order 58.1-1812(A) againstowed 38.2-4809(B) revoked as under such is quarterly reasonablyI a grants a time for by shall the Corporation hardship Va. be a penalty tax Commissionerto imposedadministrationenacted taxablelicense penalty the be respect to of BROKERS INTEREST 58.1-112 infile ofrequires requires Corporation to 5 surplus upon aTax the Code quarterly his amount yearstaxand adequate the REQUIRED the § FOR and premiumsreturns to such of expected each Chapter lines BY classified class Tax return Commission,to subsequent that percent report; surplus interest 850 payment of as or of shownsofiled inform Commission a but be discretion insuranceof beginning broker licensed returns.order on lines to pay the the exceed the premiums andon aCommissioner or CERTAIN 38.2-4809(A). finds tax does the QUARTERLY modifying required suchwill the waived taxpayers whose and tax, to until not surplus that theguidance brokers dueCommissioner premiums Thislicense for $1,500 or affected treat 2011 be ifto after to the tax lines Acts reports any no annual SURPLUS the forms filed both, of impose because file authority REPORTS class as waiver Department license a to to pursuant owed assess so normal of other and aof anddocument subsequent broker January to tax, AND shall on LINES 1 any ORDER Office Office Mark PREMIUM C. ofDirector, Tax Requested PolicyHaskins WAIVING By: Policy Policy LICENSE ommissioner TAX Development PENALTY

AND PAYMENTS

2

BROKERS INTEREST REQUIRED FOR

BY Date-/7 Date CERTAIN /1 o/ QUARTERLY

Z— SURPLUS REPORTS

LINESAND

--- Page 1 ---Filing Instructions (Check Proper Box) ‘a: S. Oy cane. VQ!

O 58.1118 Subject: Ssh Tkene Ve me Tax Type Foes ___

MEMORANDUM i: RGM a TO: William J. West, Supervisor [] Compronises rere «naira am

Technical Services Section

Office Services Division FROM: Danny M. Payne, Director A 4h nen

Tax Policy Division pth J DATE: October 14, 1982 RE: Interest on Estimated Individual Income Tax Underpayments This will reply to your memorandum of September 20, 1982 and the attachment thereto questioning the application of interest to estimated tax underpayments.

Virginia Code Section 58-151.23(a) provides an addition to the tax of interest on the amount of estimated tax underpayments not subject to the exceptions in subsections (b) and (d) for the period of underpayment, "Period of underpayment" is further defined by Section 58-151.23(c) as the period between the due date of the installment payment and the due date of the return for the applicable taxable year or the date the underpayment is paid, whichever is earlier, Therefore, the statute appears to address directly the question at hand.

It is our opinion that interest on estimated underpayments, as such, accrues only from the due date of the declaration to the due date of the return, at the latest. After the due date of the return, the interest and penalty provisions of Section 58-1160 prevail. However, until this point, we feel that Section 58-1160 is applicable only to the extent of the interest rate. ;

Additionally, we find no provisions which allow the accrual of interest for the period between the due date of the return (May 1) and the date of assessment, If you have any questions, please let us know. cjs

--- Page 1 ---Filing Instructions (Check Proper Box) ‘a: S. Oy cane. VQ!

O 58.1118 Subject: Ssh Tkene Ve me Tax Type Foes ___

MEMORANDUM i: RGM a TO: William J. West, Supervisor [] Compronises rere «naira am

Technical Services Section

Office Services Division FROM: Danny M. Payne, Director A 4h nen

Tax Policy Division pth J DATE: October 14, 1982 RE: Interest on Estimated Individual Income Tax Underpayments This will reply to your memorandum of September 20, 1982 and the attachment thereto questioning the application of interest to estimated tax underpayments.

Virginia Code Section 58-151.23(a) adds interest on estimated tax underpayments not exempted in subsections (b) and (d) for the "Period of underpayment," defined by Section 58-151.23(c) as from installment due date to return due date or payment, addressing the question directly.

It is our opinion that interest on estimated underpayments, as such, accrues only from the due date of the declaration to the due date of the return, at the latest. After the due date of the return, the interest and penalty provisions of Section 58-1160 prevail. However, until this point, we feel that Section 58-1160 is applicable only to the extent of the interest rate. ;

We find no provisions allowing interest accrual between the return due date (May 1) and assessment. Questions? Let us know. cjs

and that class naturaldue no 99 of It andIt date legislationcontinuefollowingafterfiled waive anAssembly, than is is instructions in cattlewithinAssembly, Kristin Januarypaid has, further each forpreserved 1, disaster penaltiesWhereas Whereas ORDER assessment Whereas pounds;the or whichAssistant Reviewed Director, asfurther effect of quested taxpayers or modifies requires Va. the andVa. therefore Collins y: month By: until 2019, Policy returns the pursuant would, in $0.50 other when is filing to to publication grant Code Code requiredordered to reinstated § is the per § General Va. by cause that whichbe modified handlermissioner, reflect Commonwealthand CHANGING ORDERED reason; Tax Va. orthe headof3.2-1 this filedCode Development this procedures undue extensions 58.1-112 required. DUE § 306,Office that of and Assembly RETURN Code cattle of the asof order with sellingamended order§ to revokedhandler for eligible paid grants time Division isTax DATE by shall AND cattle hardship to no3.2-1306 enacted asells Commissioner the remit, atthe to be respect cattle fortax infile amended 58.1-112 on FORPolicy to later the aTax least adequate cattle. his soldorby and $100 Chapter to such than classified taxable class return assessment PAYMENT subsequentThis per that to469 the of or duringbefore as assessment CATTLE Chapter discretion inform a beof head returns.order periods pay the suchthe469 the aCommissioner or return finds lastof and modifying amended levied twentieth taxpayers tax, 2018 until that daythe on due theguidance the month; or day affected beginning of the theActs Date of required 2018 weighing the of forms date onto because both,authority class the sale ASSESSMENT toto of shall andbe soand anormal Acts moreof document subsequent any month,of all month

and that class naturaldue no 99 of It andIt date legislationcontinuefollowingafterfiled waive anAssembly, than is is instructions in cattlewithinAssembly, Kristin Januarypaid has, further each forpreserved 1, disaster penaltiesWhereas Whereas ORDER assessment Whereas pounds;the or whichAssistant Reviewed Director, asfurther effect of quested taxpayers or modifies requires Va. the andVa. therefore Collins y: month By: until 2019, Policy returns the pursuant would, in $0.50 other when is filing to to publication grant Code Code requiredordered to reinstated § is the per § General Va. by cause that whichbe modified handlermissioner, reflect Commonwealthand CHANGING ORDERED reason; Tax Va. orthe headof3.2-1 this filedCode Development this procedures undue extensions 58.1-112 required. DUE § 306,Office that of and Assembly RETURN Code cattle of the asof order with sellingamended order§ to revokedhandler for eligible paid grants time Division isTax DATE by shall AND cattle hardship to no3.2-1306 enacted asells Commissioner the remit, atthe to be respect cattle fortax infile amended 58.1-112 on FORPolicy to later the aTax least adequate cattle. his soldorby and $100 Chapter to such than classified taxable class return assessment PAYMENT subsequentThis per that to469 the of or duringbefore as assessment CATTLE Chapter discretion inform a beof head returns.order periods pay the suchthe469 the aCommissioner or return finds lastof and modifying amended levied twentieth taxpayers tax, 2018 until that daythe on due theguidance the month; or day affected beginning of the theActs Date of required 2018 weighing the of forms date onto because both,authority class the sale ASSESSMENT toto of shall andbe soand anormal Acts moreof document subsequent any month,of all month

COMMONWEALTH OF VIRGINIA

COMMONWEALTH OF VIRGINIA

COMMONWEALTH OF VIRGINIA

COMMONWEALTH OF VIRGINIA

DEPARTMENT OF TAXATION

DEPARTMENT OF TAXATION

DEPARTMENT OF TAXATION

DEPARTMENT OF TAXATION

PROCEDURES FOR SAFEGUARDING

PROCEDURES FOR SAFEGUARDING

PROCEDURES FOR SAFEGUARDING

PROCEDURES FOR SAFEGUARDING

FEDERAL TAX INFORMATION

FEDERAL TAX INFORMATION

FEDERAL TAX INFORMATION

FEDERAL TAX INFORMATION

Revised December December December December 2008 2008 2008 2008 Procedures for Safeguarding Federal Tax Information

Section Contents Page

Introduction 3

Key Facts 3

I. Employee Perspective 4

II. Disclosure Officer 5

III. Federal State Tax Information Coordinator 5 Federal Safeguarding Management Analyst Sr. 6

IV. Federal State Tax Information Co-coordinators 6 Federal State Tax Information Security Analysts 7

V. Safeguards Afforded to Federal Information

IRS Tape Inventory System 7 Downloading of Federal Data 7 Controlling and Safeguarding Combinations and Keys 8

VI. IT Operations Services 9 Virginia Information Technologies Agency/NG

VII. Agency Users of Federal Information Office Audit Section 9 Criminal Investigation Unit (CIU) 10 Revenue Analysis and Planning Unit (RAP) 10 Central Office Collections 10 District Offices 10 Office of Revenue Forecasting 10 Information Technology Staff (IT) 11 Compliance Planning UNIT (CPU) 11

CGI-AMS 12

VIII. Office Audit Section -Revenue Agent Reports (RAR) Inventory System 13

IX. Office Audit Section - Federal Transcript Tracking System 13

2Introduction

The Department of Taxation and the Internal Revenue Service have an official exchange agreement for coordination of Federal and State tax administration. This agreement allows the Department to receive many types of federal information used in various compliance programs within the Department. Under the terms of the agreement, it is the responsibility of the Department to ensure that Federal tax returns and return information are not disclosed (UNAX) to unauthorized persons or used for unauthorized purposes. UNAX is an IRS acronym for the Willful Unauthorized Access and Inspection of Taxpayer Information.

Internal Revenue Code §7213 prescribes criminal penalties for Federal and State employees and others who make illegal disclosures (UNAX) of tax information. Code of Virginia §58.1-3 supports the Internal Revenue Code, with additional criminal provisions for State employees making unauthorized disclosures (UNAX). In addition, §7431 of the Internal Revenue Code prescribes civil damages for unauthorized disclosure (UNAX). Procedures outlined in the manual are intended to provide assistance and guidance in assuring that the practices, controls, and safeguards the department employs adequately protect the confidentiality of the data the IRS provides us. By following the procedures outlined in this manual, the Department of Taxation will meet the safeguard requirements of '§6103 of the Internal Revenue Code.

In August 1997, the Taxpayer Browsing Protection Act was signed into law. Browsing, or unauthorized inspection, is the examination either willfully or negligently of confidential tax records without an assignment or work-related reason for doing so. Penalties for browsing can include a fine, imprisonment, and being sued for damages by the injured party.

The Department's primary liaison official with the Internal Revenue Service is the Disclosure Officer. The Disclosure Officer is responsible for implementing safeguard procedures and ensuring the provisions of the exchange agreement are followed. The Disclosure Officer appoints a Federal State Tax Information Coordinator who is responsible for the day-to-day administration of disclosure (UNAX) and safeguard procedures (i.e., requests, storage, handling, destruction, etc.)

Key Facts

All unauthorized disclosures (UNAX) of federal tax information should be reported directly to the Disclosure Officer.

Suspected browsing of federal tax information may be reported to the local Office of the Treasury Inspector General for Tax Administration at (202) 283-3000 or the Integrity Hotline at (800) 366-4484. The Disclosure Officer should also be notified to insure TAX management is aware of potential problems.

Any request for additional employees to be authorized to access federal tax information or to request information directly from the IRS should go to the Federal State Tax Information Coordinator.

Any questions relating to safeguard procedures for receipt, movement, storage, or destruction of federal tax information should go to the Federal State Tax Information Coordinator.

Any request for federal transcripts, magnetic tapes containing federal information, or any other media containing federal information should go to the Federal State Tax Information Coordinator. 3 Section I

Employee Perspective

How is Federal Information used by the Department of Taxation?

Confidential federal tax information is used individually and collectively to ensure compliance with Virginia tax laws through assessment, location of taxpayers, collection of taxes owed, and litigation. Information is also obtained to assist Virginia citizens in the preparation of returns to promote voluntary compliance with Federal and Virginia tax laws.

How do I request Federal Information?

All requests for confidential federal tax information must be based on a job-related need to know.

The Office Audit Section is responsible for coordinating requests for federal tax information on behalf of the Department of Taxation. A Federal Transcript Request form must be completed and given to your Section Transcript Coordinator (STC) who will transmit your request to Office Audit.

REFER TO SECTION VIII - OFFICE AUDIT SECTION - FEDERAL TRANSCRIPT TRACKING SYSTEM. When the federal data is received from the IRS, the data will be given to your STC who will transmit the information to you.

Am I responsible for safeguarding the federal information in my possession?

Yes. The handling of Federal information must meet federal safeguarding provisions as stated in IRS Publication 1075 (Tax Information Security Guidelines) at all times. Federal information must be stored in bar-locked cabinets when not in use and at the end of each day. Under no circumstances can federal information be permanently attached to office files that are stored in Central Files or the Warehouse. Federal data cannot be faxed or released to unauthorized parties. While the federal information is in your possession, YOU are responsible for ensuring its security from unauthorized parties.

What do I do with the federal data when I no longer need it?

Return federal transcripts to your Section Transcript Coordinator who will return the data to Office Audit for destruction. Other forms of federal information should be given to your Section Manager who will account for the destruction or return the information to the Federal/State Tax Information Coordinator in the Office Audit Section for destruction. The process used by the Department of Taxation to ensure proper disposal of federal data is known as “Document Destruction”. The Department is required by the IRS to account for all federal information received and its use prior to destruction. Furthermore, the destruction of federal information must be witnessed. Bins are located throughout the Department for disposing of information as follows:

Witness Destruction - Grey (Federal Information)
All other Destruction - Blue (State Information)

Tax Processing Operations- Mail Services Section collects the locked bins/containers and transports the contents for destruction. Nikki Bennett the Office Manager for Mail Services, or authorized staff witnesses this process. The IRS Witnessed Destruction Bins must be locked at all times and must not be overfilled. Managers are required to monitor the bins in their areas and notify Nikki Bennett the Supervisor of the Mail Services before the bins are filled to total capacity. 4 Section II

Disclosure Officer

The Departments primary liaison with the Internal Revenue Service is the agency’s Disclosure Officer, Don Staples, Director of Compliance Planning, Office of Customer Relations, (804) 786-1534.

The Disclosure Officer is appointed by the Tax Commissioner and is responsible for implementing safeguard procedures. The Disclosure Officer appoints a Federal/State Tax Information Coordinator to handle the daily administration of disclosure and safeguard procedures (i.e., requests, storage, handling, destruction, etc.). In addition, the Disclosure Officer appoints a Federal/State Tax Information Co-coordinator to be responsible for the development, implementation, and maintenance of safeguard procedures within the automated system.

The Disclosure Officer or the designated appointee conducts periodic safeguard inspections throughout the year in areas that receive Federal tax returns or return information. These areas include Office Audit Section, Criminal Investigation Unit (CIU), Revenue Analysis and Planning Unit (RAP), Collections Section, District Offices (including Home Based Staff), and the Office of Fiscal Research (OFR). Periodic safeguard inspections cover the following topics:

Handling and storage of Federal tax information

Authorized lists of employees allowed to view Federal tax information

Assessment of security safeguards

Separation of Federal tax information from State tax administrative files

Security of storage space and files during non-duty hours

Access to combination locks and keys to locked rooms

Security considerations during instances of planned organizational changes

If an employee discovers a possible improper disclosure of federal tax information, the individual making the observation or receiving information should contact the Disclosure Officer. The Disclosure Officer will then evaluate the nature of the disclosure and report the finding to the appropriate IRS Officer.

Section III

Federal/State Tax Information Coordinator

The Federal/State Tax Information Coordinator is responsible for the administration and coordination of most of the agency safeguard functions and requirements. The coordinator serves as the primary contact for the actual receipt of federal tax information. The Coordinator is Cheryl E. Fox, Manager, Office Audit Section, Office of Customer Relations, (804) 786-2165. In addition, Arlene Tanner, Safeguarding Management Analyst Senior for Office Audit, assist the Coordinator with federal safeguarding issues. Managers utilizing and storing federal information on site are responsible for safeguarding federal information within their sections. For example, the Manager of RAP would be responsible for safeguarding printouts with federal information used within the RAP Unit and changing the lock combinations within that office. As part of the safeguard program, the Federal/State Tax Information Coordinator is responsible for the following: 5
Completion of the annual Safeguard Activity Report
Completion of the Safeguard Procedures Report
Updating the publication and maintenance of:
Procedures for Safeguarding Federal Tax Information
Agreement between the Virginia Information Technologies Agency (VITA)/NG and the Department of Taxation
Implementation Agreement between IRS and Taxation
Changing combinations and locks
Obtaining and maintaining an updated list of authorized employees who have access to Federal tax information
Ensuring that employee awareness programs are in place and conducted on a periodic basis; (i.e. annual federal recertification, initial and ongoing training sessions on confidentiality of federal and state tax information, etc.)
Maintaining inventories of magnetic media containing federal information and ensure tapes are properly safeguarded and records provide proper control and accountability, including proper destruction
Reviewing of procedures and reports governing the access and destruction
Communicating the request, receipt, movement, and storage of federal information
Maintaining inventories of the federal abstracts (Revenue Agent Reports) sent to the Office Audit Section and the federal transcripts requested for the Department of Taxation, including ensuring proper safeguarding of the data and accounting of destruction
Document the need and use of Federal Tax Information
Prepare annual enrollment agreements for receipt of federal magnetic media
Authorize agency users as the State Principal for Transcript Delivery System and ensure documents are stored and destroyed properly.
Authorizing all access to FTI, both physical and electronic locations.

Federal Safeguard Management Analyst Senior (Assistant to Federal/State Tax Information Coordinator)

Safeguarding Management Analyst Senior, Arlene Tanner of Office Audit, assists the Federal/State Tax Information Coordinator with daily Safeguarding issues. The analyst completes all reports and IRS documents for Coordinator’s review and also assists with responsibilities for the coordination of most of the agency safeguard functions and requirements.

Section IV

Federal/State Tax Information Co-Coordinators

The Federal/State Tax Information Co-Coordinator is responsible for the development, implementation, and maintenance of safeguard procedures within the automated system. The co-coordinator also ensures that access is limited to only users authorized while federal data resides in the system’s memory. The co-coordinator serves as the primary contact between the agency and the Virginia Information Technologies Agency. Currently, the Co-coordinator for the IRMS (Integrated Revenue Management System) is Mike Garner, of Office of Technology -Information/Technology Support. The Co-coordinator for information stored in a PC database environment in the RAP Unit and Office Audit Section is Van Nguyen, of the CPU Unit.

Mike Garner, Federal/State Tax Information Co-Coordinator is responsible for updating the Access to Federal Tax Information Report. The report lists every access to FTI via IRMS, who has access and their access privileges. The report will be prepared quarterly and sent to Cheryl 6 Fox, the Federal/State Tax Information Officer, for distribution to TAX Supervisors.

The TAX Managers/Supervisors will be required to respond via email to Cheryl Fox. They will validate the access or submit the required form for access changes.

Federal/State Tax Information Security Analysts The Information Technology Safeguard Analyst (Dee Birk) and the Disclosure Specialist (Betsy Marks) are the positions created within the Department to elevate the level of safeguard inspection with respect to both, Federal and State information. They are responsible for the design and development of the procedural and software solutions to maintain the security of confidential data and to detect security violations within the agency.

Betsy Marks and Dee Birk conduct periodic safeguard inspections of the offices receiving federal tax information to ensure safeguarding procedures outlined in the IRS publication 1075 are being followed. A standard questionnaire is utilized to assist in the inspection.

Section V

Safeguards Afforded to Federal Information

Handling of Magnetic Tapes and Printouts Containing Federal Data

The Federal/State Tax Information Coordinator, who is responsible for the physical custody of the tapes, receives CDs containing extracts from the Revenue Agent Reports and occasionally paper copies of RARs. The IRS mails the CDs to the agency’s physical address at 3600 West Broad Street. They are forwarded unopened to the FTC. The Office Audit Section has an IRS Tape Inventory System utilizing a paradox database to track the receipt and destruction of federal media. The Office Services Assistant/Federal Transcript Coordinator updates the inventory log of media upon receipt. A copy of the transmittal sheet is kept for recordkeeping. Magnetic media cartridges are no longer physically received at Tax or VITA/NG. Older tapes are still being returned from VITA/NG to Tax/ Computer Operations, when no longer needed. The tapes are stored in a double locked cabinet providing a two-barrier protection. Only the Federal/State Tax Information Coordinator and the Safeguarding Management Analyst have keys to these cabinets.

All procedures outlined in the agreement between VITA/NG and the Department of Taxation are followed. Furthermore, a segregation of physical custody and record keeping responsibilities occurs within Office Audit.

Magnetic Tapes are destroyed annually by a degaussing process, which is completed by the Federal Safeguard Management Analyst Sr. and a designated witness. The Federal Safeguard Management Analyst Senior in Office Audit then updates the log with the deleted tapes and the destruction date. An annual tape inventory is conducted and a tape inventory report is completed and submitted to the Federal/State Coordinator. Computer Operations personnel are notified to coordinate the corresponding purge of any back up tapes stored within VITA/NG.

The Electronic Data Exchange (EDX) also known as Secure Data Transfer (SDT) has replaced the manual process of receiving tape cartridges. Greg Gentry, Agency Administrative Manager within CPU, receives electronic FTI. The information required via the SDT agreement is tracked on a spreadsheet and updated by authorized personnel in CPU.

Downloading of Federal Data

Downloading of federal data to an individuals hard drive or to portable storage devices (floppy disks/disk drives) is strongly discouraged. Written approval must be obtained from Cheryl Fox, Federal/State Tax Information Coordinator. 7 If the federal information is downloaded to diskette or other portable media, the authorized individual will be responsible for ensuring the portable media and any related printouts are stored in locked cabinets when the data is not in use and at the end of each day.

Requests to ship Federal tax information must be made to the Federal State Tax Information Coordinator. The Coordinator will verify the need for the transporting of data before the shipment will be allowed. Instructions for safeguarding and returning the documents are included with each document shipment. The Coordinator will maintain a log of all documents sent and returned to the Department of Taxation.

Federal tax information will be clearly labeled and mailed by overnight courier in doubled sealed envelopes and marked "FEDERAL RETURN INFORMATION NOT TO BE OPENED EXCEPT BY THE ADDRESSEE". Personnel receiving the information are reminded that federal tax information cannot be duplicated and may not be improperly disclosed (UNAX).

Employees are responsible for safeguarding federal tax information in their possession. During non-work hours, federal materials are stored in locked file cabinets. When the materials are no longer needed, the information is returned to the Federal State Tax Information Coordinator by overnight courier with the language indicated above. The Coordinator will account for the destruction of the media and ensure the proper disposal or destruction thereof.

Controlling and Safeguarding Combinations and Keys

Keys and combinations to high-security work areas, container rooms, filing cabinets, where IRS tax information is maintained are restricted to authorized personnel. Combinations and keys are given only to those employees with an identifiable need to know and a need to have access to locked filing cabinets. The Federal/State Tax Information Coordinator maintains documentation regarding personnel possessing safe combinations or keys. A record showing the key control number, locked area, key type, name, issue date, and return date if applicable is maintained for each key access.

The Supervisor of Computer Operations, Pat Moran is responsible for safeguarding the federal data contained in the temporary holding cabinet located in that section. The cabinet must have a double- barrier lock protection. The supervisor maintains a log indicating changes to the combination lock that is used on this cabinet.

The Section Managers are required to notify Cheryl Fox, Federal/State Tax Information Coordinator immediately of any changes to staff, locks or combinations that are needed or if access has been compromised. The locks will be maintained and distributed by Cheryl Fox or the Safeguard Analyst Arlene Tanner only. All keys are logged into a database showing the employees having possession of keys and reconciled annually. In addition, annually a confirmation will be sent to all employees in possession of keys and validating any changes needed acknowledging ownership.

Section VI

IT Operation Services

Automated Data Processing System (IRMS)

The Department's automated data processing (ADP) system is a batch processing system named IRMS. The ADP system is used to compare federal and state information in order to identify discrepancies for audit by various Compliance units. 8 Data is stored on magnetic tapes in sequential access files and processed off-site, at the Virginia Information Technologies Agency data center with remote job entry at the Taxation Department.

Authorized contractors are used in connection with the processing, storage, transmission, and destruction of Federal tax information stored on electronic media.

The Department security system continues to be maintained and exceeds the C2 level of protection required by the IRS. The operating security features of the system meet each of the four requirements outlined in IRS Publication 1075.

Control over processing at Virginia Information Technologies Agency (VITA)/NG

The Department of Taxation and the Virginia Information Technologies Agency (VITA)/NG, have implemented a Memorandum of Agreement for processing Federal tax information. This agreement establishes the safeguard procedures, which must be followed by VITA/NG employees when processing Federal tax information at the computer center.

Designated agency personnel transport federal magnetic media (tapes) to and from the VITA/NG computer service center and Tax’s computer Operations Section. The tapes are released only to designated VITA/NG personnel. A list of designated personnel is maintained in the Departments Operation Service area. A Senior Systems Operations employee monitors the movement and storage of all Federal tax tapes. VITA/NG also maintains a list of all employees who have access to these tapes.

Federal tax tapes are stored in a secured tape storage cabinet with restricted access based on job function. Janitorial services in this area are performed only in the presence of VITA/NG Systems Operation personnel.

The VITA/NG Office of Internal Audit reviews procedures implemented at VITA/NG to safeguard Federal data and conducts safeguard inspections at the processing site. A written audit report is issued annually.

Section VII Agency Users of Federal Tax Information

The Office of Customer Relations - Compliance is the principle user of federal tax information from the IRS. Other areas within the Department also utilize information obtained from the IRS as authorized.

Office Audit Section

The Office Audit Section is one of the main users of federal tax information. The section utilizes federal information on tapes for the individual non-filer programs, the individual federal compare program, and the CP2000 program. These programs are computerized and information is maintained in Tax operating systems (IRMS and STARS). All older magnetic media tapes are stored in a double-locked cabinet providing a two-barrier protection maintained by the Federal/State Tax Information Coordinator as required by the IRS.

The Office Audit Section also receives IRS audit abstracts (Revenue Agent Reports) for use in Office Audit compliance programs, and federal transcripts on behalf of the Tax Department.

Inventories, including records of destruction, are maintained in the section utilizing a Paradox database system. The documents are stored in bar-locked cabinets until they are assigned to selected staff. At the end of the day, all files containing federal information are returned to the bar-locked cabinets in drawers assigned to each worker. When a file is completed, the IRS document is filed in the federal room bar-locked cabinets. Refer to Office Audit Section - Revenue 9 Agent Report (RAR) Inventory System and Office Audit Section - Federal Transcript Tracking System for additional information.

Criminal Investigation Unit (CIU)

The manager logs Federal tax information received. All requested federal tax information is maintained in a bar-locked file cabinet. While cases are ongoing, CIU investigators may request federal information either orally or in writing from the Unit Manager. Any requests for federal tax information on taxpayers with out-of-state addresses are routed to Federal/State Tax Information Coordinator for approval. The manager or Federal Safeguard Analyst through agency mail service in a double sealed envelope marked “FEDERAL RETURN INFORMATION NOT TO BE OPENED EXCEPT BY THE ADDRESSEE” mails any information requested by a CIU field investigator.

Revenue Analysis and Planning Unit (RAP)

The RAP Unit utilizes information from federal magnetic and electronic tapes, disks, federal returns, and from transcripts. Electronic Transmissions of FTI data are received by Greg Gentry, Agency Administrative Manager. FTI such as Transcripts in RAP are stored in file cabinets with lock bars when not in use. Only personnel with a need to know are authorized to handle such information.

Collections Unit

Collections periodically search the IRMF tape for bank lien sources on cases in various states in CACSG (Computer Assisted Collections System for Government). This matching process is repeated until a valid lien source is found or all sources are exhausted.

District Offices Requests for Federal tax information from district offices are made to the designated Section Transcript Coordinator. The Coordinator maintains a log of all documents sent to and returned from district offices.

When confidential IRS data is mailed to field personnel the employee receiving the material is informed of the shipment in advance and shipments are documented on transmittal forms and monitored to ensure that each shipment is properly and timely received and acknowledged.

Personnel in the district offices as well as home based staff receive Federal tax information in a double sealed envelope addressed to the employee, by overnight courier. The envelope will be clearly marked "FEDERAL RETURN INFORMATION NOT TO BE OPENED EXCEPT BY THE ADDRESSEE". District office personnel and home based staff are reminded that federal tax information cannot be duplicated and should not be shared with anyone except those who have a need to know. While in their possession, district office employees and field agents are responsible for safeguarding federal tax information as outlined in the provision of IRS publication 1075. During non-work hours, the Federal tax information is sealed and stored in a locked file cabinet. When federal tax information is no longer needed, the information is returned to the Office Audit Transcript Coordinator by overnight courier with the language indicated above.

Office of Revenue Forecasting The Federal/State Tax Information Coordinator receives a magnetic tape containing a sample of Federal returns filed by taxpayers with Virginia addresses from the IRS Statistics of Income Tape Library D:R:S:P. The tape is logged and handled according to procedures for all other federal tapes. 10 No data concerning specifically identified taxpayers will be released to anyone outside of the Department of Taxation. No statistical tabulation will be released with cells containing data from fewer than three returns. Access to the merged data set is restricted to economists within the Office of Revenue Forecasting. Access to the merged data set, either in computer tape or printed form, by other State non-Tax personnel will not be allowed. When not being used, any printouts not deemed presentable to the public (i.e., listings with cells containing fewer than three returns) will be stored within the Office of Revenue Forecasting. The tabulations are statistical and do not identify specific taxpayers or confidential federal information.

Information Technology Staff (IT) and Compliance Planning Unit (CPU) Information Technology Staff (IT Staff) and Compliance Planning Unit Staff (CPU) are subject to the same safeguard requirements and penalties for failure to safeguard federal data that apply to all agency employees.

The main users of Federal Data in IT and CPU are Operations staff, Database Administrators, Application Developers, Quality Control and IT Security personnel, however, all IT and CPU Staff must be familiar with how to safeguard Federal Tax Data. IT and CPU Staff use Federal Tax Data to test functionality in various systems such as:
Audit Compliance Repository
Advantage Revenue
Siebel
Audit Case Management
CACSG – Computer Assisted Collections System for Government

They test compliance programs in these systems by performing audit matches, checking filing dates, non-filing occurrences, FTI comparison, under reported income on the Virginia returns, and the availability of various schedules.

When using Federal Tax Data, IT Staff must remove Federal Tax identifiers such as Social security numbers, names, and addresses. If Federal Tax Data identifiers cannot be removed, written justification must be provided and formal approval obtained from OT Management in order to use data in this manner.

Some IT Staff have access to this data on an on-going basis as long as the need is justified. The access is verified quarterly with the Application Developer’s manager by the Federal Safeguard Coordinator.

Federal Tax Data is stored on the Virginia Information Technology Agency (VITA)/NG mainframe, and on windows based servers on the TAX Network. This Federal Tax Data is stored as read-only access. IT Staff, and specifically Application Developers, are allowed to copy files from here to approved alternate secured, shared directories on the mainframe and windows based servers for further analysis or importing into the various systems shown above. Copying these files to locations (potentially unsecured) other that the following locations pose disclosure risks:

Mainframe – Windows Based Servers designated in quarterly FTI report.
TAX.RAP – S:\RAP or S:\taxdata\C2 or M:\OOCOA

Please contact the IT Risk Management group for further guidance on approved storage locations to store Federal Tax Data.

Access to Federal Tax Data on the server is tracked through the use of Audit Logs. These logs capture what data has been accessed, and the date/time for each occurrence. In addition, access to the electronic Federal Tax Data is limited to the specific time period that a person needs access. In addition, random scans are performed on PCs to ensure that no Federal Tax Data is stored inappropriately. 11
When copying Federal Tax Data to approved alternate, secured directories, IT Staff should rename the files to something that does not easily identify them as containing Federal Tax Data.

Once IT Staff no longer need access to Federal Data, they must immediately notify their supervisor so access can be removed. The supervisor if needed can easily reinstate access.

Here are some key points for IT Staff to bear in mind when safeguarding Federal Tax Data.

Do NOT leave your screen unattended with Federal Data on it; logoff PC, use a password protected screensaver if you need to leave your PC unattended, or lock your computer every time you leave your desk. If you do not, there is the potential for an unauthorized disclosure (UNAX) for which you will be held accountable.

Do NOT share your password with anyone.

Do NOT copy Federal Tax Data to your PC or removable media of any kind.

Do ensure that you need access to Federal Tax Data. If you do not, contact your supervisor or manager immediately to have access removed.

Do NOT provide a file of federal data or even a screenshot of Federal Tax Data to another IT Staff member (including subordinates) who has not been authorized for access to Federal Tax Data. Doing so constitutes disclosure (UNAX).

Remember, there is no such thing as test data that contains federal data or was built from federal data unless all identifiers have been removed – otherwise it is Federal Data pure and simple and must be protected in that manner.

Application Developers are the only group within Office of Technology that is allowed to print Federal Tax Data during the course of Systems testing. If YOU DO – ensure that the information is SHREDDED or placed in an orange tag bin for destruction when the information is no longer needed. Printed federal tax data must be properly secured when not in use and at the close of each business day until the information is properly destroyed.

Use of Internal email is OK for IT Staff ONLY IF identifiers are first removed and they enable Lotus Notes Digital Signatures and Encryption. (Search the Lotus Notes Help for how to do this or contact the Help Desk.) Use of external email to send Federal Tax Data is prohibited.

If IT staff need to use Internal Mail for Federal Tax data, they should use an “orange “Hand Deliver sticker, and place the information in a double sealed envelope marked: “Federal Return Information – Not to be opened except by addressee”

When mail is delivered by authorized personnel it should be handed to the designated person on the “Hand Deliver” sticker only.

CGI-AMS - Federal Data Access Requests

All CGI-AMS staff working with Federal Tax Information receives safeguarding and disclosure (UNAX) training before access is granted. The Federal Safeguard Coordinator maintains a log of CGI-AMS staff trained in Federal Safeguarding procedures. 12 Section VIII Office Audit Section - Revenue Agent Reports (RAR) Inventory System

The Office Audit Section receives paper federal audit reports (RARS) and EOAD CDs from the IRS Philadelphia Service Center and/or the IRS Richmond District Office for use in Office Audit compliance programs. Audits are received for individual income tax, corporate income tax, and estate tax. All mail received from the IRS remains unopened. Authorized designated personnel in the mailroom record receipt in the tracking system the mail is forwarded to the Federal/State Tax Information Coordinator (FTC). The FTC or designated representative records receipt in the mail tracking system and verifies the information on the transmittal sheet with the actual inventory received. This individual signs the transmittal form and returns the form to the IRS as verification of receipt. The federal documents are given to the Office Audit Clerical Supervisor who is responsible for stamping the audits with the date of receipt. All audits are marked “State Copy” in red by the IRS and all are stored in bar-locked cabinets when not in use.

The Office Audit Clerical Supervisor logs the receipt of each audit or CD in the Office Audit RAR Inventory System. This system, which was implemented in August 1997, utilizes a Paradox database and is password protected. The data is stored on a network drive, under a subdirectory accessible only to select Office Audit employees. Each audit record is assigned a unique control number in addition to the following information: social security number or EIN, tax period, info type, tax type, name, address, request section, reason for request, assignment (team), date mailed from IRS, date received by Tax Department, destroy date, destroy method, and any pertinent comments. All audits are placed in bar-locked cabinets to be worked by Office Audit Auditors and Tax Examiner Seniors. They are carefully safeguarded until destruction. The Federal/State Information Coordinator is responsible for documenting and ensuring the proper destruction of federal RAR audit information.

Section IX

Office Audit Section - Federal Transcript Tracking System

Effective calendar year 2005, the Office Audit Section began using the IRS Transcript Delivery System (TDS) to retrieve federal transcripts direct from the IRS website. TDS automates the validation, processing and delivery of taxpayer information to the authorized third party user, thus requiring less intervention from IRS personnel. TDS has decreased the turnaround time to facilitate completion of audit activity at the state level. On behalf of the Tax Department, the Office Audit Section is the central area for requesting, receiving, tracking and destroying federal transcripts and related data such as account transcript return transcripts, statement of account, hard copies of returns, and microfiche. The Federal/State Tax Information Coordinator is responsible for overseeing these functions.

Accordingly, a Federal Transcript Tracking System was implemented utilizing a Paradox database, which is password protected. The information is stored on a network drive, under a subdirectory accessible only to selected Office Audit employees. The Office Audit Section receives requests from the designated Section Transcript Coordinators (STC) of the Agency as listed:

Criminal Investigation Unit (CIU) - Rhonda McGarvey Collections Section including Office Audit - Sarah Comstock Customer Services - Jeremy Armstrong Revenue Analysis and Planning (RAP) - Eric Armstrong District Offices - James Mason Appeals and Rulings - David Mason Customer Satisfaction - Clare Dunn 13 Each area Section Transcript Coordinator (STC) is responsible for coordinating the individual requests and submitting the IRS Transcript Request Forms to the Office Audit Section Transcript Coordinator (OASTC), Sarah Comstock.

The OASTC enters the request information into the IRS website and is able to retrieve the federal transcript within 1 to 2 business days. Each request is assigned a unique control number in the Federal Transcript Tracking System. The OASTC enters the following information for each case: SSN or EIN, tax type, tax period, form type, taxpayer name, taxpayer address, and reason code for the request which identifies the requesting section, requester, request date, date from IRS, date sent to STC, estimated destruction date, actual destruction date, destruction method and IRS tracking number.

Each Section Transcript Coordinator (STC) that requested federal information receives a report “Summary of IRS Return Requests - Section Transcript Coordinator” detailing the following: date given to coordinator, control numbers, taxpayers names, SSN(s) or EIN(s), tax type, tax period, requestor section, request date, received date, total number of requests, and signature for approval. Each STC must physically pick up the federal transcripts with the exception of the District Offices and home-based staff. District Offices and home-based staff receive Federal Information through the mail using a double sealed envelope.

Sections receiving federal transcripts are required to safeguard the federal information in locked cabinets when the data is not in use and at the end of each day. The Office Audit Section maintains a bar-locked cabinet for the Revenue Analysis and Planning Section (RAP). All federal transcripts stored in the Office Audit Section meet federal safeguarding provisions as outlined in IRS Publication 1075.

All Federal transcripts are to be returned to the Office Audit Section for destruction when no longer needed. If a destroy date is not indicated, the transcript may be destroyed 60 days from the date the document was received by the Tax Department. Effective immediately, the OASTC will distribute a list of all outstanding transcripts annually that are over 1 year old with no destruction date documented in transcript database to each STC. This list will be used to verify that the requestor still has the federal tax information in their possession. Each STC will respond with an update on the pending destruction date.

Safeguarding Organizational Structure Who’s Who in Safeguarding Quick Reference Don Staples Agency Disclosure Officer Cheryl Fox Federal Safeguarding Coordinator Mike Garner Federal/State Tax Information Co-coordinator Betsy Marks Federal Disclosure Specialist Dee Birk Information Technology Safeguard Analyst Van Nguyen Federal/State Tax Information Co-coordinator for PC Database Arlene Tanner Federal Safeguarding Management Analyst Sarah Comstock Federal Transcript Coordinator 14

COMMONWEALTH OF VIRGINIA

COMMONWEALTH OF VIRGINIA

COMMONWEALTH OF VIRGINIA

COMMONWEALTH OF VIRGINIA

DEPARTMENT OF TAXATION

DEPARTMENT OF TAXATION

DEPARTMENT OF TAXATION

DEPARTMENT OF TAXATION

PROCEDURES FOR SAFEGUARDING

PROCEDURES FOR SAFEGUARDING

PROCEDURES FOR SAFEGUARDING

PROCEDURES FOR SAFEGUARDING

FEDERAL TAX INFORMATION

FEDERAL TAX INFORMATION

FEDERAL TAX INFORMATION

FEDERAL TAX INFORMATION

Revised December 2008 Procedures for Safeguarding Federal Tax Information

Section Contents Page

Introduction 3

Key Facts 3

I. Employee Perspective 4

II. Disclosure Officer 5

III. Federal State Tax Information Coordinator 5 Federal Safeguarding Management Analyst Sr. 6

IV. Federal State Tax Information Co-coordinators 6 Federal State Tax Information Security Analysts 7

V. Safeguards Afforded to Federal Information

IRS Tape Inventory System 7 Downloading of Federal Data 7 Controlling and Safeguarding Combinations and Keys 8

VI. IT Operations Services 9 Virginia Information Technologies Agency/NG

VII. Agency Users of Federal Information Office Audit Section 9 Criminal Investigation Unit (CIU) 10 Revenue Analysis and Planning Unit (RAP) 10 Central Office Collections 10 District Offices 10 Office of Revenue Forecasting 10 Information Technology Staff (IT) 11 Compliance Planning UNIT (CPU) 11

CGI-AMS 12

VIII. Office Audit Section -Revenue Agent Reports (RAR) Inventory System 13

IX. Office Audit Section - Federal Transcript Tracking System 13

2Introduction

The Department of Taxation and the Internal Revenue Service have an official exchange agreement for coordination of Federal and State tax administration. This agreement allows the Department to receive many types of federal information used in various compliance programs within the Department. Under the terms of the agreement, it is the responsibility of the Department to ensure that Federal tax returns and return information are not disclosed (UNAX) to unauthorized persons or used for unauthorized purposes. UNAX is an IRS acronym for the Willful Unauthorized Access and Inspection of Taxpayer Information.

Internal Revenue Code §7213 prescribes criminal penalties for Federal and State employees and others who make illegal disclosures (UNAX) of tax information. Code of Virginia §58.1-3 supports the Internal Revenue Code, with additional criminal provisions for State employees making unauthorized disclosures (UNAX). In addition, §7431 of the Internal Revenue Code prescribes civil damages for unauthorized disclosure (UNAX). Procedures outlined in the manual are intended to provide assistance and guidance in assuring that the practices, controls, and safeguards the department employs adequately protect the confidentiality of the data the IRS provides us. By following the procedures outlined in this manual, the Department of Taxation will meet the safeguard requirements of '§6103 of the Internal Revenue Code.

In August 1997, the Taxpayer Browsing Protection Act was signed into law. Browsing, or unauthorized inspection, is the examination either willfully or negligently of confidential tax records without an assignment or work-related reason for doing so. Penalties for browsing can include a fine, imprisonment, and being sued for damages by the injured party.

The Department's primary liaison official with the Internal Revenue Service is the Disclosure Officer. The Disclosure Officer is responsible for implementing safeguard procedures and ensuring the provisions of the exchange agreement are followed. The Disclosure Officer appoints a Federal State Tax Information Coordinator who is responsible for the day-to-day administration of disclosure (UNAX) and safeguard procedures (i.e., requests, storage, handling, destruction, etc.)

Key Facts

All unauthorized disclosures (UNAX) of federal tax information should be reported directly to the Disclosure Officer.

Suspected browsing of federal tax information may be reported to the local Office of the Treasury Inspector General for Tax Administration at (202) 283-3000 or the Integrity Hotline at (800) 366-4484. The Disclosure Officer should also be notified to insure TAX management is aware of potential problems.

Any request for additional employees to be authorized to access federal tax information or to request information directly from the IRS should go to the Federal State Tax Information Coordinator.

Any questions relating to safeguard procedures for receipt, movement, storage, or destruction of federal tax information should go to the Federal State Tax Information Coordinator.

Any request for federal transcripts, magnetic tapes containing federal information, or any other media containing federal information should go to the Federal State Tax Information Coordinator. 3 Section I

Employee Perspective

How is Federal Information used by the Department of Taxation?

Confidential federal tax information is used individually and collectively to ensure compliance with Virginia tax laws through assessment, location of taxpayers, collection of taxes owed, and litigation. Information is also obtained to assist Virginia citizens in the preparation of returns to promote voluntary compliance with Federal and Virginia tax laws.

How do I request Federal Information?

All requests for confidential federal tax information must be based on a job-related need to know.

The Office Audit Section is responsible for coordinating requests for federal tax information on behalf of the Department of Taxation. A Federal Transcript Request form must be completed and given to your Section Transcript Coordinator (STC) who will transmit your request to Office Audit.

REFER TO SECTION VIII - OFFICE AUDIT SECTION - FEDERAL TRANSCRIPT TRACKING SYSTEM. When the federal data is received from the IRS, the data will be given to your STC who will transmit the information to you.

Am I responsible for safeguarding the federal information in my possession?

Yes. The handling of Federal information must meet federal safeguarding provisions as stated in IRS Publication 1075 (Tax Information Security Guidelines) at all times. Federal information must be stored in bar-locked cabinets when not in use and at the end of each day. Under no circumstances can federal information be permanently attached to office files that are stored in Central Files or the Warehouse. Federal data cannot be faxed or released to unauthorized parties. While the federal information is in your possession, YOU are responsible for ensuring its security from unauthorized parties.

What do I do with federal data when no longer needed?

Return federal transcripts to your Section Transcript Coordinator who will return the data to Office Audit for destruction. Other forms of federal information should be given to your Section Manager who will account for the destruction or return the information to the Federal/State Tax Information Coordinator in the Office Audit Section for destruction. The process used by the Department of Taxation to ensure proper disposal of federal data is known as “Document Destruction”. The Department is required by the IRS to account for all federal information received and its use prior to destruction. Furthermore, the destruction of federal information must be witnessed. Bins are located throughout the Department for disposing of information as follows:

Witness Destruction - Grey (Federal Information)
All other Destruction - Blue (State Information)

Tax Processing Operations- Mail Services Section collects the locked bins/containers and transports the contents for destruction. Nikki Bennett the Office Manager for Mail Services, or authorized staff witnesses this process. The IRS Witnessed Destruction Bins must be locked at all times and must not be overfilled. Managers are required to monitor the bins in their areas and notify Nikki Bennett the Supervisor of the Mail Services before the bins are filled to total capacity. 4 Section II

Disclosure Officer

The primary liaison with IRS is the Disclosure Officer, Don Staples, Director of Compliance Planning, Office of Customer Relations, (804) 786-1534.

The Disclosure Officer is appointed by the Tax Commissioner and is responsible for implementing safeguard procedures. The Disclosure Officer appoints a Federal/State Tax Information Coordinator to handle the daily administration of disclosure and safeguard procedures (i.e., requests, storage, handling, destruction, etc.). In addition, the Disclosure Officer appoints a Federal/State Tax Information Co-coordinator to be responsible for the development, implementation, and maintenance of safeguard procedures within the automated system.

The Disclosure Officer or the designated appointee conducts periodic safeguard inspections throughout the year in areas that receive Federal tax returns or return information. These areas include Office Audit Section, Criminal Investigation Unit (CIU), Revenue Analysis and Planning Unit (RAP), Collections Section, District Offices (including Home Based Staff), and the Office of Fiscal Research (OFR). Periodic safeguard inspections cover the following topics:

Handling and storage of Federal tax information

Authorized employee lists for viewing Federal tax info

Assessment of security safeguards

Separation of Federal from State tax files

Security of storage space and files during non-duty hours

Access to combination locks and keys to locked rooms

Security during organizational changes

If an employee discovers a possible improper disclosure of federal tax information, the individual making the observation or receiving information should contact the Disclosure Officer. The Disclosure Officer will then evaluate the nature of the disclosure and report the finding to the appropriate IRS Officer.

Section III

Federal/State Tax Information Coordinator

The Federal/State Tax Information Coordinator is responsible for the administration and coordination of most of the agency safeguard functions and requirements. The coordinator serves as the primary contact for the actual receipt of federal tax information. The Coordinator is Cheryl E. Fox, Manager, Office Audit Section, Office of Customer Relations, (804) 786-2165. In addition, Arlene Tanner, Safeguarding Management Analyst Senior for Office Audit, assist the Coordinator with federal safeguarding issues. Managers utilizing and storing federal information on site are responsible for safeguarding federal information within their sections. For example, the Manager of RAP would be responsible for safeguarding printouts with federal information used within the RAP Unit and changing the lock combinations within that office. As part of the safeguard program, the Federal/State Tax Information Coordinator is responsible for the following: 5
Completion of the annual Safeguard Activity Report
Completion of the Safeguard Procedures Report
Updating the publication and maintenance of:
Procedures for Safeguarding Federal Tax Information
Agreement between the Virginia Information Technologies Agency (VITA)/NG and the Department of Taxation
Implementation Agreement between IRS and Taxation
Changing combinations and locks
Obtaining and maintaining an updated list of authorized employees who have access to Federal tax information
Ensuring that employee awareness programs are in place and conducted on a periodic basis; (i.e. annual federal recertification, initial and ongoing training sessions on confidentiality of federal and state tax information, etc.)
Maintaining inventories of magnetic media containing federal information and ensure tapes are properly safeguarded and records provide proper control and accountability, including proper destruction
Reviewing of procedures and reports governing the access and destruction
Communicating the request, receipt, movement, and storage of federal information
Maintaining inventories of the federal abstracts (Revenue Agent Reports) sent to the Office Audit Section and the federal transcripts requested for the Department of Taxation, including ensuring proper safeguarding of the data and accounting of destruction
Document the need and use of Federal Tax Information
Prepare annual enrollment agreements for receipt of federal magnetic media
Authorize agency users as the State Principal for Transcript Delivery System and ensure documents are stored and destroyed properly.
Authorizing all access to FTI, both physical and electronic locations.

Federal Safeguard Management Analyst Senior (Assistant to Coordinator)

Arlene Tanner assists the Federal/State Tax Information Coordinator with safeguarding issues, completes reports, and supports safeguard functions.

Section IV

Federal/State Tax Information Co-Coordinators

The Federal/State Tax Information Co-Coordinator is responsible for the development, implementation, and maintenance of safeguard procedures within the automated system. The co-coordinator also ensures that access is limited to only users authorized while federal data resides in the system’s memory. The co-coordinator serves as the primary contact between the agency and the Virginia Information Technologies Agency. Currently, the Co-coordinator for the IRMS (Integrated Revenue Management System) is Mike Garner, of Office of Technology -Information/Technology Support. The Co-coordinator for information stored in a PC database environment in the RAP Unit and Office Audit Section is Van Nguyen, of the CPU Unit.

Mike Garner updates the Access to Federal Tax Information Report, listing all IRMS accesses, which is sent quarterly to Cheryl Fox for distribution to TAX Supervisors.

TAX Managers/Supervisors respond via email to Cheryl Fox to validate or request access changes.

The Information Technology Safeguard Analyst (Dee Birk) and Disclosure Specialist (Betsy Marks) are Department positions responsible for designing procedures and software to secure confidential data and detect violations.

Betsy Marks and Dee Birk conduct periodic inspections of offices receiving federal tax info to ensure procedures in IRS publication 1075 are followed, using a standard questionnaire.

Section V

Safeguards Afforded to Federal Information

Handling of Magnetic Tapes and Printouts Containing Federal Data

The Federal/State Tax Information Coordinator, who is responsible for the physical custody of the tapes, receives CDs containing extracts from the Revenue Agent Reports and occasionally paper copies of RARs. The IRS mails the CDs to the agency’s physical address at 3600 West Broad Street. They are forwarded unopened to the FTC. The Office Audit Section has an IRS Tape Inventory System utilizing a paradox database to track the receipt and destruction of federal media. The Office Services Assistant/Federal Transcript Coordinator updates the inventory log of media upon receipt. A copy of the transmittal sheet is kept for recordkeeping. Magnetic media cartridges are no longer physically received at Tax or VITA/NG. Older tapes are still being returned from VITA/NG to Tax/ Computer Operations, when no longer needed. The tapes are stored in a double locked cabinet providing a two-barrier protection. Only the Federal/State Tax Information Coordinator and the Safeguarding Management Analyst have keys to these cabinets.

All procedures outlined in the agreement between VITA/NG and the Department of Taxation are followed. Furthermore, a segregation of physical custody and record keeping responsibilities occurs within Office Audit.

Magnetic Tapes are destroyed annually by a degaussing process, which is completed by the Federal Safeguard Management Analyst Sr. and a designated witness. The Federal Safeguard Management Analyst Senior in Office Audit then updates the log with the deleted tapes and the destruction date. An annual tape inventory is conducted and a tape inventory report is completed and submitted to the Federal/State Coordinator. Computer Operations personnel are notified to coordinate the corresponding purge of any back up tapes stored within VITA/NG.

Electronic Data Exchange (EDX/SDT) replaces manual tape receipt. Greg Gentry, CPU Manager, receives electronic FTI. Data tracked on a spreadsheet updated by authorized CPU staff.

Downloading of Federal Data

Downloading of federal data to an individuals hard drive or to portable storage devices (floppy disks/disk drives) is strongly discouraged. Written approval must be obtained from Cheryl Fox, Federal/State Tax Information Coordinator. 7 If the federal information is downloaded to diskette or other portable media, the authorized individual will be responsible for ensuring the portable media and any related printouts are stored in locked cabinets when the data is not in use and at the end of each day.

Requests to ship Federal tax information must be made to the Federal State Tax Information Coordinator. The Coordinator will verify the need for the transporting of data before the shipment will be allowed. Instructions for safeguarding and returning the documents are included with each document shipment. The Coordinator will maintain a log of all documents sent and returned to the Department of Taxation.

Federal tax information will be clearly labeled and mailed by overnight courier in doubled sealed envelopes and marked "FEDERAL RETURN INFORMATION NOT TO BE OPENED EXCEPT BY THE ADDRESSEE". Personnel receiving the information are reminded that federal tax information cannot be duplicated and may not be improperly disclosed (UNAX).

Employees are responsible for safeguarding federal tax information in their possession. During non-work hours, federal materials are stored in locked file cabinets. When the materials are no longer needed, the information is returned to the Federal State Tax Information Coordinator by overnight courier with the language indicated above. The Coordinator will account for the destruction of the media and ensure the proper disposal or destruction thereof.

Controlling and Safeguarding Combinations and Keys

Keys and combinations to high-security work areas, container rooms, filing cabinets, where IRS tax information is maintained are restricted to authorized personnel. Combinations and keys are given only to those employees with an identifiable need to know and a need to have access to locked filing cabinets. The Federal/State Tax Information Coordinator maintains documentation regarding personnel possessing safe combinations or keys. A record showing the key control number, locked area, key type, name, issue date, and return date if applicable is maintained for each key access.

Pat Moran, Supervisor of Computer Operations, safeguards federal data in the temporary cabinet with double-lock protection and maintains a log of lock changes.

The Section Managers are required to notify Cheryl Fox, Federal/State Tax Information Coordinator immediately of any changes to staff, locks or combinations that are needed or if access has been compromised. The locks will be maintained and distributed by Cheryl Fox or the Safeguard Analyst Arlene Tanner only. All keys are logged into a database showing the employees having possession of keys and reconciled annually. In addition, annually a confirmation will be sent to all employees in possession of keys and validating any changes needed acknowledging ownership.

Section VI

IT Operation Services

Automated Data Processing System (IRMS)

The Department's automated data processing (ADP) system is a batch processing system named IRMS. The ADP system is used to compare federal and state information in order to identify discrepancies for audit by various Compliance units. 8 Data is stored on magnetic tapes in sequential access files and processed off-site, at the Virginia Information Technologies Agency data center with remote job entry at the Taxation Department.

Authorized contractors handle processing, storage, transmission, and destruction of federal electronic media.

The Department security system exceeds C2 protection and meets all four requirements in IRS Publication 1075.

Control over processing at Virginia Information Technologies Agency (VITA)/NG

The Department of Taxation and the Virginia Information Technologies Agency (VITA)/NG, have implemented a Memorandum of Agreement for processing Federal tax information. This agreement establishes the safeguard procedures, which must be followed by VITA/NG employees when processing Federal tax information at the computer center.

Designated agency personnel transport federal magnetic media (tapes) to and from the VITA/NG computer service center and Tax’s computer Operations Section. The tapes are released only to designated VITA/NG personnel. A list of designated personnel is maintained in the Departments Operation Service area. A Senior Systems Operations employee monitors the movement and storage of all Federal tax tapes. VITA/NG also maintains a list of all employees who have access to these tapes.

Federal tax tapes are stored in a secured tape storage cabinet with restricted access based on job function. Janitorial services in this area are performed only in the presence of VITA/NG Systems Operation personnel.

VITA/NG Internal Audit reviews safeguard procedures and conducts annual inspections, issuing a written report.

Section VII Agency Users of Federal Tax Information

The Office of Customer Relations - Compliance is the principle user of federal tax information from the IRS. Other areas within the Department also utilize information obtained from the IRS as authorized.

Office Audit Section

The Office Audit Section is one of the main users of federal tax information. The section utilizes federal information on tapes for the individual non-filer programs, the individual federal compare program, and the CP2000 program. These programs are computerized and information is maintained in Tax operating systems (IRMS and STARS). All older magnetic media tapes are stored in a double-locked cabinet providing a two-barrier protection maintained by the Federal/State Tax Information Coordinator as required by the IRS.

The Office Audit Section also receives IRS audit abstracts (Revenue Agent Reports) and federal transcripts for compliance programs.

Inventories, including records of destruction, are maintained in the section utilizing a Paradox database system. The documents are stored in bar-locked cabinets until they are assigned to selected staff. At the end of the day, all files containing federal information are returned to the bar-locked cabinets in drawers assigned to each worker. When a file is completed, the IRS document is filed in the federal room bar-locked cabinets. Refer to Office Audit Section - Revenue 9 Agent Report (RAR) Inventory System and Office Audit Section - Federal Transcript Tracking System for additional information.

Criminal Investigation Unit (CIU)

The manager logs Federal tax information received. All requested federal tax information is maintained in a bar-locked file cabinet. While cases are ongoing, CIU investigators may request federal information either orally or in writing from the Unit Manager. Any requests for federal tax information on taxpayers with out-of-state addresses are routed to Federal/State Tax Information Coordinator for approval. The manager or Federal Safeguard Analyst through agency mail service in a double sealed envelope marked “FEDERAL RETURN INFORMATION NOT TO BE OPENED EXCEPT BY THE ADDRESSEE” mails any information requested by a CIU field investigator.

Revenue Analysis and Planning Unit (RAP)

The RAP Unit utilizes information from federal magnetic and electronic tapes, disks, federal returns, and from transcripts. Electronic Transmissions of FTI data are received by Greg Gentry, Agency Administrative Manager. FTI such as Transcripts in RAP are stored in file cabinets with lock bars when not in use. Only personnel with a need to know are authorized to handle such information.

Collections Unit

Collections periodically search IRMF tapes for bank lien sources in CACSG until a valid lien is found or sources are exhausted.

District offices request federal tax info from the Section Transcript Coordinator, who logs all sent and returned documents.

Confidential IRS data mailed to field personnel, with prior notice, documented on transmittal forms, and monitored for proper receipt and acknowledgment.

Personnel in the district offices as well as home based staff receive Federal tax information in a double sealed envelope addressed to the employee, by overnight courier. The envelope will be clearly marked "FEDERAL RETURN INFORMATION NOT TO BE OPENED EXCEPT BY THE ADDRESSEE". District office personnel and home based staff are reminded that federal tax information cannot be duplicated and should not be shared with anyone except those who have a need to know. While in their possession, district office employees and field agents are responsible for safeguarding federal tax information as outlined in the provision of IRS publication 1075. During non-work hours, the Federal tax information is sealed and stored in a locked file cabinet. When federal tax information is no longer needed, the information is returned to the Office Audit Transcript Coordinator by overnight courier with the language indicated above.

Office of Revenue Forecasting The Federal/State Tax Information Coordinator receives a magnetic tape containing a sample of Federal returns filed by taxpayers with Virginia addresses from the IRS Statistics of Income Tape Library D:R:S:P. The tape is logged and handled according to procedures for all other federal tapes. 10 No data concerning specifically identified taxpayers will be released to anyone outside of the Department of Taxation. No statistical tabulation will be released with cells containing data from fewer than three returns. Access to the merged data set is restricted to economists within the Office of Revenue Forecasting. Access to the merged data set, either in computer tape or printed form, by other State non-Tax personnel will not be allowed. When not being used, any printouts not deemed presentable to the public (i.e., listings with cells containing fewer than three returns) will be stored within the Office of Revenue Forecasting. The tabulations are statistical and do not identify specific taxpayers or confidential federal information.

Information Technology Staff (IT) and Compliance Planning Unit (CPU) Information Technology Staff (IT Staff) and Compliance Planning Unit Staff (CPU) are subject to the same safeguard requirements and penalties for failure to safeguard federal data that apply to all agency employees.

The main users of Federal Data in IT and CPU are Operations staff, Database Administrators, Application Developers, Quality Control and IT Security personnel, however, all IT and CPU Staff must be familiar with how to safeguard Federal Tax Data. IT and CPU Staff use Federal Tax Data to test functionality in various systems such as:
Audit Compliance Repository
Advantage Revenue
Siebel
Audit Case Management
CACSG – Computer Assisted Collections System for Government

They test compliance programs by performing audit matches, verifying filing dates, non-filing, FTI comparison, underreported income, and schedule availability.

When using Federal Tax Data, IT Staff must remove Federal Tax identifiers such as Social security numbers, names, and addresses. If Federal Tax Data identifiers cannot be removed, written justification must be provided and formal approval obtained from OT Management in order to use data in this manner.

Some IT Staff have access to this data on an on-going basis as long as the need is justified. The access is verified quarterly with the Application Developer’s manager by the Federal Safeguard Coordinator.

Federal Tax Data is stored on the Virginia Information Technology Agency (VITA)/NG mainframe, and on windows based servers on the TAX Network. This Federal Tax Data is stored as read-only access. IT Staff, and specifically Application Developers, are allowed to copy files from here to approved alternate secured, shared directories on the mainframe and windows based servers for further analysis or importing into the various systems shown above. Copying these files to locations (potentially unsecured) other that the following locations pose disclosure risks:

Mainframe – Windows Based Servers designated in quarterly FTI report.
TAX.RAP – S:\RAP or S:\taxdata\C2 or M:\OOCOA

Contact IT Risk Management for guidance on approved storage locations.

Access to Federal Tax Data on the server is tracked through the use of Audit Logs. These logs capture what data has been accessed, and the date/time for each occurrence. In addition, access to the electronic Federal Tax Data is limited to the specific time period that a person needs access. In addition, random scans are performed on PCs to ensure that no Federal Tax Data is stored inappropriately. 11
When copying Federal Tax Data to approved alternate, secured directories, IT Staff should rename the files to something that does not easily identify them as containing Federal Tax Data.

Once IT Staff no longer need access to Federal Data, they must immediately notify their supervisor so access can be removed. The supervisor if needed can easily reinstate access.

Here are some key points for IT Staff to bear in mind when safeguarding Federal Tax Data.

Do NOT leave your screen unattended with Federal Data on it; logoff PC, use a password protected screensaver if you need to leave your PC unattended, or lock your computer every time you leave your desk. If you do not, there is the potential for an unauthorized disclosure (UNAX) for which you will be held accountable.

Do NOT share your password with anyone.

Do NOT copy Federal Tax Data to your PC or removable media of any kind.

Do ensure that you need access to Federal Tax Data. If you do not, contact your supervisor or manager immediately to have access removed.

Do NOT provide a file of federal data or even a screenshot of Federal Tax Data to another IT Staff member (including subordinates) who has not been authorized for access to Federal Tax Data. Doing so constitutes disclosure (UNAX).

Test data containing federal data must have all identifiers removed; otherwise, it is federal data and must be protected accordingly.

Application Developers are the only group within Office of Technology that is allowed to print Federal Tax Data during the course of Systems testing. If YOU DO – ensure that the information is SHREDDED or placed in an orange tag bin for destruction when the information is no longer needed. Printed federal tax data must be properly secured when not in use and at the close of each business day until the information is properly destroyed.

Use of Internal email is OK for IT Staff ONLY IF identifiers are first removed and they enable Lotus Notes Digital Signatures and Encryption. (Search the Lotus Notes Help for how to do this or contact the Help Desk.) Use of external email to send Federal Tax Data is prohibited.

IT staff using internal mail must use an orange “Hand Deliver” sticker and place federal data in a double-sealed envelope marked: “Federal Return Information – Not to be opened except by addressee.”

Authorized personnel should deliver mail only to the person designated on the “Hand Deliver” sticker.

CGI-AMS - Federal Data Access Requests

All CGI-AMS staff working with Federal Tax Information receives safeguarding and disclosure (UNAX) training before access is granted. The Federal Safeguard Coordinator maintains a log of CGI-AMS staff trained in Federal Safeguarding procedures. 12 Section VIII Office Audit Section - Revenue Agent Reports (RAR) Inventory System

The Office Audit Section receives paper federal audit reports (RARS) and EOAD CDs from the IRS Philadelphia Service Center and/or the IRS Richmond District Office for use in Office Audit compliance programs. Audits are received for individual income tax, corporate income tax, and estate tax. All mail received from the IRS remains unopened. Authorized designated personnel in the mailroom record receipt in the tracking system the mail is forwarded to the Federal/State Tax Information Coordinator (FTC). The FTC or designated representative records receipt in the mail tracking system and verifies the information on the transmittal sheet with the actual inventory received. This individual signs the transmittal form and returns the form to the IRS as verification of receipt. The federal documents are given to the Office Audit Clerical Supervisor who is responsible for stamping the audits with the date of receipt. All audits are marked “State Copy” in red by the IRS and all are stored in bar-locked cabinets when not in use.

The Office Audit Clerical Supervisor logs the receipt of each audit or CD in the Office Audit RAR Inventory System. This system, which was implemented in August 1997, utilizes a Paradox database and is password protected. The data is stored on a network drive, under a subdirectory accessible only to select Office Audit employees. Each audit record is assigned a unique control number in addition to the following information: social security number or EIN, tax period, info type, tax type, name, address, request section, reason for request, assignment (team), date mailed from IRS, date received by Tax Department, destroy date, destroy method, and any pertinent comments. All audits are placed in bar-locked cabinets to be worked by Office Audit Auditors and Tax Examiner Seniors. They are carefully safeguarded until destruction. The Federal/State Information Coordinator is responsible for documenting and ensuring the proper destruction of federal RAR audit information.

Section IX

Office Audit Section - Federal Transcript Tracking System

Effective calendar year 2005, the Office Audit Section began using the IRS Transcript Delivery System (TDS) to retrieve federal transcripts direct from the IRS website. TDS automates the validation, processing and delivery of taxpayer information to the authorized third party user, thus requiring less intervention from IRS personnel. TDS has decreased the turnaround time to facilitate completion of audit activity at the state level. On behalf of the Tax Department, the Office Audit Section is the central area for requesting, receiving, tracking and destroying federal transcripts and related data such as account transcript return transcripts, statement of account, hard copies of returns, and microfiche. The Federal/State Tax Information Coordinator is responsible for overseeing these functions.

Accordingly, a Federal Transcript Tracking System was implemented utilizing a Paradox database, which is password protected. The information is stored on a network drive, under a subdirectory accessible only to selected Office Audit employees. The Office Audit Section receives requests from the designated Section Transcript Coordinators (STC) of the Agency as listed:

Criminal Investigation Unit (CIU) - Rhonda McGarvey Collections Section including Office Audit - Sarah Comstock Customer Services - Jeremy Armstrong Revenue Analysis and Planning (RAP) - Eric Armstrong District Offices - James Mason Appeals and Rulings - David Mason Customer Satisfaction - Clare Dunn 13 Each area Section Transcript Coordinator (STC) is responsible for coordinating the individual requests and submitting the IRS Transcript Request Forms to the Office Audit Section Transcript Coordinator (OASTC), Sarah Comstock.

The OASTC enters the request information into the IRS website and is able to retrieve the federal transcript within 1 to 2 business days. Each request is assigned a unique control number in the Federal Transcript Tracking System. The OASTC enters the following information for each case: SSN or EIN, tax type, tax period, form type, taxpayer name, taxpayer address, and reason code for the request which identifies the requesting section, requester, request date, date from IRS, date sent to STC, estimated destruction date, actual destruction date, destruction method and IRS tracking number.

Each Section Transcript Coordinator (STC) that requested federal information receives a report “Summary of IRS Return Requests - Section Transcript Coordinator” detailing the following: date given to coordinator, control numbers, taxpayers names, SSN(s) or EIN(s), tax type, tax period, requestor section, request date, received date, total number of requests, and signature for approval. Each STC must physically pick up the federal transcripts with the exception of the District Offices and home-based staff. District Offices and home-based staff receive Federal Information through the mail using a double sealed envelope.

Sections receiving federal transcripts are required to safeguard the federal information in locked cabinets when the data is not in use and at the end of each day. The Office Audit Section maintains a bar-locked cabinet for the Revenue Analysis and Planning Section (RAP). All federal transcripts stored in the Office Audit Section meet federal safeguarding provisions as outlined in IRS Publication 1075.

All Federal transcripts are to be returned to the Office Audit Section for destruction when no longer needed. If a destroy date is not indicated, the transcript may be destroyed 60 days from the date the document was received by the Tax Department. Effective immediately, the OASTC will distribute a list of all outstanding transcripts annually that are over 1 year old with no destruction date documented in transcript database to each STC. This list will be used to verify that the requestor still has the federal tax information in their possession. Each STC will respond with an update on the pending destruction date.

Don Staples - Agency Disclosure Officer; Cheryl Fox - Federal Safeguarding Coordinator; Mike Garner - Federal/State Tax Info Co-coordinator; Betsy Marks - Federal Disclosure Specialist; Dee Birk - IT Safeguard Analyst; Van Nguyen - PC Database Co-coordinator; Arlene Tanner - Federal Safeguarding Management Analyst; Sarah Comstock - Federal Transcript Coordinator.

--- Page 1 ---Guidelines for Qualified Appraisals These guidelines are published by the Department of Taxation (TAX) pursuant to Va.

Code § 58.1-512.1 to provide guidance to donors and appraisers of land or interests in land qualifying for the Virginia Land Preservation Tax Credit for donations made on or after January 1, 2007.

Incorporated by reference The following are incorporated into these guidelines in their entirety, as they may be amended from time to time:

e The requirements of § 170(h) of the United States Internal Revenue Code of 1986, as amended (the “IRC), including the applicable regulations, which are located at 26 C.F.R. § 1.1704A-14.

e The Uniform Standards of Professional Appraisal Practice (USPAP), as developed by the Appraisal Standards Board of the Appraisal Foundation.

e The regulations of the Virginia Real Estate Appraisal Board, 18 VAC 130-20-10 et seq.

Requirements An application for a Land Preservation Tax Credit shall include a copy of the qualified appraisal, as defined in § 170(f)(11)(E) of the IRC, of the qualified donation. The appraisal must be prepared by a qualified appraiser who is licensed in Virginia pursuant to Va. Code § 54.1-2011. The application shall include the affidavit by the appraiser required by subsection C of Va. Code § 58.1-512.1. lf the appraised value is based on a hypothetical future change in use and ignores, or departs significantly from, a value based on a recent sale of the appraised property and comparable sales, then the affidavit shall clearly identify the improvements and other modifications necessary to adapt the actual physical condition of the property on the appraisal date to the hypothetical highest and best use on which the appraised value is based, and shall disclose the facts on which the appraiser based the conclusion that the hypothetical use is both likely to be needed in the near future and feasible, and shall also disclose and explain any assumptions used in determining the fair market value of the donation.

The Department also reserves the right to request any additional documentation or data, including the appraiser's workpapers.

The Department will revise and update these guidelines as deemed necessary by the Tax Commissioner.

A Adopted this of day of January, 2007, effective for donations made on or after January 1, 2007. { Ly Y 4 a Janie E. Bowen, Tax Commissioner

--- Page 1 ---Guidelines for Qualified Appraisals are published by the Department of Taxation (TAX) pursuant to Va.

Code § 58.1-512.1 provides guidance to donors and appraisers of land or interests qualifying for the Virginia Land Preservation Tax Credit for donations on or after January 1, 2007.

Incorporated by reference The following are incorporated into these guidelines in their entirety, as they may be amended from time to time:

The requirements of § 170(h) of the IRC, including regulations at 26 C.F.R. § 1.1704A-14.

e The Uniform Standards of Professional Appraisal Practice (USPAP), as developed by the Appraisal Standards Board of the Appraisal Foundation.

e The regulations of the Virginia Real Estate Appraisal Board, 18 VAC 130-20-10 et seq.

An application for a Land Preservation Tax Credit must include a copy of the qualified appraisal, as defined in § 170(f)(11)(E) of the IRC, prepared by a licensed Virginia appraiser. It must include the affidavit required by Va. Code § 58.1-512.1. If based on a hypothetical future use deviating from recent sales, the affidavit must identify necessary modifications, disclose facts supporting the hypothetical use, and explain assumptions used in valuing the donation.

The Department may request additional documentation or data, including workpapers.

The Department will revise these guidelines as needed by the Tax Commissioner.

A Adopted this of day of January, 2007, effective for donations made on or after January 1, 2007. { Ly Y 4 a Janie E. Bowen, Tax Commissioner

TAX BULLETIN 08-5 Virginia Department of Taxation March 13, 2008

IMPORTANT INFORMATION REGARDING

THE HAMPTON ROADS TRANSPORTATION

AUTHORITY

MOTOR VEHICLE REPAIR LABOR AND SERVICES SALES AND USE

TAX (“REPAIR TAX”) AND MOTOR VEHICLE FUEL SALES TAX

NOW INVALID On February 29, 2008, the Virginia Supreme Court ruled that the provisions in House Bill 3202 (Acts of Assembly 2007, Chapter 896) that permitted the Northern Virginia Transportation Authority and the Hampton Roads Transportation Authority to impose regional taxes and fees violated the Constitution of Virginia and are invalid.

The Department of Taxation (“TAX”) is responsible for the administration and collection of both the Motor Vehicle Repair Labor and Services Sales and Use Tax (“Repair Tax”) and the Motor Vehicle Fuel Sales Tax in the Hampton Roads Transportation Authority. Therefore, the Repair Tax and the Motor Vehicle Fuel Sales Tax imposed by the Hampton Roads Transportation Authority should not be collected.

The taxes and fees that the Hampton Roads Transportation Authority is authorized to impose by House Bill 3202 are not scheduled to take effect until May 1, 2008. As a result of the Virginia Supreme Court’s decision, these taxes will not become effective as scheduled.

Please frequently check TAX’s website, www.tax.virginia.gov, for updated information as more guidance regarding this matter becomes available.

If you have any questions please contact TAX at (804) 367-8037.

GUIDELINES AND RULES FOR THE

MOTOR VEHICLE FUEL SALES TAX

January 31, 2008

These guidelines and rules are published by the Department of Taxation (“TAX”) to provide guidance to dealers of motor vehicle fuels regarding the new Motor Vehicle Fuel Sales Tax authorized by Va. Code § 58.1-1724.2 et seq., enacted by House Bill 3202 (Acts of Assembly 2007, Chapter 896), that will be imposed by the Hampton Roads Transportation Authority beginning April 1, 2008.

These guidelines are also applicable to the Motor Vehicle Fuel Sales Tax currently imposed in the Northern Virginia Transportation District and in the member localities of the Potomac and Rappahannock Transportation Commission pursuant to Va. Code § 58.1-1719 et seq. These guidelines supplement TAX’s existing Motor Vehicle Fuels Sales Tax Regulations (23 Virginia Administrative Code (“VAC”) 10-240-10 et seq.). To the extent that there is a conflict between the existing regulations and these guidelines, these guidelines supersede the regulations.

House Bill 3202 provides that the development and publication of these guidelines and rules is exempt from the provisions of the Administrative Process Act (Va. Code § 2.2-4000 et seq.). TAX has worked with affected dealers to develop these guidelines and rules. As necessary, additional guidelines and rules will be published and posted on TAX’s website, www.tax.virginia.gov.

Imposition of Tax

Effective July 1, 2007, the Hampton Roads Transportation Authority was authorized to impose in its member localities a sales tax on motor vehicle fuels sold at retail at the rate of two percent of the retail price of such fuels sold within such county or city. The member localities of the Hampton Roads Transportation Authority are the Counties of Isle of Wight, James City, and York and the Cities of Chesapeake, Hampton, Newport News, Norfolk, Poquoson, Portsmouth, Suffolk, Virginia Beach, and Williamsburg. The Authority has voted to impose the tax effective April 1, 2008. (Source: Va. Code § 58.1-1724.2 et seq.)

The Motor Vehicle Fuel Sales Tax is currently imposed in the Northern Virginia Transportation District and the Potomac and Rappahannock Transportation Commission. The member localities of the Northern Virginia Transportation District are the Counties of Arlington, Fairfax and Loudoun and the Cities of Alexandria, Fairfax, and Falls Church; and the member localities of the Potomac and Rappahannock Transportation Commission are the Counties of Prince William and Stafford and the Cities of Fredericksburg, Manassas, and Manassas Park. (Source: Va. Code § 58.1-1719 et seq.)

The Motor Vehicle Fuel Sales Tax shall be subject to the provisions of the Virginia 1Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

Retail Sales and Use Tax Act except that the exemption provided for motor vehicle fuels under Va. Code § 58.1-609.1 and the bracket system provided in such Act shall not be applicable. (Source: Va. Code § 58.1-1720; Va. Code § 58.1-1724.3)

The rate of the tax is two percent on the sales price of motor vehicle fuel, which includes applicable federal and state excise taxes on motor fuels. (Source: Va. Code §§ 58.1-1720 and 58.1-1724.3) Separately stated federal diesel fuel excise taxes may be excluded from the sales price. Any dealer who fails to exclude the federal diesel excise tax when collecting any sales tax may not deduct the federal diesel excise tax from his taxable sales. (Source: Public Document (“PD”) 88-68 (April 26, 1988))

The tax must be included in the unit measure of fuel when retail sales of fuels are made through a pump and the bracket system set forth in Form FT-106, Motor Vehicle Fuel Sales Tax Bracket System, which is available for download at TAX's website at www.tax.virginia.gov, must be used for determining the proper amount of tax to be added to the sales price of each unit. The bracket system does not relieve the dealer from the liability of paying an amount equal to two percent of his gross taxable sales.

The tax on retail sales of fuels that are not made through a pump is computed at a straight two percent on the sales price and must be separately stated from the selling price. One-half cent or more is treated as one cent. (Source: 23 VAC 10-240-80)

Definitions

Terms used in the Motor Vehicle Fuel Sales Tax have the same meaning as those used in the Retail Sales and Use Tax, unless defined otherwise, as follows:

“Dealer” includes every person who: 1) manufactures or produces tangible personal property for sale at retail, for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth; 2) imports or causes to be imported into this Commonwealth tangible personal property from any state or foreign country, for sale at retail, for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth; 3) sells at retail, or who offers for sale at retail, or who has in his possession for sale at retail, or for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth, tangible personal property; 4) has sold at retail, used, consumed, distributed, or stored for use or consumption in this Commonwealth, tangible personal property and who cannot prove that the tax levied by this chapter has been paid on the sale at retail, the use, consumption, distribution, or storage of such tangible personal property; 5) leases or rents tangible personal property for a consideration, permitting the use or possession of such property without transferring title thereto; 6) is the lessee or rentee of tangible personal property and who pays to the owner of such property a consideration for the use or possession of such property without acquiring title thereto; 7) as a representative, agent, or solicitor, of an out-of-state principal, solicits, receives and accepts orders from persons in this Commonwealth for future delivery and whose principal refuses to register as a dealer under Va. Code § 58.1-613; or 8) becomes liable to and owes this Commonwealth any

2Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

amount of tax imposed by Chapter 6 of Title 58.1 of the Va. Code, whether he holds, or is required to hold, a certificate of registration under Va. Code § 58.1-613. (Source: Va.

Code § 58.1-612)

"Motor vehicle" means every vehicle, except for a mobile office, which is self propelled or designed for self-propulsion and every vehicle drawn by or designed to be drawn by a motor vehicle, every device in, upon and by which any person or property is, or can be, transported or drawn upon a highway, but excluding devices moved by human or animal power, devices used exclusively upon stationary rails or tracks and vehicles, other than manufactured homes, used in this Commonwealth but not required to be licensed by the Commonwealth. (Source: Va. Code § 58.1-602; Va. Code § 58.1-2401)

"Motor vehicle fuel" means all products commonly or commercially known, advertised, offered for sale, sold or used as gasoline, including casinghead or natural gasoline, and all other types of additives when mixed or blended into gasoline, regardless of their classification of uses; and all combustible gases and liquid, used or suitable for use in any internal combustion engine or motor for the generation of power to propel motor vehicles on the public highways, except aviation fuel or any type of fuel used in an aircraft, rocket or similar device. Motor vehicle fuel subject to the Motor Vehicle Fuel Sales Tax are those fuels subject to tax under Chapter 22 of Title 58.1 of the Va. Code, except aviation fuel or any type of fuel used in an aircraft, rocket or similar device. (Source: 23 VAC 10-240-260)

"Person" means any individual, firm, copartnership, cooperative, nonprofit membership corporation, joint venture, association, corporation, estate, trust, business trust, trustee in bankruptcy, receiver, auctioneer, syndicate, assignee, club, society, or other group or combination acting as a unit, body politic or political subdivision, whether public or private, or quasi-public, and the plural of such term shall mean the same as the singular. (Source: Va. Code § 58.1-602)

"Place of business" includes, but is not limited to, a store, a sales or other office, a warehouse or any storage facility. For determining the place of business from which a retail sale is made, "place of business" means the business location that first takes the purchaser's order for motor vehicle fuel whereby the delivery is made within a Transportation Authority. (Source: 23 VAC 10-240-320)

"Retail sale" or a "sale at retail" means a sale to a consumer or to any person for any purpose other than resale. (Source: Va. Code § 58.1-602)

"Retailer" means every person engaged in the business of making sales at retail, or for distribution, use, consumption, or storage to be used or consumed in the Commonwealth. (Source: Va. Code § 58.1-602)

"Sale" means any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible

3Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

personal property and any rendition of a taxable service for a consideration, and includes the fabrication of tangible personal property for consumers who furnish, either directly or indirectly, the materials used in fabrication, and the furnishing, preparing, or serving for a consideration of any tangible personal property consumed on the premises of the person furnishing, preparing, or serving such tangible personal property. A transaction whereby the possession of property is transferred but the seller retains title as security for the payment of the price shall be deemed a sale. (Source: Va. Code § 58.1-602)

“Sales price” means the total amount for which tangible personal property or services are sold, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer, without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever. Sales price shall not include (i) any cash discount allowed and taken; (ii) finance charges, carrying charges, service charges or interest from credit extended on sales of tangible personal property under conditional sale contracts or other conditional contracts providing for deferred payments of the purchase price; or (iii) separately stated local property taxes collected. Where used articles are taken in trade, or in a series of trades as a credit or part payment on the sale of new or used articles, the tax levied by this chapter shall be paid on the net difference between the sales price of the new or used articles and the credit for the used articles. (Source: Va. Code § 58.1-602)

“Transportation Authority” means the Hampton Roads Transportation Authority, the Northern Virginia Transportation District, or the Potomac and Rappahannock Transportation Commission. (Source: Va. Code § 58.1-1720; Enactment Clause 6, House Bill 3202 (Acts of Assembly 2007, Chapter 896); Va. Code § 58.1-1724.3)

"Wholesaler" (refiner, commission distributor or independent jobber), as distinguished from a retailer, means every person who sells for resale. If a wholesaler sells to any user or consumer, however large or small, he becomes a retailer for those sales. (Source: 23 VAC 10-240-470)

Motor Vehicles

For the purposes of this tax, “motor vehicle” includes, but is not limited to

• “Automobile and Watercraft Trailers” - any tractor truck, lowboy, vehicle, or combination, including vehicles or combinations that transport motor vehicles or watercraft on their power unit, designed and used exclusively for the transportation of motor vehicles or watercraft. (Source: Va. Code § 46.2-100)

• “Camping Trailers” - every vehicle that has collapsible sides and contains sleeping quarters but may or may not contain bathing and cooking facilities and is designed to be drawn by a motor vehicle. (Source: Va. Code § 46.2-100)

4Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

• "Charter Bus" - any motor vehicle manufactured with a minimum seating capacity of 32 passengers or more, excluding the driver. (Source: Va. Code § 46.2-2000)

• "Commuter Bus" - any motor vehicle which has a seating capacity of more than seventeen passengers, is used primarily to transport workers directly to and from factories, plants, offices, or other places where they work. (Source: Va. Code § 46.2-1175)

• "Minibus" - any motor vehicle having a seating capacity of not less than seven nor more than 31 passengers, including the driver, and used in the transportation of passengers. (Source: Va. Code § 46.2-2000)

• “Motorcycles” - every motor vehicle designed to travel on not more than three wheels in contact with the ground and is capable of traveling at speeds in excess of 35 miles per hour. (Source: Va. Code § 46.2-100)

• "Motor Homes" or “Recreational Vehicles” - every motor vehicle with a normal seating capacity of not more than ten persons, including the driver, designed primarily for use as living quarters for human beings. (Source: Va. Code § 46.2-1900)

• “Passenger Cars” - every motor vehicle other than a motorcycle designed and used primarily for the transportation of no more than 10 persons including the driver. (Source: Va. Code § 46.2-100)

• “Pickup or Panel Trucks” - every motor vehicle designed for the transportation of property and having a registered gross weight of 7,500 pounds or less. (Source: Va. Code § 46.2-100)

• “Semitrailers” - every vehicle of the trailer type so designed and used in conjunction with a motor vehicle that some part of its own weight and that of its own load rests on or is carried by another vehicle. (Source: Va. Code § 46.2-100)

• “Tow Trucks” - every motor vehicle for hire (i) designed to lift, pull, or carry another vehicle by means of a hoist or other mechanical apparatus and (ii) having a manufacturer's gross vehicle weight rating of at least 10,000 pounds. "Tow truck" also includes vehicles designed with a ramp on wheels and a hydraulic lift with a capacity to haul or tow another vehicle, commonly referred to as "rollbacks." (Source: Va. Code § 46.2-100)

• “Tractor Trucks” - every motor vehicle designed and used primarily for drawing other vehicles and not so constructed as to carry a load other than a part of the load and weight of the vehicle attached thereto. (Source: Va. Code § 46.2-100)

5Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

• “Trailers” - every vehicle without motive power designed for carrying property or passengers wholly on its own structure and for being drawn by a motor vehicle, including manufactured homes. (Source: Va. Code § 46.2-100)

• "Travel Trailers"- every vehicle designed to provide temporary living quarters of such size or weight as not to require special highway movement permits when towed by a motor vehicle and having a gross trailer area less than 320 square feet. (Source: Va. Code § 46.2-1900)

• “Trucks” - every motor vehicle designed to transport property on its own structure independent of any other vehicle and having a registered gross weight in excess of 7,500 pounds. (Source: Va. Code § 46.2-100)

For the purposes of this tax, “motor vehicle” does not include

• “All-Terrain Vehicles” - any three-wheeled or four-wheeled motor vehicle powered by a gasoline or diesel engine and generally characterized by large, low-pressure tires, a seat designed to be straddled by the operator, and handlebars for steering that is intended for off-road use by an individual rider on various types of unpaved terrain. (Source: Va. Code § 46.2-100)

• "Electric Personal Assistive Mobility Device" - a self-balancing two-nontandem-wheeled device that is designed to transport only one person and powered by an electric propulsion system that limits the device's maximum speed to 15 miles per hour or less. (Source: Va. Code § 46.2-100)

• "Electric Power-Assisted Bicycle" - a vehicle that travels on not more than three wheels in contact with the ground and is equipped with (i) pedals that allow propulsion by human power and (ii) an electric motor with an input of no more than 1,000 watts that reduces the pedal effort required of the rider. (Source: Va.

Code § 46.2-100)

• “Farm Tractors” - every motor vehicle designed and used as a farm, agricultural, or horticultural implement for drawing plows, mowing machines, and other farm, agricultural, or horticultural machinery and implements including self-propelled mowers designed and used for mowing lawns. (Source: Va. Code § 46.2-100)

• “Golf Carts” - every self-propelled vehicle that is designed to transport persons playing golf and their equipment on a golf course. (Source: Va. Code § 46.2-100)

• “Manufactured Homes” - any structure subject to federal regulation, transportable in one or more sections, which in the traveling mode is eight body feet or more in width or 40 body feet or more in length, or, when erected on site, is 320 or more square feet, and which is built on a permanent chassis and designed to be used as a dwelling with or without a permanent foundation when connected to the

6Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

required utilities, and includes the plumbing, heating, air conditioning, and electrical systems contained therein. (Source: Va. Code § 46.2-100)

• “Mobile Offices” - any industrialized building unit not subject to the federal regulation, which may be constructed on a chassis for the purpose of towing to the point of use and designed to be used with or without a permanent foundation, for commercial use and not for residential use; or two or more such units separately towable, but designed to be joined together at the point of use to form a single commercial structure, and which may be designed for removal to, and installation or erection on other sites. (Source: Va. Code § 58.1-2401)

• “Mopeds” - every vehicle that travels on not more than three wheels in contact with the ground that has (i) a seat that is no less than 24 inches in height, measured from the middle of the seat perpendicular to the ground and (ii) a gasoline, electric, or hybrid motor that displaces less than 50 cubic centimeters. (Source: Va. Code § 46.2-100)

• “Motorized Skateboards or Scooters” - every vehicle, regardless of the number of its wheels in contact with the ground, that (i) has no seat, but is designed to be stood upon by the operator, (ii) has no manufacturer-issued vehicle identification number, and (iii) is powered by an electric motor having an input of no more than 1,000 watts or a gasoline engine that displaces less than 36 cubic centimeters. (Source: Va. Code § 46.2-100)

• “Snowmobiles”- every self-propelled vehicle designed to travel on snow or ice, steered by skis or runners, and supported in whole or in part by one or more skis, belts, or cleats. (Source: Va. Code § 46.2-100)

• “Utility Vehicles” - any vehicle that is (i) designed for off-road use, (ii) powered by an engine of no more than 25 horsepower, and (iii) used for general maintenance, security, agricultural, or horticultural purposes. (Source: Va. Code § 46.2-100)

• “Watercraft or Boats”- any vehicle used on waterways. (Source: Va. Code § 58.1-2201)

Exemptions

All sales of motor vehicle fuel are subject to the motor vehicle fuel sales tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser, a certificate of exemption indicating that the fuel is exempt under the law. The certificate will remain in effect except upon notice from the TAX that it is no longer acceptable. However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice. (Source: Code of Va. § 58.1-623)

7Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

Certificates of exemption in the various categories are available on TAX’s website, www.tax.virginia.gov. Each certificate explains its use, and may be reproduced by the dealer for use on purchase orders, sales slips or other documents relating to the transaction. Reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates.

An exemption certificate cannot be used to make a tax free purchase of fuel not covered by the exact wording of the certificate.

In the event that a dealer fails to collect the Motor Vehicle Fuel Sales Tax due on the sale of taxable motor vehicle fuel, the dealer is liable for the payment of the tax.

Exemptions from the Motor Vehicle Fuel Sales Tax include, but are not limited to, the following exemptions:

• Motor vehicle fuel sold to the United States, the Commonwealth or political subdivisions of the Commonwealth if the purchases are pursuant to required official purchase orders to be paid for out of public funds; the United States Government National credit card and the Commonwealth of Virginia credit card may be used in lieu of a Certificate of Exemption when purchasing fuel from any retailer or distributor in localities subject to the motor vehicle fuel sales tax. (Source: Va. Code § 58.1-609.1(4))

• Motor vehicle fuel sold to farmers for use in farm machinery or motor vehicles, licensed or nonlicensed, used in agricultural production for market if it is to be so used at the time of purchase. Any fuel not used in agricultural production is subject to the tax at the time of purchase. (Source: Va. Code § 58.1-609.2(1))

• Motor vehicle fuel sold to a commercial waterman to operate machinery used in extracting fish, bivalves or crustaceans from water for commercial purposes; motor vehicle fuel for use in a boat is taxable at the time of purchase. (Source: Va. Code § 58.1-609.2(4))

• Motor vehicle fuel sold to harvesters of forest products who use the motor vehicle fuel in commercial tree farming. (Source: Va. Code § 58.1-609.2(6))

• Motor vehicle fuel purchased for use that would qualify for the manufacturing exemption. (Source: Va. Code § 58.1-609.3(2))

• Motor vehicle fuel for use or consumption aboard ships or vessels engaged in intercoastal trade between ports in this state and ports in other states of the United States; or in foreign commerce between ports in this state and ports in foreign countries when delivered directly to such ships or vessels. Motor vehicle fuel used directly in the building, conversion or repair of such ships and vessels is also exempt. (Source: Va. Code § 58.1-609.3(4))

8Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

• Motor vehicle fuel sold to an airline and used directly in the rendition of its common carrier service in interstate, intrastate or foreign commerce operations providing "scheduled air service." "Scheduled air service" as defined in Va. Code § 58.1-1501, means service provided by a single air carrier consisting of regularly scheduled flights to one or more Virginia airports at least five days per week. (Source: Va. Code § 58.1-609.3(6))

• Motor vehicle fuel purchased for the use or consumption of any nonprofit organization that holds a valid certificate of exemption from TAX, or any nonprofit church that holds a valid self-executing certificate of exemption, that is exempt from paying state and local Retail Sales and Use Tax. (Source: Va. Code § 58.1-609.11)

• Sales of fuel delivered outside the state or a Transportation Authority in the seller's vehicle. (Source: 23 VAC 10-240-230)

• Sales of fuel delivered outside the state or a Transportation Authority by an independent trucker hired by the seller. (Source: 23 VAC 10-240-230)

• Sales of fuel delivered by the seller to a common carrier or a licensed contract carrier for transportation outside the state or a Transportation Authority and purchases for resale and immediate transportation out of this state or a Transportation Authority, provided a valid certificate of exemption is secured by the Virginia seller. (Source: 23 VAC 10-240-230)

Refunds

Any person who purchases fuels and pays the Motor Vehicle Fuel Sales Tax and receives a refund from the Department of Motor Vehicles (“DMV”) of the Virginia Fuels Tax imposed pursuant to Chapter 22 of Title 58.1 of the Va. Code on such purchase may, within 30 days after receiving the refund, file a refund claim with TAX for the Motor Vehicle Fuel Sales Tax. Refunds of the Virginia Fuels Tax are available in the following situations:

• A refund of the Virginia Fuels Tax paid for the purchase of fuel in quantities of five gallons or more at any time shall be granted in accordance with the provisions of Va. Code § 58.1-2261 to any person who establishes to the satisfaction of DMV that such person has paid the tax levied upon any fuel:

o Sold and delivered to a governmental entity for its exclusive use;

o Used by a governmental entity, provided persons operating under contract with a governmental entity shall not be eligible for such refund;

9Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

o Sold and delivered to an organization described in Va. Code § 58.1-2226(2) or Va. Code § 58.1-2250(2) for its exclusive use in the operation of an aircraft;

o Used by an organization described in Va. Code § 58.1-2226(2) or Va.

Code § 58.1-2250(2) for its exclusive use in the operation of an aircraft, provided persons operating under contract with such an organization shall not be eligible for such refund;

o Purchased by a licensed exporter and subsequently transported and delivered by such licensed exporter to another state for sales or use outside the boundaries of the Commonwealth if the tax applicable in the destination state has been paid, provided a refund shall not be granted pursuant to this section on any fuel which is transported and delivered outside of the Commonwealth in the fuel supply tank of a highway vehicle or an aircraft;

o Used by any person performing transportation under contract or lease with any transportation district for use in a highway vehicle controlled by a Transportation Authority and used in providing transit service by the Transportation Authority by contract or lease, provided the refund shall be paid to the person performing such transportation;

o Used by any private, nonprofit agency on aging, designated by the Department for the Aging, providing transportation services to citizens in highway vehicles owned, operated or under contract with such agency;

o Used in operating or propelling highway vehicles owned by a nonprofit organization that provides specialized transportation to various locations for elderly or disabled individuals to secure essential services and to participate in community life according to the individual's interest and abilities;

o Used in operating or propelling buses owned and operated by a county or the school board thereof while being used to transport children to and from public school or from school to and from educational or athletic activities;

o Used by buses owned or solely used by a private, nonprofit, nonreligious school while being used to transport children to and from such school or from such school to and from educational or athletic activities;

o Used by any county or city school board or any private, nonprofit, nonreligious school contracting with a private carrier to transport children to and from public schools or any private, nonprofit, nonreligious school,

10Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

provided the tax shall be refunded to the private carrier performing such transportation;

o Used in operating or propelling the equipment of volunteer firefighting companies and of volunteer rescue squads within the Commonwealth used actually and necessarily for firefighting and rescue purposes;

o Used in operating or propelling motor equipment belonging to counties, cities and towns, if actually used in public activities;

o Used for a purpose other than in operating or propelling highway vehicles, watercraft or aircraft (However, fuels used in operating or propelling commercial, recreational and pleasure watercraft are eligible for a refund, see below);

o Used off-highway in self-propelled equipment manufactured for a specific off-road purpose, which is used on a job site and the movement of which on any highway is incidental to the purpose for which it was designed and manufactured;

o Proven to be lost by accident, including the accidental mixing of (i) dyed diesel fuel with tax-paid motor fuel, (ii) gasoline with diesel fuel, or (iii) undyed diesel fuel with dyed kerosene, but excluding fuel lost through personal negligence or theft;

o Used in operating or propelling vehicles used solely for racing other vehicles on a racetrack;

o Used in operating or propelling unlicensed highway vehicles and other unlicensed equipment used exclusively for agricultural or horticultural purposes on lands owned or leased by the owner or lessee of such vehicles and not operated on or over any highway for any purpose other than to move it in the manner and for the purpose mentioned;

o Used in operating or propelling commercial watercraft. The amount of refund shall be equal to the amount of the taxes paid less one and one-half cents per gallon on such fuel so used which shall be paid by DMV into the state treasury to be credited as provided in Va. Code § 58.1-2289 D;

o Used in operating stationary engines, or pumping or mixing equipment on a highway vehicle if the fuel used to operate such equipment is stored in an auxiliary tank separate from the fuel tank used to propel the highway vehicle, and the highway vehicle is mechanically incapable of self-propulsion while fuel is being used from the auxiliary tank; or

11Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

o Used in operating or propelling recreational and pleasure watercraft.

(Source: Va. Code § 58.1-2259)

• Any person purchasing fuel for consumption in a solid waste compacting or ready-mix concrete highway vehicle, or a bulk feed delivery truck, where the vehicle's equipment is mechanically or hydraulically driven by an internal combustion engine that propels the vehicle, is entitled to a refund in an amount equal to 35 percent of the tax paid on such fuel. A "bulk feed delivery truck" means bulk animal feed delivery trucks utilizing power take-off (PTO) driven auger or air feed discharge systems for off-road deliveries of animal feed. (Source: Va. Code § 58.1-2259)

• Any person purchasing fuel for consumption in a vehicle designed or permanently adapted solely and exclusively for bulk spreading or spraying of agricultural liming materials, chemicals, or fertilizer, where the vehicle's equipment is mechanically or hydraulically driven by an internal combustion engine that propels the vehicle, is entitled to a refund in an amount equal to 55 percent of the tax paid on such fuel. (Source: Va. Code § 58.1-2259)

• Any person purchasing fuel may apply for a refund of the tax if such fuel was consumed by a highway vehicle used in operating an urban or suburban bus line or a taxicab service. This refund also applies to a common carrier of passengers which has been issued a certificate of public convenience and necessity pursuant to Va. Code §§ 46.2-2005 and 58.1-2204 providing regular route service over the highways of the Commonwealth. No refund shall be granted unless the majority of the passengers using such bus line, taxicab service or common carrier of passengers do so for travel of a distance of not more than 40 miles, one way, in a single day between their place of abode and their place of employment, shopping areas or schools. (Source: Va. Code § 58.1-2259)

• If the applicant for a refund is a taxicab service, he shall hold a valid permit from DMV to engage in the business of a taxicab service. No applicant shall be denied a refund by reason of the fee arrangement between the holder of the permit and the driver or drivers, if all other conditions of this section have been met. (Source: Va. Code § 58.1-2259)

• Any person purchasing fuel for consumption in a vehicle designed or permanently adapted solely and exclusively for bulk spreading or spraying of agricultural liming materials, chemicals, or fertilizer, where the vehicle's equipment is mechanically or hydraulically driven by an internal combustion engine that propels the vehicle, is entitled to a refund in an amount equal to 55 percent of the tax paid on such fuel. (Source: Va. Code § 58.1-2259)

12Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

• Refunds resulting from any fuel shipments diverted from Virginia shall be based on the amount of tax paid for the fuel less discounts allowed by § 58.1-2233. (Source: Va. Code § 58.1-2259)

Claims received more than 30 days from receipt of the refund from the DMV will not be honored unless the fuel is specifically exempt from the Motor Vehicle Fuel Sales Tax.

Refunds authorized will be for the amount of tax paid by the person filing the claim. (Source: 23 VAC 10-240-350 A)

When any person pays the Motor Vehicle Fuel Sales Tax to a dealer and the use of the fuel is specifically exempt, such person may file a claim for refund with the dealer to whom the tax was paid. The dealer may then file a claim for refund with TAX. The dealer must show that the tax was paid to TAX, collected from his customer and subsequently refunded to his customer. Refunds authorized will be for the amount of tax paid by the dealer on this return less any applicable dealer discount. Refunds cannot be authorized on exempt transactions unless the dealer files a claim within three years from the last day prescribed by law for the timely filing of the return on which the tax was paid to TAX. (Source: 23 VAC 10-240-350 B)

Forms for filing claims for refund of the Motor Vehicle Fuel Sales Tax will be furnished by TAX upon request. (Source: 23 VAC 10-240-350)

Taxable Motor Fuel Sales

Taxable sales of motor vehicle fuel include, but are not limited to, the following:

• Motor vehicle fuel sold by or through post exchanges, ship stores, ship service stores, commissaries, filing stations, licensed traders, other similar agencies or by any person located on United States military installations when not for the exclusive use of the United States. (Source: PD 85-75 (April 4, 1985))

• Motor vehicle fuel sold at Washington National Airport. (Source: PD 92-206 (October 21, 1992))

• Motor vehicle fuel purchased for use in a boat. Marine fuel that is subject to the fuel tax imposed under Chapter 22 of Title 58.1 of the Va. Code is also subject to the Motor Vehicle Fuel Sales Tax. (Source: Va. Code § 58.1-1724.3)

• Motor vehicle fuel purchased at retail by a contract carrier whereby delivery of such fuel is made within a Transportation Authority. (Source: PD 05-77 (May 26, 2005))

• Motor vehicle fuel sold to persons engaged in the business of leasing or renting motor vehicles for use in such motor vehicles. (Source: Va. Code § 58.1-1724.3)

13Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

Sales Price

For purposes of the Motor Vehicle Fuel Sales Tax, the sales price does not include the following amounts:

• Separately stated federal diesel fuel excise taxes may be excluded from the sales price, however, any dealer who fails to exclude the federal diesel excise tax when collecting any sales tax may not deduct the federal diesel excise tax from his taxable sales (Source: PD 88-68 (April 26, 1988));

• Any transportation and delivery charges if the charges are separately stated on the invoice; otherwise the tax must be computed on the total charge (Source: 23

VAC 10-240-390);

• Any finance charges, carrying charges, service charges or interest from credit extended under conditional sale contracts or conditional contracts providing for deferred payments;

• Any bad check and late payment charges; and

• Any charges for billing and collection services.

Cash Discounts

Any person making retail sales of fuel who allows a discount against the pump price shall compute the tax on the discounted price. If the tax is not included in the pump price, the tax shall be charged on the discounted price per unit using the brackets for collection set forth in Form FT-106, Motor Vehicle Fuel Sales Tax Bracket System, which is available for download at TAX's website at www.tax.virginia.gov. If the tax is included in the pump price, no tax calculation will be made at the time of sale. In computing tax due, the dealer shall subtract cash discounts from gross fuel sales and divide the result by 1.02 to determine the base for computing the tax. This base shall be multiplied by .02 to determine the tax due. (Source: 23 VAC 10-240-90)

Example 1

Dealer makes gross monthly sales of fuel at a pump price of $20,000, and tax is included in the pump price. Dealer does not make any tax calculation at the time of the sale. Dealer has allowed $5,000 in cash discounts for the month.

Base = ($20,000-$5,000)/1.02 = $15,000/1.02 = $14,706 Tax = Base*.02 = $14,706 * .02 = $294.12

14Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

Example 2

Dealer charges a pump price of $5, tax is not included in the pump price. The dealer allows a $1 cash discount against the pump price.

Discounted price per unit = $5-$1 = $4 Dealer would collect the tax set forth in Form FT-106, Motor Vehicle Fuel Sales Tax Bracket System, for a pump price of $4.

Sourcing Rules

The Motor Vehicle Fuel Sales Tax for a Transportation Authority is imposed on motor vehicle fuel sold at retail in the Transportation Authority. If the delivery point of the motor vehicle fuel is in a Transportation Authority, then the retail sale is subject to the motor vehicle fuel sales tax. (Source: 23 VAC 10-240-410)

Example 3

An order is placed for fuel with an office of an independent jobber or a commission distributor located outside the Hampton Roads Transportation Authority whereby the fuel is delivered within the Hampton Roads Transportation Authority. The sale is subject to the Motor Vehicle Fuel Sales Tax.

Example 4

An order is placed for fuel with an office of an independent jobber or a commission distributor located within the Hampton Roads Transportation Authority whereby the fuel is delivered outside the Hampton Roads Transportation Authority. The sale is not subject to the Motor Vehicle Fuel Sales Tax.

Registration of Providers

Every person making retail sales of motor vehicle fuel whereby delivery is made within a Transportation Authority is required to file an application for a Certificate of Registration with TAX for collection and payment of the sales tax. This includes every person outside this state who makes retail sales of motor vehicle fuel for delivery into a Transportation Authority. Such dealers must file returns and perform all other duties required of dealers in this state. (Source: 23 VAC 10-240-110 A; 23 VAC 10-240-290))

The Hampton Roads Transportation Authority has voted to impose the Motor Vehicle Fuel Sales Tax beginning April 1, 2008. To the extent that TAX is able to identify such dealers as potentially liable for collecting and remitting the Motor Vehicle Fuel Sales Tax, TAX will notify such dealers in advance of the effective date and supply the dealers with the necessary forms and instructions to obtain a Certificate of Registration for the motor vehicle fuels tax from TAX. If a dealer does not receive any information from TAX, and is liable to collect the Motor Vehicle Fuel Sales Tax, he should apply for a

15Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

Certificate of Registration online at TAX's website at www.tax.virginia.gov. A separate application for a Certificate of Registration is required for each place of business.

Any person who purchases motor vehicle fuel for resale and withdraws any fuel from an inventory located within a Transportation Authority for use or consumption is required to register for payment of the tax on such withdrawals. (Source: 23 VAC 10-240-110 A)

Any person who gives an exemption certificate for the purchase of motor vehicle fuel and makes a taxable use of any portion of the fuel taken from a storage facility located within a Transportation Authority is required to register for payment of the tax on the portion of the fuel that is used in a taxable manner. (Source: 23 VAC 10-240-110 A)

TAX will review and approve an application for registration and issue the dealer an official Certificate of Registration for the specific place of business noted in the application. The Certificate of Registration is not transferable and is valid only for the designated dealer and place of business. It must always be displayed conspicuously at the appropriate place of business. (Source: 23 VAC 10-240-110 B)

If a dealer ceases to conduct his business at the place indicated on the Certificate of Registration, the certificate immediately expires. The dealer is required to notify TAX in writing within 30 days and return the Certificate of Registration. However, if the dealer wants to relocate his place of business, he must inform TAX in writing and return the certificate so a revised certificate may be issued. Changes in ownership or corporate structure may require that the business apply for and obtain a new Certificate of Registration. (Source: 23 VAC 10-240-110 B)

Filing of Monthly Returns

Every dealer is required to file Form FT-102, Motor Vehicle Fuel Sales Tax Return, on or before the 20th day of the month following each reporting period even if no tax is due.

At the time of filing Form FT-102, Motor Vehicle Fuel Sales Tax Return, the dealer must pay the amount of tax due. The return for each period becomes delinquent on the twenty-first day of the succeeding month if not paid. In the case of dealers regularly keeping books and accounts on the basis of an annual period that varies from 52 to 53 weeks, reporting consistent with such accounting period is acceptable, provided a satisfactory explanatory statement is attached to the dealer's first return filed under such annual accounting period. (Source: 23 VAC 10-240-370 A)

Every refiner, commission distributor, independent jobber or other person who makes sales of fuel to customers for resale shall file monthly schedule FT-102B, Schedule of Retailer Purchases for Resale, which includes the following information regarding purchases of fuel by customers who furnish a resale certificate of exemption: (1) name and address of customer furnishing a resale certificate of exemption; (2) customer’s certificate of registration number issued for collection of the motor vehicle fuel sales tax as shown on the resale certificate of exemption; (3) number of gallons of fuel sold to

16Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

each customer; (4) total selling price; and (5) date of sale. The schedule is required to be filed by the 20th of the month following each reporting period. (Source: 23 VAC 10-

240-370 B)

A dealer may apply in writing to TAX for an extension of time for filing a Form FT-102, Motor Vehicle Fuel Sales Tax Return, and paying the tax. The request must be made before the return becomes due and must state the necessity for additional time. An extension may be granted to the end of the calendar month in which the return is due, or for a period not exceeding 30 days. Penalty and interest will not be charged during the period of extension, except that interest will accrue on the tax at the rate prescribed in § 6621 of the Internal Revenue Code where the extension is granted beyond the end of the calendar month in which the return is due. Dealer's compensation will be allowed provided the return is filed and the tax paid before the expiration of the extension. Any dealer who fails to file the return within the extended time and to pay the full amount required will be treated as if no extension had been granted. (Source: 23 VAC 10-240-190)

Providers using commercial tax preparation software should check with their software companies for information regarding when the software company will begin supporting the Motor Vehicle Fuel Sales Tax.

Collection of Tax

The Motor Vehicle Fuel Sales Tax must be added to the sales price of fuel and remitted to TAX by the dealer. Thereafter, the tax is a debt from the purchaser to the dealer until paid and is recoverable at law in the same manner as other debts. The Motor Vehicle Fuel Sales Tax must be reported on each dealer’s Form FT-102, Motor Vehicle Fuel Sales Tax Return.

When any person purchases motor vehicle fuel under a certificate of exemption and withdraws motor vehicle fuel from an inventory in a Transportation Authority for a taxable use, he must pay the tax on the cost of such fuel. The cost of the fuel shall include the applicable federal and state excise tax on motor fuels before computing the two percent tax. Separately stated federal diesel fuel excise taxes may be excluded from the motor vehicle fuel sales tax. Any dealer who fails to exclude the federal diesel excise tax when collecting any sales tax may not deduct the federal diesel excise tax from his taxable sales. (Source: PD 88-68 (April 26, 1988))

In the event that a dealer collects the Motor Vehicle Fuel Sales Tax on exempt or non-taxable transactions, the dealer must remit the erroneously or illegally collected tax to TAX unless or until the dealer can affirmatively show that the tax has been refunded to the customer or credited to his account. A dealer who intentionally neglects, fails or refuses to collect the tax on a taxable retail sale of motor vehicle fuels is liable for and must pay the tax himself. Any dealer who intentionally neglects, fails or refuses to pay or collect the tax, except as allowed under the provisions of the sales tax holidays set

17Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

forth in Va. Code § 58.1-611.2, Va. Code § 58.1-609.1(18), and Va. Code § 58.1-611.3, is guilty of a Class 1 misdemeanor. (Source: Va. Code § 58.1-625)

No dealer shall hold out to the public that he will absorb all or any part of the Motor Vehicle Fuel Sales Tax, or that he will relieve any customer of the payment of all or any part of the tax except as authorized by the bracket system set forth in FT-106, Motor Vehicle Fuel Sales Tax Bracket System, which is available for download at TAX's website at www.tax.virginia.gov, or during the time periods set out in Va. Code § 58.1-611.2, Va. Code § 58.1-609.1(18), and Va. Code § 58.1-611.3 or during the 14 days immediately preceding such time periods for advertisements relating to sales to be made during that time period. Any dealer who does so will be guilty of a Class 2 misdemeanor. (Source: Va. Code § 58.1-626)

Charge or Credit Card Sales

Any dealer making charge or credit card sales of fuel must report the total selling price and pay the applicable tax for the taxable period in which the customer takes delivery of the fuel. (Source: 23 VAC 10-240-170)

Example 5

A customer takes delivery of fuel in July and presents a credit card as payment. The dealer must report and pay the tax on the July return, due August 20, even if reimbursement from the credit card company has not been received.

Professional License Taxes

The amount of Motor Vehicle Fuel Sales Tax collected by a dealer in any taxable year shall be excluded from gross receipts for purposes of any tax imposed under Chapter 37 of Title 58.1 of the Va. Code. (Source: Va. Code § 58.1-1724.4)

Bad Debts

Every dealer will be allowed a credit against the tax shown to be due on the return for the amount of tax previously paid on accounts that are owed to the dealer and that have been found to be worthless within the period covered by the return. The credit, however, shall not exceed the amount of the uncollected sales price determined by treating prior payments on each debt as consisting of the same proportion of sales price, sales tax and other nontaxable charges as in the total debt originally owed to the dealer. The amount of accounts for which a credit has been taken that are thereafter in whole or in part paid to the dealer shall be included in the first return filed after such collection. (Source: Va. Code § 58.1-621)

18Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

Dealer Discount

As compensation for accounting for and paying the Motor Vehicle Fuel Sales Tax, a dealer is allowed a discount of two percent, three percent, or four percent, depending on the volume of monthly taxable sales, of the motor vehicle fuel sales tax due in the form of a deduction, provided the amount due was not delinquent at the time of payment.

Dealers must compute the discount without regard to the number of certificates of registration that they hold. Dealers holding two or more certificates of registration must compute the dealer's discount based upon taxable sales from all business locations subject to the motor vehicle fuel sales tax. This requirement applies to dealers filing consolidated returns and those filing separate returns for each business location. (Source: Va. Code § 58.1-622)

To compute the dealer's discount, a dealer would multiply the Motor Vehicle Fuel Sales Tax listed on his return by:

• 4.0% (or .04) if monthly taxable sales are less than $62,501; or

• 3.0% (or .03) if monthly sales are at least $62,501 but are less than $208,001; or

• 2.0% (or .020) if monthly taxable sales equal or exceed $208,001.

Example 6

Dealer makes taxable sales of $10,000 during the month and reports Motor Vehicle Fuel Sales Tax of $200. The dealer would retain a dealer's discount of $8, provided that his return is timely filed and the motor vehicle fuel sales tax is timely paid. The $8 discount is computed by multiplying the Motor Vehicle Fuel Sales Tax ($200) by 4.0% since the dealer's monthly taxable sales volume is less than $62,501.

Example 7

Dealer makes taxable sales of $250,000 during the month and reports motor vehicle fuel sales tax of $5,000. The dealer would retain a dealer's discount of $100, provided that his return is timely filed and the Motor Vehicle Fuel Sales Tax is timely paid. The $100 discount is computed by multiplying the Motor Vehicle Fuel Sales Tax ($5,000) by

2. 0% since the dealer's monthly taxable sales volume is greater than $208,001.

Example 8

Dealer makes taxable sales of $60,000 during the month and sells an item for $1,000.

The dealer timely files a return reporting the $20 tax on the transaction, and claims the discount. The amount refunded would be $19.20 ($20 less 4.0% of the $20 motor vehicle fuel sales tax= $20 - .80 = $19.20) since the dealer’s monthly taxable sales volume is less than $62,501.

19Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

Any amount of tax refunded by TAX to a dealer will be reduced by any dealer's discount claimed on the transaction to which the refund relates.

Penalties and Interest

Except with respect to fraudulent returns, the failure to file a timely return and make a timely and full payment of this tax will subject the dealer to a specific penalty to be added to the tax in the amount of six percent if the failure is for not more than one month, with an additional six percent for each additional month, or fraction thereof, during which the failure continues, not to exceed thirty percent in the aggregate. In no case, however, shall the penalty be less than ten dollars and such minimum penalty shall apply whether or not any tax is due for the period for which such return was required. (Source: Va. Code § 58.1-635 A)

In the case of a false or fraudulent return where willful intent exists to defraud the Commonwealth of this tax, or in the case of a willful failure to file a return with the intent to defraud the Commonwealth of this tax, a specific penalty of fifty percent of the amount of the proper tax shall be assessed. (Source: Va. Code § 58.1-635 A)

The rate of interest on omitted taxes and assessments is the “Underpayment Rate” established pursuant to § 6621(a)(2) of the Internal Revenue Code plus two percent. (Source: Va. Code § 58.1-15(A))

Sale of Business

If any dealer is liable for any tax, penalty or interest and sells his business or stock of goods or quits the business, he must make a final return and payment within 15 days after the date of selling or quitting the business. At that time, he must also return his Certificate of Registration to TAX and include a letter explaining the situation. He must report on his final return the full name and address of any successor. (Source: Va.

Code § 58.1-629)

The dealer's successors or assigns, if any, must withhold a sufficient portion of the purchase money to cover the amount of any taxes, penalties and interest due and unpaid until the former owner produces either a receipt from TAX showing that payment has been made or a certificate stating that no taxes, penalties or interest are due. If the purchaser of a business or stock of goods fails to withhold a sufficient portion of the purchase money, he becomes personally liable for the payment of the taxes, penalties and interest due and unpaid by any former owner. (Source: Va. Code § 58.1-629)

A trustee, receiver, assignee, executor or administrator who continues to operate, manage or control a business engaged in making retail sales of fuel must make application for a new Certificate of Registration except for a corporation which continues to exist as the same legal entity. The tax must be collected and paid like any other

20Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

dealer. It is immaterial that such officer or person may have been appointed by a court. (Source: 23 VAC 10-240-440)

The personal representative of a decedent sometimes finds it necessary, in the course of his administration of an estate, to sell some or all of the tangible personal property coming into his hands as executor or administrator. A personal representative doing this, including a sheriff or sergeant who is acting as administrator is not required to register to collect the tax on such sales. (Source: 23 VAC 10-240-440)

Compliance Provisions

The Retail Sales and Use Tax compliance provisions and applicable Retail Sales and Use Tax Regulations will apply to the Motor Vehicle Fuel Sales Tax.

Records

Every dealer is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability. Such records shall include: (1) a daily record of all cash and credit sales; (2) a record of the amount of all fuel purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase; (3) a record of all deductions and exemptions claimed in filing tax returns, including exemption and resale certificates and bad debts; and (4) a true and complete inventory of the stock on hand and its value, taken at least once each year. (Source: Va. Code § 58.1-633 A)

Records must be open for inspection and examination at all reasonable hours of the business day by TAX. The dealer may maintain such records on microfilm. (Source: Va. Code § 58.1-633 B)

Disposition of Revenues

The revenues from the Motor Vehicle Fuel Sales Tax will be collected and remitted monthly by dealers to TAX and, after subtracting the direct costs of administration by TAX, transferred to the Transportation Authority the revenues were collected in on a monthly basis. (Source: Code of Va. § 58.1-1724.6)

Any errors made in any distribution, or adjustments that are otherwise necessary, will be made in the distribution for the next month or for subsequent months. Any interest earned on the revenues will be credited to the Transportation Authority.

Administrative Rulings

A dealer may appeal in writing to the Tax Commissioner for a ruling when there is a question about the application of the tax to a specific situation. The dealer must provide the Commissioner with all the facts: the names of individuals, firms or corporations

21Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31,2008 involved; type, location and value of property; and any other relevant information. The dealer may argue for the interpretation of the law most favorable to him. (Source: 23 VAC 10-240-1 0) A dealer who acts on a written ruling that is later revoked or set aside by the courts or the Commissioner will have acted in good faith. A written ruling, however, becomes invalid if later changed by an amendment to the law, a court decision, or a rule or regulation issued by the Commissioner. (Source: 23 VAC 10-240-1 0)

I

I Appeals Taxpayers may appeal Motor Vehicle Fuel Sales Tax issues to TAX using the administrative appeals process applicable to other state taxes administered by TAX set forth in Va. Code § 58.1 -1 820 et seq. and the Administrative Appeal Guidelines for Tax Assessments issued by the Virginia Department of Taxation (Public Document 06-140, November 29, 2006) available on-line in the Tax Policy Library section of TAX's website, located at www.tax.virginia.gov.

Additional Information These guidelines and rules are available on-line in the Tax polidy ~ibkary section of TAX's website, located at www.tax.virginia.gov.

For additional information, please contact the Office of Customer Services at (804) 367-8037.

TAX BULLETIN 08-5 Virginia Department of Taxation March 13, 2008

IMPORTANT INFORMATION REGARDING

THE HAMPTON ROADS TRANSPORTATION

AUTHORITY

MOTOR VEHICLE REPAIR LABOR AND SERVICES SALES AND USE

TAX (“REPAIR TAX”) AND MOTOR VEHICLE FUEL SALES TAX

NOW INVALID On February 29, 2008, the Virginia Supreme Court ruled that House Bill 3202 provisions allowing the Northern Virginia and Hampton Roads Transportation Authorities to impose regional taxes and fees violated the Virginia Constitution and are invalid.

The Department of Taxation (“TAX”) is responsible for the administration and collection of both the Motor Vehicle Repair Labor and Services Sales and Use Tax (“Repair Tax”) and the Motor Vehicle Fuel Sales Tax in the Hampton Roads Transportation Authority. Therefore, the Repair Tax and the Motor Vehicle Fuel Sales Tax imposed by the Hampton Roads Transportation Authority should not be collected.

The taxes and fees that the Hampton Roads Transportation Authority is authorized to impose by House Bill 3202 are not scheduled to take effect until May 1, 2008. As a result of the Virginia Supreme Court’s decision, these taxes will not become effective as scheduled.

Check www.tax.virginia.gov regularly for updates and guidance.

For questions, contact TAX at (804) 367-8037.

GUIDELINES AND RULES FOR THE

MOTOR VEHICLE FUEL SALES TAX

January 31, 2008

TAX publishes guidelines for motor vehicle fuel dealers regarding the new Motor Vehicle Fuel Sales Tax authorized by Va. Code § 58.1-1724.2, effective April 1, 2008.

These guidelines also apply to the existing Motor Vehicle Fuel Sales Tax in Northern Virginia, Potomac, and Rappahannock districts, superseding conflicting regulations.

House Bill 3202 exempts these guidelines from the Administrative Process Act. TAX collaborated with dealers; future guidelines will be posted online.

Imposition of Tax

Effective July 1, 2007, Hampton Roads Authority was authorized to impose a 2% sales tax on motor fuel in its member localities, effective April 1, 2008. (Va. Code § 58.1-1724.2)

The Motor Vehicle Fuel Sales Tax is currently imposed in the Northern Virginia Transportation District and the Potomac and Rappahannock Transportation Commission. The member localities of the Northern Virginia Transportation District are the Counties of Arlington, Fairfax and Loudoun and the Cities of Alexandria, Fairfax, and Falls Church; and the member localities of the Potomac and Rappahannock Transportation Commission are the Counties of Prince William and Stafford and the Cities of Fredericksburg, Manassas, and Manassas Park. (Source: Va. Code § 58.1-1719 et seq.)

The Motor Vehicle Fuel Sales Tax is governed by the Virginia Guidelines and Rules for the Motor Vehicle Fuel Sales Tax, January 31, 2008.

The Retail Sales and Use Tax Act applies, but exemptions under Va. Code § 58.1-609.1 and bracket system do not apply. (Va. Code §§ 58.1-1720, 58.1-1724.3)

The rate of the tax is two percent on the sales price of motor vehicle fuel, which includes applicable federal and state excise taxes on motor fuels. (Source: Va. Code §§ 58.1-1720 and 58.1-1724.3) Separately stated federal diesel fuel excise taxes may be excluded from the sales price. Any dealer who fails to exclude the federal diesel excise tax when collecting any sales tax may not deduct the federal diesel excise tax from his taxable sales. (Source: Public Document (“PD”) 88-68 (April 26, 1988))

The tax must be included in the unit measure of fuel when retail sales of fuels are made through a pump and the bracket system set forth in Form FT-106, Motor Vehicle Fuel Sales Tax Bracket System, which is available for download at TAX's website at www.tax.virginia.gov, must be used for determining the proper amount of tax to be added to the sales price of each unit. The bracket system does not relieve the dealer from the liability of paying an amount equal to two percent of his gross taxable sales.

Non-pump retail fuel sales are taxed at 2%, separately stated; amounts of half-cent or more are rounded to one cent. (23 VAC 10-240-80)

Definitions

Terms in the Motor Vehicle Fuel Sales Tax have the same meaning as in the Retail Sales and Use Tax unless otherwise defined:

“Dealer” includes every person who: 1) manufactures or produces tangible personal property for sale at retail, for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth; 2) imports or causes to be imported into this Commonwealth tangible personal property from any state or foreign country, for sale at retail, for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth; 3) sells at retail, or who offers for sale at retail, or who has in his possession for sale at retail, or for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth, tangible personal property; 4) has sold at retail, used, consumed, distributed, or stored for use or consumption in this Commonwealth, tangible personal property and who cannot prove that the tax levied by this chapter has been paid on the sale at retail, the use, consumption, distribution, or storage of such tangible personal property; 5) leases or rents tangible personal property for a consideration, permitting the use or possession of such property without transferring title thereto; 6) is the lessee or rentee of tangible personal property and who pays to the owner of such property a consideration for the use or possession of such property without acquiring title thereto; 7) as a representative, agent, or solicitor, of an out-of-state principal, solicits, receives and accepts orders from persons in this Commonwealth for future delivery and whose principal refuses to register as a dealer under Va. Code § 58.1-613; or 8) becomes liable to and owes this Commonwealth any

2Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

Liability for tax under Chapter 6 of Title 58.1, regardless of registration, as per Va. Code § 58.1-613.

Code § 58.1-612)

"Motor vehicle" includes self-propelled vehicles, drawn vehicles, and devices used on highways, excluding human/animal-powered, stationary rail, and unlicensed manufactured homes. (Va. Code §§ 58.1-602, 58.1-2401)

"Motor vehicle fuel" means all products commonly or commercially known, advertised, offered for sale, sold or used as gasoline, including casinghead or natural gasoline, and all other types of additives when mixed or blended into gasoline, regardless of their classification of uses; and all combustible gases and liquid, used or suitable for use in any internal combustion engine or motor for the generation of power to propel motor vehicles on the public highways, except aviation fuel or any type of fuel used in an aircraft, rocket or similar device. Motor vehicle fuel subject to the Motor Vehicle Fuel Sales Tax are those fuels subject to tax under Chapter 22 of Title 58.1 of the Va. Code, except aviation fuel or any type of fuel used in an aircraft, rocket or similar device. (Source: 23 VAC 10-240-260)

"Person" includes individuals, entities, groups, or political subdivisions acting as a unit, with plural meaning same as singular. (Va. Code § 58.1-602)

"Place of business" includes, but is not limited to, a store, a sales or other office, a warehouse or any storage facility. For determining the place of business from which a retail sale is made, "place of business" means the business location that first takes the purchaser's order for motor vehicle fuel whereby the delivery is made within a Transportation Authority. (Source: 23 VAC 10-240-320)

"Retail sale" means a sale to a consumer or non-resale purpose. (Va. Code § 58.1-602)

"Retailer" means every person engaged in the business of making sales at retail, or for distribution, use, consumption, or storage to be used or consumed in the Commonwealth. (Source: Va. Code § 58.1-602)

""Sale" means any transfer of title or possession, or both, exchange, barter, lease, or rental, conditional or otherwise, of tangible

3Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

personal property and taxable services for consideration, including fabrication of tangible personal property for consumers furnishing materials, and furnishing, preparing, or serving tangible property on premises. A transfer of possession with seller retaining title as security is a sale. (Source: Va. Code § 58.1-602)

“Sales price” means the total amount for which tangible personal property or services are sold, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer, without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever. Sales price shall not include (i) any cash discount allowed and taken; (ii) finance charges, carrying charges, service charges or interest from credit extended on sales of tangible personal property under conditional sale contracts or other conditional contracts providing for deferred payments of the purchase price; or (iii) separately stated local property taxes collected. Where used articles are taken in trade, or in a series of trades as a credit or part payment on the sale of new or used articles, the tax levied by this chapter shall be paid on the net difference between the sales price of the new or used articles and the credit for the used articles. (Source: Va. Code § 58.1-602)

“Transportation Authority” means the Hampton Roads Transportation Authority, the Northern Virginia Transportation District, or the Potomac and Rappahannock Transportation Commission. (Source: Va. Code § 58.1-1720; Enactment Clause 6, House Bill 3202 (Acts of Assembly 2007, Chapter 896); Va. Code § 58.1-1724.3)

"Wholesaler" (refiner, commission distributor or independent jobber), as distinguished from a retailer, means every person who sells for resale. If a wholesaler sells to any user or consumer, however large or small, he becomes a retailer for those sales. (Source: 23 VAC 10-240-470)

Motor Vehicles

For this tax, “motor vehicle” includes, but is not limited to

• “Automobile and Watercraft Trailers” - any tractor truck, lowboy, vehicle, or combination, including vehicles or combinations that transport motor vehicles or watercraft on their power unit, designed and used exclusively for the transportation of motor vehicles or watercraft. (Source: Va. Code § 46.2-100)

• “Camping Trailers” - every vehicle that has collapsible sides and contains sleeping quarters but may or may not contain bathing and cooking facilities and is designed to be drawn by a motor vehicle. (Source: Va. Code § 46.2-100)

4Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

• "Charter Bus" is a motor vehicle with at least 32 passenger seats, excluding the driver. (Source: Va. Code § 46.2-2000)

• "Commuter Bus" is a vehicle with over 17 seats, used mainly to transport workers to and from workplaces. (Source: Va. Code § 46.2-1175)

• "Minibus" is a vehicle with 7-31 seats, including the driver, used for passenger transport. (Source: Va. Code § 46.2-2000)

• “Motorcycles” are vehicles with up to three wheels, capable of over 35 mph. (Source: Va. Code § 46.2-100)

• "Motor Homes" or “Recreational Vehicles” are vehicles for living quarters, seating up to 10 persons including the driver. (Source: Va. Code § 46.2-1900)

• “Passenger Cars” are vehicles other than motorcycles, primarily for up to 10 persons including the driver. (Source: Va. Code § 46.2-100)

• “Pickup or Panel Trucks” are vehicles for property transport with a gross weight of 7,500 lbs or less. (Source: Va. Code § 46.2-100)

• “Semitrailers” - every vehicle of the trailer type so designed and used in conjunction with a motor vehicle that some part of its own weight and that of its own load rests on or is carried by another vehicle. (Source: Va. Code § 46.2-100)

• “Tow Trucks” - every motor vehicle for hire (i) designed to lift, pull, or carry another vehicle by means of a hoist or other mechanical apparatus and (ii) having a manufacturer's gross vehicle weight rating of at least 10,000 pounds. "Tow truck" also includes vehicles designed with a ramp on wheels and a hydraulic lift with a capacity to haul or tow another vehicle, commonly referred to as "rollbacks." (Source: Va. Code § 46.2-100)

• “Tractor Trucks” are vehicles mainly for drawing other vehicles, not for carrying loads other than their own and attached load. (Source: Va. Code § 46.2-100)

5Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

• “Trailers” are vehicles without motive power for property or passenger transport, drawn by a motor vehicle, including manufactured homes. (Source: Va. Code § 46.2-100)

• "Travel Trailers"- every vehicle designed to provide temporary living quarters of such size or weight as not to require special highway movement permits when towed by a motor vehicle and having a gross trailer area less than 320 square feet. (Source: Va. Code § 46.2-1900)

• “Trucks” are vehicles for property transport with a gross weight over 7,500 lbs. (Source: Va. Code § 46.2-100)

For this tax, “motor vehicle” does not include

• “All-Terrain Vehicles” - any three-wheeled or four-wheeled motor vehicle powered by a gasoline or diesel engine and generally characterized by large, low-pressure tires, a seat designed to be straddled by the operator, and handlebars for steering that is intended for off-road use by an individual rider on various types of unpaved terrain. (Source: Va. Code § 46.2-100)

• "Electric Personal Assistive Mobility Device" is a self-balancing, two-wheeled device for one person, powered electrically, limited to 15 mph. (Source: Va. Code § 46.2-100)

• "Electric Power-Assisted Bicycle" - a vehicle that travels on not more than three wheels in contact with the ground and is equipped with (i) pedals that allow propulsion by human power and (ii) an electric motor with an input of no more than 1,000 watts that reduces the pedal effort required of the rider. (Source: Va.

Code § 46.2-100)

• “Farm Tractors” are vehicles used for farming, drawing implements like plows, mowers, including self-propelled lawn mowers. (Source: Va. Code § 46.2-100)

• “Golf Carts” - every self-propelled vehicle that is designed to transport persons playing golf and their equipment on a golf course. (Source: Va. Code § 46.2-100)

• “Manufactured Homes” - structures subject to federal regulation, transportable in sections, in travel mode at least 8 feet wide or 40 feet long, or, when on site, at least 320 sq ft, built on a permanent chassis, designed as dwellings with or without a permanent foundation when connected to the

6Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

required utilities, and includes the plumbing, heating, air conditioning, and electrical systems contained therein. (Source: Va. Code § 46.2-100)

• “Mobile Offices” - any industrialized building unit not subject to the federal regulation, which may be constructed on a chassis for the purpose of towing to the point of use and designed to be used with or without a permanent foundation, for commercial use and not for residential use; or two or more such units separately towable, but designed to be joined together at the point of use to form a single commercial structure, and which may be designed for removal to, and installation or erection on other sites. (Source: Va. Code § 58.1-2401)

• “Mopeds” - every vehicle that travels on not more than three wheels in contact with the ground that has (i) a seat that is no less than 24 inches in height, measured from the middle of the seat perpendicular to the ground and (ii) a gasoline, electric, or hybrid motor that displaces less than 50 cubic centimeters. (Source: Va. Code § 46.2-100)

• “Motorized Skateboards or Scooters” - vehicles without seats, no VIN, powered by electric motors ≤1,000W or gas engines <36cc, designed to be stood upon. (Source: Va. Code § 46.2-100)

• “Snowmobiles” - self-propelled vehicles for snow or ice, steered by skis or runners, supported by skis, belts, or cleats. (Source: Va. Code § 46.2-100)

• “Utility Vehicles” - any vehicle that is (i) designed for off-road use, (ii) powered by an engine of no more than 25 horsepower, and (iii) used for general maintenance, security, agricultural, or horticultural purposes. (Source: Va. Code § 46.2-100)

• “Watercraft or Boats”- any vehicle used on waterways. (Source: Va. Code § 58.1-2201)

Exemptions

All sales of motor vehicle fuel are subject to the motor vehicle fuel sales tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser, a certificate of exemption indicating that the fuel is exempt under the law. The certificate will remain in effect except upon notice from the TAX that it is no longer acceptable. However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice. (Source: Code of Va. § 58.1-623)

7Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

Certificates of exemption in the various categories are available on TAX’s website, www.tax.virginia.gov. Each certificate explains its use, and may be reproduced by the dealer for use on purchase orders, sales slips or other documents relating to the transaction. Reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates.

Exemption certificates only cover fuel specified; cannot be used for other purchases.

Dealers failing to collect the tax are liable for payment.

Exemptions include, but are not limited to:

• Motor vehicle fuel sold to the United States, the Commonwealth or political subdivisions of the Commonwealth if the purchases are pursuant to required official purchase orders to be paid for out of public funds; the United States Government National credit card and the Commonwealth of Virginia credit card may be used in lieu of a Certificate of Exemption when purchasing fuel from any retailer or distributor in localities subject to the motor vehicle fuel sales tax. (Source: Va. Code § 58.1-609.1(4))

• Fuel sold to farmers for use in farm machinery or vehicles used in production for market; unused fuel is taxable at purchase. (Source: Va. Code § 58.1-609.2)

• Fuel sold to watermen for machinery in fishing; fuel for boats is taxable at purchase. (Source: Va. Code § 58.1-609.2)

• Fuel sold to forest product harvesters for commercial tree farming. (Source: Va. Code § 58.1-609.2)

• Motor vehicle fuel purchased for use that would qualify for the manufacturing exemption. (Source: Va. Code § 58.1-609.3(2))

• Fuel for ships in intercoastal or foreign trade, delivered directly; fuel used in shipbuilding, conversion, or repair is also exempt. (Source: Va. Code § 58.1-609.3)

8Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

• Motor vehicle fuel sold to an airline and used directly in the rendition of its common carrier service in interstate, intrastate or foreign commerce operations providing "scheduled air service." "Scheduled air service" as defined in Va. Code § 58.1-1501, means service provided by a single air carrier consisting of regularly scheduled flights to one or more Virginia airports at least five days per week. (Source: Va. Code § 58.1-609.3(6))

• Motor vehicle fuel purchased for the use or consumption of any nonprofit organization that holds a valid certificate of exemption from TAX, or any nonprofit church that holds a valid self-executing certificate of exemption, that is exempt from paying state and local Retail Sales and Use Tax. (Source: Va. Code § 58.1-609.11)

• Sales of fuel delivered outside the state or a Transportation Authority in the seller's vehicle. (Source: 23 VAC 10-240-230)

• Fuel delivered outside Virginia or a Transportation Authority by an independent trucker hired by the seller. (Source: 23 VAC 10-240-230)

• Sales of fuel delivered by the seller to a common carrier or a licensed contract carrier for transportation outside the state or a Transportation Authority and purchases for resale and immediate transportation out of this state or a Transportation Authority, provided a valid certificate of exemption is secured by the Virginia seller. (Source: 23 VAC 10-240-230)

Refunds

Persons paying the Motor Vehicle Fuel Sales Tax and receiving a DMV refund of Virginia Fuels Tax may file a refund claim within 30 days. Refunds are available in specific cases:

• A refund of the Virginia Fuels Tax paid for the purchase of fuel in quantities of five gallons or more at any time shall be granted in accordance with the provisions of Va. Code § 58.1-2261 to any person who establishes to the satisfaction of DMV that such person has paid the tax levied upon any fuel:

o Sold and delivered to a governmental entity for its exclusive use;

o Used by a governmental entity, provided persons operating under contract with such entity shall not be eligible for refund;

9Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

o Sold and delivered to an organization described in Va. Code § 58.1-2226(2) or Va. Code § 58.1-2250(2) for its exclusive use in the operation of an aircraft;

o Used by an organization described in Va. Code § 58.1-2226(2) or Va.

Code § 58.1-2250 for aircraft use, provided persons under contract with such organization are ineligible for refund;

o Purchased by a licensed exporter and subsequently transported and delivered by such licensed exporter to another state for sales or use outside the boundaries of the Commonwealth if the tax applicable in the destination state has been paid, provided a refund shall not be granted pursuant to this section on any fuel which is transported and delivered outside of the Commonwealth in the fuel supply tank of a highway vehicle or an aircraft;

o Used by any person performing transportation under contract or lease with any transportation district for use in a highway vehicle controlled by a Transportation Authority and used in providing transit service by the Transportation Authority by contract or lease, provided the refund shall be paid to the person performing such transportation;

o Used by any private, nonprofit agency on aging, designated by the Department for the Aging, providing transportation services to citizens in highway vehicles owned, operated or under contract with such agency;

o Used in operating or propelling highway vehicles owned by a nonprofit organization that provides specialized transportation to various locations for elderly or disabled individuals to secure essential services and to participate in community life according to the individual's interest and abilities;

o Used in operating or propelling buses owned and operated by a county or the school board thereof while being used to transport children to and from public school or from school to and from educational or athletic activities;

o Used by buses owned or solely used by a private, nonprofit, nonreligious school while being used to transport children to and from such school or from such school to and from educational or athletic activities;

o Used by any county or city school board or any private, nonprofit, nonreligious school contracting with a private carrier to transport children to and from public schools or any private, nonprofit, nonreligious school,

10Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

provided the tax shall be refunded to the private carrier performing such transportation;

o Used in operating or propelling the equipment of volunteer firefighting companies and of volunteer rescue squads within the Commonwealth used actually and necessarily for firefighting and rescue purposes;

o Used in operating or propelling motor equipment belonging to counties, cities and towns, if actually used in public activities;

o Used for a purpose other than in operating or propelling highway vehicles, watercraft or aircraft (However, fuels used in operating or propelling commercial, recreational and pleasure watercraft are eligible for a refund, see below);

o Used off-highway in self-propelled equipment manufactured for a specific off-road purpose, which is used on a job site and the movement of which on any highway is incidental to the purpose for which it was designed and manufactured;

o Proven to be lost by accident, including the accidental mixing of (i) dyed diesel fuel with tax-paid motor fuel, (ii) gasoline with diesel fuel, or (iii) undyed diesel fuel with dyed kerosene, but excluding fuel lost through personal negligence or theft;

o Used in operating or propelling vehicles used solely for racing other vehicles on a racetrack;

o Used in operating or propelling unlicensed highway vehicles and other unlicensed equipment used exclusively for agricultural or horticultural purposes on lands owned or leased by the owner or lessee of such vehicles and not operated on or over any highway for any purpose other than to move it in the manner and for the purpose mentioned;

o Used in operating or propelling commercial watercraft. The amount of refund shall be equal to the amount of the taxes paid less one and one-half cents per gallon on such fuel so used which shall be paid by DMV into the state treasury to be credited as provided in Va. Code § 58.1-2289 D;

o Used in operating stationary engines, or pumping or mixing equipment on a highway vehicle if the fuel used to operate such equipment is stored in an auxiliary tank separate from the fuel tank used to propel the highway vehicle, and the highway vehicle is mechanically incapable of self-propulsion while fuel is being used from the auxiliary tank; or

11Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

o Used in operating or propelling recreational and pleasure watercraft.

(Source: Va. Code § 58.1-2259)

• Any person purchasing fuel for consumption in a solid waste compacting or ready-mix concrete highway vehicle, or a bulk feed delivery truck, where the vehicle's equipment is mechanically or hydraulically driven by an internal combustion engine that propels the vehicle, is entitled to a refund in an amount equal to 35 percent of the tax paid on such fuel. A "bulk feed delivery truck" means bulk animal feed delivery trucks utilizing power take-off (PTO) driven auger or air feed discharge systems for off-road deliveries of animal feed. (Source: Va. Code § 58.1-2259)

• Any person purchasing fuel for consumption in a vehicle designed or permanently adapted solely and exclusively for bulk spreading or spraying of agricultural liming materials, chemicals, or fertilizer, where the vehicle's equipment is mechanically or hydraulically driven by an internal combustion engine that propels the vehicle, is entitled to a refund in an amount equal to 55 percent of the tax paid on such fuel. (Source: Va. Code § 58.1-2259)

• Any person purchasing fuel may apply for a refund of the tax if such fuel was consumed by a highway vehicle used in operating an urban or suburban bus line or a taxicab service. This refund also applies to a common carrier of passengers which has been issued a certificate of public convenience and necessity pursuant to Va. Code §§ 46.2-2005 and 58.1-2204 providing regular route service over the highways of the Commonwealth. No refund shall be granted unless the majority of the passengers using such bus line, taxicab service or common carrier of passengers do so for travel of a distance of not more than 40 miles, one way, in a single day between their place of abode and their place of employment, shopping areas or schools. (Source: Va. Code § 58.1-2259)

• If the applicant for a refund is a taxicab service, he shall hold a valid permit from DMV to engage in the business of a taxicab service. No applicant shall be denied a refund by reason of the fee arrangement between the holder of the permit and the driver or drivers, if all other conditions of this section have been met. (Source: Va. Code § 58.1-2259)

• Any person purchasing fuel for consumption in a vehicle designed or permanently adapted solely and exclusively for bulk spreading or spraying of agricultural liming materials, chemicals, or fertilizer, where the vehicle's equipment is mechanically or hydraulically driven by an internal combustion engine that propels the vehicle, is entitled to a refund in an amount equal to 55 percent of the tax paid on such fuel. (Source: Va. Code § 58.1-2259)

12Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

• Refunds for diverted fuel shipments from Virginia are based on tax paid minus discounts per § 58.1-2233 (Source: Va. Code § 58.1-2259)

Claims received over 30 days from DMV refund receipt will not be honored unless the fuel is specifically exempt from the Motor Vehicle Fuel Sales Tax.

Authorized refunds will be for the tax amount paid by the claimant. (Source: 23 VAC 10-240-350 A)

When any person pays the Motor Vehicle Fuel Sales Tax to a dealer and the use of the fuel is specifically exempt, such person may file a claim for refund with the dealer to whom the tax was paid. The dealer may then file a claim for refund with TAX. The dealer must show that the tax was paid to TAX, collected from his customer and subsequently refunded to his customer. Refunds authorized will be for the amount of tax paid by the dealer on this return less any applicable dealer discount. Refunds cannot be authorized on exempt transactions unless the dealer files a claim within three years from the last day prescribed by law for the timely filing of the return on which the tax was paid to TAX. (Source: 23 VAC 10-240-350 B)

TAX will furnish refund claim forms upon request. (Source: 23 VAC 10-240-350)

Taxable Motor Fuel Sales

Taxable motor vehicle fuel sales include, but are not limited to:

• Motor vehicle fuel sold by or through post exchanges, ship stores, commissaries, filing stations, licensed traders, or on U.S. military installations not for exclusive U.S. use. (Source: PD 85-75 (April 4, 1985))

• Motor vehicle fuel sold at Washington National Airport. (Source: PD 92-206 (October 21, 1992))

• Motor vehicle fuel for boats, including marine fuel taxed under Chapter 22 of Title 58.1 Va. Code, is also subject to the Motor Vehicle Fuel Sales Tax. (Source: Va. Code § 58.1-1724.3)

• Retail motor vehicle fuel purchased by a contract carrier delivered within a Transportation Authority. (Source: PD 05-77 (May 26, 2005))

• Motor vehicle fuel sold to persons leasing or renting motor vehicles for use in those vehicles. (Source: Va. Code § 58.1-1724.3)

13Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

Sales Price

For the Motor Vehicle Fuel Sales Tax, the sales price excludes the following amounts:

• Federal diesel fuel excise taxes stated separately may be excluded from the sales price. Dealers failing to exclude it when collecting sales tax cannot deduct it from taxable sales. (Source: PD 88-68 (April 26, 1988));

• Transportation and delivery charges are excluded if separately stated; otherwise, tax applies to total charge. (Source: 23

VAC 10-240-390);

• Finance, carrying, service charges, or interest from credit under conditional sale or deferred payment contracts;

• Any bad check and late payment charges; and

• Any charges for billing and collection services.

Cash Discounts

Any person making retail sales of fuel who allows a discount against the pump price shall compute the tax on the discounted price. If the tax is not included in the pump price, the tax shall be charged on the discounted price per unit using the brackets for collection set forth in Form FT-106, Motor Vehicle Fuel Sales Tax Bracket System, which is available for download at TAX's website at www.tax.virginia.gov. If the tax is included in the pump price, no tax calculation will be made at the time of sale. In computing tax due, the dealer shall subtract cash discounts from gross fuel sales and divide the result by 1.02 to determine the base for computing the tax. This base shall be multiplied by .02 to determine the tax due. (Source: 23 VAC 10-240-90)

Example 1

Dealer's gross monthly fuel sales are $20,000 with tax included. No tax calculation at sale. $5,000 in cash discounts allowed.

Base = ($20,000 - $5,000)/1.02 = $14,706; Tax = $14,706 * .02 = $294.12

14Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

Example 2

Dealer charges $5 pump price, tax not included. $1 cash discount allowed.

Discounted unit price = $4. Dealer collects tax per Form FT-106 for $4 pump price.

Sourcing Rules

The Motor Vehicle Fuel Sales Tax for a Transportation Authority is imposed on motor vehicle fuel sold at retail in the Transportation Authority. If the delivery point of the motor vehicle fuel is in a Transportation Authority, then the retail sale is subject to the motor vehicle fuel sales tax. (Source: 23 VAC 10-240-410)

Example 3

Fuel ordered outside Hampton Roads but delivered within it is subject to the tax.

Example 4

An order is placed for fuel with an office of an independent jobber or a commission distributor located within the Hampton Roads Transportation Authority whereby the fuel is delivered outside the Hampton Roads Transportation Authority. The sale is not subject to the Motor Vehicle Fuel Sales Tax.

Registration of Providers

Every person making retail sales of motor vehicle fuel whereby delivery is made within a Transportation Authority is required to file an application for a Certificate of Registration with TAX for collection and payment of the sales tax. This includes every person outside this state who makes retail sales of motor vehicle fuel for delivery into a Transportation Authority. Such dealers must file returns and perform all other duties required of dealers in this state. (Source: 23 VAC 10-240-110 A; 23 VAC 10-240-290))

The Hampton Roads Transportation Authority has voted to impose the Motor Vehicle Fuel Sales Tax beginning April 1, 2008. To the extent that TAX is able to identify such dealers as potentially liable for collecting and remitting the Motor Vehicle Fuel Sales Tax, TAX will notify such dealers in advance of the effective date and supply the dealers with the necessary forms and instructions to obtain a Certificate of Registration for the motor vehicle fuels tax from TAX. If a dealer does not receive any information from TAX, and is liable to collect the Motor Vehicle Fuel Sales Tax, he should apply for a

15Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

Apply online for a Certificate of Registration at www.tax.virginia.gov; a separate application is required for each business location.

Persons purchasing fuel for resale and withdrawing from inventory within a Transportation Authority must register to pay the tax on such withdrawals. (Source: 23 VAC 10-240-110)

Persons using exemption certificates and making taxable use of fuel from a Transportation Authority storage must register to pay tax on the taxable portion. (Source: 23 VAC 10-240-110)

TAX will review and approve an application for registration and issue the dealer an official Certificate of Registration for the specific place of business noted in the application. The Certificate of Registration is not transferable and is valid only for the designated dealer and place of business. It must always be displayed conspicuously at the appropriate place of business. (Source: 23 VAC 10-240-110 B)

If a dealer ceases or relocates business, he must notify TAX in writing within 30 days, return the certificate, and may need a new one for ownership or structural changes. (Source: 23 VAC 10-240-110)

Filing of Monthly Returns

Dealers must file Form FT-102 by the 20th of the month after each reporting period, even if no tax is due.

At the time of filing Form FT-102, Motor Vehicle Fuel Sales Tax Return, the dealer must pay the amount of tax due. The return for each period becomes delinquent on the twenty-first day of the succeeding month if not paid. In the case of dealers regularly keeping books and accounts on the basis of an annual period that varies from 52 to 53 weeks, reporting consistent with such accounting period is acceptable, provided a satisfactory explanatory statement is attached to the dealer's first return filed under such annual accounting period. (Source: 23 VAC 10-240-370 A)

Every refiner, commission distributor, independent jobber or other person who makes sales of fuel to customers for resale shall file monthly schedule FT-102B, Schedule of Retailer Purchases for Resale, which includes the following information regarding purchases of fuel by customers who furnish a resale certificate of exemption: (1) name and address of customer furnishing a resale certificate of exemption; (2) customer’s certificate of registration number issued for collection of the motor vehicle fuel sales tax as shown on the resale certificate of exemption; (3) number of gallons of fuel sold to

16Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

The schedule must be filed by the 20th of the month following each period, including customer, gallons, price, and date. (Source: 23 VAC 10-)

240-370 B)

Dealers may request in writing an extension before the due date, up to 30 days or until month-end, with no penalty or interest during extension. Return and tax must be paid before extension expires; otherwise, no extension applies. (Source: 23 VAC 10-240-190)

Providers using tax software should check with their providers for support timelines for the Motor Vehicle Fuel Sales Tax.

Collection of Tax

Dealers must add the tax to fuel sales, remit it to TAX, and report it on Form FT-102. The tax is a debt from purchaser to dealer until paid.

When any person purchases motor vehicle fuel under a certificate of exemption and withdraws motor vehicle fuel from an inventory in a Transportation Authority for a taxable use, he must pay the tax on the cost of such fuel. The cost of the fuel shall include the applicable federal and state excise tax on motor fuels before computing the two percent tax. Separately stated federal diesel fuel excise taxes may be excluded from the motor vehicle fuel sales tax. Any dealer who fails to exclude the federal diesel excise tax when collecting any sales tax may not deduct the federal diesel excise tax from his taxable sales. (Source: PD 88-68 (April 26, 1988))

Dealers must remit erroneously collected tax on exempt transactions unless refunded or credited. Willful failure to collect or pay tax on taxable sales makes the dealer liable for the tax. (Set in context of sales tax holidays)

17Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

Violations under Va. Code §§ 58.1-611.2, 58.1-609.1, and 58.1-611.3 are Class 1 misdemeanors. (Source: 58.1-625)

No dealer shall hold out to the public that he will absorb all or any part of the Motor Vehicle Fuel Sales Tax, or that he will relieve any customer of the payment of all or any part of the tax except as authorized by the bracket system set forth in FT-106, Motor Vehicle Fuel Sales Tax Bracket System, which is available for download at TAX's website at www.tax.virginia.gov, or during the time periods set out in Va. Code § 58.1-611.2, Va. Code § 58.1-609.1(18), and Va. Code § 58.1-611.3 or during the 14 days immediately preceding such time periods for advertisements relating to sales to be made during that time period. Any dealer who does so will be guilty of a Class 2 misdemeanor. (Source: Va. Code § 58.1-626)

Charge or Credit Card Sales

Dealers must report total sales and pay tax for fuel delivered during the taxable period. (Source: 23 VAC 10-240-170)

Example 5

A customer takes delivery of fuel in July and presents a credit card as payment. The dealer must report and pay the tax on the July return, due August 20, even if reimbursement from the credit card company has not been received.

Professional License Taxes

Fuel sales tax collected by dealers in a year is excluded from gross receipts for Chapter 37 of Title 58.1 Va. Code. (Source: 58.1-1724.4)

Bad Debts

Every dealer will be allowed a credit against the tax shown to be due on the return for the amount of tax previously paid on accounts that are owed to the dealer and that have been found to be worthless within the period covered by the return. The credit, however, shall not exceed the amount of the uncollected sales price determined by treating prior payments on each debt as consisting of the same proportion of sales price, sales tax and other nontaxable charges as in the total debt originally owed to the dealer. The amount of accounts for which a credit has been taken that are thereafter in whole or in part paid to the dealer shall be included in the first return filed after such collection. (Source: Va. Code § 58.1-621)

18Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

Dealer Discount

To compensate for accounting and paying the Motor Vehicle Fuel Sales Tax, a dealer may deduct 2%, 3%, or 4%, based on monthly taxable sales volume, if the amount was not delinquent at payment.

Dealers must compute the discount without regard to the number of certificates of registration that they hold. Dealers holding two or more certificates of registration must compute the dealer's discount based upon taxable sales from all business locations subject to the motor vehicle fuel sales tax. This requirement applies to dealers filing consolidated returns and those filing separate returns for each business location. (Source: Va. Code § 58.1-622)

To compute the discount, multiply the Motor Vehicle Fuel Sales Tax by:

• 4.0% (.04) if monthly sales are under $62,501;

• 3.0% (.03) if monthly sales are $62,501–$208,000;

• 2.0% (.020) if monthly sales are $208,001 or more.

Example 6

With $10,000 taxable sales and $200 tax, the dealer's $8 discount (200×4%) applies if returns and payments are timely, as sales are below $62,501.

Example 7

With $250,000 sales and $5,000 tax, the dealer's $100 discount (5,000×2%) applies if returns and payments are timely, as sales are above $208,000.

2. 0% since the dealer's monthly taxable sales exceed $208,001.

Example 8

Dealer has $60,000 taxable sales and sells a $1,000 item.

Timely return reports $20 tax; with a 4% discount, refund is $19.20 ($20−0.80), as sales are below $62,501.

19Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

Refunds to a dealer are reduced by any claimed dealer's discount on that transaction.

Penalties and Interest

Except with respect to fraudulent returns, the failure to file a timely return and make a timely and full payment of this tax will subject the dealer to a specific penalty to be added to the tax in the amount of six percent if the failure is for not more than one month, with an additional six percent for each additional month, or fraction thereof, during which the failure continues, not to exceed thirty percent in the aggregate. In no case, however, shall the penalty be less than ten dollars and such minimum penalty shall apply whether or not any tax is due for the period for which such return was required. (Source: Va. Code § 58.1-635 A)

In the case of a false or fraudulent return where willful intent exists to defraud the Commonwealth of this tax, or in the case of a willful failure to file a return with the intent to defraud the Commonwealth of this tax, a specific penalty of fifty percent of the amount of the proper tax shall be assessed. (Source: Va. Code § 58.1-635 A)

Interest on omitted taxes is the IRS Underpayment Rate plus 2%. (Source: Va. Code § 58.1-15)

Sale of Business

If any dealer is liable for any tax, penalty or interest and sells his business or stock of goods or quits the business, he must make a final return and payment within 15 days after the date of selling or quitting the business. At that time, he must also return his Certificate of Registration to TAX and include a letter explaining the situation. He must report on his final return the full name and address of any successor. (Source: Va.

Code § 58.1-629)

The dealer's successors or assigns, if any, must withhold a sufficient portion of the purchase money to cover the amount of any taxes, penalties and interest due and unpaid until the former owner produces either a receipt from TAX showing that payment has been made or a certificate stating that no taxes, penalties or interest are due. If the purchaser of a business or stock of goods fails to withhold a sufficient portion of the purchase money, he becomes personally liable for the payment of the taxes, penalties and interest due and unpaid by any former owner. (Source: Va. Code § 58.1-629)

A trustee, receiver, assignee, executor or administrator who continues to operate, manage or control a business engaged in making retail sales of fuel must make application for a new Certificate of Registration except for a corporation which continues to exist as the same legal entity. The tax must be collected and paid like any other

20Guidelines and Rules for the Motor Vehicle Fuel Sales Tax January 31, 2008

dealer. It is immaterial that such officer or person may have been appointed by a court. (Source: 23 VAC 10-240-440)

Personal representatives, including sheriffs or sergeants acting as administrators, are not required to register to collect tax on estate property sales. (Source: 23 VAC 10-240-440)

Compliance Provisions

Retail Sales and Use Tax compliance provisions apply to the Motor Vehicle Fuel Sales Tax.

Records

Every dealer is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability. Such records shall include: (1) a daily record of all cash and credit sales; (2) a record of the amount of all fuel purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase; (3) a record of all deductions and exemptions claimed in filing tax returns, including exemption and resale certificates and bad debts; and (4) a true and complete inventory of the stock on hand and its value, taken at least once each year. (Source: Va. Code § 58.1-633 A)

Records must be available for inspection during reasonable hours by TAX; microfilm is permitted. (Source: Va. Code § 58.1-633 B)

Disposition of Revenues

Dealers will collect and remit monthly Motor Vehicle Fuel Sales Tax revenues to TAX, which deducts admin costs before transferring to the Transportation Authority monthly. (Source: Va. Code § 58.1-1724.6)

Distribution errors or adjustments will be corrected in subsequent months; interest earned will be credited to the Transportation Authority.

Administrative Rulings

Dealers may appeal in writing to the Tax Commissioner for rulings on tax application, providing all relevant facts: names of involved parties, property details, and other pertinent info.

Dealers may argue for favorable interpretation; a good-faith written ruling remains valid unless later revoked, amended, or invalidated by law, court, or regulation. (Source: 23 VAC 10-240-1)

I

Taxpayers may appeal Motor Vehicle Fuel Sales Tax issues through the general administrative process per Va. Code § 58.1-820 et seq. and the Virginia Department of Taxation's guidelines at www.tax.virginia.gov.

Additional guidelines are available online in the Tax policy library at www.tax.virginia.gov.

For more info, contact Office of Customer Services at (804) 367-8037.

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MEMORANDUM

TO: William J. West, Supervisor Technical Services Section

DATE: December 9, 1985

RE: Policy Request/Sales and Use Tax Preponderance of Use

This will reply to your memorandum of July 8, 1985, in which you wish to determine the correct application of the preponderance of use test in three different situations.

First, you wished to determine how the tax would apply when a fork lift is used 55 percent of the time in exempt production activities. In such an instance, the preponderance of the fork lift's use is direct use in manufacturing rendering the fork lift totally exempt from the tax under the provisions of Section 58.1-608.1 of the Code of Virginia.

Second, you wished to determine the applicability of the tax when a taxpayer maintains a central store room of supplies and uses 75% of such stores for exempt purposes. Virginia Code Section 58.1-608.1 sets out an intention to fully exempt only a particular item that is used both in exempt and taxable manufacturing, mining, or processing activities.

Accordingly, the preponderance of use test does not apply to groups of like items in a central store room.

Lastly, you wished to determine the application of the tax when a taxpayer maintains a fuel oil storage tank that provides fuel to a production boiler and a boiler for plant heating; 90% of the fuel in this instance is used in the production boiler. While Virginia Code Section 58.1-608.1 provides the preponderance of use test with respect to machinery, tools and equipment, it does not do so with respect to

--- Page 2 --- MEMORANDUM Page 2 one-time consumables like fuel, power or energy. Thus, fuel oil used in an exempt and taxable manner may be prorated for audit purposes.

However, fuel storage tanks may be subject to the preponderance of use test when used both in a taxable and exempt manner.

War aed tllpe Danny M. Payne, Director : Tax Policy Division rmt :

ALLIS Approved: W. HY Forst Tax Commissioner

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MEMORANDUM

TO: William J. West, Supervisor Technical Services Section

DATE: December 9, 1985

RE: Policy Request/Sales and Use Tax Preponderance of Use

This replies to your July 8, 1985, memorandum on applying the preponderance of use test in three situations.

First, you asked how the tax applies when a forklift is used 55% in exempt production. The preponderance of its use is direct in manufacturing, making it fully exempt under Section 58.1-608.1 of the Code of Virginia.

Second, you asked about applying the tax when a taxpayer's central store uses 75% of supplies for exempt purposes. Virginia Code Section 58.1-608.1 fully exempts only items used in both exempt and taxable activities.

Accordingly, the preponderance of use test does not apply to groups of like items in a central store room.

Lastly, you asked about applying the tax when a fuel oil storage tank supplies fuel to a production boiler and heating boiler; 90% is used in the production boiler. Virginia Code Section 58.1-608.1 applies the preponderance test to machinery, tools, and equipment but not to

--- Page 2 --- MEMORANDUM Page 2 one-time consumables like fuel, power, or energy. Fuel oil used in both exempt and taxable ways may be prorated for audits.

However, fuel storage tanks may be subject to the preponderance of use test when used both in a taxable and exempt manner.

War aed tllpe Danny M. Payne, Director : Tax Policy Division rmt :

ALLIS Approved: W. HY Forst Tax Commissioner

--- Page 1 ---

VIRGINIA CIGARETTE TAX RATE INCREASE GUIDELINES AND

RULES

April 8, 2020

These guidelines and rules are published by the Department of Taxation (“the Department”) to provide guidance to cigarette wholesalers and retailers and to the public regarding the cigarette tax rate increase that will take effect on July 1, 2020. The cigarette tax rate increase is provided for in Item 3-5.21 of the 2020 Appropriation Act (House Bill 30). The 2020 Appropriation Act also increases the rates of the Tobacco Products Tax and imposes the tax on liquid nicotine effective July 1, 2020. The Department will issue separate guidelines and rules regarding the Tobacco Products Tax changes.

Item 3-5.21 of the 2020 Appropriation Act requires the Tax Commissioner to establish guidelines and rules for implementation of the cigarette tax rate increase. These guidelines and rules supplement the Department’s existing Cigarette Tax Regulations (23 Virginia Administrative Code 10-370-10 et seq.). To the extent that there is a conflict between the existing regulations and these guidelines and rules, these guidelines and rules govern the administration of the cigarette tax during the transition from the current tax rate to the new tax rate, including the months preceding and following July 1, 2020.

Item 3-5.21 (D) of House Bill 30 provides that the development and publication of these guidelines and rules is exempt from the provisions of the Administrative Process Act (Va. Code § 2.2-4000 et seq.). The Department has worked with cigarette wholesalers and retailers to develop these guidelines and rules. As necessary, additional guidelines and rules will be published and posted on the Department’s website at www.tax.virginia.gov. --- Page 2 ---Cigarette Tax Increase

Effective July 1, 2020, the state cigarette tax rate will increase from

1. 5 cents per cigarette (30 cents per pack of 20 cigarettes) to 3.0 cents per cigarette (60 cents per pack of 20 cigarettes).

Allocation of Revenue Stamps

During April, May, and June of 2020 (the “allocation months”), the Department will limit its sales of revenue stamps at the current tax rate (“old stamps”) based on each stamping agent’s usage of stamps during the same months in the previous year (the “base months”).

The number of old stamps that each stamping agent may purchase during each of the allocation months will be limited to its usage during the base month increased by 20 percent in April, 15 percent in May, and 10 percent in June in order to accommodate increased customer demand prior to the tax increase. The purchase limit will be rounded up to the next full roll of stamps. The Department will apply the purchase limitations by stamping permit number, rather than consolidating the stamp purchases, stamping history, and inventory of affiliated stamping agents.

Upon reaching the purchasing limit for each month in the period, orders (and payments) for old stamps will be returned unfilled.

Beginning inventory of unaffixed stamps as of April 1, 2020 and stamp purchases made after April 1, 2020 will count against each stamping agent’s purchasing limits. Any stamping agent that exceeds its purchase limit must return any excess stamps to the Department.

In the event that a stamping agent does not purchase its entire allocation for the month of April, the unused April allocation will carry forward and may be used in May or June, or partly in both. --- Page 3 ---Unused allocations from the month of May will not carry forward.

Example of Monthly Purchase Allocations

In 2019, the stamping agent used 85,000 stamps in April, 80,000 stamps in May, and 85,000 stamps in June. Increasing the stamping agent’s usage in the base months by the appropriate factors results in a monthly allocation of 120,000 (rounded up from 102,000) in April, 120,000 (rounded up from 92,000) in May, 120,000 (rounded up from 93,500) in June. Assume each roll is 30,000 stamps.

April --- Page 4 ---May

June

Total

Monthly Allocation

120,000

120,000

120,000

360,000 --- Page 5 ---Beginning Inventory 4/1/2020

35,000

2020 Purchase Orders --- Page 6 ---120,000

90,000

120,000

330,000

2020 Orders to be filled by the Department

90,000 (a) --- Page 7 ---60,000

120,000 (b)

270,000

Notes

As the stamping agent had an initial inventory of 35,000 stamps, the April order of 120,000 would cause the April monthly limit of 120,000 to be exceeded and therefore would not be filled. The stamping agent, however, would be permitted to submit a 90,000 April order (rounded up from 85,000) and still comply with the monthly limit.

Although the stamping agent purchased only 90,000 stamps in May, the unused 30,000 allocation from May does not carry forward to June.

The Department will apply the purchase limitations to each stamping permit, rather than consolidating the stamp purchases, stamping history, and inventory of affiliated stamping agents.

Code of Virginia § 58.1-1009 provides that any person who sells revenue stamps not affixed to cigarettes is guilty of a Class 6 felony.

Under its authority to issue transitional guidelines and rules, --- Page 8 ---however, the Department will allow affiliated stamping agents to transfer stamps between each affiliate during April, May, and June 2020 after providing notice to the Department. Stamping agents should contact Larry Leach in the Department’s Fiscal Office at (804) 367-6345 or larry.leach@tax.virginia.gov.

"Affiliate" means an individual or business that controls, is controlled by, or is under common control with another individual or business. For purposes of these guidelines, a person controls an entity if the person owns, directly or indirectly, more than 10 percent of the voting securities of the entity. For the purposes of this definition "voting security" means a security that (i) confers upon the holder the right to vote for the election of members of the board of directors or similar governing body of the business or (ii) is convertible into, or entitles the holder to receive, upon its exercise, a security that confers such a right to vote. A general partnership interest shall be deemed to be a voting security.

Exceptions to Purchase Limits and Appeals

The Department may, upon application of a stamping agent, make exceptions to revenue stamp purchase limits in cases where purchase allocations based on prior stamp usage impose an undue hardship on a stamping agent operating in good faith under the guidelines and rules. For example, purchase limits for new stamping agents could be based on measures of more recent stamping activity. Requests must be made to the Department in writing. The Department will provide a verbal response to written requests within five business days, followed by a written response. Please contact Larry Leach in the Department’s Fiscal Office at (804) 367-6345 or larry.leach@tax.virginia.gov for more information.

In order to avoid exceeding their allocations, each stamping agent should monitor its customers’ purchases and limit customer purchases to quantities that will not deplete the stamping agent’s allocations prior to the end of each month. The Department will not make exceptions to the purchase limits in cases where stamping --- Page 9 ---agents fail to limit customer purchases.

Sales of New Stamps

The Department will begin selling stamps reflecting the increased tax rate (“new stamps”) on or before June 1, 2020. Purchase limits will not apply to sales of new stamps. No transitional stamps will be issued. A floor tax (see below) will apply in lieu of the use of transitional stamps.

Deadlines

The following deadlines will apply to the transition

The Department will not sell old stamps after Friday, June 26, 2020. In the event of a hardship, stamping agents may petition the Department for an exemption from this deadline. Stamping agents should contact Larry Leach in the Department’s Fiscal Office at (804) 367-6345 or larry.leach@tax.virginia.gov.

Stamping agents and persons operating on their behalf may not apply old stamps to cigarette packs after 11:59 P.M. on Tuesday, June 30, 2020.

Filing of Floor Tax Returns by Stamping Agents

Stamping agents shall pay a floor tax in lieu of the application of transitional stamps. No later than July 30, 2020, each stamping agent shall file a floor tax return with the Department setting forth the number of packs of cigarettes with an old stamp affixed to the pack in the agent’s possession as of 12:01 A.M. on July 1, 2020. The floor tax return must be on a form specified by the Department. --- Page 10 ---Accompanying the floor tax return, each stamping agent shall remit a payment to the Department in an amount equal to $0.30 multiplied by the number of packs of 20 cigarettes and $0.375 multiplied by the number of packs of 25 cigarettes in the agent’s possession as of 12:01 A.M. on July 1, 2020.

The floor tax return for any stamping agent operating as both a wholesaler and a retailer shall set forth the number of packs with an old stamp affixed to the pack that are located in its distribution area or facility as of 12:01 A.M. on July 1, 2020 and the floor tax shall be an amount equal to $0.30 multiplied by the number of packs of 20 cigarettes and $0.375 multiplied by the number of packs of 25 cigarettes in the distribution area or facility.

Floor tax return forms will be mailed to stamping agents not later than Friday, June 12, 2020. They will also be available on the Department’s web site, www.tax.virginia.gov.

Unapplied Stamps

Unapplied old stamps must be returned to the Department at the stamping agent’s expense. Stamps must be postmarked, shipped, or received by the Department no later than July 1, 2020. Each stamping agent is responsible for counting and reporting to the Department the number of stamps returned. The stamping agent will receive credit toward future stamp purchases only if the old stamps are postmarked, shipped, or received by the Department no later than July 1, 2020. Additionally, in order to be eligible for a return credit, the stamping agent must have filed a completed floor tax return, with the requisite payment, no later than July 30, 2020.

Return credits may not be used for future stamp purchases until the floor tax return and remittance have been filed with the Department. Stamping agents may not use an anticipated return credit in calculating their floor tax remittance. --- Page 11 ---Bonds and Letters of Credit

Stamping agents who purchase stamps on credit by posting a bond or letter of credit should review their bond or letter of credit to insure that it will cover the increased cost of stamps due to the rate increase. The bond or letter of credit must cover the amount of purchases by a stamping agent. Stamping agents cannot exceed the amount of their bond to buy stamps. Please contact Larry Leach in the Department’s Fiscal Office at (804) 367-6345 or larry.leach@tax.virginia.gov for more information.

Penalties for Violating Cigarette Tax Law

Under Code of Virginia § 58.1-1003, failure by a stamping agent to follow cigarette stamping procedures may result in the agent having its permit revoked.

In addition, under Code of Virginia § 58.1-1013, any stamping agent who fails to properly affix the required stamps will be required to pay a civil penalty of (i) $2.50 per pack, up to $500, for the first violation by a legal entity within a 36-month period; (ii) $5.00 per pack, up to $1,000, for the second violation by the legal entity within a 36-month period; and (iii) $10 per pack, up to $50,000, for the third and any subsequent violation by the legal entity within a 36-month period.

Where willful intent exists to defraud the Commonwealth, such person will be required to pay a civil penalty of $25 per pack, up to $250,000. It shall be prima facie evidence of intent to defraud when the number of unstamped cigarettes exceeds either 30 packs or five percent of the cigarettes in the place of business of such person, whichever is greater. Notwithstanding these threshold limits, if the number of unstamped packs exceeds 500 packs, it shall be prima --- Page 12 ---facie evidence of intent to defraud. Any cigarettes in the place of business of any person required by the provisions of this chapter to stamp the same is prima facie evidence that they are intended for sale.

As the floor tax is in lieu of the application of transitional stamps, stamping agents attempting to shift product to their retail outlets, related entities, or customers, or receiving any benefit other than normal payment for cigarettes purchased from retailers for sending product to them during the transitional period to avoid the floor tax at the wholesale level, will be subject to the civil penalties set forth above. The failure by a stamping agent to follow these transitional guidelines and rules may also result in the agent having its permit revoked.

Purchasing Revenue Stamps

Stamping agents may purchase cigarette stamps from the Department by completing Form TT-2, Order for Virginia Cigarette Tax Stamps. Present the completed form with your payment to the Department’s Fiscal Office at 1957 Westmoreland Street, Richmond, VA 23230. Stamps are also available for purchase from the Office the Treasurer or Commissioner of the Revenue for the following localities:

City of Bristol City of Culpeper City of Danville City of Fairfax City of Lynchburg City of Roanoke --- Page 13 ---City of Virginia Beach City of Waynesboro

Please contact Larry Leach in the Department’s Fiscal Office at (804) 367-6345 or larry.leach@tax.virginia.gov for more information.

Cigarette Tax Forms

Revised cigarette tax forms will, not later than June 12, 2020, be available on the Department’s web site, www.tax.virginia.gov.

Additional Information

For additional information about purchasing stamps or posting a bond or letter of credit, please contact Larry Leach in the Department’s Fiscal Office at (804) 367-6345 or larry.leach@tax.virginia.gov.

If you have other questions regarding the Cigarette Tax, please contact the Department’s Tobacco Unit at tobaccounit@tax.virginia.gov or call (804) 371-0730.

These guidelines, along with other reference documents, are available in the Laws, Rules and Decisions section of the Department's website, located at www.tax.virginia.gov.

Approved

Craig M. Burns --- Page 14 ---Tax Commissioner

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VIRGINIA CIGARETTE TAX RATE INCREASE GUIDELINES AND

RULES

April 8, 2020

These guidelines, published by the Department of Taxation, provide guidance to cigarette wholesalers, retailers, and the public on the July 1, 2020, cigarette tax rate increase, as outlined in Item 3-5.21 of the 2020 Appropriation Act, which also increases Tobacco Products Tax rates and taxes liquid nicotine. Separate guidelines will address Tobacco Products Tax changes.

Item 3-5.21 of the 2020 Appropriation Act requires the Tax Commissioner to establish guidelines for implementing the cigarette tax increase, supplementing existing regulations (23 VAC 10-370-10 et seq.). During the transition around July 1, 2020, these guidelines govern administration in case of conflicts with existing regulations.

Item 3-5.21(D) of House Bill 30 exempts these guidelines from the Administrative Process Act. The Department collaborated with wholesalers and retailers to develop them, with additional guidelines posted on www.tax.virginia.gov as needed. --- Page 2 ---Cigarette Tax Increase

Effective July 1, 2020, the state cigarette tax rate will increase from

1. Increase from 5 cents per cigarette (30 cents per pack) to 3.0 cents per cigarette (60 cents per pack).

Allocation of Revenue Stamps

In April–June 2020 (the “allocation months”), the Department will limit sales of “old stamps” at the current tax rate based on each agent’s usage during the same months last year (“base months”).

Each agent’s purchase limit per month is its base month usage plus 20% in April, 15% in May, and 10% in June, rounded up to the next full roll. Limits apply per permit, not by consolidating affiliated agents’ purchases or inventory.

Once the monthly limit is reached, orders and payments for old stamps will be unfilled.

Starting April 1, 2020, initial inventory and post-April purchases count against limits. Excess stamps must be returned to the Department.

Unpurchased April allocation can be carried forward and used in May or June, or both. --- Page 3 ---Unused May allocations will not carry forward.

Example of Monthly Purchase Allocations

In 2019, usage was 85,000 (April), 80,000 (May), 85,000 (June). Increasing by factors yields allocations of 120,000 (April), 120,000 (May), 120,000 (June), each roll 30,000 stamps.

April --- Page 4 ---May

June

Total

Monthly Allocation

120,000

120,000

120,000

360,000 --- Page 5 ---Beginning Inventory 4/1/2020

35,000

2020 Purchase Orders --- Page 6 ---120,000

90,000

120,000

330,000

2020 Orders to be filled by the Department

90,000 (a) --- Page 7 ---60,000

120,000 (b)

270,000

Notes

With an initial inventory of 35,000 stamps, a 120,000 April order exceeds the limit and won't be filled. The agent can submit a 90,000 order (rounded from 85,000) to stay within the limit.

The agent’s May unused 30,000 does not carry forward to June, despite purchasing only 90,000 in May.

The Department will apply purchase limits to each stamping permit, not consolidating stamp purchases, history, or inventory of affiliated agents.

Code of Virginia § 58.1-1009 states selling revenue stamps not affixed to cigarettes is a Class 6 felony.

Under its authority, the Department allows affiliated stamping agents to transfer stamps between affiliates in April–June 2020 after notifying the Department. Contact Larry Leach at (804) 367-6345 or larry.leach@tax.virginia.gov.

"Affiliate" means an individual or business that controls, is controlled by, or is under common control with another individual or business. For purposes of these guidelines, a person controls an entity if the person owns, directly or indirectly, more than 10 percent of the voting securities of the entity. For the purposes of this definition "voting security" means a security that (i) confers upon the holder the right to vote for the election of members of the board of directors or similar governing body of the business or (ii) is convertible into, or entitles the holder to receive, upon its exercise, a security that confers such a right to vote. A general partnership interest shall be deemed to be a voting security.

Exceptions to Purchase Limits and Appeals

The Department may grant exceptions to purchase limits upon written application if prior usage causes undue hardship. Requests receive verbal reply within five days, then written. Contact Larry Leach at (804) 367-6345 or larry.leach@tax.virginia.gov.

Stamping agents must monitor and limit customer purchases to avoid depleting allocations before month-end. No exceptions for failing to limit purchases.

Sales of New Stamps

The Department will sell new stamps reflecting the increased tax rate on or before June 1, 2020. No purchase limits or transitional stamps; a floor tax applies instead.

Deadlines

The following deadlines will apply to the transition

Old stamps will not be sold after June 26, 2020. Hardship petitions for exemption can be made by contacting Larry Leach at (804) 367-6345 or larry.leach@tax.virginia.gov.

Old stamps cannot be applied to cigarette packs after 11:59 P.M. on June 30, 2020.

Filing of Floor Tax Returns by Stamping Agents

Stamping agents must file a floor tax return by July 30, 2020, reporting packs with old stamps as of July 1, 2020, on a Department form. Payment equals $0.30 per 20-pack and $0.375 per 25-pack in possession at that time.

Agents operating as wholesaler and retailer must report packs with old stamps in their distribution area or facility as of July 1, 2020, with tax calculated at $0.30 per 20-pack and $0.375 per 25-pack.

Floor tax return forms will be mailed by June 12, 2020, and available on www.tax.virginia.gov.

Unapplied Stamps

Old stamps must be returned at the agent’s expense by July 1, 2020, with counts reported. Credit is granted only if stamps are received by then and floor tax filed with payment by July 30, 2020.

Return credits cannot be used for future stamps until the floor tax return and payment are filed. Credits cannot offset remittance calculations.

Agents purchasing stamps on credit via bonds or letters of credit must ensure coverage for increased costs due to rate changes. Contact Larry Leach at (804) 367-6345.

Penalties for Violating Cigarette Tax Law

Virginia § 58.1-1003 states failure to follow stamping procedures may revoke the permit.

Virginia § 58.1-1013 imposes civil penalties: $2.50/pack up to $500 first violation, $5.00/pack up to $1,000 second, and $10/pack up to $50,000 for subsequent violations within 36 months.

Willful intent to defraud incurs a $25/pack penalty up to $250,000. Evidence includes unstamped packs exceeding 30 or 5%, or over 500 packs, indicating intent to defraud. Unstamped cigarettes are presumed for sale.

Using the floor tax to shift product to outlets or related entities for benefit during the transitional period may incur penalties and permit revocation.

Purchasing Revenue Stamps

Agents may buy stamps by submitting Form TT-2 with payment to the Fiscal Office at 1957 Westmoreland St., Richmond, VA 23230. Stamps are also available from local treasurers or revenue offices in specified localities.

Available in Bristol, Culpeper, Danville, Fairfax, Lynchburg, Roanoke, Virginia Beach, and Waynesboro.

Contact Larry Leach at (804) 367-6345 or larry.leach@tax.virginia.gov for info.

Cigarette Tax Forms

Revised cigarette tax forms will, not later than June 12, 2020, be available on the Department’s web site, www.tax.virginia.gov.

Additional Information

For info on purchasing stamps, bonds, or letters of credit, contact Larry Leach at (804) 367-6345 or larry.leach@tax.virginia.gov.

For other Cigarette Tax questions, contact the Tobacco Unit at tobaccounit@tax.virginia.gov or call (804) 371-0730.

These guidelines and reference documents are available in the Laws, Rules and Decisions section of www.tax.virginia.gov.

Approved

Craig M. Burns --- Page 14 ---Tax Commissioner

--- Page 1 ---

REVISED

GUIDELINES FOR THE RETAIL SALES AND USE TAX CHANGES

ENACTED IN THE 2013 GENERAL ASSEMBLY SESSION

June 13, 2013

The Department of Taxation has received legal advice that the new 0.7 percent additional Retail Sales and Use Tax that will be imposed in

the Northern Virginia and Hampton Roads Regions will not be imposed in the Counties of Gloucester and Surry. These Guidelines have been issued to reflect this change and supersede the Guidelines issued on May 1, 2013 as Public Document 13-57.

2013 House Bill 2313 (Acts of Assembly 2013, Chapter 766) increases the rate of the statewide Retail Sales and Use Tax, imposes an additional state Retail Sales and Use Tax in the Northern Virginia and Hampton Roads regions, and imposes a state Transient Occupancy Tax in the Northern Virginia region. These guidelines (“Guidelines”) are published by the Virginia Department of Taxation (the “Department”) to provide guidance to Retail Sales and Use Tax dealers and providers of transient lodgings.

House Bill 2313 also conforms Virginia law to the requirements of proposed federal legislation that would grant states the authority to require remote sellers to collect the Retail Sales and Use Tax. The Department will issue additional guidelines regarding the collection of the Retail Sales and Use Tax by remote sellers upon passage of the federal legislation.

These Guidelines are exempt from the provisions of the Administrative Process Act (Va.

Code § 2.2-4000 et seq.). The Department has worked with affected dealers, providers of transient lodgings, and local governments affected to develop these Guidelines.

These guidelines supplement the Department’s existing Retail Sales and Use Tax Regulations (23 Virginia Administrative Code “VAC” 10-210-10 et seq.). To the extent that there is a conflict between House Bill 2313 and the regulations, the legislation supersedes the regulations, and these Guidelines, developed pursuant to the legislation, should be followed. As necessary, additional guidelines will be published on the Department’s website, www.tax.virginia.gov. These Guidelines are available on-line in the Law, Rules and Decisions section of the Department’s website. For additional information, please contact the Office of Customer Services at (804) 367-8037 or through the “Live Chat” service on the Department’s website.

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

Statewide Retail Sales and Use Tax Rate Increase

Overview

Effective July 1, 2013, the rate of the state Retail Sales and Use Tax will increase from

4 percent to 4.3 percent. The rate of the local option Retail Sales and Use Tax will remain 1 percent. Accordingly, the total rate of the tax will increase from 5 percent to

5. 3 percent statewide. In addition, the rate for vending machine dealers will increase from 6 to 6.3 percent (5.3 percent state and 1 percent local) of wholesale purchases for resale. The rate of tax on food purchased for home consumption, currently 2.5 percent (1.5 percent state and 1 percent local) is not affected by this rate increase. (See “Regional Sales and Use Taxes” below for more information regarding the new regional sales and use tax in the Northern Virginia and Hampton Roads regions.) (Source: Va. Code §§ 58.1-603, 58.1-604, and 58.1-614)

Effective July 1, 2013, the rate of the special state use tax on motor vehicles, machinery and tools, aircraft, and equipment brought into Virginia for use in performing construction contracts will increase from 5 percent to 5.3 percent (for all property except for motor vehicles, aircraft, and watercraft). Motor vehicles are taxed at the rate of the Motor Vehicle Sales and Use Tax (4 percent effective July 1, 2013), aircraft are taxed at the rate of 2 percent, and watercraft are taxed at the rate of 2 percent with a maximum

tax of $1,000. (Source: Va. Code §§ 58.1-604.1)

The increased tax rate applies to all sales on and after July 1, 2013. Tangible personal property delivered to a purchaser and paid for on or after July 1, 2013 is taxable at the

5. 3 percent rate, regardless of when the property was ordered. The increased rate will not apply to property delivered prior to July 1, 2013, but paid for on or after July 1, 2013.

Also, the increased rate will not apply when a taxable sale or lease payment is paid for in full prior to July 1, 2013, even though delivery may occur on or after July 1, 2013, or the paid-in-full lease payment covers a lease period beginning on or after July 1, 2013. (Source: Va. Code §§ 58.1-602, 58.1-603, and 58.1-604)

Transitional provisions in the legislation provide for the refund of the 0.3 percent tax paid on tangible personal property purchased or leased under certain contracts and leases entered into before April 3, 2013 (the date the legislation was signed by the Governor). (See “Transitional Rules” below for more information.) (Source: Va. Code § 58.1-639)

Dealer Discount

Beginning with the June, 2010 return, the dealer discount was suspended for any dealer who has an average monthly Retail Sales and Use Tax liability exceeding $20,000. The Department annually determines which dealers have an average monthly Retail Sales and Use Tax liability exceeding $20,000 and notifies those dealers that they are no

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

longer eligible for the dealer discount. The Department also notifies those dealers who no longer meet the threshold that they will become eligible for the dealer discount. Any dealer who is not certain whether the suspension of the dealer discount applies to him should contact the Department at (804) 367-8037 to confirm the correct account status. (Source: House Bill 1500 (Item 5.08 of 2013 Acts of Assembly, Chapter 766; Va. Code

§ 58.1-202.1))

As compensation for accounting for and paying the tax, all other dealers are allowed a discount of 1.6 percent, 1.2 percent or 0.8 percent, depending on the volume of monthly taxable sales, of the first 3 percent of the state tax (first 4 percent of the state tax for vending machine dealers). (Source: House Bill 1500 (Item 5.08 of 2013 Acts of Assembly, Chapter 766))

Starting with the July 2013 return (due August 20, 2013) or the July-September 2013 quarterly return (due October 20, 2013), in order to simplify the calculation on the Retail Sales and Use Tax returns and worksheets, dealers may use the discount factors listed in the following table and on the worksheets provided with the Retail Sales and Use Tax returns to calculate the discount:

Retail Sales and Use Tax Dealer Discounts Available to Dealers With Average Monthly Tax Liability Not Exceeding $20,000

Monthly Taxable Sales Statutory General Sales Qualifying Discount Discount Food Discount Percentage Factor Factor At Least But Less Than $0 $62,501 1.6% .01116 .016 $62,501 $208,001 1.2% .00837 .012 $208,001 And Up 0.8% .00558 .008

Vending Machine Sales Dealer Discounts Available to Dealers With Average Monthly Tax Liability Not Exceeding $20,000

Monthly Taxable Sales Statutory Discount Factor Discount Percentage At Least But Less Than $0 $62,501 1.6% .01208 $62,501 $208,001 1.2% .00906 $208,001 And Up 0.8% .00604

3

[TABLE 3-1] Monthly Taxable Sales | | Statutory Discount Percentage | General Sales Discount Factor | Qualifying Food Discount Factor At Least | But Less Than | | | $0 | $62,501 | 1.6% | .01116 | .016 $62,501 | $208,001 | 1.2% | .00837 | .012 $208,001 | And Up | 0.8% | .00558 | .008

[/TABLE]

[TABLE 3-2] Monthly Taxable Sales | | Statutory Discount Percentage | Discount Factor At Least | But Less Than | | $0 | $62,501 | 1.6% | .01208 $62,501 | $208,001 | 1.2% | .00906 $208,001 | And Up | 0.8% | .00604

[/TABLE]

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

The discount factors are based on the amount of tax owed pursuant to the 4.3 percent (5.3 percent for vending machines) statewide tax. As the dealer discount does not apply to the additional 0.7 percent tax in the Northern Virginia and Hampton Roads regions, the amount of regional tax should not be added when using the discount factors to determine the dealer discount. (See “Regional Sales and Use Taxes” below

for more information regarding the new regional sales and use tax in the Northern Virginia and Hampton Roads regions.)

Dealers holding two or more certificates of registration must compute the dealer’s discount based upon taxable sales from all business locations. This requirement applies to dealers filing consolidated returns and those filing separate returns for each business location. Dealers with multistate business locations must compute the discount based upon the combined taxable sales from all business locations in Virginia and on Virginia taxable sales from out-of-state business locations. (Source: Va. Code § 58.1-622)

Regional Sales and Use Tax

Definitions

“Northern Virginia Region” is defined as the Counties of Arlington, Fairfax, Loudoun,

and Prince William and the Cities of Alexandria, Fairfax, Falls Church, Manassas, and Manassas Park. (Source: Va. Code §§ 58.1-603.1 and 58.1-604.01)

“Hampton Roads Region” is defined as the Counties of Isle of Wight, James City, Southampton, and York and the Cities of Chesapeake, Franklin, Hampton, Newport News, Norfolk, Poquoson, Portsmouth, Suffolk, Virginia Beach, and Williamsburg. (Source: Va. Code §§ 58.1-603.1 and 58.1-604.01)

Overview

Effective July 1, 2013, a new additional state Retail Sales and Use Tax will be imposed in the Northern Virginia and Hampton Roads regions at the rate of 0.7 percent.

Accordingly, the total rate of the state and local Retail Sales and Use Tax will be 6 percent in localities that fall within these regions (4.3 percent state, 0.7 percent regional, and 1 percent local). The rate for vending machine dealers in the Northern Virginia and Hampton Roads regions will increase to 7.0 percent (5.3 percent state, 0.7 percent

regional, and 1 percent local) of wholesale purchases for resale. (Source: Va. Code §§ 58.1-603.1 and 58.1-604.01)

The regional tax will be administered in the same manner as the state Retail Sales and Use Tax. However, food purchased for home consumption is not subject to the regional tax. No dealer discount is allowed on the regional tax. (Source: Va. Code §§ 58.1-603.1 and 58.1-604.01)

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

The regional tax applies to sales on and after July 1, 2013 in localities that fall within the Northern Virginia and Hampton Roads regions. Tangible personal property delivered to a purchaser and paid for on or after July 1, 2013 is subject to the regional tax, regardless of when the property was ordered. The new tax will not apply to tangible

personal property delivered prior to July 1, 2013, but paid for on or after July 1, 2013.

The new tax also will not apply when a taxable sale or lease is paid for in full prior to July 1, 2013, even though delivery may occur on or after July 1, 2013, or the paid-in-full lease covers a lease period beginning on or after July 1, 2013. (Source: Va. Code §§ 58.1-602, 58.1-603.1 and 58.1-604.01)

Although the regional tax is effective July 1, 2013, the transitional provisions provide for the refund of the tax paid on tangible personal property purchased or leased under certain contracts and leases entered into before April 3, 2013 (the date the legislation was signed by the Governor) even though the property is delivered subsequent to July 1, 2013. (See “Transitional Rules” below)

Sourcing Rules

Sales Tax

As it is administered in the same manner as the Retail Sales and Use Tax, the new

regional sales tax is sourced in the same manner as the local option sales tax. For intrastate sales, the local option sales tax is generally sourced to the city or county of the place of business of the dealer collecting the tax, without regard to the city or county of possible use by the purchaser. Accordingly, in-state dealers should collect the regional sales tax on sales made in places of business located in the Northern Virginia and Hampton Roads regions, even if the goods are delivered outside the Northern Virginia and Hampton Roads regions. Likewise, in-state dealers not located in the Northern Virginia and Hampton Roads regions should not collect the regional sales tax, even if the goods are delivered into the Northern Virginia or Hampton Roads regions. (Source: Va. Code §§ 58.1-603.1 and 58.1-605). The following provides detailed rules for various additional scenarios:

1. When tangible personal property is purchased by the purchaser at the place of business of the seller, the sale is sourced to that place of business, even if the goods are ultimately delivered to the purchaser at another location. (Source:

23VAC10-210-2070(E)).

Example 1

Dealer A makes a sale to a customer on July 1, 2013 at his place of business in the City of Fairfax in the Northern Virginia region. Dealer A has the goods delivered to the customer in Loudoun County in the

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

Northern Virginia region. The sale is sourced to the City of Fairfax.

Dealer A should collect 6 percent (4.3 percent state, 0.7 percent regional, and 1 percent local) sales tax on the purchase. The 1 percent local tax should be sourced to the City of Fairfax.

Example 2

Dealer B makes a sale to a customer on July 1, 2013 at his place of business in Loudoun County in the Northern Virginia region, but the goods are delivered to the customer in Roanoke County, which is not in the Northern Virginia or Hampton Roads region. The sale is sourced to Loudoun County, in the Northern Virginia region. Dealer B should collect 6 percent sales tax on the purchase. The 1 percent local tax should be sourced to Loudoun County.

2. When tangible personal property is purchased remotely (by telephone, Internet, or mail order) from an in-state dealer with a place of business in Virginia, the sale is sourced to the location in which the order was first taken, even if the goods are ultimately delivered to the Customer at another location.

Example 3

Customer C orders merchandise from Dealer D in August, 2013 by placing a call to Dealer D’s store, located in the City of Newport News in the Hampton Roads region. The goods will be shipped to Customer C’s residence that is neither in the Hampton Roads nor Northern Virginia region. The sale is sourced to the City of Newport News in the Hampton Roads region. Dealer D should collect 6 percent (4.3 percent state, 0.7 percent regional, and 1 percent local) sales tax on the purchase. The 1 percent local tax should be sourced to the City of Newport News.

3. When tangible personal property is purchased remotely from an out-of-state dealer and is not received by the purchaser at the dealer’s business location, the sale is sourced to the location to which the goods are delivered.

Example 4

Customer E orders merchandise from Dealer F’s website, which has a

place of business and warehouse in North Carolina. Dealer F is registered to collect the Virginia Retail Sales and Use Tax. The invoice indicates that the merchandise will be shipped to Customer E’s residence in the City of Richmond, which is outside the Northern Virginia and Hampton Roads regions. Because Dealer F’s place of business and warehouse are located outside of Virginia, the sale is sourced to the

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

location in which the merchandise is delivered, the City of Richmond, which is outside the Northern Virginia and Hampton Roads regions.

Dealer F should collect 5.3 percent (4.3 percent state and 1 percent local) sales tax on the purchase. The 1 percent local tax should be sourced to the City of Richmond.

4. When tangible personal property is leased from an in-state lessor, the sale is sourced to the lessor’s place of business. (23VAC10-210-2070(E)).

Example 5

Customer G enters into a rental agreement with a lessor with a place of business in the City of Hampton in the Hampton Roads region. The equipment will be used for a highway construction project in Fairfax County in the Northern Virginia region. The sale is sourced to the lessor’s place of business in the City of Hampton in the Hampton Roads region.

The lessor should collect the tax at the rate of 6 percent (4.3 percent state,

0. 7 percent regional, and 1 percent local). The 1 percent local tax should be sourced to the City of Hampton.

Use Tax Collected by Dealers

As it is administered in the same manner as the Retail Sales and Use Tax, the new regional use tax is sourced in the same manner as the local option use tax. The new regional use tax is sourced to the city or county where the goods are used or consumed by the purchaser, or stored for use or consumption. Out-of-state dealers who hold Certificates of Registration to collect the use tax from their customers must source sales into Virginia according to the city or county of destination. Sales shipped into the Northern Virginia or Hampton Roads regions are subject to the new regional use tax. (Source: Va. Code §§ 58.1-604.01 and 58.1-606; 23 VAC 10-210-880)

Example 6

Dealer A makes Internet sales from his place of business in North Carolina. Dealer A holds a Certificate of Registration to collect the use tax from Virginia customers. Dealer A makes a sale on July 25, 2013, and ships the goods to the City of Fairfax. Dealer A would collect 6 percent (4.3 percent state, 0.7 percent regional, and 1 percent local) use tax on

the sale. The 1 percent local tax should be sourced to the City of Fairfax.

Example 7

Dealer B makes Internet sales from his place of business in Maryland.

Dealer B holds a Certificate of Registration to collect the use tax from

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

Virginia customers. Dealer B makes a sale on August 1, 2013, and ships the goods to the City of Harrisonburg. Dealer B would collect 5.3 percent (4.3 percent state and 1 percent local) use tax on the sale. The 1 percent local tax should be sourced to the City of Harrisonburg.

Consumer Use Tax

Virginia residents and others purchasing goods from a business that does not collect the Virginia Retail Sales and Use Tax or purchasing goods tax-free while outside Virginia and bringing them into Virginia are subject to the Consumer Use Tax, including the regional use tax, with certain exceptions.

The use tax does not apply to tangible personal property brought into the Commonwealth by a nonresident of Virginia for personal use. Additionally, the use tax does not apply to property purchased outside the Commonwealth by a nonresident of Virginia who subsequently moves into the Commonwealth at least six months after the property is purchased. However, the tax does apply to tangible personal property temporarily brought into the Commonwealth from outside of the Commonwealth for the performance of contracts for the construction, reconstruction, installation, repair, or for any other service with respect to real estate or fixtures thereon. Tangible personal property that becomes subject to the use tax within six months of its acquisition is taxed on the basis of its cost price.

Any person purchasing tangible personal property in other areas of the Commonwealth for use in either the Northern Virginia or Hampton Roads region is not responsible for the regional Consumer Use Tax if the Retail Sales and Use Tax has been paid on the purchase. (Source: Va. Code §§ 58.1-604, 58.1-604.01, 58.1-606, and 58.1-607)

Example 8

Customer A, who is located in the City of Fairfax, makes an Internet purchase of tangible personal property on July 10, 2013 from a West Virginia dealer who does not hold a Virginia Certificate of Registration and does not collect the use tax from Virginia customers. Customer A must remit 6 percent (4.3 percent state, 0.7 percent regional, and 1 percent local) use tax on the purchase.

Example 9

Customer B, who is located in the City of Bristol, Virginia, makes an Internet purchase of tangible personal property on July 20, 2013 from a New York dealer who does not hold a Virginia Certificate of Registration and does not collect the use tax from Virginia customers. Customer B

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

must remit 5.3 percent (4.3 percent state and 1 percent local) use tax on the purchase.

Example 10

Customer C is located in the City of Charlottesville. Customer C buys

equipment in Charlottesville on July 10, 2013, intended for use performing a construction contract in Fairfax County and pays 5.3 percent sales tax.

Customer C moves the equipment into Fairfax County on July 29, 2013.

Customer C does not owe the regional use tax on the equipment as the sales tax has been paid.

Filing and Paying Consumer Use Tax

Businesses that are registered dealers for the purposes of the Retail Sales and Use Tax owing the consumer use tax on tangible personal property i) brought into Virginia from outside the Commonwealth and ii) upon which the applicable tax has not been paid, are required to remit the use tax on their regular Retail Sales and Use Tax returns.

Businesses that are not registered dealers are required to file and remit the use tax using the Business Consumer's Use Tax Return, Form ST-7. The regional use tax for tangible personal property brought into the Northern Virginia or Hampton Roads Regions from outside the Commonwealth also is required to be remitted directly to the Department using the applicable return.

Individuals who are not registered dealers owing the consumer use tax on tangible personal property i) brought into Virginia from outside the Commonwealth and ii) upon which the applicable tax has not been paid, are required to remit the tax directly to the Department using either Form CU-7, Consumer Use Return, or the Individual Income Tax Return, Form 760 Schedule ADJ. The regional use tax for tangible personal property brought into the Northern Virginia or Hampton Roads Regions from outside the Commonwealth also is required to be remitted directly to the Department using either Form CU-7, Consumer Use Return or the Individual Income Tax Return, Form 760 Schedule ADJ. The forms and instructions are available on the Department's web site, www.tax.virginia.gov. No prior registration with the Department is required for taxpayers filing a Form CU-7, Consumer Use Return.

Transitional Rules

Overview

The statewide increase of the Retail Sales and Use Tax rate and the new regional Retail Sales and Use Tax apply to sales on and after July 1, 2013. Tangible personal property delivered to a purchaser and paid for on or after July 1, 2013 is taxable at the higher rate, regardless of when the property was ordered. The increased rate will not apply to property delivered prior to July 1, 2013, but paid for on or after July 1, 2013.

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

Also, the increased rate will not apply when a taxable sale or lease payment is paid for in full prior to July 1, 2013, even though delivery may occur on or after July 1, 2013, or the paid-in-full lease payment covers a lease period beginning on or after July 1, 2013. (Source: Va. Code §§ 58.1-602, 58.1-603, 58.1-603.1, 58.1-604, and 58.1-603.1)

The new law includes transitional provisions for persons who, prior to April 3, 2013 (the date the legislation is signed by the Governor), enter into bona fide real estate construction contracts, contracts for the sale of tangible personal property, or leases of tangible personal property. Under the transitional provisions, although tangible personal property purchased or leased under such contracts will be subject to the 5.3 percent (6.0 percent in the Northern Virginia and Hampton Roads Regions) additional tax (“additional tax”) on and after July 1, 2013, the purchaser or lessee of the property will be entitled to request a refund from the Department of the additional tax paid as the result of the rate increase if the date of delivery of the tangible personal property is on or before September 30, 2013. (Source: Va. Code § 58.1-639)

Refund Requests

Refunds of the additional tax paid on purchases or leases of tangible personal property under bona fide real estate construction contracts, contracts for the sale of tangible personal property, or leases of tangible personal property will be limited to only the purchaser or lessee of the property. (Source: Va. Code § 58.1-639)

The purchaser or lessee of tangible personal property under qualifying contracts or leases shall request refunds of the additional tax directly from the Department and not from the seller or lessor of the property. In seeking refunds, the purchaser or lessee shall furnish the Department with copies of the contract or lease under which property is purchased or leased. Also, the purchaser or lessee shall indicate the delivery date of all items for which refunds are claimed and must be able to demonstrate that the additional tax was actually paid to his suppliers or lessors. Copies of invoices will be required to verify that the additional tax was paid on purchases or leases of tangible personal property for which refunds are requested. (Source: Va. Code § 58.1-639)

As with refund requests generally, the request must be made within 3 years of the date the tax became due. For instance, if a piece of equipment is purchased in July 2013, the tax does not become due from the dealer until August 20, 2013. Thus, a refund request could be filed anytime on or before August 20, 2016. In addition, interest will be paid by the Department on such refunds for the period from the date the tax became

due until the date of refund. (Source: Va. Code §§ 58.1-639 and 58.1-1823)

Real Estate Construction Contracts

Refunds of the tax paid on and after July 1, 2013 are available when tangible personal property is purchased or leased under a bona fide real estate construction contract or

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

bona fide highway construction contract entered into before April 3, 2013. A “bona fide” contract is one that included finished plans and specifications before April 3, 2013.

Refunds will not be available, however, in the event that a bona fide contract is renegotiated or to the extent that a contract is expanded to include additional work or the furnishing of additional materials. (Source: Va. Code § 58.1-639)

Refunds will be available only for the additional tax paid on (i) materials permanently incorporated into real estate, and (ii) construction supplies, fixtures, equipment, etc., that enter into the construction of or become a part of a structure, highway, etc. Further, refunds will be limited to property purchased or leased in connection with a specific contract and used exclusively in such contract. Thus, refunds will not be available for tax paid on equipment, materials, supplies, tools, etc. that will be used in more than one contract. (Source: Va. Code § 58.1-639)

As noted below, rules for obtaining refunds of the tax on purchases or leases under bona fide real estate construction contracts vary depending on whether or not the contract contains a specific and stated date of completion.

In the case of bona fide real estate construction contracts that do not contain a specific and stated date of completion, refunds of the additional tax may be claimed only with respect to purchased or leased tangible personal property that is delivered to the contractor on or before September 30, 2013. (Source: Va. Code § 58.1-639)

Example 11

Contractor A enters into a bona fide contract before April 3, 2013, for the erection of a home, but the contract does not contain a specific and stated date of completion. After July 1, 2013, Contractor A makes two orders of materials for use in the project and pays the full 5.3 percent sales tax on the materials. Because the contract did not contain a specific and stated date of completion, Contractor A must take delivery of goods purchased for use in the project on or before September 30, 2013, in order to receive a refund of the additional tax. The first order is delivered to Contractor A on August 30, 2013, but the second order is delivered to Contractor A on December 1, 2013. Contractor A may receive a refund of the 0.3 percent (1.0 percent in the Northern Virginia and Hampton Roads Regions) tax paid on the first order, but will not be able to receive a similar refund on the second order because it was delivered after September 30, 2013.

In the case of bona fide real estate construction contracts that contain a specific and stated date of completion, refunds of the additional tax paid on and after July 1, 2013, will be available for all property delivered to the contractor on or before the completion date specified in the contract. (Source: Va. Code § 58.1-639)

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

Example 12

Contractor B enters into a bona fide contract before April 3, 2013, for the erection of a bridge. The contract contains a specific and stated completion date of June 30, 2015. On and after July 1, 2013, Contractor

B pays the 5.3 percent (6.0 percent in the Northern Virginia and Hampton Roads Regions) tax on his purchases of materials for use in the contract and all such materials, except one shipment, are delivered to the contractor by the June 30, 2015, date of completion. The last shipment of materials is delivered to Contractor B on July 1, 2015. Refunds of the 0.3 percent (1.0 percent in the Northern Virginia and Hampton Roads Regions) tax paid by Contractor B will be available for all materials delivered to him by the specified completion date stated in his contract, June 30, 2015. However, a refund will not be available for the additional tax paid on the last delivery because that delivery occurred after the specified and stated completion date for the project. Both contracts containing a specific date for completion, e.g., July 1, 2015, and contracts containing a specific number of calendar days for completion, e.g., 150 calendar days, shall be considered as contracts with a specific and stated date of completion.

When a subcontractor performs work for a general contractor, the date of completion for

purposes of this provision is the date stated in the subcontract and not the completion date specified in the contract between the general contractor and the customer.

The refund provisions applicable to contracts that contain a specific and stated date of completion do not apply when the completion date specified in the original bona fide real estate construction contract is extended for any reason, unless a new contract is entered into or the original contract is renegotiated before April 3, 2013. In the event that the completion date specified in the original bona fide real estate construction contract is extended, refunds of the additional tax paid on and after July 1, 2013, will be available only for property delivered on or before the completion date specified in the original contract. In the event that the completion date is extended through a new contract or a renegotiated contract entered into prior to April 3, 2013, refunds will be available for the additional tax paid on all property delivered to the contractor on or before the completion date specified in the new or renegotiated contract. (Source: Va.

Code § 58.1-639)

Refunds of the 0.3 percent (1.0 percent in the Northern Virginia and Hampton Roads Regions) tax paid by contractors on and after July 1, 2013, will not be available when purchases or leases are made pursuant to non-bona fide real estate construction contracts. A non-bona fide contract is one that did not include finished plans or specifications before April 3, 2013. Contracts that are entered into on or before April 3, 2013, without finished plans or specifications but which are amended after April 3, 2013,

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

to include plans or specifications are also not bona fide contracts. (Source: Va. Code § 58.1-639)

Contracts for the Sale of Tangible Personal Property

Refunds of the additional tax paid on and after July 1, 2013, may be claimed for tangible personal property purchased under sale contracts entered into before April 3, 2013, provided the property is delivered to the purchaser on or before September 30, 2013.

Refunds will not be available if a sale contract was entered into on or after April 3, 2013, or if the property purchased is delivered to the purchaser after September 30, 2013. (Source: Va. Code § 58.1-639)

The provisions for the refund of the additional tax apply to all layaways made before April 3, 2013, and delivered to the purchaser on or before September 30, 2013. (Source: Va. Code § 58.1-639)

Example 13

Customer A makes a layaway purchase of an item of merchandise before April 3, 2013, and takes delivery of the merchandise on September 30, 2013. Customer A will be required to pay the full 5.3 percent (6.0 percent in the Northern Virginia and Hampton Roads Regions) tax when he

completes the layaway purchase, but he will be able to request a refund of the additional tax he paid.

Example 14

Customer B makes a layaway purchase of an item of merchandise before April 3, 2013, but does not take delivery of the merchandise until December 1, 2013. Customer B will be required to pay the full 5.3 percent (6.0 percent in the Northern Virginia and Hampton Roads Regions) sales tax on the purchase, but will not be able to request a refund of the additional tax because he did not take delivery of the merchandise until after September 30, 2013.

Pursuant to 23 VAC 10-210-670, the sales tax is not to be collected on the sale of gift certificates, but is to be collected when gift certificates are redeemed for merchandise.

Because gift certificates are not taxable until redeemed, refunds of the additional tax

paid on purchases made with gift certificates redeemed on and after July 1, 2013, will not be available.

Pursuant to 23 VAC 10-210-450, the sales and use tax is due in full when an agreement for an installment sale is made. 23 VAC 10-210-450 does not permit the tax on an installment sale to be paid in installments. Therefore, all installment sales prior to July

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

1, 2013, will be subject to state and local Retail Sales and Use Tax at a rate of 5.0 percent, while sales on and after July 1, 2013, will be subject to tax at the rate of 5.3 percent (6.0 percent in the Northern Virginia and Hampton Roads Regions). Because the tax on installment sales is due as of the date the contract of sale is entered into, refunds of the additional tax paid on an installment sale on and after July 1, 2013, will

not be available.

Current Virginia law provides that the sale of maintenance, the terms of which provide for both repair or replacement parts and repair labor, are subject to tax upon one-half of the total charge for such contracts only. Persons providing maintenance pursuant to such a contract may continue to purchase repair or replacement parts under a resale certificate of exemption. As with other sales of tangible personal property, the sales and use tax becomes due in full when the contract is entered into. Therefore, all such taxable maintenance contracts entered into before July 1, 2013, will be subject to the tax at a rate of 2.5 percent, while those taxable maintenance contracts entered into on or after July 1, 2013, will be subject to the tax at a rate of 2.65 percent (3.0 percent in the Northern Virginia and Hampton Roads Regions). Because the tax on such contracts becomes due as of the date the contract is entered into, refunds of the additional tax paid on and after July 1, 2013, will not be available. (Source: Va. Code § 58.1-609.5)

Leases

Refunds of the additional tax paid on leases of tangible personal property on and after July 1, 2013, will be available, provided that (i) the lease or rental is entered into before April 3, 2013, and (ii) the leased property is delivered to the lessee by September 30, 2013. However, refunds will not be available for the additional tax paid on leases entered into on or after April 3, 2013, or where leased property is delivered to the lessee after September 30, 2013.

So long as the above two conditions are met, refunds may be requested for the additional tax paid over the course of a lease. For instance, a person who enters into a five-year equipment lease before April 3, 2013, and who takes delivery of the equipment by September 30, 2013, would be able to seek refunds of the additional tax in the Northern Virginia and Hampton Roads Regions) tax paid for periods through the end of the five-year lease period. (Source: Va. Code § 58.1-639)

However, if the lessee assigns the lease, or if the property is turned over to anyone

else, refunds of the additional tax will not be available for tax paid after the change. In addition, refunds of the additional tax will not be available if there are replacements of the property leased (except for replacements due to defective goods), if additional property is added to the lease, or if the lease is renegotiated or renewed. (Source: Va.

Code § 58.1-639)

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

Example 15

Customer A enters into a one-year lease for equipment before April 3, 2013, and takes delivery of the equipment on September 30, 2013.

Customer A makes monthly payments on the lease beginning September

30, 2013 and ending September 30, 2014. Customer A will be required to pay the full 5.3 percent (6.0 percent in the Northern Virginia and Hampton Roads Regions) tax on the lease payments, but he will be able to request a refund of the additional tax paid.

Example 16

Customer B enters into a one-year lease for equipment before April 3, 2013, but does not take delivery of the equipment until December 1, 2013.

Customer B will be required to pay the full 5.3 percent sales tax (6.0 percent in the Northern Virginia and Hampton Roads Regions) on the purchase, but will not be able to request a refund of the additional tax because he did not take delivery of the equipment until after September 30, 2013.

Retail Sales and Use Taxation of Transient Accommodations

The statewide increase of the Retail Sales and Use Tax rate and the new regional Retail Sales and Use Tax apply to rentals of accommodations to transients on and after July 1, 2013. Accommodations i) furnished to transients on or after July 1, 2013, and ii) paid for on or after July 1, 2013, are taxable at the 5.3 percent rate (6.0 percent in the Northern Virginia and Hampton Roads Regions), regardless of when the rental was reserved. However, the increased state tax rate and new state regional tax will not apply to accommodations furnished to transients prior to July 1, 2013, but paid for on or after July 1, 2013. Additionally, the increased state tax rate and new regional tax will not apply when the accommodations are paid for in full prior to July 1, 2013, even if the accommodations are not furnished to the transient until on or after July 1, 2013. Finally, the transitional rules for certain leases only apply to leases of tangible property and are not applicable to lodgings. (Source: Va. Code §§ 58.1-603, 58.1-603.1, 58.1-604, 58.1-604.01 and 58.1-639)

Example 17

Customer A reserves a stay in a summer rental house in Virginia Beach for the first week in October, 2013. Customer A makes the reservation and pays for the accommodation in full on June 15, 2013. Even though the accommodation will not be furnished to Customer A until after July 1, 2013, as the accommodation is paid in full prior to July 1, 2013, the accommodation is subject to the Retail Sales and Use Tax at the rate of 5

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

percent (4 percent state and 1 percent local). The accommodation would not be subject to the state tax rate increase or the new regional tax in the Hampton Roads Region.

Example 18

Customer B reserves a stay in a bed and breakfast inn in the City of Roanoke for the first week in August, 2013. Customer B makes the reservation and pays a deposit on June 15, 2013. Customer B pays the remaining amount at the end of the stay in August. As the accommodation is not furnished to Customer B prior to July 1, 2013, and is not paid in full prior to July 1, 2013, the accommodation is subject to the Retail Sales and Use Tax at the increased rate of 5.3 percent (4.3 percent state and 1 percent local).

Example 19

Customer C reserves a stay in a bed and breakfast inn in the City of Virginia Beach for the first week in August, 2013. Customer C makes the reservation and pays a deposit on June 15, 2013. Customer C pays the remaining amount at the end of the stay in August. As the accommodation is not furnished to Customer C prior to July 1, 2013, and

is not paid in full prior to July 1, 2013, the accommodation would be subject to the state tax rate increase and the new regional tax in the Hampton Roads Region. The accommodation is subject to the Retail Sales and Use Tax at the increased rate of 6 percent (4.3 percent state,

0. 7 percent regional, and 1 percent local).

Computation of Tax and Bracket Charts

Generally, the tax shall be computed at 5.3 percent (6.0 percent in the Northern Virginia and Hampton Roads Regions) with one half cent or more being treated as one cent.

However, if a dealer can show to the satisfaction of the Tax Commissioner that more than 85 percent of the total dollar volume of his gross taxable sales during the taxable month was from individual sales at prices of 10 cents or less each and that he was unable to adjust his prices in such manner as to prevent the economic incidence of the sales tax from falling on him, the Tax Commissioner shall determine the proper tax liability of the dealer based on that portion of the dealer's gross taxable sales that was

from sales at prices of 11 cents or more. (Source: Va. Code § 58.1-628.2)

For sales of five dollars or less, dealers may compute the 5.3 percent Retail Sales and Use Tax in Virginia (other than in the Northern Virginia and Hampton Roads Regions) using the following bracket chart to eliminate fractions of one cent. Any dealer who

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

collects the tax in accordance with the following bracket chart shall not be deemed to have overcollected the tax.

5. 3% Virginia (Other than Northern Virginia and Hampton Roads Regions) Bracket Chart for Sales of Five Dollars or Less

$0.00 to $0.09 no tax .10 to .28 1¢ tax .29 to .47 2¢ tax .48 to .66 3¢ tax .67 to .84 4¢ tax .85 to 1.03 5¢ tax

1. 04 to 1.22 6¢ tax
2. 23 to 1.41 7¢ tax
3. 42 to 1.60 8¢ tax
4. 61 to 1.79 9¢ tax
5. 80 to 1.98 10¢ tax
6. 99 to 2.16 11¢ tax
7. 17 to 2.35 12¢ tax
8. 36 to 2.54 13¢ tax
9. 55 to 2.73 14¢ tax

10. 74 to 2.92 15¢ tax

11. 93 to 3.11 16¢ tax

12. 12 to 3.30 17¢ tax
13. 31 to 3.49 18¢ tax
14. 50 to 3.67 19¢ tax
15. 68 to 3.86 20¢ tax
16. 87 to 4.05 21¢ tax
17. 06 to 4.24 22¢ tax
18. 25 to 4.43 23¢ tax
19. 44 to 4.62 24¢ tax
20. 63 to 4.81 25¢ tax
21. 82 to 4.99 26¢ tax
22. 00 27¢ tax

For sales of five dollars or less, dealers may compute the 6.0 percent Retail Sales and Use Tax in the Northern Virginia and Hampton Roads Regions using the following bracket chart to eliminate fractions of one cent. Any dealer who collects the tax in

accordance with the following bracket chart shall not be deemed to have overcollected the tax.

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

6. 0% Northern Virginia and Hampton Roads Regions Bracket Chart for Sales of Five Dollars or Less

$0.00 to $0.08 no tax .09 to .24 1¢ tax

.25 to .41 2¢ tax .42 to .58 3¢ tax .59 to .74 4¢ tax .75 to .91 5¢ tax .92 to 1.08 6¢ tax

1. 09 to 1.24 7¢ tax
2. 25 to 1.41 8¢ tax
3. 42 to 1.58 9¢ tax
4. 59 to 1.74 10¢ tax
5. 75 to 1.91 11¢ tax
6. 92 to 2.08 12¢ tax
7. 09 to 2.24 13¢ tax
8. 25 to 2.41 14¢ tax
9. 42 to 2.58 15¢ tax
10. 59 to 2.74 16¢ tax
11. 75 to 2.91 17¢ tax

12. 92 to 3.08 18¢ tax

13. 09 to 3.24 19¢ tax

14. 25 to 3.41 20¢ tax
15. 42 to 3.58 21¢ tax
16. 59 to 3.74 22¢ tax
17. 75 to 3.91 23¢ tax
18. 92 to 4.08 24¢ tax
19. 09 to 4.24 25¢ tax
20. 25 to 4.41 26¢ tax
21. 42 to 4.58 27¢ tax
22. 59 to 4.74 28¢ tax
23. 75 to 4.91 29¢ tax
24. 91 to 5.00 30¢ tax

Filing of Returns

The regional Retail Sales and Use Tax will be reported on dealers’ Retail Sales and Use

Tax and Vending Machine Tax and Business Consumer’s Use Tax returns. The Department will make the revised returns available early May. Returns for April, May, and June 2013 are not affected by the legislation. Monthly filers should use the new returns for periods beginning with the month of July 2013. Quarterly filers should begin using the new forms for the quarter ending September 30, 2013. In general, dealers must file Retail Sales and Use Tax returns on a monthly basis, with returns due by the

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

20th of the month after the sales occurred. However, the Department may change a dealer’s filing frequency from monthly to quarterly based on his tax liability. Dealers will be notified prior to the effective date if their filing frequency is changed.

2012 House Bill 1301 (Acts of Assembly 2012 Special Session I, Chapter 3), Item 273

(O) required that all sales and use tax returns and payments be filed electronically. All monthly sales tax filers were required to file and remit payment electronically beginning with the July, 2012 return, due August 2012. Less frequent filers must file and remit payment electronically beginning with their first return due after July 1, 2013. Waivers will be granted if the Tax Commissioner finds that this requirement creates an unreasonable burden on the dealer. All requests for waiver must be submitted to the Tax Commissioner in writing.

Generally, in-state dealers are those dealers making Virginia sales while having one or more physical locations in Virginia. Such businesses must submit Form ST-9, Retail Sales and Use Tax Return, to the Department. A return must be filed for each period, even if there are no sales to report.

Out-of-state dealers, in most cases, are those dealers physically located outside of Virginia but make qualified sales, leases or rentals into Virginia. If an out-of-state dealer has sufficient nexus with Virginia, the dealer must register with Virginia to collect Virginia Use Tax on their Virginia sales. Out-of-state businesses that do not have

sufficient nexus with Virginia may still choose to register with Virginia to collect the tax as a courtesy to their Virginia customers. Whether required to register or not, any out-of-state dealer registered to collect Virginia Use Tax must file Form ST-8, Out-of-State Dealers Use Tax Return. A return must be filed for each period, even if there are no sales to report.

A Direct Payment Permit allows certain companies to purchase goods without paying the sales or use tax at the time of purchase. These companies agree to pay the tax due directly to the Department, and allocate the local tax so that no county or city will lose any revenue. Direct Payment Permits are typically issued to manufacturers, contractors or mine operators who store tangible personal property within the Commonwealth for use both in and outside of Virginia. Businesses who meet the qualifications set forth in Va. Code § 58.1-624 may apply to the Tax Commissioner for a permit. If approved, the business would file Form ST-6, Direct Pay Permit Sales and Use Tax Return.

Additionally, the Retail Sales and Use Tax is imposed on dealers who place vending

machines for the sale of tangible personal property. The tax is computed on the cost price (or manufactured cost) of tangible personal property sold through the vending machines. Dealers who are subject to the Retail Sales and Use Tax on tangible personal property sold through vending machines must file Form VM-2, Vending Machine Dealer’s Sales Tax Return.

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

Penalties and Interest

Except with respect to fraudulent returns, the failure to file a timely return and make a timely and full payment of this tax will subject the dealer to a penalty of six percent of the tax owed if the failure is for not more than one month, with an additional six percent

for each additional month, or fraction thereof, during which the failure continues, not to exceed thirty percent. In no case, however, shall the penalty be less than ten dollars and such minimum penalty shall apply whether or not any tax is due for the period for which such return was required. A dealer who does not collect and remit the 0.7 percent additional regional tax due has not made a timely and full payment of the tax, even if he has remitted the 5.3 percent tax, and will be subject to the penalty for the tax owed. (Source: Va. Code § 58.1-635 A)

In the case of a false or fraudulent return where willful intent exists to defraud the Commonwealth of this tax, or in the case of a willful failure to file a return with the intent to defraud the Commonwealth of this tax, a penalty of fifty percent of the amount of the proper tax shall be assessed. (Source: Va. Code § 58.1-635 A)

The rate of interest on omitted taxes and assessments is the "Underpayment Rate" established pursuant to § 6621(a)(2) of the Internal Revenue Code plus two percent. (Source: Va. Code § 58.1-15(A))

Example 20

Dealer A makes a sale to a customer on July 1, 2013 at his place of business in the City of Fairfax in the Northern Virginia region. The sale is sourced to the City of Fairfax. Dealer A should collect 6 percent (4.3 percent state, 0.7 percent regional, and 1 percent local) sales tax on the purchase. However, Dealer A only collects and remits the 5.3 percent sales tax (4.3 percent state and 1 percent local) on the purchase and does not collect the 0.7 percent additional regional tax. Dealer A has not made a timely and full payment of the sales tax. Dealer A would owe a penalty of six percent of the amount of tax owed (only the 0.7 percent additional regional tax) if the failure is for not more than one month.

Dealer A would also owe interest on the amount of tax owed (only the 0.7 percent additional regional tax).

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

Additional Information

These Guidelines are available on-line in the Law, Rules and Decisions section of the Department's website. Forms, instructions, frequently asked questions and other helpful information are also available on the Department's website. For additional

information, please contact the Office of Customer Services at (804) 367-8037 or through the “Live Chat” service on the Department’s website, www.tax.virginia.gov.

Approved

---

Craig M. Burns Tax Commissioner

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REVISED

GUIDELINES FOR THE RETAIL SALES AND USE TAX CHANGES

ENACTED IN THE 2013 GENERAL ASSEMBLY SESSION

June 13, 2013

The Department of Taxation received legal advice that the new 0.7% additional Retail Sales and Use Tax in

the Northern Virginia and Hampton Roads Regions will not be imposed in the Counties of Gloucester and Surry. These Guidelines have been issued to reflect this change and supersede the Guidelines issued on May 1, 2013 as Public Document 13-57.

2013 House Bill 2313 (Acts of Assembly 2013, Chapter 766) increases the statewide Retail Sales and Use Tax, adds regional taxes in Northern Virginia and Hampton Roads, and imposes a state Transient Occupancy Tax in Northern Virginia. These Guidelines (“Guidelines”) are published by the Virginia Department of Taxation (“Department”) to guide Retail Sales and Use Tax dealers and transient lodging providers.

House Bill 2313 aligns Virginia law with proposed federal legislation allowing states to require remote sellers to collect the Retail Sales and Use Tax. The Department will issue further guidelines after federal passage.

These Guidelines are exempt from the Administrative Process Act (Va.

Code § 2.2-4000 et seq.). The Department collaborated with dealers, lodging providers, and local governments to develop these Guidelines.

These Guidelines supplement the Department’s Retail Sales and Use Tax Regulations (23 VAC 10-210-10 et seq.). If House Bill 2313 conflicts with regulations, legislation supersedes, and these Guidelines must be followed. Additional guidelines will be posted on www.tax.virginia.gov. For more info, contact the Office of Customer Services at (804) 367-8037 or via Live Chat on the website.

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Guidelines for 2013 General Assembly Retail Sales and Use Tax Changes REVISED: June 13, 2013

Statewide Retail Sales and Use Tax Rate Increase

Overview

Effective July 1, 2013, the state Retail Sales and Use Tax rate increases from

4% to 4.3%. The local option Retail Sales and Use Tax remains 1%. Total tax increases from 5% to

5. 3 percent statewide. Vending machine dealer rate increases from 6 to 6.3 percent (5.3 percent state, 1 percent local) of wholesale resale. Food tax remains 2.5 percent (1.5 percent state, 1 percent local). See “Regional Sales and Use Taxes” for new regional tax info in Northern Virginia and Hampton Roads. (Source: Va. Code §§ 58.1-603, 58.1-604, 58.1-614)

Effective July 1, 2013, the special state use tax on motor vehicles, machinery, tools, aircraft, and equipment for construction increases from 5% to 5.3% (except for motor vehicles, aircraft, watercraft). Motor vehicles are taxed at 4%, aircraft at 2%, and watercraft at 2% with a $1,000 max.

tax of $1,000. (Source: Va. Code §§ 58.1-604.1)

The increased rate applies to all sales and tangible personal property delivered and paid for on or after July 1, 2013, at the

5. 3 percent rate applies regardless of order date. The increased rate does not apply to property delivered before July 1, 2013, but paid for on or after that date.

The increased rate does not apply if a taxable sale or lease is paid in full before July 1, 2013, even if delivery or lease begins on or after that date. (Source: Va. Code §§ 58.1-602, 58.1-603, 58.1-604)

Legislation provides refunds of the 0.3% tax paid on property purchased or leased before April 3, 2013. See “Transitional Rules” for details. (Source: Va. Code § 58.1-639)

Dealer Discount

Since June 2010, the dealer discount was suspended for dealers with an average monthly Retail Sales and Use Tax liability over $20,000. The Department annually reviews and notifies dealers of their status.

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

Dealers exceeding the threshold are ineligible for the discount; those below become eligible. Dealers unsure should contact the Department at (804) 367-8037. (Source: House Bill 1500, Item 5.08, 2013 Acts; Va. Code

§ 58.1-202.1))

Dealers are allowed discounts of 1.6%, 1.2%, or 0.8%, based on monthly taxable sales volume, on the first 3% of the state tax (first 4% for vending machine dealers). (Source: House Bill 1500, Item 5.08, 2013 Acts)

Starting with the July 2013 return (due August 20, 2013) or Q3 quarterly return (due October 20, 2013), dealers may use the discount factors in the table and worksheets to simplify calculations:

Retail Sales and Use Tax Dealer Discounts for Dealers with Monthly Liability ≤ $20,000

Monthly Taxable Sales Statutory General Sales Qualifying Discount Discount Food Discount Percentage Factor Factor At Least But Less Than $0 $62,501 1.6% .01116 .016 $62,501 $208,001 1.2% .00837 .012 $208,001 And Up 0.8% .00558 .008

Vending Machine Sales Dealer Discounts Available to Dealers With Average Monthly Tax Liability Not Exceeding $20,000

Monthly Taxable Sales Statutory Discount Factor Discount Percentage At Least But Less Than $0 $62,501 1.6% .01208 $62,501 $208,001 1.2% .00906 $208,001 And Up 0.8% .00604

3

[TABLE 3-1] Monthly Taxable Sales | | Statutory Discount Percentage | General Sales Discount Factor | Qualifying Food Discount Factor At Least | But Less Than | | | $0 | $62,501 | 1.6% | .01116 | .016 $62,501 | $208,001 | 1.2% | .00837 | .012 $208,001 | And Up | 0.8% | .00558 | .008

[/TABLE]

[TABLE 3-2] Monthly Taxable Sales | | Statutory Discount Percentage | Discount Factor At Least | But Less Than | | $0 | $62,501 | 1.6% | .01208 $62,501 | $208,001 | 1.2% | .00906 $208,001 | And Up | 0.8% | .00604

[/TABLE]

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

The discount factors are based on the tax owed under the 4.3 percent (5.3 percent for vending machines) statewide tax. Since the dealer discount excludes the 0.7 percent regional tax in Northern Virginia and Hampton Roads, regional tax should not be added when calculating the dealer discount. (See “Regional Sales and Use Taxes” below

for more information on the new regional sales and use tax in Northern Virginia and Hampton Roads.)

Dealers with two or more certificates must compute the discount on taxable sales from all locations. This applies to consolidated and separate filings. Multistate dealers must include all Virginia sales and out-of-state Virginia sales. (Source: Va. Code § 58.1-622)

Regional Sales and Use Tax

Definitions

“Northern Virginia Region” includes Arlington, Fairfax, Loudoun,

and Prince William and the Cities of Alexandria, Fairfax, Falls Church, Manassas, and Manassas Park. (Source: Va. Code §§ 58.1-603.1 and 58.1-604.01)

“Hampton Roads Region” includes Isle of Wight, James City, Southampton, York, and the Cities of Chesapeake, Franklin, Hampton, Newport News, Norfolk, Poquoson, Portsmouth, Suffolk, Virginia Beach, Williamsburg. (Source: Va. Code §§ 58.1-603.1 and 58.1-604.01)

Overview

Effective July 1, 2013, a 0.7% additional state Retail Sales and Use Tax will be imposed in Northern Virginia and Hampton Roads.

Accordingly, the total rate of the state and local Retail Sales and Use Tax will be 6 percent in localities that fall within these regions (4.3 percent state, 0.7 percent regional, and 1 percent local). The rate for vending machine dealers in the Northern Virginia and Hampton Roads regions will increase to 7.0 percent (5.3 percent state, 0.7 percent

regional, and 1 percent local) of wholesale purchases for resale. (Source: Va. Code §§ 58.1-603.1 and 58.1-604.01)

The regional tax is administered like the state sales tax. Food for home use is exempt. No dealer discount applies to regional tax. (Source: Va. Code §§ 58.1-603.1 and 58.1-604.01)

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

The regional tax applies to sales on and after July 1, 2013 in localities that fall within the Northern Virginia and Hampton Roads regions. Tangible personal property delivered to a purchaser and paid for on or after July 1, 2013 is subject to the regional tax, regardless of when the property was ordered. The new tax will not apply to tangible

personal property delivered prior to July 1, 2013, but paid for on or after July 1, 2013.

The tax does not apply if the sale or lease is paid in full before July 1, 2013, even if delivery or lease begins afterward. (Source: Va. Code §§ 58.1-602, 58.1-603.1, 58.1-604.01)

Transitional rules allow refunds for property purchased or leased before April 3, 2013, even if delivered after July 1, 2013. (See “Transitional Rules” below)

Sourcing Rules

Sales Tax

As it is administered in the same manner as the Retail Sales and Use Tax, the new

regional sales tax is sourced in the same manner as the local option sales tax. For intrastate sales, the local option sales tax is generally sourced to the city or county of the place of business of the dealer collecting the tax, without regard to the city or county of possible use by the purchaser. Accordingly, in-state dealers should collect the regional sales tax on sales made in places of business located in the Northern Virginia and Hampton Roads regions, even if the goods are delivered outside the Northern Virginia and Hampton Roads regions. Likewise, in-state dealers not located in the Northern Virginia and Hampton Roads regions should not collect the regional sales tax, even if the goods are delivered into the Northern Virginia or Hampton Roads regions. (Source: Va. Code §§ 58.1-603.1 and 58.1-605). The following provides detailed rules for various additional scenarios:

1. Tangible personal property purchased at the seller’s place of business is sourced there, even if delivered elsewhere. (Source:

23VAC10-210-2070(E)).

Example 1

Dealer A sells on July 1, 2013, in Fairfax (Northern Virginia). Goods are delivered in Loudoun County.

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

Northern Virginia region. The sale is sourced to the City of Fairfax.

Dealer A should collect 6 percent (4.3% state, 0.7% regional, 1% local) sales tax; the local tax is sourced to Fairfax.

Example 2

Dealer B's July 1, 2013 sale in Loudoun County, Northern Virginia, with delivery in Roanoke County outside regions, is sourced to Loudoun County; 6% tax, local sourced to Loudoun.

2. Remote purchase from an in-state Virginia dealer is sourced to where the order was first taken, even if delivered elsewhere.

Example 3

Customer C’s August 2013 purchase from Dealer D in Newport News, Hampton Roads, shipped outside regions, is sourced to Newport News; 6% tax, local sourced to Newport News.

3. Remote purchase from out-of-state dealer is sourced to the delivery location if not received at dealer’s business.

Example 4

Customer E orders merchandise from Dealer F’s website, which has a

Dealer F’s North Carolina warehouse and business are outside Virginia; the sale shipped to Richmond, outside regions, is sourced to the location of delivery, Richmond.

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

The sale is sourced to the delivery location, Richmond, outside the regions.

Dealer F should collect 5.3% (4.3% state, 1% local) sales tax; local sourced to Richmond.

4. Leased tangible property from in-state lessor is sourced to lessor’s place of business. (23VAC10-210-2070(E)).

Example 5

Customer G’s rental from a Hampton-based lessor in Hampton Roads, for use in Fairfax County, is sourced to the lessor’s Hampton location.

The lessor should collect 6% tax (4.3% state,

0. 7 percent regional and 1 percent local tax, sourced to Hampton.

Use Tax Collected by Dealers

The regional use tax, like the local use tax, is sourced where goods are used, consumed, or stored. Out-of-state dealers with registration source sales to Virginia's regions per destination (Va. Code §§ 58.1-604.01, 58.1-606; 23 VAC 10-210-880).

Example 6

Dealer A, NC-based with Virginia registration, made a July 25, 2013 sale shipped to Fairfax, collecting 6% (4.3% state, 0.7% regional, 1% local) use tax.

The local 1% tax is sourced to Fairfax.

Example 7

Dealer B makes Internet sales from Maryland.

Dealer B holds a registration to collect Virginia use tax.

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

On August 1, 2013, Dealer B’s sale shipped to Harrisonburg, with 5.3% (4.3% state, 1% local) use tax; local sourced to Harrisonburg.

Consumer Use Tax

Virginia residents or others buying goods from non-collecting businesses or tax-free outside Virginia and bringing them in are subject to Consumer Use Tax, with exceptions.

Use tax excludes property brought into Virginia by nonresidents for personal use or purchased outside and moved in after 6 months. It applies to property temporarily imported for services or contracts within 6 months, taxed on cost.

Purchasers in other Virginia areas for use in Northern Virginia or Hampton Roads are not responsible for regional Consumer Use Tax if sales tax was paid (Va. Code §§ 58.1-604, 58.1-604.01, 58.1-606, 58.1-607).

Example 8

Customer A in Fairfax, July 10, 2013, bought from WV dealer not registered; must remit 6% use tax (4.3% state, 0.7% regional, 1% local).

Example 9

Customer B in Bristol, July 20, 2013, bought from NY dealer not registered; must remit 6% use tax.

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

must remit 5.3 percent (4.3 percent state and 1 percent local) use tax on the purchase.

Example 10

Customer C is in Charlottesville. Customer C buys

equipment in Charlottesville on July 10, 2013, for use in a construction contract in Fairfax County, paying 5.3% sales tax.

Customer C moves the equipment into Fairfax County on July 29, 2013.

Customer C owes no regional use tax on the equipment as sales tax was paid.

Filing and Paying Consumer Use Tax

Registered dealers owing consumer use tax on tangible personal property brought into Virginia from outside the Commonwealth must remit the use tax on their regular Retail Sales and Use Tax returns.

Unregistered businesses must file Form ST-7 to remit use tax; regional use tax for Northern Virginia or Hampton Roads must be remitted directly to the Department.

Unregistered individuals owing use tax on tangible property brought into Virginia must remit it directly via Form CU-7 or Form 760 Schedule ADJ; no prior registration needed. Forms are on www.tax.virginia.gov.

Transitional Rules

Overview

Effective July 1, 2013, statewide and regional sales/use tax rates increase; property delivered on or after this date is taxed at the higher rate, regardless of order date. Pre-July 1 deliveries paid after are not taxed at the higher rate.

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

The higher rate does not apply if the sale or lease is paid in full before July 1, 2013, even if delivery or lease begins on or after that date. (Va. Code §§ 58.1-602 et seq.)

Before April 3, 2013, persons entering bona fide real estate, sale, or lease contracts can request a refund of the additional 5.3% (6% in Northern Virginia and Hampton Roads) tax paid if delivery occurs on or before September 30, 2013. (Va. Code § 58.1-639)

Refund Requests

Only the purchaser or lessee of tangible property under qualifying contracts or leases can request refunds of the additional tax paid. (Va. Code § 58.1-639)

Purchasers or lessees must request refunds directly from the Department, providing copies of contracts or leases, delivery dates, and proof of tax paid, not from sellers or lessors. (Va. Code § 58.1-639)

Refund requests must be made within 3 years of the tax due date. For example, a July 2013 purchase can be refunded until August 20, 2016. Interest is paid from tax due date until refund.

due until the refund date. (Va. Code §§ 58.1-639, 58.1-1823)

Real Estate Construction Contracts

Refunds of tax paid after July 1, 2013, are available for tangible property purchased or leased under bona fide real estate construction contracts or

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

or bona fide highway construction contracts entered into before April 3, 2013, with completed plans and specifications before that date.

Refunds are unavailable if a bona fide contract is renegotiated or expanded to include additional work or materials. (Va. Code § 58.1-639)

Refunds will be available only for the additional tax paid on (i) materials permanently incorporated into real estate, and (ii) construction supplies, fixtures, equipment, etc., that enter into the construction of or become a part of a structure, highway, etc. Further, refunds will be limited to property purchased or leased in connection with a specific contract and used exclusively in such contract. Thus, refunds will not be available for tax paid on equipment, materials, supplies, tools, etc. that will be used in more than one contract. (Source: Va. Code § 58.1-639)

Refund rules vary depending on whether the contract specifies a completion date.

For contracts without a specific completion date, refunds are only available for property delivered on or before September 30, 2013. (Va. Code § 58.1-639)

Example 11

Contractor A's bona fide contract before April 3, 2013, for a home lacks a specific completion date. After July 1, 2013, A orders materials, pays 5.3% tax. To get a refund, goods must be delivered by September 30, 2013. The first order was delivered August 30, 2013, refundable; the second, delivered December 1, 2013, not refundable.

For bona fide real estate contracts with a specific completion date, refunds of additional tax paid on or after July 1, 2013, are available for property delivered on or before that date. (Source: Va. Code § 58.1-639)

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

Example 12

Contractor B enters into a bona fide contract before April 3, 2013, for the erection of a bridge. The contract contains a specific and stated completion date of June 30, 2015. On and after July 1, 2013, Contractor

B pays the 5.3 percent (6.0 percent in the Northern Virginia and Hampton Roads Regions) tax on his purchases of materials for use in the contract and all such materials, except one shipment, are delivered to the contractor by the June 30, 2015, date of completion. The last shipment of materials is delivered to Contractor B on July 1, 2015. Refunds of the 0.3 percent (1.0 percent in the Northern Virginia and Hampton Roads Regions) tax paid by Contractor B will be available for all materials delivered to him by the specified completion date stated in his contract, June 30, 2015. However, a refund will not be available for the additional tax paid on the last delivery because that delivery occurred after the specified and stated completion date for the project. Both contracts containing a specific date for completion, e.g., July 1, 2015, and contracts containing a specific number of calendar days for completion, e.g., 150 calendar days, shall be considered as contracts with a specific and stated date of completion.

When a subcontractor performs work for a general contractor, the date of completion for

The completion date for this provision is the subcontract date, not the general contractor's contract date.

Refunds for contracts with a specific completion date do not apply if the original date is extended unless a new or renegotiated contract is made before April 3, 2013. If extended, refunds are only for property delivered on or before the original date unless a new or renegotiated contract is made before April 3, 2013. (Source: Va.

Code § 58.1-639)

Refunds of the 0.3% (1.0%) tax paid after July 1, 2013, are not available for non-bona fide real estate contracts, i.e., those without finished plans or specifications before April 3, 2013, even if amended afterward.

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

to include plans or specifications are also not bona fide contracts. (Source: Va. Code § 58.1-639)

Contracts for the Sale of Tangible Personal Property

Refunds for tangible personal property purchased before April 3, 2013, under sale contracts are available if delivered by September 30, 2013, and the tax was paid after July 1, 2013.

Refunds are unavailable if the sale contract is on or after April 3, 2013, or if delivery occurs after September 30, 2013. (Source: Va. Code § 58.1-639)

Refund provisions apply to layaways made before April 3, 2013, and delivered by September 30, 2013. (Source: Va. Code § 58.1-639)

Example 13

Customer A's layaway before April 3, 2013, with delivery by September 30, 2013, requires full tax payment, but refunds of additional tax are available.

He can request a refund of the additional tax paid.

Example 14

Customer B's layaway before April 3, 2013, with delivery after September 30, 2013, requires full tax but no refund of additional tax is available.

Per 23 VAC 10-210-670, sales tax isn't collected on gift certificates but upon redemption for merchandise.

Because gift certificates are not taxable until redeemed, refunds of the additional tax

Refunds of additional tax paid on gift certificate purchases after July 1, 2013, are not available.

Per 23 VAC 10-210-450, sales tax is due in full at installment sale agreement, not in installments. All sales before July 1, 2013, are taxed at 5.0%.

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

Sales before July 1, 2013, are taxed at 5.0%; on or after, at 5.3% (6.0% in certain regions). Tax on installment sales is due when the sale contract is signed; refunds after July 1, 2013, are not available.

not be available.

Virginia law taxes half the charge for maintenance contracts with parts and labor. Contracts before July 1, 2013, are taxed at 2.5%; on or after, at 2.65% (3.0%). Tax is due when the contract is signed; refunds after July 1, 2013, are not available. Persons can buy parts under resale exemption.

Leases

Refunds of additional tax on leases of tangible personal property paid on or after July 1, 2013, are available if the lease was entered before April 3, 2013, and property delivered by September 30, 2013. Refunds are not available for leases entered on or after April 3, 2013, or property delivered after September 30, 2013.

If conditions are met, refunds can be requested for additional tax paid during the lease. For example, a five-year lease entered before April 3, 2013, with delivery by September 30, 2013, allows refunds in Northern Virginia and Hampton Roads for the lease duration. (Source: Va. Code § 58.1-639)

If the lessee assigns the lease or turns over the property to anyone,

Refunds are not available after lease assignment, property replacement (except defective goods), addition of property, or lease renegotiation or renewal. (Source: Va.

Code § 58.1-639)

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

Example 15

Customer A enters a one-year lease before April 3, 2013, with delivery by September 30, 2013.

Customer A makes monthly lease payments starting September

Payments from September 30, 2013, to September 30, 2014, are taxed at 5.3% (6.0% in Northern Virginia and Hampton Roads). Refunds of the additional tax paid are available.

Example 16

Customer B's one-year lease before April 3, 2013, with delivery on December 1, 2013.

Customer B pays 5.3% (6.0% in Northern Virginia and Hampton Roads) sales tax but cannot request a refund as delivery was after September 30, 2013.

Retail Sales and Use Taxation of Transient Accommodations

Effective July 1, 2013, the statewide and regional Retail Sales and Use Tax rates apply to accommodations furnished to transients on or after that date and paid for on or after that date. Accommodations furnished before July 1, 2013, but paid after, are exempt. Payments made before July 1, 2013, are also exempt. Transitional rules apply only to tangible property leases, not lodgings. (Source: Va. Code §§ 58.1-603, 58.1-603.1, 58.1-604, 58.1-604.01, 58.1-639)

Example 17

Customer A reserves and pays in full for a Virginia Beach rental in June 2013 for October stay. Since paid before July 1, 2013, it is taxed at 5.3%.

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

percent (4 percent state and 1 percent local). The accommodation would not be subject to the state tax rate increase or the new regional tax in the Hampton Roads Region.

Example 18

Customer B's August stay in Roanoke B&B, paid in June 2013, is taxed at 5.3% (4.3% state, 1% local) since not furnished or paid in full before July 1, 2013.

Example 19

Customer C's August stay in Virginia Beach B&B, paid in June 2013, is taxed at 6% (including regional tax) since not furnished or paid in full before July 1, 2013.

Since not paid in full before July 1, 2013, the accommodation is taxed at 6% (4.3% state, 1% local) in Hampton Roads.

0. 7 percent regional, and 1 percent local).

Computation of Tax and Bracket Charts

Tax is generally 5.3% (6.0% in Northern Virginia and Hampton Roads), with half-cent or more rounded to one cent.

If a dealer shows over 85% of taxable sales were at 10¢ or less and prices couldn't be adjusted, the Tax Commissioner will determine tax liability based on sales at 11¢ or more.

from sales at 11¢ or more. (Source: Va. Code § 58.1-628.2)

For sales ≤$5, dealers in Virginia (excluding Northern Virginia and Hampton Roads) may use the bracket chart to compute 5.3% tax, eliminating fractions of a cent. Any dealer who

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

collects the tax in accordance with the following bracket chart shall not be deemed to have overcollected the tax.

5. 3% Virginia bracket chart for sales of $5 or less (excluding Northern Virginia and Hampton Roads).

$0.00 to $0.09 no tax .10 to .28 1¢ tax .29 to .47 2¢ tax .48 to .66 3¢ tax .67 to .84 4¢ tax .85 to 1.03 5¢ tax

1. 04 to 1.22 6¢ tax
2. 23 to 1.41 7¢ tax
3. 42 to 1.60 8¢ tax
4. 61 to 1.79 9¢ tax
5. 80 to 1.98 10¢ tax
6. 99 to 2.16 11¢ tax
7. 17 to 2.35 12¢ tax
8. 36 to 2.54 13¢ tax
9. 55 to 2.73 14¢ tax

10. 74 to 2.92 15¢ tax

11. 93 to 3.11 16¢ tax

12. 12 to 3.30 17¢ tax
13. 31 to 3.49 18¢ tax
14. 50 to 3.67 19¢ tax
15. 68 to 3.86 20¢ tax
16. 87 to 4.05 21¢ tax
17. 06 to 4.24 22¢ tax
18. 25 to 4.43 23¢ tax
19. 44 to 4.62 24¢ tax
20. 63 to 4.81 25¢ tax
21. 82 to 4.99 26¢ tax
22. 00 27¢ tax

For sales of $5 or less, dealers may compute the 6.0% Retail Sales and Use Tax in Northern Virginia and Hampton Roads using the bracket chart to eliminate fractions of one cent. Any dealer who collects the tax in

accordance with the following bracket chart shall not be deemed to have overcollected the tax.

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

6. 0% Northern Virginia and Hampton Roads Regions Bracket Chart for Sales of Five Dollars or Less

$0.00 to $0.08 no tax .09 to .24 1¢ tax

.25 to .41 2¢ tax .42 to .58 3¢ tax .59 to .74 4¢ tax .75 to .91 5¢ tax .92 to 1.08 6¢ tax

1. 09 to 1.24 7¢ tax
2. 25 to 1.41 8¢ tax
3. 42 to 1.58 9¢ tax
4. 59 to 1.74 10¢ tax
5. 75 to 1.91 11¢ tax
6. 92 to 2.08 12¢ tax
7. 09 to 2.24 13¢ tax
8. 25 to 2.41 14¢ tax
9. 42 to 2.58 15¢ tax
10. 59 to 2.74 16¢ tax
11. 75 to 2.91 17¢ tax

12. 92 to 3.08 18¢ tax

13. 09 to 3.24 19¢ tax

14. 25 to 3.41 20¢ tax
15. 42 to 3.58 21¢ tax
16. 59 to 3.74 22¢ tax
17. 75 to 3.91 23¢ tax
18. 92 to 4.08 24¢ tax
19. 09 to 4.24 25¢ tax
20. 25 to 4.41 26¢ tax
21. 42 to 4.58 27¢ tax
22. 59 to 4.74 28¢ tax
23. 75 to 4.91 29¢ tax
24. 91 to 5.00 30¢ tax

Filing of Returns

The regional Retail Sales and Use Tax will be reported on dealers’ Retail Sales and Use

Tax, Vending Machine Tax, and Business Consumer’s Use Tax returns. The Department will release revised returns in early May. Returns for April–June 2013 are unaffected. Monthly filers should use new returns starting July 2013; quarterly filers for the quarter ending September 30, 2013. Generally, dealers must file Retail Sales and Use Tax returns monthly, due by the

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

File by the 20th of the month after sales. The Department may change a dealer’s filing frequency from monthly to quarterly based on tax liability, with prior notice.

2012 House Bill 1301 (Acts of Assembly 2012 Special Session I, Chapter 3), Item 273

(O) requires all sales and use tax returns and payments to be filed electronically. Monthly filers must do so from July 2012; less frequent filers after July 1, 2013. Waivers are granted if the Tax Commissioner finds an unreasonable burden; requests must be in writing.

In-state dealers are those making Virginia sales with physical locations in Virginia. They must submit Form ST-9 each period, even if no sales occur.

Out-of-state dealers are those outside Virginia making qualified sales, leases, or rentals into Virginia. Dealers with sufficient nexus must register to collect Virginia Use Tax; those without may choose to register.

Out-of-state dealers with nexus must register and file Form ST-8 each period, even if no sales; those without nexus may register voluntarily to collect tax.

A Direct Payment Permit allows certain companies to buy goods without paying sales/use tax at purchase, paying directly to the Department and allocating local tax. Permits are issued to qualifying manufacturers, contractors, or mine operators storing property in Virginia, who then file Form ST-6.

Additionally, the Retail Sales and Use Tax applies to dealers placing vending

Machines for selling tangible personal property are taxed based on cost. Dealers must file Form VM-2, Vending Machine Dealer’s Sales Tax Return.

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

Penalties and Interest

Except for fraudulent returns, failure to file timely and pay full tax incurs a penalty of 6% of tax owed for up to one month, plus 6% for each additional month, not exceeding 30%. Minimum penalty is $10, regardless of tax due.

Each additional month of failure incurs penalties, capped at 30%. Minimum $10 penalty applies regardless of tax due. Failure to remit the 0.7% regional tax also incurs penalties.

Fraudulent returns or willful failure to file with intent to defraud incur a penalty of 50% of the proper tax.

The interest rate on omitted taxes is the "Underpayment Rate" per § 6621(a)(2) plus two percent, per Va. Code § 58.1-15(A).

Example 20

Dealer A sold on July 1, 2013, in Fairfax, sourced to Fairfax. The total sales tax is 6% (4.3% state, 0.7% regional, 1% local). Dealer A collected only 5.3% (4.3% state, 1% local), missing 0.7% regional. Dealer A's late payment incurs a penalty of 6% of the unpaid 0.7% if overdue by one month.

Dealer A owes interest on the unpaid 0.7% regional tax.

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Guidelines for the Retail Sales and Use Tax Changes Enacted in the 2013 General Assembly Session REVISED: June 13, 2013

Additional Information

Guidelines, forms, instructions, FAQs, and info are online in the Law, Rules, and Decisions section of the Department's website. For more

For info, contact Customer Services at (804) 367-8037 or via Live Chat on www.tax.virginia.gov.

Approved

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Craig M. Burns Tax Commissioner

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| RECIPROCAL PERSONAL INCOME TAX AGREEMENT

| BETWEEN

COMMONWEALTH OF PENNSYLVANIA

AND i COMMONWEALTH OF VIRGINIA I. Statement of purpose.

It is the intention of this agreement and the parties

hereto

A. To relieve employers and employees in the Commonwealth of Pennsylvania and the Commonwealth of Virginia

from the withholding of Virginia income tax on compensation paid in Virginia to residents of Pennsylvania and from the withholding of Pennsylvania income tax on compensation paid in Pennsylvania to residents of Virginia;

B. To relieve Pennsylvania residents from liability for Virginia income tax and the requirement for filing a tax return with regard to compensation paid in Virginia;

C. To relieve Virginia residents from liability for Pennsylvania income tax and the requirement for filing a tax return with regard to compensation

paid in Pennsylvania;

D. To establish procedures to assist each party in the enforcement of the withholding provisions of the income tax laws of these Commonwealths against employers in the other party's Commonwealth.

E. To establish procedures for the interchange of Commonwealth tax information between the parties to assist each party in the compliance, administration, and enforcement of its respective income tax laws.

II. Agreements. | In furtherance of their above stated intention and purposes, the parties agree as follows:

A. Agreements respecting withholding.

1. No Virginia or Pennsylvania employer shall be

| required to withhold Virginia income tax from 1 compensation paid in Virginia to a resident of Pennsylvania who files with his employer a certificate of nonresidence unless and until such employer is | advised that any such certificate was improperly filed.

2. No Virginia or Pennsylvania employer shall be required to withhold Pennsylvania income tax from compensation paid in Pennsylvania to a resident of Virginia who files with his employer a certificate of nonresidence unless and until such employer is

advised that any such certificate was improperly filed.

--- Page 2 ---

TT

3. Every Pennsylvania employer shall, to the extent i provided by the Virginia Income Tax Act, be liable i to the Commonwealth of Virginia for the withholding of Virginia income tax from compensation paid to residents of Virginia. i 4. Every Virginia employer shall, to the extent I provided by the Pennsylvania Income Tax Act, be liable to the Commonwealth of Pennsylvania for the 1 withholding of Pennsylvania individual income tax from compensation paid to residents of Pennsylvania.

4. Virginia will encourage Virginia employers to withhold and remit Pennsylvania income tax for

| residents of Pennsylvania employed in Virginia.

6. Pennsylvania will encourage Pennsylvania employers to withhold and remit Virginia income tax for residents of Virginia employed in Pennsylvania.

| 7. For purposes of this agreement "compensation paid | in Virginia" is as defined in Section 58-151.1(1) of the Virginia Income Tax Act.

8. For purposes of this agreement, "compensation paid in Pennsylvania" is defined in Section 301(d) of

i the Pennsylvania Income Tax Act.

9. For purposes of this agreement, the term "Pennsylvania employer" means an employer who is subject to the jurisdiction of the Commonwealth of Pennsylvania, and the term "Virginia employer" means an employer who is subject to the jurisdiction of the Commonwealth of Virginia.

B. Agreements respecting liability for individual income tax and tax return filing.

1. No Pennsylvania resident who signs a nonresident certificate shall be required to pay Virginia income tax or to file a Virginia income tax return on compensation paid in Virginia.

2. No Virginia resident who signs a nonresident certificate shall be required to pay Pennsylvania income tax or to file a Pennsylvania income tax | return on compensation paid in Pennsylvania.

3. For purposes of this agreement, the term "Pennsylvania resident" means an individual who is a resident as | defined in the Pennsylvania Income Tax Act, and

| the term "Virginia resident" means an individual who is a resident as defined in the Virginia | \ Income Tax Act. |

4. Nothing in this agreement shall be interpreted to exempt a resident of Pennsylvania or Virginia who waS a part-year resident of the other Commonwealth from liability for payment of income tax or filing an income tax return with regard to compensation | received while a resident of the other Commonwealth.

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--- Page 3 ---nn tt LL CL A A iS SE lily pS } 5. Nothing in this agreement shall be interpreted to f exempt a resident of Pennsylvania or Virginia who has taxable income in the Commonwealth of nonresidence other than in the form of compensation from liability rl for payment of income tax or filing an income tax } return with regard to such other taxable income.

Tit. Agreements respecting exchanges of information.

Each of the parties hereto agrees to furnish the i other with the following information at such time iH or times and in such manner as may be agreed upon 1 between them: | 1. The name, address and federal taxpayer identification number of each individual filing an income tax or information return in such party's Commonwealth, which shows an address for such individual in the other party's Commonwealth.

2. The amount of income tax shown as due on each return referred to in subparagraph 1 of this paragraph.
3. The amount and nature of any adjustments made in | any item affecting the tax liability of the individual in such party's Commonwealth.
4. Such other information as the parties hereto may from time to time agree upon and as shall be set forth in writing and appended hereto.

IV. Other matters.

A. If for any reason either party is unable to comply with any one or more of the terms of this agreement, the parties shall mutually agree on the extent to which this agreement shall continue in effect or, in the absence of such mutual agreement, this agreement shall terminate in accordance with the provisions of paragraph V in its entirety without prejudice however, to any action previously taken | hereunder. B. Each of the parties signatory hereto hereby states and represents that he is authorized to enter into this agreement and to furnish the information and 1 assistance contemplated hereby, and that the | fulfillment of his obligations hereunder will not violate any provision of his Commonwealth's constitution or laws, including, without limitation, provisions respecting confidentiality of Commonwealth information.

VV. Effective Date. | ty te? , : .

This agreement is made this /*?) , date of h'o~ , Jo PDQ. and shall become effective and operative upon the parties with respect to taxable years beginning after December 31, 1982. This agreement may be terminated by either party signatory hereto upon 90 days written notice to the other party. | State Tax Commissioner | Commonwealth of Virginia | | a secretary of Revenue CPaAmmaAanwanTEH Af DAK AIL

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| RECIPROCAL PERSONAL INCOME TAX AGREEMENT

| BETWEEN

COMMONWEALTH OF PENNSYLVANIA

AND i COMMONWEALTH OF VIRGINIA I. Statement of purpose.

This agreement and the parties intend

hereto

A. To relieve employers and employees in Pennsylvania and Virginia

from withholding Virginia income tax on Virginia-paid compensation to Pennsylvania residents and Pennsylvania income tax on Pennsylvania-paid compensation to Virginia residents;

B. To relieve Pennsylvania residents from Virginia income tax liability and filing requirements for compensation paid in Virginia;

C. To relieve Virginia residents from liability for Pennsylvania income tax and the requirement for filing a tax return with regard to compensation

paid in Pennsylvania;

D. To establish procedures to help enforce withholding laws against employers in the other Commonwealth.

E. To establish procedures for exchanging tax information to aid compliance, administration, and enforcement of each Commonwealth's income tax laws.

II. Agreements. | In furtherance of their stated purposes, the parties agree:

A. Agreements respecting withholding.

1. No Virginia or Pennsylvania employer shall be

| required to withhold Virginia income tax from 1 compensation paid in Virginia to a resident of Pennsylvania who files with his employer a certificate of nonresidence unless and until such employer is | advised that any such certificate was improperly filed.

2. No Virginia or Pennsylvania employer shall be required to withhold Pennsylvania income tax from compensation paid in Pennsylvania to a Virginia resident who files a nonresidence certificate unless such employer is

advised that any such certificate was improperly filed.

--- Page 2 ---

TT

3. Every Pennsylvania employer shall, to the extent i provided by the Virginia Income Tax Act, be liable i to the Commonwealth of Virginia for the withholding of Virginia income tax from compensation paid to residents of Virginia. i 4. Every Virginia employer shall, to the extent I provided by the Pennsylvania Income Tax Act, be liable to the Commonwealth of Pennsylvania for the 1 withholding of Pennsylvania individual income tax from compensation paid to residents of Pennsylvania.

4. Virginia will encourage Virginia employers to withhold and remit Pennsylvania income tax for

| residents of Pennsylvania employed in Virginia.

6. Pennsylvania will encourage Pennsylvania employers to withhold and remit Virginia income tax for residents of Virginia employed in Pennsylvania.

| 7. For purposes of this agreement "compensation paid | in Virginia" is as defined in Section 58-151.1(1) of the Virginia Income Tax Act.

8. For this agreement, "compensation paid in Pennsylvania" is defined in Section 301(d) of

i the Pennsylvania Income Tax Act.

9. For this agreement, "Pennsylvania employer" means an employer under Pennsylvania jurisdiction, and "Virginia employer" means one under Virginia jurisdiction.

B. Agreements respecting liability for individual income tax and tax return filing.

1. Pennsylvania residents signing a nonresident certificate shall not be required to pay Virginia income tax or file a Virginia return on Virginia-paid compensation.

2. No Virginia resident who signs a nonresident certificate shall be required to pay Pennsylvania income tax or to file a Pennsylvania income tax | return on compensation paid in Pennsylvania.

3. For purposes of this agreement, the term "Pennsylvania resident" means an individual who is a resident as | defined in the Pennsylvania Income Tax Act, and

| the term "Virginia resident" means an individual who is a resident as defined in the Virginia | \ Income Tax Act. |

4. Nothing in this agreement shall be interpreted to exempt a resident of Pennsylvania or Virginia who waS a part-year resident of the other Commonwealth from liability for payment of income tax or filing an income tax return with regard to compensation | received while a resident of the other Commonwealth.

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--- Page 3 ---nn tt LL CL A A iS SE lily pS } 5. Nothing in this agreement shall be interpreted to f exempt a resident of Pennsylvania or Virginia who has taxable income in the Commonwealth of nonresidence other than in the form of compensation from liability rl for payment of income tax or filing an income tax } return with regard to such other taxable income.

Tit. Agreements respecting exchanges of information.

Each of the parties hereto agrees to furnish the i other with the following information at such time iH or times and in such manner as may be agreed upon 1 between them: | 1. The name, address and federal taxpayer identification number of each individual filing an income tax or information return in such party's Commonwealth, which shows an address for such individual in the other party's Commonwealth.

2. The income tax amount due on each return in subparagraph 1.
3. The amount and nature of any adjustments made in | any item affecting the tax liability of the individual in such party's Commonwealth.
4. Other information the parties agree upon in writing and append hereto.

IV. Other matters.

A. If for any reason either party is unable to comply with any one or more of the terms of this agreement, the parties shall mutually agree on the extent to which this agreement shall continue in effect or, in the absence of such mutual agreement, this agreement shall terminate in accordance with the provisions of paragraph V in its entirety without prejudice however, to any action previously taken | hereunder. B. Each of the parties signatory hereto hereby states and represents that he is authorized to enter into this agreement and to furnish the information and 1 assistance contemplated hereby, and that the | fulfillment of his obligations hereunder will not violate any provision of his Commonwealth's constitution or laws, including, without limitation, provisions respecting confidentiality of Commonwealth information.

VV. Effective Date. | ty te? , : .

This agreement is made this /*?) , date of h'o~ , Jo PDQ. and shall become effective and operative upon the parties with respect to taxable years beginning after December 31, 1982. This agreement may be terminated by either party signatory hereto upon 90 days written notice to the other party. | State Tax Commissioner | Commonwealth of Virginia | | a secretary of Revenue CPaAmmaAanwanTEH Af DAK AIL

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Recyclable Materials Processing Equipment Tax Credit Guidelines

Introduction

During the 2015 Session, the Virginia General Assembly enacted House Bill 1554 (2015 Acts of Assembly, Chapter 49) and Senate Bill 1205 (2015 Acts of Assembly, Chapter 94), which made several changes to the Recyclable Materials Processing Equipment Tax Credit. These changes include increasing the amount of the credit, imposing an annual credit cap, and amending certain credit qualification requirements. This legislation requires the Department of Taxation (“the Department”), in consultation with the Department of Environmental Quality (“DEQ”), to adopt guidelines to implement the provisions of such legislation.

These guidelines are published by the Department to provide guidance to taxpayers regarding the Recyclable Materials Processing Equipment Tax Credit. These guidelines are not rules or regulations subject to the provisions of the Administrative Process Act (Va. Code § 2.2-4000 et seq.) and are being published in accordance with the Tax Commissioner’s general authority to supervise the administration of the tax laws of the Commonwealth pursuant to Va. Code § 58.1-202. As necessary, additional information will be published and posted on the Department’s website, www.tax.virginia.gov.

These guidelines represent the Department’s interpretation of the relevant laws. They do not constitute formal rulemaking and hence do not have the force and effect of law or regulation. In the event that the final determination of any court holds that any provision of these guidelines is contrary to law, taxpayers who follow these guidelines will be treated as relying on erroneous written advice for purposes of waiving penalty and interest under Va. Code §§ 58.1-105, 58.1-1835, and 58.1-1845. To the extent there is a question regarding the application of these guidelines, taxpayers are encouraged to write to the Department and seek a written response to their question.

Legislative History

During the 1990 Session, the Virginia General Assembly enacted Senate Bill 101 (1990 Acts of Assembly, Chapter 709), which established the Recyclable Materials Processing Equipment Tax Credit, effective for taxable years beginning on or after January 1, 1991. This is an individual and corporate income tax credit for certain taxpayers that purchase machinery and equipment used on the premises of a manufacturing facility or plant unit which manufactures, processes, compounds, or produces items of tangible personal property from recyclable materials within Virginia for sale. The credit amount that may be claimed cannot exceed 40 percent of the taxpayer’s Virginia income tax liability for the taxable year in which the credit is being claimed. Prior to claiming the credit, the taxpayer must receive certification from DEQ that the equipment meets the credit requirements.

Originally, the Department of Waste Management was responsible for certifying that machinery or equipment is integral to the recycling process. In 1996, House Bill 297 (1996 Acts of Assembly, Chapter 837) transferred the responsibility for certifying machinery and equipment to DEQ. This legislation also extended the credit carryover period from five years to ten years.

In 2003, the provision that allowed individuals to claim the Recyclable Materials Processing Equipment Tax Credit expired. As a result, only corporations were entitled to claim new credits during Taxable Years 2003 through 2007. In 2007, House Bill 3044 (2007 Acts of Assembly, Chapter 529) and Senate Bill 870 (2007 Acts of Assembly, Chapter 593) reinstated the credit for individuals, effective for taxable years beginning on or after January 1, 2008.

Virginia Department of Taxation - 1 - April 3, 2017

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Recyclable Materials Processing Equipment Tax Credit Guidelines

Changes Effective for Taxable Year 2015 and After

Effective for Taxable Year 2015 and thereafter, taxpayers may claim the credit for purchases made during the taxable year for machinery and equipment used predominantly in or on the premises of manufacturing facilities or plant units which manufacture, process, compound, or produce items of tangible personal property from recyclable materials within Virginia for sale.

For such taxable years, the amount of the credit is increased to 20 percent of a taxpayer’s qualifying expenditures.

Prior to Taxable Year 2015, the credit was allowed only for qualifying purchases that were used exclusively in or on the premises of manufacturing facilities or plant units which manufacture, process, compound, or produce items of tangible personal property from recyclable materials within Virginia for sale. For such taxable years, the credit was equal to 10 percent of a taxpayer’s qualifying expenditures.

Effective for Taxable Year 2015 and thereafter, no taxpayer may claim the credit for machinery or equipment unless such machinery or equipment manufactures, processes, compounds, or produces items of tangible personal property from recyclable materials. Prior to Taxable Year 2015, the law required that the machinery or equipment be used on the premises of a manufacturing facility that manufactures, processes, compounds, or produces items of tangible personal property from recyclable materials, but there was no explicit requirement regarding how a taxpayer used such machinery or equipment on the premises.

Also effective for Taxable Year 2015 and thereafter, no taxpayer may be denied the credit based solely on another person’s use of the tangible personal property produced by the taxpayer, provided that the tangible personal property was sold by the taxpayer to an unaffiliated person in an arm’s-length sale. Prior to Taxable Year 2015, there was no specific requirement preventing a taxpayer from being denied the credit based solely on another person’s use of the tangible personal property produced by the taxpayer. For purposes of determining whether such property was sold to an unaffiliated person, an “affiliated person” means a “related person” as defined for purposes of Internal Revenue Code (“IRC”) § 267.

Annual Credit Cap

Effective for Taxable Year 2015 and thereafter, the credit is capped at $2 million per fiscal year.

If the total amount of all approved credits exceeds the $2 million credit cap for credits, each taxpayer will be granted a pro rata amount of credits as determined by the Department. The amount of the prorated credit will be determined by multiplying the amount of approved credits requested by an eligible taxpayer for the taxable year by a fraction, the numerator of which is the $2 million credit cap, and denominator of which is the total amount of approved credits requested by all eligible taxpayers for such taxable year.

Prior to Taxable Year 2015, the Recyclable Materials Processing Equipment Tax Credit was uncapped and, therefore, the proration of approved credits was unnecessary.

Determining the Purchase Price Paid

For Taxable Year 2015 and thereafter, the amount of the Recyclable Materials Processing Equipment Tax Credit is equal to 20 percent of the purchase price paid during the taxable year for machinery or equipment that qualifies for the credit. Prior to Taxable Year 2015, the amount of the credit was equal to 10 percent of the purchase price paid during the taxable year for such

Virginia Department of Taxation - 2 - April 3, 2017

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Recyclable Materials Processing Equipment Tax Credit Guidelines

machinery or equipment. For purposes of determining the credit amount, the “purchase price paid” consists of:

 The amount actually paid for machinery or equipment that qualifies for the credit in the year of the purchase; or

 For capitalized machinery or equipment that qualifies for the credit, an amount equal to the original total capitalized cost of such machinery or equipment minus any capitalized interest related to such machinery or equipment.

Original Total Capitalized Cost Under federal law, a taxpayer is generally required to capitalize the purchase price of a new asset if such asset has a useful life that extends beyond the current taxable year. See IRC § 263; Treasury Regulations (Treas. Reg.) §§ 1.263(a)-1. A taxpayer with an asset that must be capitalized may also capitalize certain costs incurred to acquire or produce such asset. See Treas. Reg. § 1.263(a)-2. Costs that may be capitalized in addition to the cost of a capitalized asset include, but are not limited to, certain transportation and installation expenses. For more information regarding capitalization, see IRS Publication 535.

For purposes of the Recyclable Materials Processing Equipment Tax Credit, “original total capitalized costs” include both the purchase price of machinery or equipment that is capitalized for federal income tax purposes, and any capitalized costs incurred in the year of purchase to acquire or produce such machinery or equipment. “Original total capitalized costs” do not include costs that are incurred in a year other than the year of purchase or costs that are not capitalized. When determining the purchase price paid for machinery or equipment, subtract any capitalized interest related to the purchase from the original total capitalized cost of such machinery or equipment.

Example 1

In Taxable Year 2016, Taxpayer A purchased an item of equipment that qualifies for the Recyclable Materials Processing Equipment Tax Credit for $10,000 that Taxpayer A intends to capitalize. When transporting and installing such equipment, Taxpayer A incurred $2,000 of installation costs in the year of purchase that it intends to capitalize and $1,000 of additional costs related to such equipment in the year of purchase that may not be capitalized under federal law. When determining the amount of the credit, Taxpayer A may include the $10,000 cost of purchasing the equipment and $2,000 of capitalized installation costs. When determining the amount of the credit, Taxpayer A may not include the $1,000 in additional costs that may not be capitalized.

Example 2

Assume the same facts as in Example 1. In Taxable Year 2017, Taxpayer A also incurs $2,000 in costs that it intends to capitalize that are related to maintaining the equipment that qualified for the Recyclable Materials Processing Equipment Tax Credit for Taxable Year 2015. Although the maintenance costs were capitalized costs related to an item of equipment that qualified for the credit, Taxpayer A may not use the maintenance costs to claim the credit because such costs were incurred in a year after the year Taxpayer A purchased such equipment.

Virginia Department of Taxation - 3 - April 3, 2017

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Recyclable Materials Processing Equipment Tax Credit Guidelines

Capital Leases

Leased machinery and equipment does not generally qualify for the Recyclable Materials Processing Equipment Tax Credit. However, if a taxpayer is required to capitalize the value of leased machinery or equipment for federal income tax purposes in the first year the relevant lease is effective (a “capitalized lease”), the amount actually capitalized and any capitalized costs incurred in such year to acquire or produce such asset are considered “original total capitalized costs” for purposes the credit. A lease of machinery or equipment is required to be treated as a capitalized lease if:  The lease transfers ownership of the leased machinery or equipment at the end of the lease term;

 There is an option to purchase the leased machinery or equipment at a bargain price at the end of the lease term;

 The lease term equals or exceeds 75 percent of the estimated economic life of the leased machinery or equipment; or

 The present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90 percent of the fair market value of the leased machinery or equipment.

No leased machinery or equipment may qualify for the credit if such machinery or equipment was not capitalized in the first year the relevant lease was effective. In addition, no capitalized interest related to the leased machinery or equipment may qualify for the credit.

Claiming the Credit

When a Taxpayer May Claim the Credit

A taxpayer may claim the Recyclable Materials Processing Equipment Tax Credit only for the taxable year in which such taxpayer purchases qualifying machinery or equipment. If such machinery or equipment does not qualify for the credit in the year of purchase, the taxpayer may not claim the credit for a later taxable year when the machinery or equipment meets the credit requirements. A taxpayer that does not qualify for the credit in the taxable year of purchase or that fails to meet the application deadlines may neither claim the credit for the year of purchase nor claim original or carryover credits for years following the year of purchase.

In Public Document (“P.D”) 04-190 (10/20/2004), the Department addressed a situation where a taxpayer purchased otherwise qualifying equipment in one year, but did not produce a sufficient quantity of recycled materials for DEQ to certify the machinery and equipment as integral to the recycling process for several years. In such case, the Department provided that a taxpayer that did not qualify for the credit in the year of purchase may later amend its tax return for the taxable year of purchase and claim the credit, as long as the amended return is filed within the three-year statute of limitations. The Department also provided that a taxpayer that did not claim the credit on an amended return within the three-year statute of limitations may amend its tax returns for the taxable years following the year of purchase to claim carryover credits that would have been available if the credit had been claimed for the year of purchase as long as

Virginia Department of Taxation - 4 - April 3, 2017

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Recyclable Materials Processing Equipment Tax Credit Guidelines

such returns are filed within three-year statute of limitations. The Department issued similar guidance in P.D. 10-136 (7/12/2010) and P.D. 10-227 (9/29/2010).

This guidance was issued prior to the imposition of an annual credit cap, which requires the establishment of deadlines in order to allocate credits. Accordingly, for machinery or equipment purchased in taxable years beginning on or after January 1, 2015, these Guidelines supersede such rules set forth in P.D. 04-190, P.D. 10-136, and P.D. 10-227 as applied to the Recyclable Materials Processing Equipment Tax Credit. For machinery or equipment purchased in taxable years beginning before January 1, 2015, such rules remain in effect and a taxpayer may claim credits from such purchases on an amended return, as long as the amended return is filed within the three-year statute of limitations.

Certification by DEQ

Prior to claiming the Recyclable Materials Processing Equipment Tax Credit, a taxpayer first must receive written certification from DEQ stating that the machinery or equipment is integral to the recycling process. When determining whether an item of machinery or equipment is integral to the recycling process, DEQ will determine whether the machinery or equipment is being used predominantly in or on the premises of manufacturing facilities or plant units that manufacture, process, compound, or produce items of tangible personal property from recyclable materials within Virginia for sale. DEQ will also determine whether the machinery or equipment is being used to manufacturer, process, compound, or produce items of tangible personal property from recyclable materials. See Va. Code § 58.1-439.7(A)(2) and 9 VAC 15-30-10 et seq.

To apply for certification, a taxpayer is required to submit a completed application (Form DEQ50-11S) to DEQ by March 1 of the year following the year it purchased the machinery or equipment. This is similar to the process required prior to Taxable Year 2015, except that taxpayers must now apply to DEQ by the March 1 deadline. No taxpayer may claim the credit unless it has received written certification from DEQ stating that the machinery or equipment is integral to the recycling process. More information regarding DEQ’s certification process is available on DEQ’s website located at www.deq.virginia.gov.

Submission of the Credit Application to the Department

Once a taxpayer receives written certification from DEQ stating that the machinery or equipment is integral to the recycling process, such taxpayer must then apply to the Department for an allocation of credits. To apply for an allocation of credits, a completed application (Form RMC), the certification received from DEQ, and any other required documentation must be submitted to the Department by June 1 of the year following the year the machinery or equipment was purchased. Form RMC is available on the Department’s website at www.tax.virginia.gov. No taxpayer that submits a credit application to the Department after June 1 will be eligible to receive an allocation of credits. The Department will review all applications for completeness and notify taxpayers of any errors by August 1. If any additional information is required, it must be provided to the Department no later than August 15 to be considered for the credit. All eligible taxpayers will be notified as to the amount of credits that they may claim by September

1. Such deadlines apply to applications submitted for Taxable Year 2016 and thereafter.

Virginia Department of Taxation - 5 - April 3, 2017

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Recyclable Materials Processing Equipment Tax Credit Guidelines

Filing Requirements

Upon receiving notification of the credit amount from the Department, the taxpayer must claim the credit on its Virginia income tax return. In the event that a taxpayer does not receive notification of the allowable credit amount before its Virginia income tax return is due, the taxpayer may file the return during the extension period, or it may file the original return without claiming the credit and then file an amended tax return once notification of the allowable credit amount is received.

Carryover Credits

Any tax credit not used for the taxable years in which the purchase price on recycling machinery and equipment was paid may be carried over for credit against the taxpayer’s income taxes in the ten succeeding taxable years until the total credit amount is used. Carryover credits earned and claimed on returns prior to Taxable Year 2015 are not subject to the $2 million annual cap or any of the other changes imposed by the 2015 legislation.

Additional Information

These guidelines are available online under the Laws, Rules and Decisions section of the Department’s website, located at http://www.policylibrary.tax.virginia.gov. For additional information, please contact the Department at (804) 786-2992.

Approved

________ Craig M. Burns Tax Commissioner

Virginia Department of Taxation - 6 - April 3, 2017

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Recyclable Materials Processing Equipment Tax Credit Guidelines

Introduction

During the 2015 Session, Virginia enacted HB 1554 and SB 1205, increasing the credit, setting an annual cap, and amending qualification requirements. The Department, with DEQ, must adopt guidelines to implement these provisions.

The Department publishes guidelines to assist taxpayers with the tax credit. These are not rules under the Administrative Process Act and are issued under the Tax Commissioner’s authority. Additional info will be posted on www.tax.virginia.gov.

These guidelines are Department interpretations, not formal rules, and lack the force of law. If courts find any provision unlawful, taxpayers relying on them are protected from penalties and interest. Taxpayers are encouraged to seek written Department advice.

Legislative History

In 1990, Virginia enacted SB 101, establishing a tax credit for individuals and corporations purchasing machinery used at manufacturing facilities to process recyclable materials. The credit is limited to 40% of the taxpayer’s Virginia tax liability, with DEQ certification required before claiming.

Initially, the Department of Waste Management certified recycling machinery. In 1996, DEQ took over certification, and the credit carryover period was extended from five to ten years.

In 2003, individual claims expired, leaving only corporations eligible from 2003-2007. In 2007, HB 3044 and SB 870 reinstated the credit for individuals starting in 2008.

Virginia Department of Taxation - 1 - April 3, 2017

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Recyclable Materials Processing Equipment Tax Credit Guidelines

Changes Effective for Taxable Year 2015 and After

Starting 2015, taxpayers may claim the credit for purchases of machinery and equipment used mainly on manufacturing premises to produce items from recyclable materials within Virginia for sale.

From 2015 onward, the credit increases to 20% of qualifying expenditures.

Before 2015, the credit was 10% for qualifying purchases used exclusively on manufacturing premises to produce items from recyclable materials within Virginia for sale.

From 2015, machinery must produce items from recyclables to qualify. Before 2015, use on manufacturing premises was required but not explicitly linked to production.

Starting 2015, a taxpayer cannot be denied the credit solely because an unrelated person uses the property, if sold in an arm’s-length transaction. Prior to 2015, no such restriction existed. “Unaffiliated” means a “related person” under IRC § 267.

Annual Credit Cap

From 2015, the credit cap is $2 million annually.

If total approved credits exceed $2 million, each taxpayer receives a pro rata share, calculated by multiplying their requested credits by the ratio of $2 million to total requests.

Before 2015, no cap existed, so proration was unnecessary.

Determining the Purchase Price Paid

From 2015, the credit is 20% of the purchase price; before, it was 10%.

Virginia Department of Taxation - 2 - April 3, 2017

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Recyclable Materials Processing Equipment Tax Credit Guidelines

machinery or equipment. For credit purposes, “purchase price paid” includes:

 The actual amount paid for qualifying machinery or equipment in the purchase year;

 For capitalized qualifying machinery, “purchase price paid” is the original total capitalized cost minus capitalized interest.

Under federal law, a taxpayer must capitalize the purchase price of assets with a useful life beyond the year, including related costs like transportation and installation, per IRC § 263 and Treas. Reg. § 1.263, and IRS Pub 535.

For the Recyclable Materials Processing Equipment Tax Credit, “original total capitalized costs” include the purchase price and capitalized costs incurred in the purchase year, excluding costs from other years or non-capitalized costs. Subtract capitalized interest from the purchase price.

Example 1

In 2016, Taxpayer A purchased qualifying equipment for $10,000, intending to capitalize. It incurred $2,000 in capitalized installation costs and $1,000 in non-capitalized costs. The credit includes the $10,000 purchase and $2,000 installation costs but excludes the $1,000 non-capitalized costs.

Example 2

In 2017, Taxpayer A incurred $2,000 in maintenance costs related to equipment qualifying for the 2015 credit. These costs cannot be used for the credit because they were incurred after the purchase year.

Virginia Department of Taxation - 3 - April 3, 2017

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Recyclable Materials Processing Equipment Tax Credit Guidelines

Capital Leases

Leased machinery and equipment does not generally qualify for the Recyclable Materials Processing Equipment Tax Credit. However, if a taxpayer is required to capitalize the value of leased machinery or equipment for federal income tax purposes in the first year the relevant lease is effective (a “capitalized lease”), the amount actually capitalized and any capitalized costs incurred in such year to acquire or produce such asset are considered “original total capitalized costs” for purposes the credit. A lease of machinery or equipment is required to be treated as a capitalized lease if:  The lease transfers ownership of the leased machinery or equipment at the end of the lease term;

 There is an option to purchase the leased machinery or equipment at a bargain price at the end of the lease term;

 The lease term equals or exceeds 75 percent of the estimated economic life of the leased machinery or equipment; or

 The present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90 percent of the fair market value of the leased machinery or equipment.

Leased machinery not capitalized in the lease year, or capitalized interest, cannot qualify for the credit.

Claiming the Credit

When a Taxpayer May Claim the Credit

Taxpayers can only claim the credit in the purchase year. If not qualified or deadlines missed, they cannot claim or carry over credits later.

In P.D. 04-190, if a taxpayer purchased qualifying equipment but couldn't certify it as integral within three years, they could amend returns to claim the credit or carryover credits if filed timely.

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Recyclable Materials Processing Equipment Tax Credit Guidelines

such returns are filed within three-year statute of limitations. The Department issued similar guidance in P.D. 10-136 (7/12/2010) and P.D. 10-227 (9/29/2010).

Before 2015, rules allowed amended claims within three years. After 2015, new guidelines supersede prior rules due to the credit cap, but old rules apply for purchases before 2015.

Certification by DEQ

Before claiming the credit, taxpayers must obtain written DEQ certification that machinery is integral to recycling, based on its use in manufacturing or processing recyclable materials in Virginia.

Taxpayers must submit Form DEQ50-11S by March 1 after purchase to DEQ for certification, which is required before claiming the credit. Details are on DEQ’s website.

Submission of the Credit Application to the Department

After DEQ certification, taxpayers must apply for credit allocation with Form RMC by June 1. The Department reviews applications, notifies errors by August 1, requests additional info by August 15, and announces credits by September.

1. Such deadlines apply to applications submitted for Taxable Year 2016 and thereafter.

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Recyclable Materials Processing Equipment Tax Credit Guidelines

Filing Requirements

Taxpayers must claim the credit on their Virginia return after notification. If no notification before due date, they may file during extension or amend later.

Carryover Credits

Unused credits can be carried over 10 years. Credits before 2015 are not subject to the $2 million cap or 2015 changes.

Additional Information

These guidelines are available online under the Laws, Rules and Decisions section at http://www.policylibrary.tax.virginia.gov. For more info, contact the Department at (804) 786-2992.

Approved

________ Craig M. Burns Tax Commissioner

Virginia Department of Taxation - 6 - April 3, 2017

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DEPARTMENT OF TAXATION ISSUE PAPER

Virginia Child Care Credit

ISSUE

At

the

last

meeting

of

Joint Subcommittee Studying

Early Childhood

and Day Care Programs Task Force on Corporate

Involvement

and Funding

of

that

a

Virginia

Day Care Programs it was Suggested

individual

income

tax

credit for child care

expenses be considered.

CURRENT LAW

tax

Virginia currently provides an individual income

deduction equal to the amount of em

ployment related expenses

upon

which

the

federal

child

and dependent

care

credit is

based.

child

Generally, this credit base is limited to $2,400 for one

and $4,800 for two or more children.

However,

this credit

base

amount

is

reduced

to

exclude

the

value

of

any

employer-provided day

care

services

to

(up

$5,000)

and

is

limited to the earned income of the lower-earning

spouse.

While

Virginia

allows

a

deduction

for

the

full

amount

employment

related

of

expenses

upon

which

the federal credit is

based,

the

federal

credit

itself

ranges

from a full 30% for

persons

with

income

below

$10,000

to

income

of $28,000 or more.

20% for taxpayers with

The credit is reduced by 1% for each

$2,000 in income between $10,

000 and $28,000.

CHILD

C

ARE CREDITS AND DEDUCTIONS

SSS UN VIER DIALED

is

IN OTHER STATES

Virginia

currently

one of 23 states which provide some sort of credit

or

deduction

for

child care.

12 states have credits which are

generally

computed

as

a

percentage

of

the

federal

ranging

from

credit,

10% to 50% of the federal credit.

5 states have a

state-specific

credit, based in part on the federal credit.

The

remaining

6

states,

including Virginia, allow a deduction for

the federally allowable expenses.

The

federal

credit

is

claimed

on

8. 8% of all returns,

while

state

incentives

are

average.

used by between 7-10% of taxpayers on the

OPTIONS

FOR VIRGINIA CHILD CARE CREDIT

The

asked

that

subcommittee

of

the Department of Taxation review

the revenue impact

a

Virginia

child

care

credit.

Because no specific credit

option

was

suggested,

four

different

types

of

impacted.

credits were

All

of

the

credit

options

are

based

federal

credit

or federal credit base.

on a percentage of the

either

the

Retaining conformity to

federal

credit or credit base is essential both for

compliance

purposes

and

to

make

the

computations easier for

taxpayers.

Additionally,

each credit is "nonrefundable," that

is the credit is limited to Virginia tax lia

bility.

--- Page 2 ---Summary of Options OPTION 1 would provide a state individual income tax credit identical to the federal credit, that is based on between 20% and 30% of the allowable employment related expenses, declining by 1% for each $2,000 in income between $10,000 and $28,000.

OPTION 2 would provide a credit, again declining between $10,000 and $28,000, with the federal credit amounts scaled down to equate to the Virginia tax structure. Thus the credits range from 6% to 4%.

OPTION 3 would provide a credit ranging from 6% at the lowest income levels to 10%. Because the top Virginia tax rate is 5 3/4%, any credit which begins at a level above 5 3/4% will provide a greater tax benefit to all taxpayers than the current deduction.

OPTION 4 would provide a flat 10% credit to all taxpayers, regardless of income level.

The current Virginia deduction costs approximately $20 million annually. The revenue effects of any credit options are identified both in terms of their absolute costs and the extent to which the credit costs exceed the costs of the current deduction.

The following table summarizes the credit options and their costs.

OPTION 1 OPTION 2 OPTION 3 OPTION 4 Virginia Adjusted Credit (as % of federal expenses) S 0- $ 9,999 30.0% 6.0% 10.0% 10.0% 10,000 - 11,999 29.0 5.8 9.6 10.0 12,000 - 13,999 28.0 5.6 9.2 10.0 14,000 - 15,999 27.0 5.4 8.8 10.0 16,000 - 17,999 26.0 ae 8.4 10.0 18,000 - 19,999 25.0 5.0 8.0 10.0 20,000 - 21,999 24.0 4.8 7.6 10.0 22,000 - 23,999 23.0 4.6 7.2 10.0 24,000 - 25,999 22.0 4.4 6.8 10.0 26,000 - 27,999 21.0 4.2 6.4 10.0 28,000 and over 20.0 4.0 6.0 10.0 (millions of $) Absolute Cost of Credit $78.6 $15.7 $24.3 $35.3 Cost of Current Deduction 19.1 19.1 19.1 19.1 Additional Cost of Credit 59.5 (3.4) 5.2 16.2

--- Page 3 ---

COMMENTS ON CREDIT OPTIONS

• All of the credits examined are nonrefundable. Current Virginia law relieves married persons with income of less than $8,000 of all Virginia tax liability--these taxpayers would receive no benefit from a credit. Likewise, taxpayers with substantial deductions and very little tax liability will in many cases receive no more benefit from a credit than from the current deduction.

¢ Viewing the costs of the various credit options, it is appropriate to consider whether a tax credit is a good alternative to a direct appropriation for child care programs. Tax credits generally carry substantially greater administrative costs and are a "hit and miss" approach to reaching target groups, that is, the credit will provide relief and/or incentives to taxpayers ofmily ..if:. 1) £t' dis understood by taxpayers; 2) taxpayers have adequate income to absorb the credit; and 3) the credit is a sufficient motivator to encourage expenditures.

¢ Credits must also be considered in terms of their exportability. Some portion of every credit is exported to the federal government by taxpayers who itemize their deductions. This is also true for a deduction, but to a much lesser degree. The following example illustrates this concept.

A taxpayer with 2 children in child care has $4,800 in qualifying expenses. Assuming the Virginia credit is 10%, the taxpayer would receive a $480 credit. This increases the Virginia tax refund reportable for federal purposes, with the following results: If the taxpayer is in a 17% federal tax bracket, the federal income tax will be increased by $81.60, reducing the value of the credit to $398.60. If the taxpayer is in the 28% federal tax bracket, the value of the credit is reduced by $134.40 to $345.60.

Therefore, the state "spends" $480 to Qive a taxpayer a credit worth between $80 and $135 less because of the federal tax consequences.

ADMINISTRATIVE COSTS: Although the administrative costs of a

child care credit would vary depending on how the credit is

constructed, it is estimated that first-year costs might be approximately $200,000.

December 13, 1988

--- Page 1 ---

DEPARTMENT OF TAXATION ISSUE PAPER

Virginia Child Care Credit

ISSUE

At

the

last

meeting

of

Joint Subcommittee Studying

Early Childhood

and Day Care Programs Task Force on Corporate

Involvement

and Funding

of

that

a

Virginia

Day Care Programs it was Suggested

individual

income

tax

credit for child care

expenses be considered.

CURRENT LAW

tax

Virginia currently provides an individual income

deduction equal to the amount of em

ployment related expenses

upon

which

the

federal

child

and dependent

care

credit is

based.

child

Generally, this credit base is limited to $2,400 for one

and $4,800 for two or more children.

However,

this credit

base

amount

is

reduced

to

exclude

the

value

of

any

employer-provided day

care

services

to

(up

$5,000)

and

is

limited to the earned income of the lower-earning

spouse.

While

Virginia

allows

a

deduction

for

the

full

amount

employment

related

of

expenses

upon

which

the federal credit is

based,

the

federal

credit

itself

ranges

from 30% for

persons

with

income

below

$10,000

to

income

of $28,000 or more.

20% for taxpayers with

The credit is reduced by 1% for each

$2,000 in income between $10,

000 and $28,000.

CHILD

C

ARE CREDITS AND DEDUCTIONS

SSS UN VIER DIALED

is

IN OTHER STATES

Virginia

currently

one of 23 states providing some credit

or

deduction

for

child care.

12 states have credits which are

generally

computed

as

a

percentage

of

the

federal

ranging

from

credit,

10% to 50% of the federal credit.

5 states have a

state-specific

credit, partly based on federal credit.

The

remaining

6

states,

including Virginia, allow a deduction for

the federally allowable expenses.

The

federal

credit

is

claimed

on

8. 8% of all returns,

while

state

incentives

are

average.

used by between 7-10% of taxpayers on the

OPTIONS

FOR VIRGINIA CHILD CARE CREDIT

The

asked

that

subcommittee

of

the Department of Taxation review

the revenue impact

a

Virginia

child

care

credit.

Because no specific credit

option

was

suggested,

four

different

types

of

impacted.

credits were

All

of

the

credit

options

are

based

federal

credit

or federal credit base.

on a percentage of the

either

the

Retaining conformity to

federal

credit or credit base is essential both for

compliance

purposes

and

to

make

the

computations easier for

taxpayers.

Additionally,

each credit is "nonrefundable," that

limit to Virginia tax liability.

bility.

OPTION 1 offers a state income tax credit equal to the federal credit, based on 20%-30% of employment expenses, decreasing by 1% per $2,000 income between $10,000 and $28,000.

OPTION 2 offers a credit declining between $10,000 and $28,000, scaled to Virginia tax, ranging from 6% to 4%.

OPTION 3 offers a credit from 6% at low income to 10%. Since the top Virginia rate is 5 3/4%, credits above that provide greater tax benefits than current deductions.

OPTION 4 provides a flat 10% credit to all taxpayers.

The current Virginia deduction costs approximately $20 million annually. The revenue effects of any credit options are identified both in terms of their absolute costs and the extent to which the credit costs exceed the costs of the current deduction.

The table summarizes credit options and costs.

OPTION 1 OPTION 2 OPTION 3 OPTION 4 Virginia Adjusted Credit (as % of federal expenses) S 0- $ 9,999 30.0% 6.0% 10.0% 10.0% 10,000 - 11,999 29.0 5.8 9.6 10.0 12,000 - 13,999 28.0 5.6 9.2 10.0 14,000 - 15,999 27.0 5.4 8.8 10.0 16,000 - 17,999 26.0 ae 8.4 10.0 18,000 - 19,999 25.0 5.0 8.0 10.0 20,000 - 21,999 24.0 4.8 7.6 10.0 22,000 - 23,999 23.0 4.6 7.2 10.0 24,000 - 25,999 22.0 4.4 6.8 10.0 26,000 - 27,999 21.0 4.2 6.4 10.0 28,000 and over 20.0 4.0 6.0 10.0 (millions of $) Absolute Cost of Credit $78.6 $15.7 $24.3 $35.3 Cost of Current Deduction 19.1 19.1 19.1 19.1 Additional Cost of Credit 59.5 (3.4) 5.2 16.2

--- Page 3 ---

COMMENTS ON CREDIT OPTIONS

• All of the credits examined are nonrefundable. Current Virginia law relieves married persons with income of less than $8,000 of all Virginia tax liability--these taxpayers would receive no benefit from a credit. Likewise, taxpayers with substantial deductions and very little tax liability will in many cases receive no more benefit from a credit than from the current deduction.

¢ Viewing the costs of the various credit options, it is appropriate to consider whether a tax credit is a good alternative to a direct appropriation for child care programs. Tax credits generally carry substantially greater administrative costs and are a "hit and miss" approach to reaching target groups, that is, the credit will provide relief and/or incentives to taxpayers ofmily ..if:. 1) £t' dis understood by taxpayers; 2) taxpayers have adequate income to absorb the credit; and 3) the credit is a sufficient motivator to encourage expenditures.

¢ Credits must also be considered in terms of their exportability. Some portion of every credit is exported to the federal government by taxpayers who itemize their deductions. This is also true for a deduction, but to a much lesser degree. The following example illustrates this concept.

A taxpayer with $4,800 expenses and 10% Virginia credit gets $480. Federal tax increases reduce net benefit: $81.60 at 17% bracket, $134.40 at 28%.

Therefore, the state "spends" $480 to Qive a taxpayer a credit worth between $80 and $135 less because of the federal tax consequences.

ADMINISTRATIVE COSTS: Although the administrative costs of a

child care credit would vary depending on how the credit is

construction, first-year costs estimated at $200,000.

December 13, 1988

--- Page 1 ---

Updated Virginia Insurance Premiums License Tax Guidelines

**These Guidelines supersede the Virginia Insurance Premiums License Tax Guidelines issued by the Department on December 7, 2012 (Public Document 12-203).

Introduction

During its 2011 session, the Virginia General Assembly enacted Senate Bill 1124 (2011 Acts of Assembly, Chapter 850), which transferred the administration of the Insurance Premiums License Tax from the State Corporation Commission (“SCC”) to the Department of Taxation (“the Department”). This transfer includes the processing of tax reports, the handling of payments and billing, customer service functions, collections, and certain auditing duties. The SCC’s Bureau of Insurance (“BOI”) will continue to be responsible for the licensing of insurance companies and the administration of the maintenance fund.

Certain provisions of the 2011 legislation mandate that declarations of estimated tax be

made in accordance with guidelines prescribed by the Department. Accordingly, the Department has developed these guidelines, which explain the:

 Timing of the transfer of administration to the Department from the SCC and duties the SCC’s BOI will retain;

 Declarations of estimated tax made by taxpayers subject to the Insurance Premiums License Tax;

 Declarations of estimated tax and amendments to such declarations for insurance companies with a taxable year of less than 12 months; and

 Penalty and interest rules for the underpayment of estimated Insurance Premiums License Taxes.

In addition to the procedures regarding declarations of estimated taxes and estimated tax payments, these guidelines also explain the process for exchanging information between the Department and the SCC, as well as new procedures that will apply as a result of the transfer of the administration of the tax to the Department.

During the 2013 session, the Virginia General Assembly enacted House Bill 2155 (2013 Acts of Assembly, Chapter 29) and Senate Bill 1216 (2013 Acts of Assembly, Chapter 163), which made technical corrections to the Insurance Premiums License Tax. In part, the 2013 legislation make changes to the interest rate applied to underpayments of tax by insurance companies, the Insurance Premiums License Tax payment and billing deadlines, and the provisions for disclosure of information related to the Insurance Premiums License Tax.

These guidelines are issued by the Department to provide guidance to taxpayers regarding the change in administration of the Insurance Premiums License Tax. These

Virginia Department of Taxation 1 July 1, 2013

--- Page 2 ---

Updated Virginia Insurance Premiums License Tax Guidelines

guidelines are exempt from the Administrative Process Act (Va. Code § 2.2-4000 et seq.) and are being published in accordance with the Tax Commissioner’s general authority to supervise the administration of the tax laws of the Commonwealth pursuant to Va. Code § 58.1-202. These Guidelines supersede the Virginia Insurance Premiums License Tax Guidelines issued by the Department on December 7, 2012 (Public Document 12-203). As necessary, additional guidelines will be published and posted on the Department’s website, www.tax.virginia.gov.

These guidelines represent the Department’s interpretation of the relevant laws. They do not constitute formal rulemaking and hence do not have the force and effect of law or regulation. In the event that the final determination of any court holds that any provisions of these guidelines are contrary to law, taxpayers who follow these guidelines will be treated as relying on erroneous written advice for purposes of waiving penalty and interest under Va. Code §§ 58.1-105, 58.1-1835, and 58.1-1845. To the extent there is a question regarding the application of these guidelines, taxpayers are

encouraged to write to the Department and seek a written response to their question.

Timing of the Transfer of the Insurance Premiums License Tax

Effective for taxable years beginning on and after January 1, 2013, the administration of the Insurance Premiums License Tax will be transferred from the SCC’s BOI to the Department. Responsibilities transferred to the Department include the processing of tax reports, the handling of related payments and billing, customer service functions, and all collections and auditing duties. Additionally, the Department will administer the retaliatory cost assessment on certain foreign insurance companies, as well as oversee the retaliatory costs tax credit for domestic insurance companies.

The BOI will continue to be responsible for the licensing of insurance companies. In the event that a taxpayer fails to pay the Insurance Premiums License Tax, the Department will notify the BOI, which may then suspend or revoke the insurer’s license. The BOI will continue to administer the annual Maintenance, Fire, Flood, Fraud, and HEAT Fund

assessments. All applicable taxpayers will continue to receive Maintenance, Fire, Flood, Fraud, and HEAT Fund assessments from the BOI after the transfer and will be responsible for making payments to the BOI for such assessments.

The Department will begin administering the Insurance Premiums License Tax for Taxable Year 2013. Taxpayers must file their annual Insurance Premiums License Tax reports for Taxable Year 2012 with the BOI by March 1, 2013. All subsequent tax reports, including declarations of estimated payments, will be filed with the Department.

Insurance companies’ first filing to the Department will be the first quarter estimated Insurance Premiums License Tax declaration, which is due April 15, 2013. Insurance companies must file annual tax reports for Taxable Year 2013 with the Department by March 1, 2014.

Virginia Department of Taxation 2 July 1, 2013

--- Page 3 ---

Updated Virginia Insurance Premiums License Tax Guidelines

Declarations of Estimated Tax

Any insurance company with an annual direct gross Insurance Premiums License Tax liability that is expected to exceed $3,000 is required to file estimated payments throughout the year. This $3,000 limitation is imposed after accounting for any applicable tax credits. Insurance companies must use Form 800ES to calculate estimated payments. This form provides instructions for calculating the amount of Insurance Premiums License Tax an insurance company should pay, as well as the amount and due dates for each estimated tax payment. Insurance companies may submit payments electronically via the Department’s website at www.tax.virginia.gov.

Any insurance company with an annual direct gross Insurance Premiums License Tax liability that is not expected to exceed $3,000, after all applicable credits have been utilized, is not required to file declarations of estimated Insurance Premiums License Tax for that year. Such a taxpayer would pay any Insurance Premiums License Tax

with the annual tax report due March 1 of the year following the taxable year.

Penalty and Interest Provisions for Declarations of Estimated Tax

If an insurance company submits a declaration of estimated tax past its due date, interest will begin accruing on the unpaid balance at the rate set forth in Va. Code § 58.1-15. If the payment is not submitted by the due date of the annual tax report, the insurance company will be subject to a late payment penalty equal to ten percent of the amount of tax due. Additionally, any company that fails to file the annual tax report by the March 1 deadline will be subject to a penalty of $50 per day.

Addition to Tax for Underpayment of Estimated Taxes

In addition to the interest that accrues on late estimated tax payments and the late filing and payment penalties that may be assessed, if an insurance company fails to pay the license tax by the due date of the annual tax report, interest will continue to accrue at

the rate set forth in Va. Code § 58.1-15. For purposes of determining whether additional interest is due, the amount of the underpayment is equal to the amount of the installment that would be required to be paid if the estimated tax were equal to ninety percent of the tax ascertained for the license year, less the amount of the installment paid on or before the due date. The period of the underpayment runs from the date the installment was required to be paid to the earlier of:

 The first day of the third month following the close of the taxable year, or

 With respect to any portion of the underpayment, the date on which such portion is paid.

An insurance company can compute the amount of the underpayment and the addition to tax by completing Form 800C.

Virginia Department of Taxation 3 July 1, 2013

--- Page 4 ---

Updated Virginia Insurance Premiums License Tax Guidelines

Exceptions to the Addition to Tax

Pursuant to Va. Code § 58.1-2528, there are several exceptions to the addition to tax for the underpayment of an installment. Such addition to tax is not imposed if the total amount of all payments of estimated tax made on or before the last date prescribed for the payment of such installment equals or exceeds the amount which would have been required to be paid on or before such date if the estimated tax were whichever of the following is the lesser:

 The tax as shown on the annual tax report for the preceding taxable year, so long as such tax was computed on the basis of a taxable year of twelve months.

 An amount equal to the tax computed at the rate applicable to the taxable year but otherwise on the basis of the facts shown on the annual tax report of the insurance company for, and the law applicable to, the preceding taxable year; or

 An amount equal to ninety percent of the tax measured by direct gross premium income received or derived in the taxable year computed by placing on an annualized basis the taxable direct gross premium income:

o For the first three months of the taxable year, in the case of the installment required to be paid in the fourth month,

o For the first three months or for the first five months of the taxable year, in the case of the installment required to be paid in the sixth month,

o For the first six months or for the first eight months of the taxable year, in the case of the installment required to be paid in the ninth month, and

o For the first nine months or for the first eleven months of the taxable year, in the case of the installment required to be paid in the twelfth month of the taxable year.

When computing whether the third exception applies, the taxable direct gross premium income is placed on an annualized basis by multiplying the taxable direct gross premium income computed by twelve and dividing the resulting amount by the number of months in the taxable year (three, five, six, eight, nine, or eleven, as the case may be). An insurance company can notify the Department that one of the exceptions applies by completing Form 800C.

Declarations for Insurance Companies with Taxable Years of Less than Twelve Months

Any insurance company with a taxable year of less than 12 months but whose annual

Insurance Premiums License Tax liability is expected to exceed $3,000 must file

Virginia Department of Taxation 4 July 1, 2013

--- Page 5 ---

Updated Virginia Insurance Premiums License Tax Guidelines

declarations of estimated payments of Insurance Premiums License Tax. Such taxpayers must follow the same procedures as those described above.

The date the declaration is to be filed and the number and amount of installments to be paid is determined as follows:

 If an insurance company meets the requirements before April 1, it must file its first declaration by April 15 of the taxable year, and must make four estimated payments equal to one-fourth of the estimated tax;

 If an insurance company meets the requirements after March 30 but before June 1, it must file its first declaration by June 15 of the taxable year, and must make three estimated payments equal to one-third of the estimated tax;

 If an insurance company meets the requirements after May 31 but before September 1, it must file its first declaration by September 15 of the taxable year, and must make two estimated payments equal to one-half of the estimated tax.

 If an insurance company meets the requirements after August 30 but before December 1, it must file one declaration by December 15 of the taxable year, and must make one estimated payment equal to one hundred percent of the estimated tax.

Amending Declarations of Estimated Tax

Va. Code § 58.1-2522 allows insurance companies to submit amended declarations of estimated taxes. An amendment of a declaration may be filed in any interval between

installment dates prescribed for the taxable year, but only one amendment may be filed in each such interval. In order to amend a declaration of estimated taxes, a taxpayer should complete the “Amended Computation” section of Form 800ES, and follow the form instructions.

Penalty and Interest Rules for the Underpayment of Taxes

If an insurance company fails to pay the required tax for a given taxable year by the time its annual tax report is due, a penalty of 10 percent of the amount due. An additional penalty of $50 per day is added for each day an insurance company fails to file an annual tax report. In addition to these penalties, interest will continue to accrue at the rate set forth in Va. Code § 58.1-15 until the date of full payment.

Exchange of Information Between the Department and the SCC

Va. Code § 58.1-3 generally allows the Department to share information with another

agency of the Commonwealth in the line of duty under state law. Additionally, Va. Code § 58.1-2528 specifically authorizes the Department and the SCC to exchange

Virginia Department of Taxation 5 July 1, 2013

--- Page 6 ---

Updated Virginia Insurance Premiums License Tax Guidelines

information for the purposes of enforcing the provisions of the Insurance Premiums License Tax. The SCC will provide the Department with information regarding which insurers are licensed in Virginia and may have an Insurance Premiums License Tax liability. Pursuant to Va. Code § 58.1-2507, the Department will notify the SCC if an insurance company fails to make the necessary payment with its annual tax report. The SCC may use such information to suspend or revoke the insurance company’s license to do business in Virginia if the additional amounts due are not paid.

Additional Information

These guidelines are available online in the Tax Policy Library section of the Department’s website, located at www.policylibrary.tax.virginia.gov. For additional information, please contact the Department at (804) 367-8037. For any questions regarding licensing or annual maintenance assessments, please contact the State Corporation Commission’s Bureau of Insurance at (804) 371-9741.

Approved

---

Craig M. Burns Tax Commissioner

Virginia Department of Taxation 6 July 1, 2013

--- Page 1 ---

Updated Virginia Insurance Premiums License Tax Guidelines

These Guidelines supersede the Department's December 7, 2012, Virginia Insurance Premiums License Tax Guidelines (Public Document 12-203).

Introduction

In 2011, Virginia enacted SB 1124 (Acts of Assembly, Chapter 850), transferring Insurance Premiums License Tax administration from SCC to the Department, including reports, payments, billing, customer service, collections, and audits. The SCC’s Bureau of Insurance (BOI) retains responsibility for licensing and the maintenance fund.

Certain 2011 legislation provisions mandate declarations of estimated tax

made per Department guidelines. These guidelines explain the:

 Timing of the transfer to the Department and duties retained by the SCC’s BOI;

 Estimated tax declarations by taxpayers subject to the Insurance Premiums License Tax;

 Estimated tax declarations and amendments for insurance companies with taxable years under 12 months;

 Penalty and interest rules for the underpayment of estimated Insurance Premiums License Taxes.

These guidelines also explain information exchange procedures between the Department and SCC and new procedures resulting from the transfer of tax administration.

In 2013, Virginia enacted HB 2155 (Ch. 29) and SB 1216 (Ch. 163), making technical corrections to the Insurance Premiums License Tax, including interest rates, payment deadlines, and disclosure provisions.

These guidelines provide taxpayers guidance on the change in Insurance Premiums License Tax administration.

Virginia Department of Taxation 1 July 1, 2013

--- Page 2 ---

Updated Virginia Insurance Premiums License Tax Guidelines

guidelines are exempt from the Administrative Process Act (Va. Code § 2.2-4000 et seq.) and are being published in accordance with the Tax Commissioner’s general authority to supervise the administration of the tax laws of the Commonwealth pursuant to Va. Code § 58.1-202. These Guidelines supersede the Virginia Insurance Premiums License Tax Guidelines issued by the Department on December 7, 2012 (Public Document 12-203). As necessary, additional guidelines will be published and posted on the Department’s website, www.tax.virginia.gov.

These guidelines represent the Department’s interpretation of the relevant laws. They do not constitute formal rulemaking and hence do not have the force and effect of law or regulation. In the event that the final determination of any court holds that any provisions of these guidelines are contrary to law, taxpayers who follow these guidelines will be treated as relying on erroneous written advice for purposes of waiving penalty and interest under Va. Code §§ 58.1-105, 58.1-1835, and 58.1-1845. To the extent there is a question regarding the application of these guidelines, taxpayers are

encouraged to write to the Department and seek a written response to their question.

Timing of the Transfer of the Insurance Premiums License Tax

Effective for taxable years beginning on and after January 1, 2013, the administration of the Insurance Premiums License Tax will be transferred from the SCC’s BOI to the Department. Responsibilities transferred to the Department include the processing of tax reports, the handling of related payments and billing, customer service functions, and all collections and auditing duties. Additionally, the Department will administer the retaliatory cost assessment on certain foreign insurance companies, as well as oversee the retaliatory costs tax credit for domestic insurance companies.

The BOI will continue to be responsible for the licensing of insurance companies. In the event that a taxpayer fails to pay the Insurance Premiums License Tax, the Department will notify the BOI, which may then suspend or revoke the insurer’s license. The BOI will continue to administer the annual Maintenance, Fire, Flood, Fraud, and HEAT Fund

assessments. All applicable taxpayers will continue to receive Maintenance, Fire, Flood, Fraud, and HEAT Fund assessments from the BOI after the transfer and will be responsible for making payments to the BOI for such assessments.

The Department will begin administering the Insurance Premiums License Tax for Taxable Year 2013. Taxpayers must file their annual Insurance Premiums License Tax reports for Taxable Year 2012 with the BOI by March 1, 2013. All subsequent tax reports, including declarations of estimated payments, will be filed with the Department.

Insurance companies’ first filing to the Department will be the first quarter estimated Insurance Premiums License Tax declaration, which is due April 15, 2013. Insurance companies must file annual tax reports for Taxable Year 2013 with the Department by March 1, 2014.

Virginia Department of Taxation 2 July 1, 2013

--- Page 3 ---

Updated Virginia Insurance Premiums License Tax Guidelines

Declarations of Estimated Tax

Insurance companies with an annual gross Insurance Premiums License Tax liability exceeding $3,000 must file estimated payments using Form 800ES, which includes calculation instructions and due dates. Payments can be submitted electronically at www.tax.virginia.gov.

Insurance companies with an annual gross Insurance Premiums License Tax liability not exceeding $3,000 after credits are not required to file estimated declarations and will pay any owed tax.

with the annual tax report due March 1 of the following taxable year.

Penalty and Interest for Estimated Tax Declarations

If an insurance company files a late estimated tax declaration, interest accrues at Va. Code § 58.1-15. A late report incurs a 10% penalty, and failure to file by March 1 results in $50 daily penalties.

Addition to Tax for Underpayment of Estimated Taxes

Besides interest on late estimated payments and penalties, if an insurance company fails to pay the license tax by the due date, interest accrues at

at the rate in Va. Code § 58.1-15. The underpayment equals the installment needed if estimated tax is 90% of the year's tax minus the paid installment. The underpayment period runs from the due date to the earlier of:

 The first day of the third month following the close of the taxable year, or

 With respect to any portion of the underpayment, the date on which such portion is paid.

An insurance company computes the underpayment and tax addition using Form 800C.

Virginia Department of Taxation 3 July 1, 2013

--- Page 4 ---

Updated Virginia Insurance Premiums License Tax Guidelines

Exceptions to the Addition to Tax

Under Va. Code § 58.1-2528, exceptions to the underpayment penalty exist if total estimated payments made by the due date meet or exceed the lesser of the following:

 The tax as shown on the annual tax report for the preceding taxable year, so long as such tax was computed on the basis of a taxable year of twelve months.

 An amount equal to the tax computed at the rate applicable to the taxable year but otherwise on the basis of the facts shown on the annual tax report of the insurance company for, and the law applicable to, the preceding taxable year; or

 An amount equal to ninety percent of the tax measured by direct gross premium income received or derived in the taxable year computed by placing on an annualized basis the taxable direct gross premium income:

o For the first three months of the taxable year, in the case of the installment required to be paid in the fourth month,

o For the first three months or for the first five months of the taxable year, in the case of the installment required to be paid in the sixth month,

o For the first six months or for the first eight months of the taxable year, in the case of the installment required to be paid in the ninth month, and

o For the first nine months or for the first eleven months of the taxable year, in the case of the installment required to be paid in the twelfth month of the taxable year.

To determine if the third exception applies, annualize the gross premium income by multiplying by twelve and dividing by the months in the taxable year. Notify the Department via Form 800C.

Declarations for Insurance Companies with Shorter Taxable Years

Any insurance company with a taxable year under 12 months, but whose annual

Insurance Premiums License Tax liability exceeding $3,000 must file

Virginia Department of Taxation 4 July 1, 2013

--- Page 5 ---

Updated Virginia Insurance Premiums License Tax Guidelines

must file estimated Insurance Premiums License Tax payments following the same procedures.

The declaration filing date and installment amounts are determined as follows:

 If an insurance company meets the requirements before April 1, it must file its first declaration by April 15 of the taxable year, and must make four estimated payments equal to one-fourth of the estimated tax;

 If an insurance company meets the requirements after March 30 but before June 1, it must file its first declaration by June 15 of the taxable year, and must make three estimated payments equal to one-third of the estimated tax;

 If an insurance company meets the requirements after May 31 but before September 1, it must file its first declaration by September 15 of the taxable year, and must make two estimated payments equal to one-half of the estimated tax.

 If an insurance company meets the requirements after August 30 but before December 1, it must file one declaration by December 15 of the taxable year, and must make one estimated payment equal to one hundred percent of the estimated tax.

Amending Declarations of Estimated Tax

Va. Code § 58.1-2522 allows insurance companies to submit amended declarations of estimated taxes. An amendment of a declaration may be filed in any interval between

installment dates prescribed for the taxable year, but only one amendment may be filed in each such interval. In order to amend a declaration of estimated taxes, a taxpayer should complete the “Amended Computation” section of Form 800ES, and follow the form instructions.

Penalty and Interest Rules for the Underpayment of Taxes

If an insurance company fails to pay the required tax for a given taxable year by the time its annual tax report is due, a penalty of 10 percent of the amount due. An additional penalty of $50 per day is added for each day an insurance company fails to file an annual tax report. In addition to these penalties, interest will continue to accrue at the rate set forth in Va. Code § 58.1-15 until the date of full payment.

Exchange of Information Between the Department and the SCC

Va. Code § 58.1-3 generally allows the Department to share information with another

agency of the Commonwealth in the line of duty under state law. Additionally, Va. Code § 58.1-2528 specifically authorizes the Department and the SCC to exchange

Virginia Department of Taxation 5 July 1, 2013

--- Page 6 ---

Updated Virginia Insurance Premiums License Tax Guidelines

information for the purposes of enforcing the provisions of the Insurance Premiums License Tax. The SCC will provide the Department with information regarding which insurers are licensed in Virginia and may have an Insurance Premiums License Tax liability. Pursuant to Va. Code § 58.1-2507, the Department will notify the SCC if an insurance company fails to make the necessary payment with its annual tax report. The SCC may use such information to suspend or revoke the insurance company’s license to do business in Virginia if the additional amounts due are not paid.

Additional Information

These guidelines are available online in the Tax Policy Library section of the Department’s website, located at www.policylibrary.tax.virginia.gov. For additional information, please contact the Department at (804) 367-8037. For any questions regarding licensing or annual maintenance assessments, please contact the State Corporation Commission’s Bureau of Insurance at (804) 371-9741.

Approved

---

Craig M. Burns Tax Commissioner

Virginia Department of Taxation 6 July 1, 2013

--- Page 1 --- POLICY RECOMMENDATIONS SUBJECT: Increase in Late Filing/Payment Penalties to 6% per month up to a maximum of 30% effective July 1, 1991

(1991 HB1830/SB739).

ISSUE ONE: How do the penalties apply if an individual income tax return is timely filed on May 1, but payment is not included?

RECOMMENDATION: The late payment penalty would apply for five months or until full payment is made. The rate of the penalty would vary since the return was timely filed prior to the effective date of the rate change as provided below: Late payment penalty of 5% assessed in May and June.

Late payment penalty of 6% assessed in July, August and September.

Total late payment penalty of 28%.

Janije E. Bowen, Director 4 [2sfer TaxvPolicy Division Date APPROVED: Lit —$<—>— re 6.1 y Gs W. H. Forst Date Tax Commissioner ISSUE TWO: How would the penalties apply if a sales tax return is filed late after July 1, but includes full payment of the tax?

RECOMMENDATION: Because the return is filed after July 1, the , late filing penalty would apply at 6% per month, up to the maximum penalty of 30%. The taxable period (before or after July

1. does not matter in this case, nor does the fact that the tax Was paid in full, since the return was filed late and after July
2. \ ‘, thy _— ‘ Janie E. Bowen, Director fy /a Taw Policy Division Date APPROVED: LUT an s/o W. H. Forst Date Tax Commissioner

--- Page 2 --- POLICY RECOMMENDATION Late Filing/Payment Penalties Page Two ISSUE THREE: A) How would the penalties apply =: a sales tax return is filed before July 1 with full payment, but it is not timely filed?

B. How would the penalties apply if a sales tax return is filed before July 1 without a payment, but it is not timely filed?

RECOMMENDATION: A) Because the return is filed before July 1, the late filing penalty would apply at 5% per month for each month or fraction thereof that the return is late.

B. The late filing/payment penalties would apply for a five month period or until full payment is made.

For example, if the return was due March 20 and filed without a payment on June 15, the rate of the penalties would vary since the return was filed prior to July 1 as provided below: March, Late filing penalty of 5% assessed for, April, May and June. . Late payment penalty of 6% assessed for July, Total late filing/payment penalties of 26%. x PA 4 Sobre Janie E. Bowen, Director lisse: Tax Policy Division Date Pad APPROVED: {4b lama ~

• A. Forst Date ;

Tax Commissioner

--- Page 1 --- POLICY RECOMMENDATIONS SUBJECT: Increase in Late Filing/Payment Penalties to 6% per month up to a maximum of 30% effective July 1, 1991

(1991 HB1830/SB739).

ISSUE ONE: How do the penalties apply if an individual income tax return is timely filed on May 1, but payment is not included?

RECOMMENDATION: The late payment penalty applies for five months or until full payment. The rate varies since the return was timely filed before the rate change: 5% late payment penalty in May and June.

Late payment penalty of 6% assessed in July, August and September.

Total late payment penalty of 28%.

Janije E. Bowen, Director 4 [2sfer TaxvPolicy Division Date APPROVED: Lit —$<—>— re 6.1 y Gs W. H. Forst Date Tax Commissioner ISSUE TWO: How would the penalties apply if a sales tax return is filed late after July 1, but includes full payment of the tax?

RECOMMENDATION: Because the return is filed after July 1, the , late filing penalty would apply at 6% per month, up to the maximum penalty of 30%. The taxable period (before or after July

1. The fact that the tax was paid in full does not matter, as the return was filed late after July.
2. \ ‘, thy _— ‘ Janie E. Bowen, Director fy /a Taw Policy Division Date APPROVED: LUT an s/o W. H. Forst Date Tax Commissioner

--- Page 2 --- POLICY RECOMMENDATION Late Filing/Payment Penalties Page Two ISSUE THREE: A) How do penalties apply if a sales tax return is filed before July 1 with full payment but is not timely?

B. How do penalties apply if a sales tax return is filed before July 1 without payment but is not timely?

RECOMMENDATION: A) Since the return is filed before July 1, late filing penalty applies at 5% per month for each month or fraction thereof late.

B. Late filing/payment penalties apply for five months or until full payment.

For example, if the return was due March 20 and filed without a payment on June 15, the rate of the penalties would vary since the return was filed prior to July 1 as provided below: March, Late filing penalty of 5% assessed for, April, May and June. . Late payment penalty of 6% assessed for July, Total late filing/payment penalties of 26%. x PA 4 Sobre Janie E. Bowen, Director lisse: Tax Policy Division Date Pad APPROVED: {4b lama ~

• A. Forst Date ;

Tax Commissioner

--- Page 1 ---

NOTE: AS THE 2021 APPROPRIATION ACT MAINTAINS THE $10.0 MILLION

THRESHOLD FOR DEALERS TO BE LIABLE FOR THE ACCELERATED SALES

TAX PAYMENT DUE IN JUNE 2021, DEALERS SHOULD CONTINUE TO RELY ON

THESE GUIDELINES. MORE INFORMATION IS AVAILABLE AT

WWW.TAX.VIRGINIA.GOV/ACCELERATED-SALES-AND-USE-TAX-PAYMENT

GUIDELINES FOR THE

ACCELERATED SALES TAX PAYMENT

May 25, 2019

These Guidelines are effective for the additional payment made by dealers who are required to make accelerated sales tax payments in June 2019.

2019 House Bill 1700, the 2019 Appropriation Act, raises the accelerated sales tax threshold to taxable sales and/or purchases of $10.0 million or greater in the previous fiscal year for the accelerated sales tax payment due in June 2020. The threshold

remains at $4.0 million for the payment due in June 2019. Each dealer meeting this threshold is required to make a payment in June equal to 90 percent of its Retail Sales and Use Tax liability for June of the previous year. Each affected dealer will be entitled to take a credit for the amount of the accelerated sales tax payment on its return for June of the current year due July 20. The Department of Taxation (the “Department”) will notify each affected dealer in early May of this obligation to make an accelerated sales tax payment. The Department will provide each affected dealer with payment instructions, a payment voucher for the additional payment, and a worksheet to assist the dealer in reconciling its payment for its June tax liability due in July with the accelerated sales tax payment in late May. The thresholds for the accelerated sales tax payments and the enacting legislation are provided in the chart below.

Applied to Dealers Payment Enacting Legislation with Taxable Sales in June of and Purchases of House Bill 29 (2010 Acts of Assembly, Chapter 872) 2010 $1 million or more House Bill 30 (2010 Acts of Assembly, Chapter 874) House Bill 1500 (2011 Acts of Assembly, Chapter 890) 2011 $5.4 million or more House Bill 1300 (2012 Acts of Assembly Special 2012 $26 million or more Session I, Chapter 2) No change 2013 $26 million or more House Bill 1500 (2013 Acts of Assembly, Chapter 806) 2014 $48.5 million or more House Bill 5001 (2014 Acts of Assembly, Special Session I, Chapter 1) House Bill 1400 (2015 Acts of Assembly, Chapter 665) 2015 $2.5 million or more House Bill 1400 (2015 Acts of Assembly, Chapter 665) 2016 $2.5 million or more House Bill 1500 (2017 Acts of Assembly, Chapter 836) 2017 $2.5 million or more House Bill 1500 (2017 Acts of Assembly, Chapter 836) 2018 $4 million or more House Bill 5002 (2018 Acts of Assembly, Special 2019 $4 million or more Session I, Chapter 2)

1

[TABLE 1-1] Enacting Legislation | Payment in June of | | Applied to Dealers | | | | with Taxable Sales | | | | and Purchases of | House Bill 29 (2010 Acts of Assembly, Chapter 872) House Bill 30 (2010 Acts of Assembly, Chapter 874) | 2010 | $1 million or more | | House Bill 1500 (2011 Acts of Assembly, Chapter 890) | 2011 | $5.4 million or more | | House Bill 1300 (2012 Acts of Assembly Special Session I, Chapter 2) | 2012 | $26 million or more | | No change | 2013 | $26 million or more | | House Bill 1500 (2013 Acts of Assembly, Chapter 806) House Bill 5001 (2014 Acts of Assembly, Special Session I, Chapter 1) | 2014 | $48.5 million or more | | House Bill 1400 (2015 Acts of Assembly, Chapter 665) | 2015 | $2.5 million or more | | House Bill 1400 (2015 Acts of Assembly, Chapter 665) | 2016 | $2.5 million or more | | House Bill 1500 (2017 Acts of Assembly, Chapter 836) | 2017 | $2.5 million or more | | House Bill 1500 (2017 Acts of Assembly, Chapter 836) | 2018 | $4 million or more | | House Bill 5002 (2018 Acts of Assembly, Special Session I, Chapter 2) | 2019 | $4 million or more | |

[/TABLE]

[TABLE 1-2] Payment in June of

[/TABLE]

--- Page 2 ---

Guidelines for the Accelerated Sales Tax Payment May 25, 2019

House Bill 1700 (2019 Appropriation Act) 2020 $10 million or more

These guidelines (“Guidelines”) are issued by the Department to provide guidance to taxpayers regarding the accelerated sales tax payment. These guidelines are exempt

from the provisions of the Administrative Process Act (Va. Code § 2.2-4000 et seq.) and only apply to the additional payment made by dealers who are subject to the accelerated sales tax payment requirement. Unless noted otherwise below, the applicable Retail Sales and Use Tax Regulations (23 Virginia Administrative Code (VAC) 10-210-10 et seq.) continue to apply. To the extent that the legislative change requiring the accelerated sales tax payment conflicts with the regulations, the legislation supersedes the regulations, and these Guidelines, developed pursuant to the legislation, should be followed. As necessary, additional guidelines will be published and posted on the Department’s web site, www.tax.virginia.gov.

Accelerated Sales Tax Payment Requirement

Any dealer having taxable sales and/or purchases of $4 million or greater during the 12-month period beginning July 1, 2017 and ending June 30, 2018 is required to make an accelerated sales tax payment in June 2019 equal to 90 percent of his Retail Sales and Use Tax liability for June 2018.

The accelerated sales tax payment is due on or before June 30 if paying by electronic funds transfer. If payment is made by another method, the payment must be made on or before June 25. In the event that either June 25 or June 30 falls on a Saturday or Sunday, any payment made on or before the next succeeding business day will be considered timely. For the June 2019 accelerated sales tax payment, payments made by electronic funds transfer are due July 1, since June 30 is a Sunday, and all other payments are due June 25. Dealers who are required to remit the Retail Sales and Use Tax by electronic funds transfer are also required to remit the accelerated sales tax payment for those accounts by electronic funds transfer. Dealers who are not currently required to remit the Retail Sales and Use Tax for specific accounts by electronic funds transfer may remit the accelerated sales tax payment for those accounts by either electronic funds transfer or by mail. (Item § 3-5.06, 2018 Acts of Assembly, Chapter 2).

Beginning with the July 2012 return, all monthly sales and use tax returns and payments are required to be filed and remitted electronically, unless a hardship waiver has been granted by the Tax Commissioner. Waivers will be granted if the Tax Commissioner

finds that this requirement creates an unreasonable burden on the dealer. All requests for waiver must be submitted to the Tax Commissioner in writing. Waiver requests for the June 2019 payment must be filed on or before June 7, 2019.

Affected Dealers

2

[TABLE 2-1] | House Bill 1700 (2019 Appropriation Act) | | 2020 | $10 million or more

[/TABLE]

--- Page 3 ---

Guidelines for the Accelerated Sales Tax Payment May 25, 2019

For the purposes of the Accelerated Sales Tax Payment, “dealer” includes every person who is required to collect and remit sales tax and also every person who is required to remit use tax to the Commonwealth.

Under current law, in general, and with limited exceptions, every dealer must file his Retail Sales and Use Tax return and remit the tax due for transactions occurring during the month on or before the twentieth day of the following month. (Va. Code § 58.1-615).

The applicability of the accelerated sales tax to each dealer will be determined each year by the Department based on the dealer’s taxable sales or purchases in the previous fiscal year (July 1 through June 30) without regard to whether the dealer was subject to the accelerated sales tax payment in the past. Taxable sales or purchases will be computed without regard to the number of certificates of registration held by the dealer. The accelerated sales tax payment will not apply to persons who are required to file only a Form ST-7, Consumer's Use Tax Return. In addition to the sales and purchases reported by each dealer on his returns, a dealer's taxable sales and purchases include those sales and purchases assessed to the dealer by the Department for the previous fiscal year, including audit assessments and other adjustments to returns for the previous fiscal year.

Example 1

Dealer is a retailer who holds a certificate of registration for 8 locations and files one

consolidated return for all locations. Each location had taxable sales of $7 million in Fiscal Year 2017 (the 12-month period beginning July 1, 2016, and ending June 30, 2017), for a total of $56 million in Fiscal Year 2017. Each location had taxable sales of $250,000 in Fiscal Year 2018 (the 12-month period beginning July 1, 2017, and ending June 30, 2018), for a total of $2 million in Fiscal Year 2018.

In June 2018, dealer was required to make an accelerated sales tax payment of 90 percent of his entire Retail Sales and Use Tax liability, less any applicable dealer discount, for June 2017. In June 2019, dealer would not be required to make an accelerated sales tax payment.

Example 2

Dealer is a retailer who holds a certificate of registration for 8 locations and files separate returns for each location. Each location had taxable sales of $7 million in Fiscal Year 2018 (the 12-month period beginning July 1, 2017, and ending June 30,

2018. , for a total of $56 million in Fiscal Year 2018. Each location had taxable sales of $1,000,000 in Fiscal Year 2019 (the 12-month period beginning July 1, 2018, and ending June 30, 2019), for a total of $8 million in Fiscal Year 2019.

Regardless of the number of certificates of registration held by a dealer, the Department will add together all of the taxable sales and purchases of the dealer when determining whether the dealer is subject to the accelerated sales tax

3

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Guidelines for the Accelerated Sales Tax Payment May 25, 2019

payment. In June 2019, dealer will be required to make an accelerated sales tax payment of 90 percent of his entire Retail Sales and Use Tax liability, less any applicable dealer discount, for June 2018. In June 2020, dealer would not be required to make an accelerated sales tax payment.

Exceptions

A dealer who would otherwise be required to make an accelerated sales tax payment but is no longer in business, will not be required to make the accelerated sales tax payment. In making the determination regarding whether a dealer is exempt from the requirement to make an accelerated tax payment, a corporate or similar reorganization that simply results in the use of a new Virginia Retail Sales and Use Tax registration number or Federal Employer Identification Number (FEIN) will not relieve the dealer from having to make an accelerated sales tax payment. Likewise, dealers who have filed a petition for a bankruptcy reorganization on or before June 30 would not be exempted from the requirement of making an accelerated sales tax payment.

Example 3

Dealer had taxable sales of $5 million in Fiscal Year 2017 (the 12-month period beginning July 1, 2016, and ending June 30, 2017) and was required to make the accelerated sales tax payment in 2018. Dealer goes out of business effective December 1, 2018.

Dealer would not be required to make the accelerated sales tax payment in June 2019.

Example 4

Dealer was organized as a corporation and had taxable sales of $15 million in Fiscal Year 2018 (the 12-month period beginning July 1, 2017, and ending June 30, 2018) and is required to make the accelerated sales tax payment in June 2019. Dealer reorganizes his business as a limited liability company effective December 1, 2018.

Dealer would be required to make the accelerated sales tax payment in June 2019.

Accelerated Sales Tax Payment and Reconciliation

In May of each year that a dealer is subject to the accelerated sales tax payment requirement, the Department will mail the dealer a notice and voucher listing the amount

of the accelerated payment due. Unless the dealer has received a hardship waiver from the Department (see below), the amount due will be equal to 90 percent of his Retail Sales and Use Tax liability for the previous June. The accelerated sales tax payment will be due on June 25 for dealers paying by mail and on June 30 for dealers paying electronically. In the event that either June 25 or June 30 falls on a Saturday or Sunday, any payment made on or before the next succeeding business day will be considered timely. The Department will not bill an account with a tax liability that is de minimus.

4

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Guidelines for the Accelerated Sales Tax Payment May 25, 2019

Each mailing will also contain a reconciliation worksheet (see below). If a dealer does not receive a mailing and believes that he is liable to make the accelerated sales tax payment, he should contact the Department at 804.367.8037 for assistance.

In July, dealers will reconcile their actual tax liability for June against the accelerated payment using their regular filing procedures. If a dealer files electronically using iFile or

Web Upload, the Department will automatically reconcile the dealer's tax liability. If a dealer files by mail, the dealer should fill out his regular June Retail Sales and Use Tax return and compute his actual tax liability for June on the return, without regard to the accelerated sales tax payment. The dealer should then use the reconciliation worksheet to subtract the amount of the accelerated sales tax payment from his actual June Retail Sales and Use Tax liability to determine the amount of the payment due with the return.

The dealer will be responsible for filing his regular June Retail Sales and Use Tax return and paying the amount due on or before July 20. The Department will verify that the accelerated sales tax payment and the payment made with the June return equal the actual tax liability shown on the June return. If the accelerated payment creates an overpayment for June, the dealer should follow the same procedure for the July return due in August. To the extent that a dealer is not able to claim the credit in its entirety on the July return, the Department will automatically issue the dealer a refund.

Example 5

Dealer had taxable sales of $52 million in Fiscal Year 2018 (the 12-month period

beginning July 1, 2017, and ending June 30, 2018) and was required to make the accelerated sales tax payment. The dealer's Retail Sales and Use Tax liability for June 2018 was $5 million. Dealer's actual sales and use tax liability for June 2019 is $6 million.

In June 2019, dealer will be required to make an accelerated sales tax payment of $4.5 million ($5 million x 90%). By July 20, 2019, dealer will file his regular June Retail Sales and Use Tax return showing his actual tax liability for June of $6 million and remit a payment of $1.5 million, the difference between his actual Retail Sales and Use Tax liability for June 2019 and his accelerated sales tax payment ($6 million - $4.5 million = $1.5 million).

Example 6

Dealer had taxable sales of $52 million in Fiscal Year 2018 (the 12-month period beginning July 1, 2017, and ending June 30, 2018) and is required to make the

accelerated sales tax payment. The dealer's Retail Sales and Use Tax liability for June 2018 was $5 million. Dealer's actual sales and use tax liability for June 2019 is $4 million. The dealer's actual sales and use tax liability for July 2019 is $4.5 million.

In June 2019, dealer will be required to make an accelerated sales tax payment of $4.5 million ($5 million x 90%). By July 20, 2019, dealer will file his June Retail Sales and Use Tax return showing his actual tax liability of $4 million and remit no payment

5

--- Page 6 ---

Guidelines for the Accelerated Sales Tax Payment May 25, 2019

with the June return, as his accelerated sales tax payment was greater than his actual Retail Sales and Use Tax liability for June 2019 by $500,000. On his July Retail Sales and Use Tax return, the dealer would show his actual tax liability of $4.5 million and remit a payment of $4 million, the difference between his actual Retail Sales and Use Tax liability for July 2019 and the remaining credit from the accelerated sales tax payment ($4.5 million - $500,000).

Beginning with the July 2012 return, all monthly sales and use tax returns and payments are required to be filed and remitted electronically, unless a hardship waiver has been granted by the Tax Commissioner. Dealers may remit the accelerated sales tax payment online through Business iFile or by contacting their banks to initiate an ACH Credit and dealers may file returns online through eForms, Business iFile or Web Upload. Please refer to the Electronic Payments Guide available on our website, www.tax.virginia.gov, for details. Payments and returns may also be mailed.

Penalties and Interest

Except with respect to fraudulent returns, the failure to make a timely and full payment of the accelerated sales tax will subject the dealer to a penalty of six percent of the amount of tax underpayment. No other penalty for delinquent returns or payments will apply. (Item § 3-5.06, House Bill 5002 (2018 Acts of Assembly, Special Session I, Chapter 2)).

In the case of a false or fraudulent return where willful intent exists to defraud the Commonwealth of this tax, or in the case of a willful failure to file a return with the intent to defraud the Commonwealth of this tax, a penalty of 50 percent of the amount of the proper tax shall be assessed. (Va. Code § 58.1-635(A)).

The rate of interest on omitted taxes and assessments is the “Underpayment Rate” established pursuant to Va. Code § 58.1-15. (House Bill 5002 (2018 Acts of Assembly, Special Session I, Chapter 2)).

Dealers are also responsible for timely filing their return and paying the tax due for May on or before June 20 and their return for June on or before July 20. In the event that either June 20 or July 20 falls on a Saturday or Sunday, any payment made on or before the next succeeding business day will be considered timely. Failure to file or pay the full amount of tax due by the due date will result in the assessment of a penalty of six percent per month in addition to the tax owed. The maximum penalty is 30 percent, and the minimum penalty is $10.00. The minimum penalty applies to late returns even if

there is no tax owed.

Hardship Exceptions

The Tax Commissioner may waive the requirement for dealers to make the accelerated sales tax payment or allow the dealer to pay a lesser amount upon a finding that the accelerated payment requirement would cause an undue hardship. Any dealer

6

--- Page 7 ---

Guidelines for the Accelerated Sales Tax Payment May 25, 2019

otherwise required to make an accelerated sales tax payment must request a waiver from the Tax Commissioner in writing and clearly demonstrate the nature of the hardship with documentation and financial records. In general, if the dealer can show an undue hardship, the Tax Commissioner will allow the dealer to make an accelerated sales tax payment equal to 90 percent of the dealer's average monthly Retail Sales and Use Tax liability for the first quarter of the current calendar year. Undue hardship would

include, but is not limited to

• The selling or closing of a significant part of the dealer’s business that results in the dealer’s sales and use tax liability in current months being substantially lower than his liability for the previous June;

• A substantial decline in sales since the previous June;

• Extenuating circumstances, such as a major change in the dealer’s business model, such that the accelerated payment amount would cause a financial hardship on the dealer;

• Out-of-state dealers who no longer make sales in Virginia;

• A dealer who is primarily eligible for the accelerated sales tax payment because of a one-time extraordinary event in the previous fiscal year; and

• A dealer whose tax liability for the previous June included a one-time

extraordinary event.

The Tax Commissioner will not waive the requirement for payment of the accelerated sales tax payment except in extraordinary circumstances.

Example 7

In June 2018, dealer was a retailer and had a Retail Sales and Use Tax liability for the month of $3 million. However, sales for the dealer have significantly dropped and dealer's average monthly sales and use tax liability for the first quarter of calendar year 2019 was $250,000.

Dealer may request in writing a waiver from the Tax Commissioner and provide any necessary documentation to demonstrate the drop in taxable sales. The Tax Commissioner may grant the dealer a waiver and dealer's accelerated sales tax

payment will be $225,000 ($250,000 x 90%).

Example 8

In June 2018, dealer was both a wholesaler and a retailer and had a Retail Sales and Use Tax liability for the month of $13 million. In January 2019, dealer closed

7

--- Page 8 ---

Guidelines for the Accelerated Sales Tax Payment May 25, 2019

down his retail locations and now only sells at wholesale. Dealer has had no sales tax liability since December 2018.

Dealer may request in writing a waiver from the Tax Commissioner and provide any necessary documentation to show the change in his business structure. The Tax Commissioner may grant dealer a waiver, and dealer will be relieved of his

responsibility to make an accelerated sales tax payment.

Hardship waiver requests must be accompanied by full and complete documentation containing sufficient information so that the grounds upon which the dealer relies in requesting a hardship waiver are fully set forth to allow the Tax Commissioner to make an informed determination.

Dealers should make every effort to submit requests for waivers as soon as possible in order to receive a timely decision from the Department. However, all requests for hardship waivers for the June 2019 payment must be received by the Department by June 7, 2019. Applications for hardship waivers should be mailed to:

Tax Commissioner Virginia Department of Taxation Post Office Box 5771 Richmond, Virginia 23220-0771

Applications for hardship waivers may also be sent by fax to 804.225.3376. The Department is not responsible for delays resulting from a dealer using other addresses or fax numbers.

Until a dealer who is otherwise required to make an accelerated sales tax payment is notified by the Department that he may pay a different amount or is not required to make an accelerated sales tax payment, the dealer must make an accelerated sales tax payment equal to 90 percent of his Retail Sales and Use Tax liability for the previous June on or before June 25 if paying by mail and on or before June 30 if paying electronically.

Requests for Reconsideration

In cases where a dealer is able to demonstrate that the Department’s determination on its request for a hardship exception was not based on correct or complete facts, the dealer may request reconsideration of the Department’s determination. Requests for

reconsideration should be mailed to

Tax Commissioner Virginia Department of Taxation Post Office Box 5771 Richmond, Virginia 23220-0771

8

--- Page 9 ---

Guidelines for the Accelerated Sales Tax Payment May 25, 2019

Requests for reconsideration may also be sent by fax to 804.225.3376.

9

--- Page 10 ---

Guidelines for the Accelerated Sales Tax Payment May 25, 2019

In order for the Tax Commissioner to grant a request for reconsideration, the dealer must demonstrate one of the following:

• The facts upon which the original determination is based are misstated by the Tax Commissioner or are inaccurate, and the determination would have a

different result based on a correction of the Tax Commissioner’s misstatement of the facts presented or a clarification of the original facts presented in the taxpayer's request for a hardship waiver; or

• The dealer has discovered additional evidence or documentation that was not available to the dealer at the time the original request for a hardship waiver was filed with the Department, and the additional evidence or documentation would produce a result different from the original determination.

Requests for reconsideration will be reviewed as time permits. Although the Department will make every effort to answer each request for reconsideration in a timely fashion, until a dealer who is otherwise required to make an accelerated sales tax payment is notified by the Department that he may pay a different amount or is not required to make an accelerated sales tax payment, the dealer must make an accelerated sales tax payment equal to 90 percent of his Retail Sales and Use Tax liability for the previous June by June 25 if paying by mail and on June 30 if paying electronically.

Disposition of Revenues

With the exception of revenues distributed under the provisions of Va. Code §§ 58.1-605, 58.1-606, 58.1-638(A), 58.1-638(G)-(H), 58.1-638.2, and 58.1-638.3, all revenues collected from the accelerated sales tax payment will be considered General Fund revenue. However, no distribution of the state or local Retail Sales and Use Tax revenues will be made until the Tax Commissioner certifies the revenues. The Tax Commissioner shall certify the Retail Sales and Use Tax revenues generated by the accelerated sales tax payments as soon as practicable after the funds have been paid into the state treasury in any month for the preceding month. If the Governor determines on July 31 of each year that funds are available to transfer the state Retail Sales and Use Tax revenues in accordance with Va. Code §§ 58.1-638(B)-(F) and 58.1-638.1, he will direct the State Comptroller to make such allocation. (Item § 3-5.06, House Bill 5002 (2018 Acts of Assembly, Special Session I, Chapter 2)).

10

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Guidelines for the Accelerated Sales Tax Payment May 25, 2019

Additional Information

These Guidelines are available online in the Laws, Rules & Decisions section of the Department's website, located at www.tax.virginia.gov/content/laws-rules-decisions. For additional information, please contact the Department at 804.367.8037 or visit www.tax.virginia.gov.

Approved

---

Craig M. Burns Tax Commissioner

11

--- Page 1 ---

NOTE: AS THE 2021 APPROPRIATION ACT MAINTAINS THE $10.0 MILLION

THRESHOLD FOR DEALERS TO BE LIABLE FOR THE ACCELERATED SALES

For June 2021, dealers should continue relying on

THESE GUIDELINES. MORE INFORMATION IS AVAILABLE AT

WWW.TAX.VIRGINIA.GOV/ACCELERATED-SALES-AND-USE-TAX-PAYMENT

GUIDELINES FOR THE

ACCELERATED SALES TAX PAYMENT

May 25, 2019

These Guidelines apply to dealers required to make accelerated sales tax payments in June 2019.

2019 House Bill 1700 raises the accelerated sales tax threshold to $10 million or more in the previous fiscal year for June 2020 payment. The threshold

The threshold remains at $4 million for June 2019. Dealers meeting this must pay 90% of June previous year's Retail Sales and Use Tax liability, credited on June return due July 20. The Department will notify affected dealers in early May, providing payment instructions, vouchers, and reconciliation worksheets. Thresholds and legislation details are in the chart below.

Applied to Dealers Payment Enacting Legislation with Taxable Sales in June of and Purchases of House Bill 29 (2010 Acts of Assembly, Chapter 872) 2010 $1 million or more House Bill 30 (2010 Acts of Assembly, Chapter 874) House Bill 1500 (2011 Acts of Assembly, Chapter 890) 2011 $5.4 million or more House Bill 1300 (2012 Acts of Assembly Special 2012 $26 million or more Session I, Chapter 2) No change 2013 $26 million or more House Bill 1500 (2013 Acts of Assembly, Chapter 806) 2014 $48.5 million or more House Bill 5001 (2014 Acts of Assembly, Special Session I, Chapter 1) House Bill 1400 (2015 Acts of Assembly, Chapter 665) 2015 $2.5 million or more House Bill 1400 (2015 Acts of Assembly, Chapter 665) 2016 $2.5 million or more House Bill 1500 (2017 Acts of Assembly, Chapter 836) 2017 $2.5 million or more House Bill 1500 (2017 Acts of Assembly, Chapter 836) 2018 $4 million or more House Bill 5002 (2018 Acts of Assembly, Special 2019 $4 million or more Session I, Chapter 2)

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[TABLE 1-1] Enacting Legislation | Payment in June of | | Applied to Dealers | | | | with Taxable Sales | | | | and Purchases of | House Bill 29 (2010 Acts of Assembly, Chapter 872) House Bill 30 (2010 Acts of Assembly, Chapter 874) | 2010 | $1 million or more | | House Bill 1500 (2011 Acts of Assembly, Chapter 890) | 2011 | $5.4 million or more | | House Bill 1300 (2012 Acts of Assembly Special Session I, Chapter 2) | 2012 | $26 million or more | | No change | 2013 | $26 million or more | | House Bill 1500 (2013 Acts of Assembly, Chapter 806) House Bill 5001 (2014 Acts of Assembly, Special Session I, Chapter 1) | 2014 | $48.5 million or more | | House Bill 1400 (2015 Acts of Assembly, Chapter 665) | 2015 | $2.5 million or more | | House Bill 1400 (2015 Acts of Assembly, Chapter 665) | 2016 | $2.5 million or more | | House Bill 1500 (2017 Acts of Assembly, Chapter 836) | 2017 | $2.5 million or more | | House Bill 1500 (2017 Acts of Assembly, Chapter 836) | 2018 | $4 million or more | | House Bill 5002 (2018 Acts of Assembly, Special Session I, Chapter 2) | 2019 | $4 million or more | |

[/TABLE]

[TABLE 1-2] Payment in June of

[/TABLE]

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Guidelines for the Accelerated Sales Tax Payment May 25, 2019

House Bill 1700 (2019 Appropriation Act) 2020 $10 million or more

These guidelines (“Guidelines”) are issued by the Department to provide guidance to taxpayers regarding the accelerated sales tax payment. These guidelines are exempt

from the provisions of the Administrative Process Act (Va. Code § 2.2-4000 et seq.) and only apply to the additional payment made by dealers who are subject to the accelerated sales tax payment requirement. Unless noted otherwise below, the applicable Retail Sales and Use Tax Regulations (23 Virginia Administrative Code (VAC) 10-210-10 et seq.) continue to apply. To the extent that the legislative change requiring the accelerated sales tax payment conflicts with the regulations, the legislation supersedes the regulations, and these Guidelines, developed pursuant to the legislation, should be followed. As necessary, additional guidelines will be published and posted on the Department’s web site, www.tax.virginia.gov.

Accelerated Sales Tax Payment Requirement

Dealers with taxable sales/purchases of $4M+ from July 1, 2017, to June 30, 2018, must pay 90% of June 2018 Retail Sales and Use Tax in June 2019.

The June 2019 accelerated sales tax payment is due by June 30 via EFT or June 25 otherwise. If June 25 or 30 falls on a weekend, payment by next business day is timely. EFT payments are due July 1; non-EFT can be mailed. Dealers required to remit Retail Sales and Use Tax by EFT must also remit the accelerated payment via EFT.

Beginning with the July 2012 return, all monthly sales and use tax returns and payments are required to be filed and remitted electronically, unless a hardship waiver has been granted by the Tax Commissioner. Waivers will be granted if the Tax Commissioner

finds that this requirement creates an unreasonable burden on the dealer. All requests for waiver must be submitted to the Tax Commissioner in writing. Waiver requests for the June 2019 payment must be filed on or before June 7, 2019.

Affected Dealers

2

[TABLE 2-1] | House Bill 1700 (2019 Appropriation Act) | | 2020 | $10 million or more

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Guidelines for the Accelerated Sales Tax Payment May 25, 2019

For the Accelerated Sales Tax Payment, “dealer” includes anyone required to collect/remit sales or use tax to the Commonwealth.

Generally, dealers must file Retail Sales and Use Tax returns and remit taxes by the 20th of the following month, with limited exceptions. (Va. Code § 58.1-615).

The Department annually determines each dealer’s applicability based on taxable sales/purchases in the prior fiscal year, including assessments and adjustments, regardless of past accelerated payment status. It does not apply to those filing only Form ST-7.

Example 1

Dealer with 8 locations holding a certificate of registration and filing one

Filing one consolidated return, each location had $7M taxable sales in FY 2017 ($56M total) and $250K in FY 2018 ($2M total).

In June 2018, dealer paid 90% of June 2017 Retail Sales and Use Tax liability; in June 2019, no payment was required.

Example 2

Dealer with 8 locations filing separate returns had $7M taxable sales in FY 2018.

2018. totaling $56 million in FY 2018. Each location had $1,000,000 taxable sales in FY 2019 (July 1, 2018–June 30, 2019), totaling $8 million.

The Department will sum all taxable sales and purchases of a dealer, regardless of registration certificates, to determine if the dealer is subject to the accelerated sales tax

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Guidelines for the Accelerated Sales Tax Payment May 25, 2019

In June 2019, dealer must pay 90% of his June 2018 Retail Sales and Use Tax liability, minus discounts; no payment is required in June 2020.

Exceptions

Dealers no longer in business are exempt; corporate reorganizations using new registration or FEIN do not exempt; bankruptcy petitions filed by June 30 do not exempt from accelerated payment.

Example 3

Dealer with $5M taxable sales in FY 2017 required to pay in 2018; goes out of business December 1, 2018.

Dealer is not required to pay in June 2019.

Example 4

Dealer, a corporation with $15M sales in FY 2018, must pay in June 2019; reorganized as LLC December 1, 2018.

Dealer must pay in June 2019.

Accelerated Sales Tax Payment and Reconciliation

Each May, the Department mails dealers a notice and voucher with the amount

Due by June 25 (mail) or June 30 (electronic), unless a hardship waiver; amount equals 90% of June's liability; payments on weekend due next business day; de minimus liabilities not billed.

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Guidelines for the Accelerated Sales Tax Payment May 25, 2019

Mailings include a reconciliation worksheet; dealers missing mailings should contact 804.367.8037.

In July, dealers reconcile June liability with actual tax via regular filing; electronic filers use iFile or

Web Upload auto-reconciles; mail filers complete June return, calculate actual liability, and use worksheet to subtract accelerated payment to find due amount.

Dealer files June return and pays by July 20; Department verifies payments; overpayments are refunded if full credit isn't claimed.

Example 5

Dealer with $52M sales in FY 2018 required to pay accelerated tax.

June 2018 liability: $5M; June 2019 actual liability: $6M.

June 2019, pay $4.5M (90% of $5M); file by July 20, pay $1.5M difference between actual $6M liability and $4.5M payment.

Example 6

Dealer with $52M sales in FY 2018 required to pay accelerated tax.

June 2018 liability: $5M; June 2019: $4M; July 2019: $4.5M.

June 2019, pay $4.5M; file by July 20; actual liability $4M; no additional payment due.

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Guidelines for the Accelerated Sales Tax Payment May 25, 2019

June return shows $4.5M liability, overpaid by $500K; July, report $4.5M liability, remit $4M after credit.

Since July 2012, all returns/payments must be electronic unless waived; payments via Business iFile, ACH, eForms, Web Upload; mail also accepted.

Penalties and Interest

Except for fraudulent returns, failure to timely and fully pay the accelerated sales tax incurs a 6% penalty of the tax underpayment. No other penalties apply. (Item § 3-5.06, House Bill 5002 (2018 Acts of Assembly, Special Session I, Chapter 2)).

For false or fraudulent returns with willful intent to defraud the Commonwealth, or willful failure to file with intent to defraud, a 50% penalty of the proper tax applies. (Va. Code § 58.1-635(A)).

Interest on omitted taxes is the “Underpayment Rate” per Va. Code § 58.1-15. (House Bill 5002 (2018 Acts of Assembly, Special Session I, Chapter 2)).

Dealers must file May returns and pay by June 20, June returns and pay by July 20. Payments on weekends are timely if made next business day. Late filings incur 6% monthly penalties, max 30%, min $10, even if no tax is owed.

there is no tax owed.

Hardship Exceptions

The Tax Commissioner may waive or reduce the accelerated sales tax payment if the dealer demonstrates undue hardship. Any dealer

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Guidelines for the Accelerated Sales Tax Payment May 25, 2019

Dealers must request a written waiver from the Tax Commissioner, demonstrating hardship with documentation. If shown, the dealer may pay 90% of their average monthly Retail Sales and Use Tax liability for the first quarter.

include, but is not limited to

• Selling or closing a significant part of the business that substantially lowers current months' sales and use tax liability compared to previous June;

• A substantial sales decline since previous June;

• Extenuating circumstances, like a major business change, causing financial hardship from the accelerated payment;

• Out-of-state dealers no longer making Virginia sales;

• Dealers eligible mainly due to a one-time extraordinary event in the previous fiscal year; and

• A dealer whose June tax liability included a one-time

extraordinary event.

The Tax Commissioner will only waive the accelerated sales tax payment in extraordinary circumstances.

Example 7

In June 2018, the dealer's Retail Sales and Use Tax liability was $3 million; by early 2019, it dropped to an average of $250,000 monthly.

Dealer may request a written waiver with documentation; the Tax Commissioner may grant a waiver, reducing the accelerated sales tax

payment will be $225,000 ($250,000 x 90%).

Example 8

In June 2018, the dealer, both wholesaler and retailer, had $13 million liability; by January 2019, they closed

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Guidelines for the Accelerated Sales Tax Payment May 25, 2019

closed retail locations, now only wholesales; no sales tax liability since December 2018.

Dealer may request a written waiver with documentation of business change; the Tax Commissioner may grant relief from the accelerated payment.

responsibility to make an accelerated sales tax payment.

Hardship waiver requests must include complete documentation detailing grounds for the waiver for the Tax Commissioner’s review.

Dealers should submit waiver requests promptly; all June 2019 requests must be received by June 7, 2019. Mail applications to:

Tax Commissioner Virginia Department of Taxation Post Office Box 5771 Richmond, Virginia 23220-0771

Applications for hardship waivers may also be faxed to 804.225.3376. The Department isn't responsible for delays from using other addresses or fax numbers.

Until notified otherwise, dealers must pay 90% of last June's Retail Sales and Use Tax liability by June 25 (mail) or June 30 (electronic).

Requests for Reconsideration

If a dealer can show the Department’s hardship determination was based on incorrect or incomplete facts, they may request reconsideration. Requests for

reconsideration should be mailed to

Tax Commissioner Virginia Department of Taxation Post Office Box 5771 Richmond, Virginia 23220-0771

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Guidelines for the Accelerated Sales Tax Payment May 25, 2019

Requests for reconsideration may be faxed to 804.225.3376.

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Guidelines for the Accelerated Sales Tax Payment May 25, 2019

To get reconsideration, the dealer must demonstrate one of the following:

• The facts underlying the original determination are misstated or inaccurate, and the determination would have a

a different result based on correcting the Tax Commissioner’s misstatement or clarifying facts in the hardship waiver request; or

• The dealer discovered new evidence or documentation not available at the original hardship waiver request, which would alter the original determination.

Reconsideration requests are reviewed as time permits. Until notified otherwise, dealers must pay 90% of last June’s liability by June 25 (mail) or June 30 (electronic).

Disposition of Revenues

Except for certain distributions, all revenues from accelerated sales tax go to the General Fund. The Tax Commissioner certifies revenues after funds are paid into the treasury. The Governor may direct allocations annually after certification.

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Guidelines for the Accelerated Sales Tax Payment May 25, 2019

Additional Information

These Guidelines are available online in the Laws, Rules & Decisions section of the Department's website, located at www.tax.virginia.gov/content/laws-rules-decisions. For additional information, please contact the Department at 804.367.8037 or visit www.tax.virginia.gov.

Approved

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Craig M. Burns Tax Commissioner

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Property Analytics Firm Hybrid Sales Factor Guidelines

Introduction

During the 2022 Session, the Virginia General Assembly enacted House Bill 453 (2022 Acts of Assembly, Chapter 256) and Senate Bill 346 (2022 Acts of Assembly, Chapter 257), which allow property information and analytics firms that meet certain criteria and choose to enter into a memorandum of understanding (“MOU”) with the Virginia Economic Development Partnership Authority (“the Authority”) to source sales of services to Virginia using market-based sourcing.

These guidelines are published by the Department of Taxation (“the Department”) to provide guidance to taxpayers regarding the sourcing of sales for certain property information and analytic firms, as required by the second enactment clause of both House Bill 453 and Senate Bill 346. These guidelines are not rules or regulations subject to the provisions of the Administrative Process Act (Va. Code § 2.2-4000 et seq.) and are being

published in accordance with the Tax Commissioner’s general authority to supervise the administration of the tax laws of the Commonwealth pursuant to Va. Code § 58.1-202.

As necessary, additional information will be published and posted on the Department’s website, www.tax.virginia.gov. These guidelines complement the Department’s existing Corporation Income Tax Regulations (23 Virginia Administrative Code (“VAC”) 10-120-10, et seq.). To the extent that there is a conflict between the Department’s existing regulations and Va. Code §§ 58.1-416 and 58.1-422.3, the provisions of those sections of the Code of Virginia, as interpreted by these guidelines, supersede the existing regulations.

These guidelines represent the Department’s interpretation of the relevant laws. They do not constitute formal rulemaking and hence do not have the force and effect of law or regulation. In the event that the final determination of any court holds that any provision of these guidelines is contrary to law, taxpayers who follow these guidelines will be treated as relying on erroneous written advice for purposes of waiving penalty and interest under Va. Code §§ 58.1-105, 58.1-1835, and 58.1-1845. To the extent there is a question

regarding the application of these guidelines, taxpayers are encouraged to write to the Department and seek a written response to their question.

These guidelines address how to compute the hybrid sales factor for a property information and analytics firm that has already qualified and entered into an MOU with the Authority for a particular taxable year (“qualified firm” or “Firm”). These guidelines do not address how to qualify under this legislation. Please consult the Authority for more information on how to qualify and the criteria that must be met.

Sales Factor Calculation

For apportionment purposes, the sales factor consists of a fraction, the numerator of which is the total sales of the corporation in Virginia during the taxable year, and the denominator of which is the total sales of the corporation everywhere during the taxable year. To be included in the sales factor, the sales must be used to produce Virginia taxable income and be effectively connected with the conduct of a trade or business within

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Property Analytics Firm Hybrid Sales Factor Guidelines

the United States, where the income from such conduct is includable in federal taxable income.

According to Va. Code § 58.1-416(A), sales of tangible personal property are generally deemed in Virginia and must be included in the sales factor numerator if the tangible personal property is delivered to a location in Virginia. In contrast, Va. Code § 58.1-416(B)(1) provides that sales other than sales of tangible personal property are generally deemed in Virginia and must be included in the sales factor numerator if:

• The income-producing activity is performed in Virginia; or

• The income-producing activity is performed both in and outside of Virginia and a

greater proportion of the income-producing activity is performed in Virginia than in any other state, based on costs of performance.

Qualified firms are allowed a limited exception to these rules by being able to source sales of services using market-based sourcing. Pursuant to Va. Code § 58.1-416(B)(2), sales of services will be deemed in Virginia and will be required to be included in the sales factor numerator if the benefit of the service is received in Virginia.

Market-based sourcing under this legislation is limited to sales of services only. As a result, a qualified firm must compute its sales factor using standard rules, except that the sale of services would be sourced to Virginia if the benefit of such services was received in Virginia. Sales of intangible property and real estate continue to be sourced to Virginia based on the location of the greater portion of costs of performance, and sales of tangible personal property continue to be sourced to Virginia based upon whether property is received in Virginia by the purchaser.

Definitions

As used in these guidelines, unless the context requires otherwise

“Benefit of a service is received” means the location where the taxpayer's customer has either directly or indirectly received value from delivery of that service.

“Cannot be determined” means that the taxpayer's records or the records of the taxpayer's customer which are available to the taxpayer do not indicate the location where the benefit of the service was received.

“Reasonable approximation” means considering all sources of information other than the terms of the contract and the Firm's books and records kept in the normal course of business, the location of the market for the benefit of the services is determined in a manner that is consistent with the activities of the customer to the extent such information is available to the taxpayer. Reasonable approximation shall be limited to the jurisdictions or geographic areas where the customer or purchaser, at the time of purchase, will

receive the benefit of the services to the extent such information is available to the

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Property Analytics Firm Hybrid Sales Factor Guidelines

taxpayer. If population is a reasonable approximation, the population used shall be the U.S. population as determined by the most recent U.S. census data. If it can be shown by the taxpayer that the benefit of the service is being substantially received outside the U.S., then the populations of those other countries where the benefit of the service is being substantially received shall be added to the U.S. population. Information that is specific in nature is preferred over information that is general in nature.

“Service” means activities engaged in by a person for another person for consideration.

The term “service” does not include activities performed by a person who is not in a regular trade or business offering its services to the public, and does not include services rendered to an entity “affiliated,” as defined in Va. Code § 58.1-302, with the taxpayer.

“To the extent” means that if the customer of a service receives the benefit of a service in more than one state, the gross receipts from the performance of the service are included

in the numerator of the sales factor according to the portion of the benefit of the services received in this Commonwealth.

Market-Based Sourcing Methods

In determining whether sales of services are in Virginia under Va. Code § 58.1-416(B)(2), various sourcing methods are provided below that apply sequentially in a hierarchy. For each sale of services, a qualified firm must make a reasonable effort to apply the preceding sourcing method before seeking to apply the next sourcing method in the hierarchy. For example, the primary sourcing method for corporations and other business entities requires a Firm to determine the location where the benefit of the service is received, and if a Firm cannot do so, the secondary method requires a Firm to reasonably approximate the location of assignment. In this case, the Firm must attempt to assign the sales of serviced to the location where the benefit of the service is received (e.g., apply the primary method in the hierarchy) in good faith and with reasonable effort before it may reasonably approximate the location.

Individual Customers

In the case where an individual is the Firm's customer, receipt of the benefit of the service shall be determined as follows:

Primary Sourcing Method. The location of the benefit of the service shall be presumed to be received in Virginia if the billing address of the Firm's customer, as determined at the end of the taxable year, is in the Commonwealth. If the Firm uses the customer's billing address as the method of assigning the sales to the Commonwealth, the Department will accept this method of assignment. This presumption may be overcome by the Firm by showing, based on a preponderance of the evidence, that either the contract between the Firm and the Firm's customer, or other books and records of the taxpayer kept in the normal course of business, provide the extent to which the benefit of the service is received at a location in the Commonwealth. If the Firm believes it has overcome the presumption and uses an alternative method based on either the contract

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Property Analytics Firm Hybrid Sales Factor Guidelines

between the Firm and the Firm's customer or other books and records of the taxpayer kept in the normal course of business, the Department may examine the Firm's alternative method to determine if the billing address presumption has been overcome and, if so, whether the Firm's alternate method of assignment reasonably reflects where the benefit of the service was received by the Firm's customers.

Alternative Sourcing Method. If the presumption in primary sourcing method is overcome by the Firm, and an alternative method cannot be determined by reference to the contract between the Firm and its customer or the Firm's books and records kept in the normal course of business, then the location where the benefit of the services is received by the customer shall be reasonably approximated.

Business Customers

In the case where a corporation or other business entity is the Firm's customer, receipt of the benefit of the service shall be determined as follows:

Primary Sourcing Method. If the necessary information is available to allow the Firm to determine the location where the benefit is received, it is required to assign sales of services to such location. The location of the benefit of the services shall be presumed to be received in the location where the contract between the Firm and the Firm’s customer or the Firm’s books and records kept in the normal course of business, notwithstanding the billing address of the Firm’s customer, indicate the benefit of the service is located.

This presumption may be overcome by the Firm or the Department by showing, based on a preponderance of the evidence, that the location indicated by the contract or the Firm’s books and records was not the actual location where the benefit of the service was received.

Alternative Sourcing Methods. If neither the contract nor the Firm’s books and records provide the location where the benefit of the service is received, or the presumption in the

primary sourcing method is overcome, then the location where the benefit is received shall be reasonable approximated.

If the location where the benefit of the service is received cannot be determined under the primary sourcing method nor reasonably approximated, then the location where the benefit of the service is received shall be presumed to be in the location from which the Firm’s customer placed the order for the service.

If the location where the benefit of the service is received cannot be determined pursuant to the primary sourcing method, reasonably approximated, nor by the location where the Firm’s customer placed the order for the service, then the benefit of the services shall be in the location of the Firm’s customer’s billing address.

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Property Analytics Firm Hybrid Sales Factor Guidelines

Example 1

Firm A sells property information and analytic services to business customers under contracts that indicate that the benefit is received in State 1. Firm A sells other property information and analytic services to other business customers under contracts that do not indicate where the benefit is received, and Firm A’s records do not indicate where the benefit is received.

For those customers whose contract indicate the location where the benefit is received, Firm A must assign these sales to State 1. For those customers whose contract does not indicate where the benefit is received, nor does Firm A have records indicating where the benefit is received, Firm A must source these sales by reasonable approximation if possible. Firm A may not choose out of convenience to source these sales based on the location from which the customer

ordered the services or the customer’s billing address.

However, if these sales cannot be sourced by reasonably approximation, Firm A must source these sales to the location from which the customer ordered the services. In the event that Firm A also cannot determine the location from which the customer ordered the services, Firm A must then use the customer’s billing address to source these sales.

Example 2

Firm A sells property information and analytic services to a business customer under a contract which indicates that the benefit is received in State 1, where the customer’s headquarters is located. However, Firm A knows that the business customer is actually receiving and using these services at a branch office in State

2. Accordingly, Firm A must assign these sales to State 2.

General Principles of Application

In order to satisfy the requirements in the “Market-Based Sourcing Methods” section, a qualified firm’s assignment of sales of services must be consistent with the following principles:

Principle 1: The Firm must apply the methods set forth in the “Market-Based Sourcing Methods” section based on objective criteria and must consider all sources of information reasonably available to the Firm at the time of its tax filing. The Firm must determine the location where the benefit of the service is received as indicated by the contract or the Firm’s books and records kept in the normal course of business in good faith, and apply such determinations consistently with respect to similar transactions and year to year.

The Firm must retain contemporaneous records that explain the determination and application of its method of assigning sales of services, including its underlying assumptions, and must provide those records to the Department upon request.

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Property Analytics Firm Hybrid Sales Factor Guidelines

Principle 2: The “Market-Based Sourcing Methods” section provides various sourcing methods that apply sequentially in a hierarchy. For each sale to which a hierarchical method applies, the Firm must make a reasonable effort to apply the preceding method applicable to the sale before seeking to apply the next method in the hierarchy. For example, the applicable method first requires the Firm to determine the location where the benefit was received, and if the Firm cannot do so, the method requires the Firm to reasonably approximate the location. In these cases, the Firm must attempt to determine the location where the service was received (i.e., apply the primary method in the hierarchy) in good faith and with reasonable effort before it may reasonably approximate the location.

Principle 3: The Firm’s method of assigning its sales of services, including the use of a method of reasonable approximation, where applicable, must reflect an attempt to obtain the most accurate assignment of such sales consistent with the standards set forth in the

“Market-Based Sourcing Methods” section, rather than an attempt to lower the Firm’s tax liability. A method of assignment that is reasonable for one Firm may not necessarily be reasonable for another Firm, depending upon the applicable facts.

Exclusion of Sales from the Sales Factor

In a case in which a Firm cannot ascertain the location to which a sale of services is to be assigned pursuant to the applicable methods set forth in the “Market-Based Sourcing Methods” section (including through the use of a method of reasonable approximation, where relevant) using a reasonable amount of effort undertaken in good faith, the Department will require that such sale be excluded from both the numerator and denominator of the Firm’s sales factor pursuant to its authority under Va. Code § 58.1-416(D) to adopt remedies and corrective procedures.

Treatment of Pass-through Entities

Pass-through entities (“PTEs”) are required to use corporate apportionment to determine the portion of their income that is from Virginia sources for purposes of allocating a share of that income to nonresident individuals. This will affect the amount that the nonresident individuals report on their Virginia nonresident income tax returns or that the PTE reports on behalf of its nonresident owners, and the amount for which the PTE may be required to withhold from Virginia income. See the PTE Guidelines (P.D. 15-240) for more information.

A corporate owner of a PTE may be required to include its share of the PTE’s property, payroll, and sales in the corporation’s own apportionment factors. (See P.D. 95-19, 95-263, and 99-76.) The corporate owners would include in their factors only their share of the PTE’s factors for the applicable taxable year.

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Property Analytics Firm Hybrid Sales Factor Guidelines

Inapplicability of Virginia’s Administrative Extension of Public Law 86-272

A taxpayer is not subject to Virginia corporate income tax to the extent that federal or state law exempts the taxpayer from such tax. One federal law, Public Law (“P.L.”) 86-272, prohibits a state from imposing a net income tax where the only contacts with the state are a narrowly defined set of activities constituting solicitation of orders for sales of tangible personal property. While P.L. 86-272 itself only relates to sales of tangible personal property, the Department has an administrative policy of generally extending this federal law to sales other than sales of tangible personal property. See P.D. 93-75.

Because services are a type of sales other than sales of tangible personal property, a Firm would generally be exempt from Virginia corporate income tax to the extent that its only sales in Virginia were services protected under this administrative policy.

However, Va. Code § 58.1-416(C) asserts nexus over property information and analytic

firms with sales of services attributable to Virginia to the maximum extent permitted under the Constitutions of Virginia and the United States and federal law. This provision of Virginia law supersedes the Department’s administrative extension of P.L. 86-272. As a result, a Firm is not eligible for an exemption from taxation on the basis that its sales of service would be protected under the Department’s administrative policy. Note that Va.

Code § 58.1-416(C) only supersedes the Department’s administrative policy. It does not remove any exemption from taxation afforded to taxpayers, including Firms, under P.L. 86-272 itself. To the extent that a Firm’s only sales in Virginia are sales of tangible personal property protected under P.L. 86-272, the Firm will continue to be exempt from Virginia corporate income tax.

Additional Information

These guidelines are available on the Department’s website, located at http://www.tax.virginia.gov/. For additional information, please contact the Department at (804) 367-8037.

Approved

Craig M. Burns Tax Commissioner

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Property Analytics Firm Hybrid Sales Factor Guidelines

Introduction

In 2022, Virginia enacted HB 453 and SB 346, permitting qualifying property info and analytics firms that enter an MOU with the Authority to source service sales to Virginia via market-based sourcing.

The Department publishes these guidelines to guide taxpayers on sourcing sales for qualifying property info and analytics firms, as required by the second enactment clause of HB 453 and SB 346. They are not rules under the Administrative Process Act (Va. Code § 2.2-4000 et seq.).

Published under the Tax Commissioner’s authority to supervise tax law administration per Va. Code § 58.1-202.

Additional info will be posted on www.tax.virginia.gov. These guidelines supplement existing Corporation Income Tax Regulations (23 VAC 10-120-10, et seq.). If conflicts arise, Va. Code §§ 58.1-416 and 58.1-422.3, as interpreted here, supersede regulations.

These guidelines reflect the Department’s interpretation and are not formal rules. If a court finds any provision unlawful, taxpayers following them are considered relying on erroneous advice to waive penalties and interest under Va. Code §§ 58.1-105, 58.1-1835, and 58.1-1845. For questions

Taxpayers are encouraged to contact the Department for written guidance on applying these guidelines.

These guidelines explain how to compute the hybrid sales factor for a qualified firm with an MOU for a taxable year. They do not cover qualification; consult the Authority for qualification criteria.

Sales Factor Calculation

For apportionment, the sales factor is a fraction: numerator is total Virginia sales during the taxable year; denominator is total worldwide sales. Sales must generate Virginia taxable income and be effectively connected with a trade or business within

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Property Analytics Firm Hybrid Sales Factor Guidelines

the United States, where the income from such conduct is includable in federal taxable income.

According to Va. Code § 58.1-416(A), sales of tangible personal property are generally deemed in Virginia and must be included in the sales factor numerator if the tangible personal property is delivered to a location in Virginia. In contrast, Va. Code § 58.1-416(B)(1) provides that sales other than sales of tangible personal property are generally deemed in Virginia and must be included in the sales factor numerator if:

• The income-producing activity is performed in Virginia; or

• The activity is performed both in and outside Virginia, and

a greater proportion of the activity is performed in Virginia than any other state, based on costs.

Qualified firms can source service sales using market-based sourcing. Under Va. Code § 58.1-416(B)(2), service sales are in Virginia if the benefit is received there.

Market-based sourcing applies only to service sales; they are sourced to Virginia if the benefit is received there. Intangible property and real estate are sourced based on costs of performance; tangible personal property is sourced if received in Virginia.

Definitions

As used in these guidelines, unless the context requires otherwise

“Benefit of a service is received” means where the customer directly or indirectly receives value from the service.

“Cannot be determined” means the records do not specify where the benefit was received.

“Reasonable approximation” considers all info except the contract and firm’s records, determining the benefit location consistent with customer activities, limited to relevant jurisdictions at purchase.

receive the benefit where info indicates, to the extent available to the

Virginia Department of Taxation - 2 - December 14, 2023

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Property Analytics Firm Hybrid Sales Factor Guidelines

taxpayer. If population is a reasonable estimate, use U.S. census data. If benefits are substantially received outside the U.S., include those countries’ populations. Specific info is preferred.

“Service” means activities performed by one person for another for consideration.

The term “service” excludes activities by non-trade persons offering services publicly and services to an “affiliated” entity as defined in Va. Code § 58.1-302.

“To the extent” means gross receipts from a service are included if the customer benefits in multiple states.

in the sales factor numerator based on the benefit received in this Commonwealth.

Market-Based Sourcing Methods

To determine if sales are in Virginia under Va. Code § 58.1-416(B)(2), firms must sequentially apply sourcing methods, first locating where the benefit is received, then approximating if needed, with good faith effort.

Individual Customers

For individual customers, receipt of service benefit is determined as follows:

Primary method: benefit is presumed in Virginia if the customer's end-of-year billing address is in the Commonwealth. This presumption can be rebutted by evidence from the contract or records showing the benefit location.

Virginia Department of Taxation - 3 - December 14, 2023

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Property Analytics Firm Hybrid Sales Factor Guidelines

between the Firm and the Firm's customer or other books and records of the taxpayer kept in the normal course of business, the Department may examine the Firm's alternative method to determine if the billing address presumption has been overcome and, if so, whether the Firm's alternate method of assignment reasonably reflects where the benefit of the service was received by the Firm's customers.

Alternative Sourcing Method. If the presumption in primary sourcing method is overcome by the Firm, and an alternative method cannot be determined by reference to the contract between the Firm and its customer or the Firm's books and records kept in the normal course of business, then the location where the benefit of the services is received by the customer shall be reasonably approximated.

Business Customers

For business customers, receipt of the benefit is determined as follows:

Primary method: if available, assign sales to the location indicated by the contract or records, regardless of billing address.

This presumption can be rebutted by evidence showing the indicated location was not where the benefit was received.

Alternative methods apply if neither the contract nor records specify the benefit location, or the presumption in the

primary sourcing method is overcome, then the location where the benefit is received shall be reasonable approximated.

If the location where the benefit of the service is received cannot be determined under the primary sourcing method nor reasonably approximated, then the location where the benefit of the service is received shall be presumed to be in the location from which the Firm’s customer placed the order for the service.

If benefit location cannot be determined or approximated, source to the customer’s billing address.

Virginia Department of Taxation - 4 - December 14, 2023

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Property Analytics Firm Hybrid Sales Factor Guidelines

Example 1

Firm A sells services with contracts indicating benefit in State 1; others lack such indication and records do not specify benefit location.

Sales with benefit location indicated are assigned to State 1; others without indication or records must be reasonably approximated if possible, not by convenience.

ordered the services or the customer’s billing address.

If not reasonably approximated, source to the customer’s order location; if unknown, use billing address.

Example 2

If a contract indicates benefit in State 1 but the customer uses the services at a branch in another state, the actual benefit location prevails.

2. Accordingly, Firm A must assign these sales to State 2.

General Principles of Application

To satisfy “Market-Based Sourcing Methods,” a firm’s sales assignment must follow these principles:

Principle 1: Apply sourcing methods objectively, considering all reasonably available info, and determine benefit location based on contracts or records, applying consistently over time.

The Firm must keep contemporaneous records explaining its sales assignment method, including assumptions, and provide them to the Department upon request.

Virginia Department of Taxation - 5 - December 14, 2023

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Property Analytics Firm Hybrid Sales Factor Guidelines

Principle 2: The “Market-Based Sourcing Methods” section lists sourcing methods in hierarchy. The Firm must first try to apply the applicable method before seeking to approximate the location, making a good-faith, reasonable effort to determine where the benefit was received.

Principle 3: The Firm’s sales assignment method, including reasonable approximation, must aim for the most accurate assignment consistent with the standards in the

“Market-Based Sourcing Methods” section, not to lower the Firm’s tax liability. A reasonable method for one Firm may differ for another, depending on facts.

Exclusion of Sales from the Sales Factor

If a Firm cannot determine a sale’s location using the applicable methods or reasonable effort in good faith, the Department will exclude that sale from both numerator and denominator of the sales factor under Va. Code § 58.1-416(D).

Treatment of Pass-through Entities

PTEs must use corporate apportionment to allocate Virginia-source income to nonresident individuals, affecting their tax reporting and withholding. See PTE Guidelines (P.D. 15-240).

A corporate owner of a PTE may need to include its share of the PTE’s property, payroll, and sales in its apportionment factors for the relevant taxable year. (See P.D. 95-19, 95-263, 99-76.)

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Property Analytics Firm Hybrid Sales Factor Guidelines

Inapplicability of Virginia’s Administrative Extension of Public Law 86-272

A taxpayer is exempt from Virginia corporate income tax if federal or state law exempts it. P.L. 86-272 prohibits tax if contacts are limited to solicitation of tangible property sales, and the Department extends this policy to other sales (see P.D. 93-75).

Since services are sales other than tangible property, a Firm is generally exempt from Virginia corporate income tax if its only Virginia sales are services protected under this policy.

However, Va. Code § 58.1-416(C) asserts nexus over property information and analytic

firms with Virginia sales to the maximum extent allowed by law. This law supersedes the Department’s extension of P.L. 86-272, so firms are not exempt based on that policy. Note that Va.

Va. Code § 58.1-416(C) supersedes the Department’s policy but does not remove exemptions under P.L. 86-272. If a Firm’s only Virginia sales are tangible property protected by P.L. 86-272, it remains exempt.

Additional Information

These guidelines are on the Department’s website at http://www.tax.virginia.gov/. For more info, contact (804) 367-8037.

Approved

Craig M. Burns Tax Commissioner

Virginia Department of Taxation - 7 - December 14, 2023

F O RETURN OF TANGIBLE PERSONAL PROPERTY, MACHINERY AND TOOLS,

R AND MERCHANTS’ CAPITAL — FOR LOCAL TAXATION ONLY M VIRGINIA 762 Please print Your social security number2025or FEIN Name Name of spouse

Spouse’s social security number Home address Number and street or rural route

County or City City, town or post office State ZIP Code District, Ward or Town

PART I – TANGIBLE PERSONAL PROPERTY

1. Motor vehicles * Leased vehicles for business use BusinessUse Trade Name of Year Modelor No. Cylindersor Date Number AirYesCond.or FairasMarketListed Valueby asFairAscertainedMarket Valueby do not qualify for the personal property tax reduction. Yes or No Motor Vehicle Series Tonnage Acquired Owned No Taxpayer ofCommissionerthe Revenue (a) Automobiles (not daily rental passenger cars)

VIN

VIN: (b) Motorcycles (c) Autocycles (d) Trucks (e) Tractors and trailers (f) Antique motor vehicles (g) All other motor vehicles and motor homes

2. Manufactured (mobile) offices, campers, travel trailers, and recreational camping trailers Length and Date Number Year Model or Series Width Acquired Owned Cost

3. Manufactured (mobile) homes (see instructions on back) Length and Date Number Manufacturer Year Model or Series Width Acquired Owned Cost

4. BoatspropertyandwhichWatercraftpertains(Assessto craftthe(§58.1-3500))value of all 5OverTons 5UnderTons Manufacturer Year Type HorsepowerLength and AcquiredDate NumberOwned Cost (a) Used for recreation and pleasure only . . . (b)Boat trailers, etc. . . . . . . . (c)Other . . . . . . . . . . ..

Model or Date Number5.Aircraft Manufacturer Year Series Acquired Owned Cost (a) Aircraft owned by scheduled air carriers with seating capacity of no more than 50 persons . . . . . . . . . . . . . . . . . . . . . . . . . (b) All other aircraft and flight simulators . . . . . . . . . . . . . . . . . . .

6. Motor vehicles owned/leased by auxiliary police officers, members or auxiliary members of a volunteer rescue squad, fire department or
7. Motorsheriff’svehiclesdepartmentownedor uniformedby a nonprofitmembersorganizationof the Virginia(§Defense58.1-3506(17)).Forms (§§ 58.1-3506(15),. . . . . .(16),. (20),. . (32),. . and. .(44)). .. .. .. .. .. .. .. ..
8. Heavy construction machinery (attach schedule). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9. Business furniture and listings not returnable as part of merchants’ capital or if not defined as intangible personal property (§ 58.1-1100).. . . . . . 10.Furniture and office equipment, including books, used in practicing a profession. . . . . . . . . . . . . . . . . . . 11.Tools, hand or power, including woodworking equipment, and metal lathes. . . . . . . . . . . . . . . . . . . . .12.Farming implements, including gas engines, electric motors, etc., threshing machines, corn huskers, feed cutters, combines, harvesters, 13.Tangibleblowers, plows,personalharrows,propertyrakes,usedmowers,in researchanimal drawnand vehicles,developmentpeanutbusiness.pickers, etc... .. .. . . . . . . . .. .. .. .. . . . . . . . .. .. .. .. . . . . . . . .. 14.Tangible personal property, leased, loaned or otherwise made available from federal, state, or local government. . . . . . 15.Tangible personal property consisting of programmable computer equipment and peripherals used in business. . . . . . 16.Miscellaneous and incidental property used in a trade or business . . . . . . . . . . . . . . . . . . . . . . . .

Value as Date Ascertained by Original Value CommissionerPARTII – MACHINERY AND TOOLS (see instructions on Page 2) Acquired Capitalized as Listed by Cost Taxpayer of the Revenue 17.18.MachineryEnergy conversionand tools.equipment. . . . of. MANUFACTURERS. . . . . . . . (§. 58.1-3506).. . . . . .. .. .. .. .. .. .. .. .. .. .. .. 05/24 Value asPARTIII – MERCHANTS’ CAPITAL (see instructions on Page 2) Value Ascertained by CommissionerRev. asTaxpayerListed by of the Revenue 2601043 19.20.InventoryDaily rentalof passengerstock on hand.cars.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.All other taxable merchants’ capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.Total taxable merchants’ capital (add lines 19, 20, and 21). . . . . . . . . . . . . . . . . . . . . . . . . . .TAXATION PARTIV – OTHER TANGIBLE PERSONAL PROPERTY OF 23.24.TotalAll otheramounttangibleof PartpersonalIV frompropertyline 32 noton thespecificallyback of theenumeratedreturn . . on. this. .return. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .DEPTVA 25.TotalManufacturer(add lines 1-18, 22, 23, and 24) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .FORM 762 (2025) Page 2 Fair Market Value Fair Market Value Ascertained by Listed by as PART IV – OTHER TANGIBLE PERSONAL PROPERTY as Commissioner Taxpayer of the Revenue 26. (a)(b)Horses,Cattle. . mules. . .and. other. . .kindred. . . animals.. . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. Owned(c)Sheep and goats. . . . . . . . . . . . . . . . . . . . . . . . . . (d)Hogs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (e)Poultry — chickens, turkeys, ducks, geese, etc.. . . . . . . . . . . . . . (f)Equipment used by farmers or cooperatives to produce ethanol derived primarily from farm products. . . . . . . . . . (g)Grains and other feeds used for the nurture of farm animals. . . . . . . . . . . . . . . . . . . . . . . . . . (h)Grain, tobacco and other agricultural products in the hands of a producer . . . . . . . . . . . . . . . . . . . . (i)Equipment and machinery used by farm wineries in the production of wine . . . . . . . . . . . . . . . . . . . . 27.Felled timber, ties, poles, cord wood, bark and other timber products . . . . . . . . . . . . . . . . . . . . . . . 28.(a) Refrigerators, deep freeze units, air conditioners, and automatic refrigerating machinery. . . . . . . . . . . . . . . (b)Vacuum cleaners, sewing machines, washing machines, dryers, and all other household machinery . . . . . . . . . . (c)Pianos and organs, television sets, radios, phonographs and records, and all other musical instruments. . . . . . . . (d)Watches and clocks and gold and silver plates and plated ware. . . . . . . . . . . . . . . . . . . . . . . . (e)Oil paintings, pictures, statuary, and other works of art $ __books $ ___ . . . . . . . . . . . . . . . (f)Diamonds, cameos and other precious stones and precious metals used as ornaments or jewelry. . . . . . . . . . . (g)Sporting and photographic equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (h)Firearms and weapons of all kinds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i)Bicycles and lawn mowers, hand or power. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (j)Household and kitchen furniture (state number of rooms _ ______). . . . . . . . . . . . . . . . . . . . . . . (k)All-terrain vehicles, mopeds, and off-road motorcycles . . . . . . . . . . . . . . . . . . . . . . . . . . . . (l)Electronic communications and processing devices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.Seines, pound nets, fykes, weirs and other devices for catching fish. . . . . . . . . . . . . . . . . . . . . . . . 30.Poles, wires, switchboards, etc., telephone or telegraph instruments, apparatus, etc., owned by any person, firm, association, or company not incorporated . company). . . . . . . . . . .32.31. TotalToll bridges,of Part turnpikesIV (add linesand26ferriesthrough(except31 andsteamenterferrieson lineowned23). and. . operated. . . . by. chartered. . Number. . . . . . . . . . . . . . . .

GENERAL INSTRUCTIONS: Complete Form 762, reporting property which you owned on January 1, 2025, then file it with the Commissioner of the Revenue of the County or City generally on or before May 1, 2025. Since some localities have due dates other than May 1, you may want to contact your local office to be sure of the proper due date. Write the word “None” opposite each item of property which you do not own. No property is assessable as tangible personal property if defined by Va. Code § 58.1-1100 as intangible personal property. If additional space is needed, attach a separate schedule. Note: If your motor vehicle is considered by State Law to have a business usage, it does not qualify for Car Tax Relief. Your vehicle is classified as having business usage if any of the following circumstances apply: 1) more than 50% of the mileage for the year was reported as a business expense for Federal Income Tax purposes or reimbursed by an employer; 2) more than 50% of the depreciation associated with the vehicle is deducted as a business expense for Federal Income Tax purposes; 3) the cost of the vehicle is expensed pursuant to Section IRC § 179; or 4) the vehicle is leased by an individual and the leasing company pays the tax without reimbursement from the individual.

DEFINITION OF MANUFACTURED HOMES (ALSO KNOWN AS MOBILE HOMES) FOR PART I, LINE 3: “Manufactured home” means a structure subject to federal regulation, which is transportable in one or more sections; is eight body feet or more in width and 40 body feet or more in length in the traveling mode, or is 320 or more square feet when erected on site; is built on a permanent chassis; is designed to be used as a single-family dwelling, with or without a permanent foundation, when connected to the required utilities; and includes the plumbing, heating, air-conditioning, and electrical systems contained in the structure (Va. Code § 36-85.3). “Manufactured homes” are also known as “mobile homes.” INFORMATION FOR MISCELLANEOUS AND INCIDENTAL PROPERTY USED IN A TRADE OR BUSINESS FOR PART I, LINE 16: In order to be considered miscellaneous and incidental property used in a trade or business, the property must not be classified as machinery and tools, merchants’ capital or short-term rental property, and have an original cost of less than $250.

INFORMATION FOR PART II, MACHINERY AND TOOLS: If you are engaged in a manufacturing, mining, water well drilling, processing or reprocessing, radio or television broadcasting, dairy, dry cleaning or laundry business, report all machinery and tools used in manufacturing, mining, water well drilling, processing or reprocessing, radio or television broadcasting, dairy, dry cleaning or laundry business, such machinery and tools being segregated by Va. Code § 58.1-3507, as amended for local taxation exclusively, and each county, city, and town being required to make a separate classification for all such machinery and tools.

INFORMATION FOR PART III, MERCHANTS’ CAPITAL: If you are a merchant and if locality taxes the capital of merchants, report all other taxable personal property of any kind whatsoever, except money on hand and on deposit and except tangible personal property not offered for sale as merchandise, which tangible personal property should be reported as such on front of this return under PART I.

FOR EXECUTORS, ADMINISTRATORS, TRUSTEES, COMMITTEES, GUARDIANS, AND OTHER FIDUCIARIES If this is the return of tangible personal property, machinery and tools, or merchants’ capital in the hands of an executor, administrator, trustee, committee, guardian, or other fiduciary, such fiduciary must complete so much of both pages of this return as pertains to such property and, in addition, supply the information called for below:

1. Character of Fiduciary: Executor c Administrator c Trustee c Committee c Guardian c Other c Specify______
2. Name of Estate, Trust or Ward___________________

DECLARATION OF TAXPAYER I declare that the statement and figures submitted on both pages of this return are true, full and correct to the best of my knowledge and belief. I certify that unless otherwise indicated as business use, the vehicles listed herein are for personal use.

NOTE — It is a misdemeanor for any person willfully to subscribe a return which he does not believe to be true and correct as to every material matter (Va. Code § 58.1-11).

_________ ______ ___________ (Signature of Taxpayer) (Date) (Taxpayer’s Phone Number) Executors, administrators, trustees and other fiduciaries must also supply information called for on this return.

F O RETURN OF TANGIBLE PERSONAL PROPERTY, MACHINERY AND TOOLS,

R AND MERCHANTS’ CAPITAL — FOR LOCAL TAXATION ONLY M VIRGINIA 762 Please print Your social security number2025or FEIN Name Name of spouse

Spouse’s social security number Home address Number and street or rural route

County or City City, town or post office State ZIP Code District, Ward or Town

PART I – TANGIBLE PERSONAL PROPERTY

1. Motor vehicles * Leased vehicles for business use BusinessUse Trade Name of Year Modelor No. Cylindersor Date Number AirYesCond.or FairasMarketListed Valueby asFairAscertainedMarket Valueby do not qualify for the personal property tax reduction. Yes or No Motor Vehicle Series Tonnage Acquired Owned No Taxpayer ofCommissionerthe Revenue (a) Automobiles (not daily rental passenger cars)

VIN

VIN: (b) Motorcycles (c) Autocycles (d) Trucks (e) Tractors and trailers (f) Antique motor vehicles (g) All other motor vehicles and motor homes

2. Manufactured (mobile) offices, campers, travel trailers, and recreational camping trailers Length and Date Number Year Model or Series Width Acquired Owned Cost

3. Manufactured (mobile) homes (see instructions on back) Length and Date Number Manufacturer Year Model or Series Width Acquired Owned Cost

4. BoatspropertyandwhichWatercraftpertains(Assessto craftthe(§58.1-3500))value of all 5OverTons 5UnderTons Manufacturer Year Type HorsepowerLength and AcquiredDate NumberOwned Cost (a) Used for recreation and pleasure only . . . (b)Boat trailers, etc. . . . . . . . (c)Other . . . . . . . . . . ..

Model or Date Number5.Aircraft Manufacturer Year Series Acquired Owned Cost (a) Aircraft owned by scheduled air carriers with seating capacity of no more than 50 persons . . . . . . . . . . . . . . . . . . . . . . . . . (b) All other aircraft and flight simulators . . . . . . . . . . . . . . . . . . .

6. Motor vehicles owned/leased by auxiliary police, rescue squad, fire department, or similar personnel.
7. Motorsheriff’svehiclesdepartmentownedor uniformedby a nonprofitmembersorganizationof the Virginia(§Defense58.1-3506(17)).Forms (§§ 58.1-3506(15),. . . . . .(16),. (20),. . (32),. . and. .(44)). .. .. .. .. .. .. .. ..
8. Heavy construction machinery (attach schedule). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9. Business furniture and listings not returnable as part of merchants’ capital or if not defined as intangible personal property (§ 58.1-1100).. . . . . . 10.Furniture and office equipment, including books, used in practicing a profession. . . . . . . . . . . . . . . . . . . 11.Tools, hand or power, including woodworking equipment, and metal lathes. . . . . . . . . . . . . . . . . . . . .12.Farming implements, including gas engines, electric motors, etc., threshing machines, corn huskers, feed cutters, combines, harvesters, 13.Tangibleblowers, plows,personalharrows,propertyrakes,usedmowers,in researchanimal drawnand vehicles,developmentpeanutbusiness.pickers, etc... .. .. . . . . . . . .. .. .. .. . . . . . . . .. .. .. .. . . . . . . . .. 14.Tangible personal property, leased, loaned or otherwise made available from federal, state, or local government. . . . . . 15.Tangible personal property consisting of programmable computer equipment and peripherals used in business. . . . . . 16.Miscellaneous and incidental property used in a trade or business . . . . . . . . . . . . . . . . . . . . . . . .

Value as Date Ascertained by Original Value CommissionerPARTII – MACHINERY AND TOOLS (see instructions on Page 2) Acquired Capitalized as Listed by Cost Taxpayer of the Revenue 17.18.MachineryEnergy conversionand tools.equipment. . . . of. MANUFACTURERS. . . . . . . . (§. 58.1-3506).. . . . . .. .. .. .. .. .. .. .. .. .. .. .. 05/24 Value asPARTIII – MERCHANTS’ CAPITAL (see instructions on Page 2) Value Ascertained by CommissionerRev. asTaxpayerListed by of the Revenue 2601043 19.20.InventoryDaily rentalof passengerstock on hand.cars.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.All other taxable merchants’ capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.Total taxable merchants’ capital (add lines 19, 20, and 21). . . . . . . . . . . . . . . . . . . . . . . . . . .TAXATION PARTIV – OTHER TANGIBLE PERSONAL PROPERTY OF 23.24.TotalAll otheramounttangibleof PartpersonalIV frompropertyline 32 noton thespecificallyback of theenumeratedreturn . . on. this. .return. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .DEPTVA 25.TotalManufacturer(add lines 1-18, 22, 23, and 24) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .FORM 762 (2025) Page 2 Fair Market Value Fair Market Value Ascertained by Listed by as PART IV – OTHER TANGIBLE PERSONAL PROPERTY as Commissioner Taxpayer of the Revenue 26. (a)(b)Horses,Cattle. . mules. . .and. other. . .kindred. . . animals.. . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. Owned(c)Sheep and goats. . . . . . . . . . . . . . . . . . . . . . . . . . (d)Hogs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (e)Poultry — chickens, turkeys, ducks, geese, etc.. . . . . . . . . . . . . . (f)Equipment used by farmers or cooperatives to produce ethanol derived primarily from farm products. . . . . . . . . . (g)Grains and other feeds used for the nurture of farm animals. . . . . . . . . . . . . . . . . . . . . . . . . . (h)Grain, tobacco and other agricultural products in the hands of a producer . . . . . . . . . . . . . . . . . . . . (i)Equipment and machinery used by farm wineries in the production of wine . . . . . . . . . . . . . . . . . . . . 27.Felled timber, ties, poles, cord wood, bark and other timber products . . . . . . . . . . . . . . . . . . . . . . . 28.(a) Refrigerators, deep freeze units, air conditioners, and automatic refrigerating machinery. . . . . . . . . . . . . . . (b)Vacuum cleaners, sewing machines, washing machines, dryers, and all other household machinery . . . . . . . . . . (c)Pianos and organs, television sets, radios, phonographs and records, and all other musical instruments. . . . . . . . (d)Watches and clocks and gold and silver plates and plated ware. . . . . . . . . . . . . . . . . . . . . . . . (e)Oil paintings, pictures, statuary, and other works of art $ __books $ ___ . . . . . . . . . . . . . . . (f)Diamonds, cameos and other precious stones and precious metals used as ornaments or jewelry. . . . . . . . . . . (g)Sporting and photographic equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (h)Firearms and weapons of all kinds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i)Bicycles and lawn mowers, hand or power. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (j)Household and kitchen furniture (state number of rooms _ ______). . . . . . . . . . . . . . . . . . . . . . . (k)All-terrain vehicles, mopeds, and off-road motorcycles . . . . . . . . . . . . . . . . . . . . . . . . . . . . (l)Electronic communications and processing devices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.Seines, pound nets, fykes, weirs and other devices for catching fish. . . . . . . . . . . . . . . . . . . . . . . . 30.Poles, wires, switchboards, etc., telephone or telegraph instruments, apparatus, etc., owned by any person, firm, association, or company not incorporated . company). . . . . . . . . . .32.31. TotalToll bridges,of Part turnpikesIV (add linesand26ferriesthrough(except31 andsteamenterferrieson lineowned23). and. . operated. . . . by. chartered. . Number. . . . . . . . . . . . . . . .

Complete Form 762 for property owned on Jan 1, 2025, and file by May 1, 2025, or local due date. Mark “None” if property not owned. Property defined as intangible under Va. Code § 58.1-1100 is not assessable. Attach additional schedules if needed. Vehicles with business use do not qualify for Car Tax Relief if over 50% mileage, depreciation, expensed under §179, or leased with tax paid by leasing company.

Manufactured (mobile) homes, per Va. Code §36-85.3, are transportable, built on a chassis, ≥8 ft wide, ≥40 ft long or ≥320 sq ft, used as single-family dwellings. Miscellaneous trade property must not be machinery, merchants’ capital, or short-term rental, and cost less than $250.

Report machinery and tools used in manufacturing, mining, drilling, broadcasting, dairy, dry cleaning, or laundry, classified per §58.1-3507, with separate local classifications.

If taxed, report all other taxable personal property of merchants, excluding cash and non-merchandise property, which is reported under PART I.

Fiduciaries must complete this return for tangible property, machinery, or merchants’ capital they hold, including required additional info.

1. Character of Fiduciary: Executor c Administrator c Trustee c Committee c Guardian c Other c Specify______
2. Name of Estate, Trust or Ward___________________

I declare all statements are true and correct; vehicles are for personal use unless marked otherwise.

It is a misdemeanor to knowingly submit false material information (Va. Code §58.1-11).

_________ ______ ___________ (Signature of Taxpayer) (Date) (Taxpayer’s Phone Number) Executors, administrators, trustees and other fiduciaries must also supply information called for on this return.

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Guidelines for Reporting Federal Tax Adjustments

During the 2020 Session, the Virginia General Assembly enacted House Bill 1417 (2020 Acts of Assembly, Chapter 1030) which provided updated procedures for reporting certain adjustments, including partnership adjustments, that result from federal tax changes and other changes to federal taxable income to the Department of Taxation (“the Department”). This legislation updated Virginia’s law regarding reporting tax adjustments to make it match with new federal procedures set forth in the federal Bipartisan Budget Act of 2015 (“BBA”). In addition, this legislation specified when other Virginia income taxpayers such as individuals, estates, trusts, and corporations must report federal tax changes to the Department.

These guidelines are published by the Department of Taxation (“the Department”) to provide guidance to taxpayers regarding the updated procedures for reporting federal tax changes to the Department, as required by the second enactment clause of 2020 House

Bill 1417. These guidelines are not rules or regulations subject to the provisions of the Administrative Process Act (Va. Code § 2.2-4000 et seq.) and are being published in accordance with the Tax Commissioner’s general authority to supervise the administration of the tax laws of the Commonwealth pursuant to Va. Code § 58.1-202. As necessary, additional information regarding these procedures will be published and posted on the Department’s website, www.tax.virginia.gov.

These guidelines complement the Department’s existing General Provisions Applicable to All Taxes Administered by the Department of Taxation Regulation (23 Virginia Administrative Code (“VAC”) 23 VAC 10-20-10 et seq.), Individual Income Tax Regulation (23 VAC 10-110-20 et seq.), and Corporation Income Tax Regulation (23 VAC 10-120-10 et seq.). To the extent that there is a conflict between the Department’s existing guidance and 2020 Acts of Assembly, Chapter 1030, the provisions of that law, as interpreted by these guidelines, supersede existing guidance.

These guidelines represent the Department’s interpretation of the relevant laws. They do

not constitute formal rulemaking and hence do not have the force and effect of law or regulation. In the event that the final determination of any court holds that any provision of these guidelines is contrary to law, taxpayers who follow these guidelines will be treated as relying on erroneous written advice for purposes of waiving penalty and interest under Va. Code §§ 58.1-105, 58.1-1835, and 58.1-1845.

Definitions

As used in these guidelines, unless the context requires otherwise

"Administrative adjustment request" means an administrative adjustment request filed by a partnership pursuant to Internal Revenue Code (“IRC”) § 6227.

"Direct" means, with respect to a partner, that such partner holds a direct interest in a partnership or a pass-through entity and that such interest is not held indirectly through another partnership or pass-through entity.

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Guidelines for Reporting Federal Tax Adjustments

"Federal adjustment" means a change to an item or amount determined under the IRC that is used by a taxpayer to compute Virginia tax owed, regardless of whether that change results from an action by the Internal Revenue Service (“IRS”) including a partnership-level audit, or the filing of an amended federal return, federal refund claim, or administrative adjustment request by the taxpayer. A federal adjustment is positive to the extent that it increases Virginia taxable income and is negative to the extent that it decreases Virginia taxable income.

"Partner" means a person that holds an interest directly or indirectly in a partnership or pass-through entity.

"Partnership" means an entity subject to taxation under Subchapter K, 26 U.S.C. § 701 et seq., of Chapter 1 of Subtitle A of the IRC.

"Partnership-level audit" means an examination by the IRS at the partnership level pursuant to Subchapter C, 26 U.S.C. § 6221 et seq., of Chapter 63 of Subtitle F of the IRC that results in federal adjustments.

"Pass-through entity" means any pass-through entity as defined in Va. Code § 58.1-390.1, other than a partnership as defined in this section.

"Reviewed taxable year" means the taxable year of a partnership that is subject to a partnership-level audit from which federal adjustments arise.

General Requirements for the Reporting of Federal Tax Adjustments

If an adjustment is made to the federal taxable income of an individual, estate, trust or corporate taxpayer, taxpayers are required to report federal adjustments to the Department (“general reporting requirement”). If the adjustment results in an increase in the taxpayer’s Virginia income tax liability, additional tax may be due at the time when the change is reported. If the adjustment results in a decrease, the taxpayer may be entitled to a refund. These adjustments are most commonly the result of either an audit by the IRS or the filing of an amended federal income tax return by the taxpayer.

Effective July 1, 2020 and after, 2020 House Bill 1417 requires that federal adjustments be reported to the Department within one year after a “final determination date” rather than one year after a “final determination,” the term used under prior law. This new definition of “final determination date” will apply throughout these guidelines, unless context requires otherwise, including the sections regarding partnerships. In addition, the application will depend on whether the federal adjustment arises from IRS action or from taxpayer action.

Prior to July 1, 2020, federal adjustments were required to be reported to the Department within one year after the “final determination” of such adjustment. 23 VAC 10-20-

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Guidelines for Reporting Federal Tax Adjustments

180(B)(2)-(5) provides guidance regarding the final determination of a federal adjustment.

Federal Adjustment From IRS-Initiated Action

If the federal adjustment arises from an IRS audit or other action by the IRS, "final determination date" means:

1. The first day on which no federal adjustments arising from that audit or other action remain to be finally determined, whether by IRS decision with respect to which all rights of appeal have been waived or exhausted, by agreement, or, if appealed or contested, by a final decision with respect to which all rights of appeal have been waived or exhausted. For agreements required to be signed by the IRS and the

taxpayer, the final determination date is the date on which the last party signed the agreement.

2. If the taxpayer filed as a member of a combined or consolidated return, the final determination date means the first day on which no related federal adjustments arising from that audit remain to be finally determined, as determined in Paragraph 1 above, for the entire group.

Because 23 VAC 10-20-180(B)(2)-(5) is generally consistent with the "final determination date" definition in 2020 House Bill 1417, the Department will follow such regulations in interpreting this legislation. As a result, the date when any one of the following events occur will be considered to be a final determination date:

• The signing of federal Form 870 or other IRS form consenting to the deficiencies, accepting any overassessment shown on the form, or both. However, where the

signature of an authorized representative of the IRS is also required, the final determination date is the date on which the taxpayer receives notice of the signing by the IRS.

• The expiration of the 90-day time period (150-day period in the case of notice addressed to a person outside the states of the union and the District of Columbia) within which a petition for redetermination may be filed with the United States Tax Court with respect to a statutory notice of deficiency issued by the IRS, if a petition is not filed with that court within such time.

• A closing agreement entered into with the IRS under IRC § 7121. The final determination shall occur when the taxpayer receives notice of the signing by the Commissioner of Internal Revenue.

• A decision by the United States Tax Court, a United States district court, the U.S.

Claims Court, a United States court of appeals, or the United States Supreme

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Court that has become final, or the date the court approves a voluntary agreement stipulating disposition of the case.

Federal Adjustment From Taxpayer-Initiated Action

If the federal adjustment does not arise from an IRS audit or other action by the IRS, the “final determination date” means the day on which the amended return, refund claim, administrative adjustment request, or other similar report was filed (“the filing rule”).

Because the filing rule is inconsistent with the payment and refund rule in 23 VAC 10-20-180(B)(1), the Department considers the filing rule in House Bill 1417 to supersede this portion of the regulation.

Requirements for Reporting Certain Partnership-Level Federal Tax Adjustments

Under the federal Bipartisan Budget Act of 2015 (“BBA”), Congress enacted a new regime for auditing partnerships referred to as “the centralized partnership audit regime.” Under this regime, tax is generally determined, assessed, and collected at the partnership level.

This has the effect of generally shifting the burden of paying tax resulting from federal audits from the taxpaying partners to the partnership itself. As a result, partnerships are no longer required for federal purposes to provide their partners with information regarding federal tax adjustments.

Federal Centralized Partnership Audit Regime

Under the BBA, a federal centralized audit is conducted entirely at the partnership level through its partnership representative. A partnership representative is the person designated by the partnership who makes all audit-related decisions. For more information, please see the BBA Centralized Partnership Audit Regime webpage maintained by the IRS.

Virginia Partnership Reporting Requirement

For Virginia income tax purposes, the general requirement to report federal adjustments is imposed on the partners, not the partnership itself. However, under the new federal centralized partnership audit regime, partnerships are not generally required to provide information regarding federal adjustments to their partners. In addition, under prior Virginia law, there was nothing requiring the partnership to provide such information to their partners. Therefore, partners in a partnership subject to the centralized partnership audit regime may have difficulties reporting federal adjustments to the Department due to a lack of necessary information from the partnership.

To address this issue, the General Assembly enacted House Bill 1417 during the 2020 Session. Effective July 1, 2020 and after, this legislation requires that a partnership must report final federal adjustments arising from a partnership-level audit or an administrative adjustment request both to the Department and to its partners (“the partnership reporting

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requirement”). All partnerships are subject to the partnership reporting requirement for taxable years beginning on or after January 1, 2018, unless the partnership has made a valid federal election out of the centralized partnership audit regime. Partnerships are subject to the partnership reporting requirement for taxable years beginning before January 1, 2018 if the partnership has made a valid federal election into the centralized partnership audit regime.

However, if either the push-out or pull-in process established by the IRS in order to report federal adjustments is used or if there are adjustments that do not result in an imputed underpayment, the partnership reporting requirement does not apply to such adjustments.

These adjustments will flow through to the affected partners, and they will therefore be included in income for Virginia tax purposes. This treatment is also given to reallocation adjustments. However, because the IRS accounts for these adjustments as a

nonrefundable credit or as additional tax in the adjustment year, additions and subtractions may be necessary on the partner’s amended Virginia income tax return for the reviewed taxable year. The Department will publish more information regarding this process in its form instructions, including any additions and subtractions that may be necessary.

90-Day Rule for Partnerships to Report and Notify

Under the partnership reporting requirement, a partnership must file with the Department a completed Form 502FED-1 no later than 90 days after the final determination date. On the Form 502FED-1, the partnership is required to report the details of the effect of federal adjustments on amounts reported on the original partnership return for the reviewed taxable year. Along with the Form 502FED-1, the partnership must file an amended Form 502 with all associated forms and schedules.

In addition to making filings with the Department, a partnership must notify each direct

partner of its distributive share of the federal adjustments no later than 90 days after the final determination date. In order to comply with this requirement, the partnership must provide to each direct partner a copy of:

• Form 502FED-1,
• An amended federal Schedule K-1, and
• An amended Schedule VK-1.

Nonresident Withholding Tax

If the partnership paid nonresident withholding tax with respect to its nonresident owners, the partnership must include with its amended Form 502 a payment for any additional withholding tax that may be due as a result of the federal adjustments. “Nonresident owner” means any person who is treated as a partner, member, or shareholder of the

partnership for federal income tax purposes and, in the case of an individual, is not a

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domiciliary or actual resident of Virginia, or, in the case of any other entity, does not have its commercial domicile in Virginia

Composite Return

If the partnership previously filed a composite return (“Form 765”) on behalf of its qualified nonresident owners, the partnership must file an amended Form 765 no later than 90 days after the final determination date. This amended Form 765 is required in addition to the filing of a Form 502FED-1 and an amended Form 502. The partnership must include with its amended Form 765 a payment for any income tax that may be due as a result of the federal adjustments. Please see the Department’s Guidelines for Pass-Through Entity Withholding (“Public Document 15-240) for additional details, including the definition of a “qualified nonresident owner.”

One-Year Rule for Partners to Report and Pay

If the partnership reporting requirement applies to a partnership, any direct partner of such partnership must file a federal adjustments report no later than one year after the final determination date (“the one-year rule”). In the case of the one-year rule, the federal adjustments report will take the form of an amended Virginia income tax return for the reviewed taxable year. In addition, the partner must include a payment for any additional amount of income tax due as if federal adjustments had been properly reported, including any applicable penalty and interest. The payment may be reduced by any credit for related amounts paid or withheld and remitted on behalf of the direct partner. However, the one-year rule does not apply to the following:

• Partners whose income for the reviewed taxable year after any federal adjustments places them below the filing threshold specified in Va. Code § 58.1-321; and
• Partners who are not subject to Virginia’s individual, estates and trusts, or

corporate income tax.

Failure of Partnership to Comply with Federal Adjustments Reporting Filing Requirements

A partnership failing to file its federal adjustments report within the 90-day period or a partner failing to file its federal adjustments report within the one-year period will be liable for a penalty of $200 if the failure is for not more than one month, with an additional $200 for each additional month or fraction thereof during which such failure to file continues, not exceeding six months in the aggregate. In no case, however, may the penalty be less than $200. See Va. Code §§ 58.1-399.7 and 58.1-394.1(A).

In addition, if any partnership’s failure to comply with the 90-day period exceeds six months, the Department will assess a penalty of six percent of the total amount of federal

adjustments derived by its partners from the partnership for the taxable year. If any partner’s failure to comply with the one-year period exceeds six months, the Department

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will assess a penalty of six percent of the total amount of federal adjustments attributable to that partner from the partnership for the taxable year. The Department may determine such penalty from any information in its possession. The six percent penalty may be reduced by the monthly $200 penalty assessed. In addition, the penalty would not apply to any tax paid by the partners on their share of federal adjustments from the partnership for the taxable year.

The penalties will be assessed and collected by the Department in the manner provided for the assessment and collection of income taxes or in a civil action, at the instance of the Department. In addition, the partnership may be compellable by mandamus to file a complete federal adjustments report and notify its direct partners.

Partnership Pays Election

As an alternative to having partners report and pay tax on their distributive share of adjustments, an audited partnership may make an election to pay tax on their behalf (“the partnership pays election”). "Audited partnership" means a partnership subject to a partnership-level audit that results in a federal adjustment. Partnerships with final federal adjustments arising from administrative adjustment requests are not able to make the partnership pays election. To properly make such election, the audited partnership must:

• No later than 90 days after the final determination date, file a completed Form 502FED-1 and Form 502FED-2, checking the box indicating that it is making a partnership pays election to submit an elective payment on behalf of its partners; and

• No later than one year after the final determination date, make the elective payment.

The election may be made by checking the appropriate box on the Form 502FED-2. If multiple taxable years are included in the federal audit, one Form 502FED-1 and one Form 502FED-2 are required to be filed for each year. The audited partnership may make a separate election for each taxable year and is not be required to make the election for all taxable years. The partnership should ensure that the appropriate box is checked on each Form 502FED-2 that is filed. If an election to pay the tax on behalf of its partners is made for a particular taxable year, then all partners of the audited partnership must be included in the election, including those that were originally included in a composite return.

The partnership is required to issue to each direct partner a written statement regarding the amount of elective payment that has been made and that partner’s pro rata share of such payment. If an elective payment is made after the Form 502FED-2 is filed, it is recommended that the elective payment be made as soon as possible and that any

written statement also be provided to direct partners as soon as possible to ensure such partners have sufficient time to file amended returns for refunds if they are eligible.

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Guidelines for Reporting Federal Tax Adjustments

Adjustments that do not result in additional tax are not included in the elective payment computation for partnerships making a partnership pays election. Those adjustments will flow through to the affected partners, and will therefore be included in income for that year. Because the IRS accounts for these adjustments as a nonrefundable credit in the adjustment year, additions and subtractions may be necessary on the partner’s amended return for the reviewed taxable year. The Department will publish more information regarding this process in its form instructions.

Allocation and Apportionment of Income

The first step in computing the elective payment is determining the allocation and apportionment of the partnership’s income. If a partnership’s entire business is conducted

within Virginia, then all of its income is Virginia source income, and no income is allocated or apportioned to another state.

If a partnership conducts its business within Virginia and elsewhere in a manner such that its income would be subject to a tax on net income in Virginia and at least one other state, the partnership must allocate and apportion its income in the same manner that is provided in Virginia law for corporations. Dividends received are to be allocated to the state of the partnership’s commercial domicile, but all other income must be apportioned.

A partnership may not apportion its income based on divisional or separate accounting, or any other alternative method unless it has requested and received permission to do so in advance from the Department.

Effect of Allocation and Apportionment on the Elective Payment

The second step in computing the elective payment is determining the effect of the partnership’s allocation and apportionment on the partners, which varies as described

below.

Non-Tiered Partners

To the extent that the partners of the electing partnership are direct, non-tiered partners, the elective payment amount will be calculated according to this section depending upon whether the partner is a resident partner, nonresident partner, corporate partner, or tax-exempt partner.

Resident Partners

For the portion of federal adjustments that would flow through to a resident partner, the elective payment is the distributive share of the full amount of such adjustments multiplied by Virginia’s highest individual income tax rate of 5.75 percent. This is because a Virginia resident individual owner is taxable on all of his or her partnership income regardless of the partnership’s allocation and apportionment.

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Guidelines for Reporting Federal Tax Adjustments

With respect to an individual partner, a "resident partner" means that such partner is a “resident,” as defined in Va. Code § 58.1-302, for the relevant tax period. Any individual partner who does not meet this definition is a “nonresident partner.”

With respect to an estate or trust partner, "resident partner" means that such partner is a “resident estate or trust,” as defined in Va. Code § 58.1-302, for the relevant tax period.

Any estate or trust partner who does not meet this definition is a “nonresident partner.”

Direct Nonresident Partners

For the portion of federal adjustments that would flow through to a nonresident partner, the elective payment amount is the distributive share of such adjustments that are

sourced to Virginia and multiplied by Virginia’s highest individual tax rate of 5.75 percent.

A “nonresident partner” is any individual, estate, or trust partner that is not a resident partner. The allocation and apportionment is a partnership-level computation. In determining the distributive share of adjustments that are sourced to Virginia, the electing partnership adds:

• The direct nonresident partner’s distributive share of federal adjustments to income other than dividend income (“apportionable income”) multiplied by the partnership’s post-audit apportionment percentage; and

• The direct nonresident partner’s distributive share of federal adjustments to dividend income if the partnership is commercially domiciled in Virginia.

Example 1. Partner A is a nonresident individual who is a direct partner with a 40%

ownership interest in Partnership Z. Partnership Z’s apportionable income reported on its original return was $100,000. The partnership has a $10,000 federal adjustment to apportionable income, making its apportionable income $110,000.

Its apportionment percentage is 20 percent.

As a result of the audit , Partnership Z’s post-apportionment income increased from $20,000 ($100,000 income reported on original return X 20 percent) to $22,000 ($110,000 income determined by IRS X 20 percent). In this case, the difference between these two amounts is the federal adjustment, which is $2,000 ($22,000 post-apportionment income after audit - $20,000 post-apportionment income before audit). Because Partner A is a 40 percent owner of the partnership, Partner A’s distributive share of that adjustment is $800 ($2,000 X 40 percent), and the elective payment on such distributive share is $46 ($800 X 5.75 percent).

Example 2. Same as Example 2, except that Partnership Z’s apportionment

percentage was 10 percent prior to the federal audit but is now 20 percent as a result of the federal audit.

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As a result of the audit and its effect on its apportionment percentage, Partnership Z’s post-apportionment income increased from $10,000 ($100,000 income reported on original return X 10 percent) to $22,000 ($110,000 income determined by IRS X 20 percent). In this case, the difference between these two amounts is the federal adjustment, which is $12,000 ($22,000 post-apportionment income after audit - $10,000 post-apportionment income before audit). Because Partner A is a 40 percent owner of the partnership, Partner A’s distributive share of that adjustment is $4,800 ($12,000 X 40 percent), and the elective payment on such distributive share is $276 ($4,800 X 5.75 percent).

Corporate Partner

For the portion of federal adjustments that would flow through to a corporate partner, the elective payment amount is the distributive share of such adjustments that are apportioned or allocated to Virginia and multiplied by Virginia’s 6 percent corporate income tax rate. "Corporate partner" means a partner that is subject to the Virginia corporate income tax.

The allocation and apportionment is a partnership-level computation. In determining the distributive share of adjustments that are apportioned and allocated to Virginia, the electing partnership adds:

• The corporate partner’s distributive share of federal adjustments to income other than dividend income (“apportionable income”) multiplied by the partnership’s post-audit apportionment percentage; and

• The corporate partner’s distributive share of federal adjustments to dividend

income if the partnership is commercially domiciled in Virginia.

Tax-Exempt Partners

For the portion of federal adjustments that are to unrelated business income or other taxable income to which a tax-exempt partner would be subject to tax under Va. Code § 58.1-400, the elective payment amount is the distributive share of such adjustments that are apportioned or allocated to Virginia and multiplied by Virginia’s 6 percent corporate tax rate. In determining the distributive share of such adjustments that are allocated and apportioned to Virginia, the same principles apply to tax-exempt partners that apply to corporate partners.

“Tax-exempt partner” means a partner exempt from Virginia income taxation. If such

partner has unrelated business taxable income but otherwise is exempt from Virginia income taxation, such partner shall be considered a “tax-exempt partner.” "Unrelated business taxable income" has the same meaning as such term is defined in IRC § 512.

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Guidelines for Reporting Federal Tax Adjustments

For the portion of federal adjustments that are to income other than unrelated business income or other taxable income to which the a tax-exempt partner would not be subject to tax under Va. Code § 58.1-400, the elective payment amount is zero.

Tiered Partners

For the portion of federal adjustments that would flow through to a direct tiered partner, the elective payment amount is the distributive share of Virginia source adjustments multiplied by Virginia’s highest individual tax rate of 5.75 percent. In determining the distributive share of such adjustments that are Virginia source adjustments, the same principles apply to direct tiered partners that apply to direct nonresident partners. See Va.

Code § 58.1-399.1(B)(4)(ii).

An exception to this general rule provides that adjustments that are of a type that would not be subject to sourcing in Virginia are required to be included in their entirety in the elective payment. See Va. Code § 58.1-399.1(B)(4)(ii). Because Virginia requires sourcing of all income through either allocation or apportionment under its statutory method, this exception will not typically apply to an electing partnership’s adjustments.

However, this exception may apply to certain partnerships that are properly using an alternative method of apportionment or are considered an investment pass-through entity under Public Document 15-240. In such cases, if the partnership has adjustments that are of a type that would not be subject to sourcing in Virginia, then they must be included in the elective payment amount computation in their entirety as an initial matter. If the partnership seeks, instead, to exclude any portion of these adjustments, it may do so to the extent that it can establish that the amount is properly allocable to an indirect nonresident partner. While not dispositive, helpful factors in proving non-residency for this purpose may include a copy of a resident tax return filed by the nonresident indirect partner in another state and, if filed, a copy of a nonresident tax return filed by the nonresident indirect partner in Virginia. Adjustments may also be excluded to the extent

an electing partnership can establish the amount is properly allocable to a partner that is not subject to tax on such amount or excludable under procedures for alternative reporting and payment.

Assessment and Collection of Elective Payment

If any partner or partnership makes a partnership pays election, the Department must assess and collect elective payments, interest, and penalties arising from final federal adjustments as if the elective payments are a corporate income tax. Penalties and interest imposed on a partner or partnership will be determined based on the date the Form 502 for the reviewed taxable year originally was due. Therefore, the provisions of Chapter 3 and Chapter 18 of Title 58.1 relating to the assessment and collection of corporate income tax apply, making such changes necessary after considering the differences between the corporate income tax and the elective payment. The effect of some of these provisions on audited partnerships is detailed below.

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Failure to Pay Penalty and Interest

The failure to pay penalty for electing partnerships will be based upon the corporate penalty in Va. Code § 58.1-455. The amount of such penalty will be equal six percent of the elective payment amount for each month or fraction thereof from the date the Form 502 for the reviewed taxable year originally was due until paid, not exceeding thirty percent in the aggregate.

Interest upon such elective payment, and on the accrued penalty, will be added at a rate determined in accordance with Va. Code § 58.1-15, from the date the Form 502 for the reviewed taxable year originally was due until paid. In the case of an elective payment assessed by the Department, if the Form 502 was made in good faith and the understatement of the amount in the return was not due to any fault of the electing

partnership, there will be no penalty on the elective payment because of such understatement. However, interest will be added to the amount of the deficiency at a rate determined in accordance with Va. Code § 58.1-15, from the date the Form 502 for the reviewed taxable year originally was due until paid.

If the understatement is false or fraudulent with intent to evade the tax, a penalty of 100 percent of the elective payment will be added together with interest on the payment at a rate determined in accordance with Va. Code § 58.1-15, from the date the Form 502 for the reviewed taxable year originally was due until paid.

Failure of Partnership to File a Federal Adjustments Report

Any partnership that fails to file a Form 502FED-1 and Form 502FED-2 within 90 days after the final determination date or any partnership that files such forms but fails to check the appropriate box on the Form 502FED-2 indicating that it is making a partnership pays election will be considered to have not made a partnership pays election for the reviewed

taxable year or taxable years included in the federal audit. Such partnership will be subject to the penalty applicable to non-electing partnerships described under Failure of Partnership to Comply with the 90-Day Requirement Penalty above.

Authority to Consolidate Accounts and to Challenge Certain Transactions

In assessing and collecting the elective payment against an electing partnership, the Department has the authority to require a consolidated federal adjustment report or a consolidation of accounts and to challenge certain transactions. This authority is based upon the corporate provisions in Va. Code §§ 58.1-445 and 58.1-446, which will be applied as if the electing partnership is a corporation and all direct and indirect partners are stockholders of that corporation. In particular, the Department will exercise such authority where the partnership pays election is used to shift income or avoid Virginia income taxes through tiered partnership structures.

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State Partnership Representative

The state partnership representative for a reviewed taxable year is the partnership's federal partnership representative unless the partnership designates in writing another person as its state partnership representative.

The state partnership representative has the sole authority to act on behalf of a partnership with respect to an action required or permitted to be taken under Article 9.1 of Chapter 3 of the Title 58.1 of the Code of Virginia, and with respect to any administrative or judicial appeal of such action pursuant to Chapter 18 of the Code of Virginia. The actions of the state partnership representative will be binding on the direct partners and indirect partners of the partnership.

If a partnership desires to designate a person other than their federal partnership representative for Virginia tax purposes, please see the Form 502FED-1 Instructions regarding the process by which such person may be designated. The qualifications for a person to be a state representative are the same as provided by the Internal Revenue Service for a federal partnership representative.

Alternative Payment Election

An audited partnership may enter into an agreement with the Department to use an alternative reporting and payment method (“alternative payment election”). The Department will enter into such agreement only if such audited partnership demonstrates, to the satisfaction of the Department, that the alternative method is reasonably expected to provide for the reporting and payment of taxes, penalties, and interest due by the partners in aggregate. Application for approval of an alternative reporting and payment method must be made by the audited partnership no later than 90 days after the final determination date. The audited partnership must also submit the Form 502FED-1 to the

Department no later than 90 days after the final determination date.

The partnership should indicate in its application whether, in the event its application is denied, it would like to make a partnership pays election. If the partnership would like to make a partnership pays election in the event that its application is denied but does not indicate so in its application, the partnership must submit a letter in writing to the Department within 90 days of the final determination date indicating this desire.

Effect of the Partnership Pays Election and the Alternative Reporting Election

Revoking the Election

If a partnership or partner makes a partnership pays election or an alternative payment election, such election is irrevocable by such partnership or partner. However, pursuant to Va. Code § 58.1-399.4, such election is revocable by the Department in its discretion.

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[TABLE 13-1] | o later than 90 days after the final determination date. The audited partnership must also submit the Form 502FED-1 to the | Department no later than 90 days after the final determination date. |

[/TABLE]

[TABLE 13-2] The partnership should indicate in its application whether, in the event its application is denied, it would like to make a partnership pays election. If the partnership would like to make a partnership pays election in the event that its application is denied but does not indicate so in its application, the partnership must submit a letter in writing to the Department within 90 days of the final determination date indicating this desire.

[/TABLE]

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Guidelines for Reporting Federal Tax Adjustments

Paid-in-Lieu of Partner’s Taxes

If properly reported and paid by the electing partnership, amounts paid pursuant to a partnership pays or alternative payment election will be treated as paid in lieu of taxes owed by a direct or indirect partner, to the extent applicable, on the final federal adjustments. As a result, the partners of such partnership may exclude the income on which such tax was paid when filing any subsequent amended returns. Since the income is excluded, no tax attributes of the affected partners will be reduced.

However, if an electing partnership fails to timely make any report or payment, the Department may assess the direct and indirect partners of such partnership for any taxes owed. Each partner is required to provide information requested by the electing partnership so that such partnership can properly calculate the amount due under the

partnership pays election or the alternative payment election.

Treatment of Tax Preferences on Partners’ Taxes

General Rule

Direct and indirect partners are not allowed to claim subtractions, deductions, credits, or refunds of amounts paid by the partnership. In addition, no net operating losses of any type may be eligible to reduce the total additional Virginia taxable income or distributive share of such income when the audited partnership makes a partnership pays election or an alternative payment election.

Exception for Credit for Taxes Paid

The amount of tax paid by the electing partnership pursuant to Va. Code §§ 58.1-399.1 and 58.1-399.3 is considered to have been paid by its direct partners in proportion to their

ownership of such partnership. Accordingly, resident direct partners who would be eligible for a credit under Va. Code § 58.1-332(A) if they paid the tax themselves will be eligible for a credit for their distributive share of amounts paid by the electing partnership.

Nonresident direct partners who would be eligible for a credit under Va. Code § 58.1-332(B) if they paid the tax themselves will also be eligible for a credit for their distributive share of amounts paid by the electing partnership.

In order to allow its direct partners to claim a credit under Va. Code § 58.1-332 for payments made by an electing partnership pursuant to Va. Code §§ 58.1-399.1 and 58.1-399.3, the electing partnership is required to provide written statements to each direct partner. For each direct partner, the written statement is required to indicate the amount of tax that has been paid by the partnership on his or her behalf, the direct partner’s proportion of ownership of such partnership, and the direct partner’s distributive share of amounts paid by such partnership. It is recommended that any written statement be provided to direct partners as soon as possible to ensure such partners have sufficient time to file amended returns for refunds if they are eligible. Failure of the electing

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Guidelines for Reporting Federal Tax Adjustments

partnership to provide a written statement to a direct partner will not extend the partner’s applicable statute of limitations for refunds.

Tiered Partners

The following categories of partners are subject to the partnership reporting requirement and are entitled to make a partnership pays election or apply to use an alternative reporting and payment method:

1. Any direct tiered partner of an audited partnership;

2. Any indirect tiered partner of an audited partnership; and

3. Any partner of a partner specified in 1 or 2 above.

Any of the three categories of partners described above must make any required reports and payments no later than 90 days after the time for filing and providing statements to tiered partners and their partners pursuant to the provisions of IRC § 6226 and any regulations promulgated thereunder.

Limitations Periods

Assessments Arising From Federal Adjustments

A one-year statute of limitations period applies to assessments arising from federal adjustments. Where no partnership pays election or alternative payment election has

been made

• The Department may assess taxes, interest, and penalties against each partner within one year of the date on which each partner filed an amended Virginia income tax return; and

• The Department may assess the failure to file penalty against a partnership within one year of the date on which it filed Form 502FED-1.

If a partner or partnership fails to file an amended Virginia income tax return or Form 502FED-1 within the time period specified, the statute of limitations on assessments will remain open indefinitely until such return or form is filed. Similar treatment applies if a Virginia amended return or form is filed within the time period specified but the partner or partnership omits final federal adjustments or understates the correct amount of tax owed.

Where a partnership pays election or alternative payment election has been made, the Department may assess in-lieu-of-amounts, interest, and penalties against the partnership within one year of the date on which it was required to file a Form 502FED-1 and, if applicable, a Form 502FED-2. If the partnership fails to pay the full amount of

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Guidelines for Reporting Federal Tax Adjustments

payment required under such election, the Department may assess taxes, interest, and penalties against each partner of the partnership within one year of the date on which each partner would have been required to file an amended Virginia income tax return had no partnership pays election been made.

This one-year limitations is in addition to and not in place of any other limitations period that may apply. Unless otherwise agreed to in writing by the partner and the Department, any adjustments by the Department or by the partner or partnership that are made pursuant to this one-year statute of limitations are limited to adjustments to the partner's or partnership’s tax liability that arise from federal adjustments.

Refunds Arising from Federal Adjustments

A one-year statute of limitations period applies to refunds arising from federal adjustments. Where no partnership pays election or alternative payment election has been made:

• Each partner may claim a refund of taxes, interest, and penalties within one year of the date on which each partner was required to file an amended Virginia income tax return; and

• The partnership may claim a refund of the failure to file penalty within one year of the date on which it was required to file Form 502FED-1.

Where a partnership pays election or alternative payment election has been made, the partnership may claim a refund of in-lieu-of-amounts, interest, and penalties if such claim for refund is made within one year of the date on which it was required to file Form

502FED-1.

This one-year limitations is in addition to and not in place of any other limitations period that may apply. Unless otherwise agreed to in writing by the partner and the Department, any adjustments by the Department or by the partner or partnership that are made pursuant to this one-year statute of limitations are limited to adjustments to the partner's or partnership’s tax liability that arise from federal adjustments.

Extensions of the Limitations Periods

This one-year limitation period for assessments and refunds may be extended

• Automatically, upon written notice to the Department, by 60 days for an audited partnership or a tiered partner that has 10,000 or more direct partners; or
• By written agreement between the partnership or partner and the Department.

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Guidelines for Reporting Federal Tax Adjustments

Any extension granted extends by an equal time period the last day for the Department to assess any additional amounts arising from the adjustments to federal taxable income and the period for filing a claim for refund or credit of taxes.

Additional Information

These guidelines are available online on the Virginia Regulatory Town Hall website, located at https://townhall.virginia.gov, and on the Guidance Documents section of the Department’s website, located at http://tax.virginia.gov/guidance-documents. For additional information, please contact the Department at (804) 367-8037.

Approved

Craig M. Burns Tax Commissioner

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Guidelines for Reporting Federal Tax Adjustments

During 2020, Virginia enacted House Bill 1417 (2020 Acts, Chapter 1030) updating procedures for reporting adjustments, including partnership adjustments, from federal tax changes to the Department, aligning with the federal Bipartisan Budget Act of 2015 (“BBA”) and specifying reporting requirements for individuals, estates, trusts, and corporations.

These guidelines, published by the Department, provide guidance on reporting federal tax changes as required by the second enactment clause of 2020 House

These guidelines are not rules under the Administrative Process Act (Va. Code § 2.2-4000) but are published under the Tax Commissioner’s authority (Va. Code § 58.1-202). Additional info will be posted on www.tax.virginia.gov.

These guidelines supplement the Department’s General Provisions (23 VAC 10-20-10), Individual Income Tax (23 VAC 10-110-20), and Corporation Income Tax (23 VAC 10-120-10). If conflicting, the law, as interpreted here, supersedes existing guidance.

These guidelines are the Department’s interpretation of relevant laws.

These guidelines are not formal rulemaking and lack the force of law. If a court finds any provision unlawful, taxpayers following these guidelines will be treated as relying on erroneous advice to waive penalties and interest (Va. Code §§ 58.1-105, 58.1-1835, 58.1-1845).

Definitions

As used in these guidelines, unless the context requires otherwise

"Administrative adjustment request" means a request filed by a partnership under IRC § 6227.

"Direct" means a partner holds a direct interest in a partnership or pass-through entity, not indirectly through another entity.

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Guidelines for Reporting Federal Tax Adjustments

""Federal adjustment" means a change under IRC used to compute Virginia tax, from IRS action, amended return, refund claim, or administrative adjustment. It increases or decreases Virginia taxable income accordingly.

"Partner" means a person that holds an interest directly or indirectly in a partnership or pass-through entity.

"Partnership" means an entity taxed under IRC Subchapter K, § 701 et seq.

"Partnership-level audit" means an IRS examination under IRC § 6221 resulting in federal adjustments.

"Pass-through entity" means any entity defined in Va. Code § 58.1-390.1, excluding partnerships.

"Reviewed taxable year" means a partnership’s taxable year subject to a partnership-level audit with federal adjustments.

General Requirements for the Reporting of Federal Tax Adjustments

Taxpayers must report federal adjustments to the Department if federal taxable income changes, potentially owing additional tax or receiving a refund, usually from IRS audits or amended returns.

Effective July 1, 2020, HB 1417 requires reporting federal adjustments within one year of the “final determination date,” replacing the prior one-year rule, with application depending on IRS or taxpayer action.

Before July 1, 2020, federal adjustments were reported within one year of the “final determination” (23 VAC 10-20-).

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Guidelines for Reporting Federal Tax Adjustments

180(B)(2)-(5) guides the final determination of a federal adjustment.

Federal Adjustment From IRS-Initiated Action

For IRS audits or actions, "final determination date" means:

1. The first day when no federal adjustments from that audit or action remain to be finally determined, whether by IRS decision, waiver, exhaustion, or final decision. For agreements requiring IRS signatures,

The final determination date is when the last party signs the agreement.

2. If the taxpayer filed a combined or consolidated return, the final determination date is the first day when no related federal adjustments from that audit remain to be finally determined for the entire group.

Since 23 VAC 10-20-180(B)(2)-(5) aligns with HB 1417, the Department will follow these regulations, and the final determination date is when any of the following events occur:

• Signing federal Form 870 or other IRS form consenting to deficiencies or overassessments, or both. However, where the

An authorized IRS representative's signature is required; the final determination date is when the taxpayer receives notice of IRS signing.

• The 90-day (or 150-day outside U.S. and D.C.) period for filing a petition for redetermination with the U.S. Tax Court expires if not filed within this time.

• A closing agreement under IRC § 7121 is final when the taxpayer receives notice of the Commissioner's signing.

• A decision by the U.S. Tax Court, district court, or the U.S.

Claims Court, a United States court of appeals, or the United States Supreme

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Guidelines for Reporting Federal Tax Adjustments

When the court decision becomes final or the court approves a voluntary stipulation.

Federal Adjustment From Taxpayer-Initiated Action

If the adjustment isn't from an IRS audit, the final determination date is when the amended return, refund claim, or similar report is filed (“the filing rule”).

Since the filing rule conflicts with 23 VAC 10-20-180(B)(1), the Department considers House Bill 1417's filing rule to supersede this regulation.

Requirements for Reporting Certain Partnership-Level Federal Tax Adjustments

The 2015 Bipartisan Budget Act (BBA) established the centralized partnership audit regime, where tax is determined, assessed, and collected at the partnership level.

This shifts the tax payment burden from partners to the partnership, which no longer needs to provide partners with federal tax adjustment info.

Federal Centralized Partnership Audit Regime

Under the BBA, a centralized audit is conducted at the partnership level via its designated partnership representative who makes all audit decisions. See IRS BBA webpage for details.

Virginia Partnership Reporting Requirement

Virginia law generally requires partners to report federal adjustments, but under the centralized regime, partnerships aren't required to provide this info, complicating partner reporting.

The 2020 House Bill 1417 requires partnerships to report final federal adjustments from audits or administrative requests to the Department and partners, effective July 1, 2020.

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Guidelines for Reporting Federal Tax Adjustments

requirement”). All partnerships are subject to the partnership reporting requirement for taxable years beginning on or after January 1, 2018, unless the partnership has made a valid federal election out of the centralized partnership audit regime. Partnerships are subject to the partnership reporting requirement for taxable years beginning before January 1, 2018 if the partnership has made a valid federal election into the centralized partnership audit regime.

However, if either the push-out or pull-in process established by the IRS in order to report federal adjustments is used or if there are adjustments that do not result in an imputed underpayment, the partnership reporting requirement does not apply to such adjustments.

These adjustments will flow through to the affected partners, and they will therefore be included in income for Virginia tax purposes. This treatment is also given to reallocation adjustments. However, because the IRS accounts for these adjustments as a

nonrefundable credit or as additional tax in the adjustment year, additions and subtractions may be necessary on the partner’s amended Virginia income tax return for the reviewed taxable year. The Department will publish more information regarding this process in its form instructions, including any additions and subtractions that may be necessary.

90-Day Rule for Partnerships to Report and Notify

Under the partnership reporting requirement, a partnership must file with the Department a completed Form 502FED-1 no later than 90 days after the final determination date. On the Form 502FED-1, the partnership is required to report the details of the effect of federal adjustments on amounts reported on the original partnership return for the reviewed taxable year. Along with the Form 502FED-1, the partnership must file an amended Form 502 with all associated forms and schedules.

Besides filing with the Department, a partnership must notify each direct

Within 90 days after the final determination, the partnership must notify each partner of their federal adjustment share and provide a copy of:

• Form 502FED-1,
• An amended federal Schedule K-1, and
• An amended Schedule VK-1.

Nonresident Withholding Tax

If the partnership paid nonresident withholding tax for its nonresident owners, it must include with its amended Form 502 any additional withholding due to federal adjustments. “Nonresident owner” means any person treated as a partner, member, or shareholder of the

partnership for federal tax purposes and, for individuals, is not a

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Guidelines for Reporting Federal Tax Adjustments

domiciliary or actual resident of Virginia, or, for other entities, does not have its commercial domicile in Virginia

Composite Return

If the partnership previously filed a composite return (“Form 765”) for its qualified nonresident owners, it must file an amended Form 765 within 90 days of final determination. This is in addition to filing a Form 502FED-1 and amended Form 502. The amended Form 765 must include any income tax due from federal adjustments. See Department’s Guidelines for Pass-Through Entity Withholding (“Public Document 15-240”) for details, including the definition of a “qualified nonresident owner.”

One-Year Rule for Partners to Report and Pay

If the partnership reporting applies, each direct partner must file a federal adjustments report within one year of the final determination (“the one-year rule”). This report is an amended Virginia return for the reviewed year. The partner must include any additional income tax due, including penalties and interest, reduced by related credits. The one-year rule does not apply to:

• Partners whose income after federal adjustments for the reviewed year falls below the threshold in Va. Code § 58.1-321; and
• Partners not subject to Virginia’s individual, estate, or trust taxes;

corporate income tax.

Failure to Comply with Federal Adjustments Reporting

A partnership failing to file within 90 days or a partner within one year faces a penalty of $200, plus $200 for each additional month, up to six months. Penalty is never less than $200. See Va. Code §§ 58.1-399.7 and 58.1-394.1(A).

If a partnership’s failure exceeds six months, the Department will assess a penalty of six percent of the total federal

adjustments from its partners for the taxable year. If a partner’s failure exceeds six months, the Department

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Guidelines for Reporting Federal Tax Adjustments

The Department will assess a six percent penalty of federal adjustments attributable to that partner. The penalty may be reduced by monthly $200 penalties. It does not apply if partners paid tax on their share of adjustments.

The Department will assess and collect penalties as for income taxes or via civil action. The partnership may be compelled by mandamus to file complete reports and notify partners.

Partnership Pays Election

Instead of partners reporting adjustments, an audited partnership may elect to pay tax on their behalf (“the partnership pays election”). "Audited partnership" means one subject to a partnership-level audit resulting in federal adjustments. Partnerships with adjustments from administrative requests cannot make this election. To do so, the partnership must:

• Within 90 days of final determination, file Form 502FED-1 and 502FED-2, checking the box for the partnership pays election to submit an elective payment;

• Within one year of final determination, make the elective payment.

The election is made by checking the box on Form 502FED-2. For multiple years, file separate forms for each year. The partnership can elect separately for each year. All partners, including those in a composite return, must be included if the election is made for a year.

The partnership must issue each direct partner a statement of the elective payment and their share. If made after filing, it’s recommended to pay promptly and notify partners.

A written statement should be provided promptly to give partners time to file amended returns for refunds if eligible.

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Guidelines for Reporting Federal Tax Adjustments

Adjustments not increasing tax are excluded from the elective payment but flow through to partners’ income. IRS treats these as nonrefundable credits; partners may need to amend returns. Department will publish details.

Allocation and Apportionment of Income

The first step in calculating the elective payment is determining the partnership’s income allocation and apportionment. If the partnership’s entire business is conducted

Within Virginia, all income is Virginia source income; none is allocated or apportioned elsewhere.

If a partnership operates in Virginia and other states, it must allocate and apportion income as Virginia law for corporations requires. Dividends go to the domicile state; all other income is apportioned.

A partnership cannot apportion income by divisional, separate, or other methods unless prior Department approval is obtained.

Effect of Allocation and Apportionment on the Elective Payment

The second step in calculating the elective payment is assessing how the partnership’s allocation and apportionment affect partners, as described

below.

Non-Tiered Partners

For direct, non-tiered partners, the elective payment is calculated based on whether the partner is resident, nonresident, corporate, or tax-exempt.

Resident Partners

For federal adjustments passing to a resident, the elective payment is the partner’s share multiplied by Virginia’s 5.75% rate, as residents are taxed on all partnership income regardless of allocation or apportionment.

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Guidelines for Reporting Federal Tax Adjustments

A "resident partner" is defined in Va. Code § 58.1-302; others are "nonresident partners."

An estate or trust partner is a "resident" if defined as such in Va. Code § 58.1-302.

Estate or trust partners not meeting this are "nonresident partners."

Direct Nonresident Partners

For federal adjustments passing to a nonresident, the elective payment is the partner’s share of adjustments that are

sourced to Virginia and multiplied by 5.75%.

A "nonresident partner" is any nonresident individual, estate, or trust. Allocation and apportionment are at partnership level. To determine Virginia-sourced adjustments, the partnership adds:

• The nonresident partner’s share of federal adjustments to apportionable income, multiplied by the partnership’s post-audit apportionment percentage; and

• The nonresident partner’s share of federal adjustments to dividend income if the partnership is Virginia-domiciled.

Example 1. Partner A, a nonresident individual, owns 40%.

Ownership in Partnership Z, which reported $100,000 apportionable income; with a $10,000 federal adjustment, total is $110,000.

Its apportionment percentage is 20 percent.

Audit increased Partnership Z’s income from $20,000 to $22,000; the $2,000 difference is the federal adjustment. Partner A’s 40% share is $800; elective payment is $46.

Example 2. same as previous, but Partnership Z’s apportionment

percentage was 10% before audit, now 20% after.

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Guidelines for Reporting Federal Tax Adjustments

Audit increased income from $10,000 to $22,000; the $12,000 difference is the adjustment. Partner A’s 40% share is $4,800; elective payment is $276.

Corporate Partner

For federal adjustments flowing to a corporate partner, the elective payment is the distributive share allocated to Virginia multiplied by Virginia’s 6% corporate tax. "Corporate partner" means a partner subject to Virginia corporate income tax.

Allocation and apportionment are partnership-level. To determine Virginia-adjusted distributive share, the partnership adds:

• The partner’s distributive share of federal adjustments to non-dividend income multiplied by the partnership’s post-audit apportionment percentage;

• The partner’s distributive share of federal dividend adjustments

income if the partnership is commercially domiciled in Virginia.

Tax-Exempt Partners

For federal adjustments to unrelated business or taxable income subject to Virginia tax, the elective payment is the distributive share allocated to Virginia multiplied by 6%. Same principles apply to tax-exempt partners as to corporate partners.

“Tax-exempt partner” means a partner exempt from Virginia income taxation. If such

If a partner has unrelated business taxable income but is otherwise exempt, it is a “tax-exempt partner.” "Unrelated business taxable income" is as defined in IRC § 512.

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Guidelines for Reporting Federal Tax Adjustments

For adjustments to income other than unrelated business or taxable income where the partner is not subject to Virginia tax, the elective payment is zero.

Tiered Partners

For adjustments flowing to a tiered partner, the elective payment is the Virginia source share multiplied by 5.75%. Same sourcing principles apply as to nonresident partners. See Va.

Code § 58.1-399.1(B)(4)(ii).

Adjustments not subject to Virginia sourcing must be fully included in the elective payment. Virginia’s sourcing rules generally prevent this exception from applying to electing partnerships.

Certain partnerships using alternative apportionment or considered investment pass-through must include adjustments not subject to Virginia sourcing in full initially. They may exclude portions if properly allocable to nonresident partners, supported by relevant tax returns.

An electing partnership can exclude adjustments properly allocable to non-taxable or alternative-reporting partners.

Assessment and Collection of Elective Payment

If a partner or partnership makes an election, the Department assesses and collects elective payments, interest, and penalties as if they were corporate income tax. Penalties and interest are based on the original due date of Form 502, with applicable Chapter 58.1 provisions applying, considering differences from corporate tax.

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Guidelines for Reporting Federal Tax Adjustments

Failure to Pay Penalty and Interest

Failure to pay penalty for electing partnerships is based on Va. Code § 58.1-455, at 6% of the elective payment per month, up to 30%.

Interest on the payment and penalty accrues at Va. Code § 58.1-15 rate from the original due date until paid. If made in good faith and no fault, no penalty applies.

No penalty if good faith; interest accrues at Va. Code § 58.1-15 rate from original due date.

Fraudulent understatement incurs a 100% penalty plus interest at Va. Code § 58.1-15 rate from due date.

Failure to File Federal Adjustments Report

Partnerships failing to file Form 502FED-1 and 2 within 90 days or not indicating the election on 502FED-2 will be considered as not making the election for the reviewed

Taxable year(s) in the federal audit. Such partnership is subject to the penalty for non-electing partnerships under Failure of Partnership to Comply with the 90-Day Requirement Penalty above.

Authority to Consolidate Accounts and to Challenge Certain Transactions

The Department may require consolidated federal adjustment reports or account consolidations and challenge transactions based on Va. Code §§ 58.1-445 and 58.1-446, treating the partnership as a corporation with partners as stockholders, especially when used to shift income or avoid Virginia taxes via tiered structures.

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Guidelines for Reporting Federal Tax Adjustments

State Partnership Representative

The reviewed year's state partnership representative is the partnership's federal representative unless it designates another in writing.

The state partnership representative alone can act on behalf of the partnership under Article 9.1 of Chapter 3, Title 58.1, and appeal actions under Chapter 18; their actions bind all partners.

Partnerships wishing to designate a different Virginia tax representative should see Form 502FED-1 instructions; qualifications mirror IRS standards for federal representatives.

Alternative Payment Election

An audited partnership may request an alternative reporting and payment agreement if it demonstrates the method reasonably ensures reporting and payment of taxes, penalties, and interest. Application and Form 502FED-1 are due within 90 days after the final determination date.

Department within 90 days after final determination.

In its application, the partnership must state if it wants to make a partnership pays election if denied; if not indicated, a written request within 90 days of final determination is required.

Effect of Partnership Pays and Alternative Reporting Elections

Revoking the Election

Once made, partnership pays or alternative payment elections are irrevocable by the partnership or partner but can be revoked by the Department at its discretion per Va. Code § 58.1-399.4.

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[TABLE 13-1] | No later than 90 days after the final determination date, the audited partnership must submit Form 502FED-1 to the | Department no later than 90 days after the final determination date. |

[/TABLE]

[TABLE 13-2] The partnership must state in its application if it wants a partnership pays election if denied; if not, a written request within 90 days of final determination is required.

[/TABLE]

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Guidelines for Reporting Federal Tax Adjustments

Paid-in-Lieu of Partner’s Taxes

If properly reported and paid, amounts under partnership pays or alternative election are treated as paid in lieu of partner taxes on final federal adjustments. Partners may exclude such income in amended returns, with no reduction to their tax attributes.

If an electing partnership fails to timely report or pay, the Department may assess partners for owed taxes. Partners must provide requested info for proper calculation.

partnership pays or alternative payment election.

Treatment of Tax Preferences on Partners’ Taxes

General Rule

Partners cannot claim subtractions, deductions, credits, refunds, or reduce taxable income with net operating losses when the partnership makes a partnership pays or alternative election.

Exception for Credit for Taxes Paid

The amount of tax paid by the electing partnership pursuant to Va. Code §§ 58.1-399.1 and 58.1-399.3 is considered to have been paid by its direct partners in proportion to their

ownership of such partnership. Accordingly, resident direct partners who would be eligible for a credit under Va. Code § 58.1-332(A) if they paid the tax themselves will be eligible for a credit for their distributive share of amounts paid by the electing partnership.

Nonresident direct partners who would be eligible for a credit under Va. Code § 58.1-332(B) if they paid the tax themselves will also be eligible for a credit for their distributive share of amounts paid by the electing partnership.

In order to allow its direct partners to claim a credit under Va. Code § 58.1-332 for payments made by an electing partnership pursuant to Va. Code §§ 58.1-399.1 and 58.1-399.3, the electing partnership is required to provide written statements to each direct partner. For each direct partner, the written statement is required to indicate the amount of tax that has been paid by the partnership on his or her behalf, the direct partner’s proportion of ownership of such partnership, and the direct partner’s distributive share of amounts paid by such partnership. It is recommended that any written statement be provided to direct partners as soon as possible to ensure such partners have sufficient time to file amended returns for refunds if they are eligible. Failure of the electing

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Guidelines for Reporting Federal Tax Adjustments

partnership to provide a written statement to a direct partner will not extend the partner’s applicable statute of limitations for refunds.

Tiered Partners

Partners subject to reporting requirements may make a partnership pays election or use an alternative reporting and payment method:

1. Any direct tiered partner of an audited partnership;

2. Any indirect tiered partner of an audited partnership; and

3. Any partner of a partner specified in 1 or 2 above.

Any of the three categories of partners described above must make any required reports and payments no later than 90 days after the time for filing and providing statements to tiered partners and their partners pursuant to the provisions of IRC § 6226 and any regulations promulgated thereunder.

Limitations Periods

Assessments Arising From Federal Adjustments

A one-year statute applies to assessments from federal adjustments. Where no partnership pays election or alternative payment election has

been made

• The Department may assess taxes, interest, and penalties against each partner within one year of their amended Virginia return filing;

• The Department may assess failure-to-file penalties against a partnership within one year of filing Form 502FED-1.

Failure to file an amended Virginia return or Form 502FED-1 within the deadline keeps the statute open until filed. Similar if filed but omits federal adjustments or understates tax.

If a partnership makes an election, the Department may assess in-lieu amounts, interest, and penalties within one year of filing Form 502FED-1 and, if applicable, Form 502FED-2. If full payment is not made,

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Guidelines for Reporting Federal Tax Adjustments

If full payment under the election is not made, the Department may assess taxes, interest, and penalties against each partner within one year of their required amended Virginia return, assuming no election.

This one-year limitations is in addition to and not in place of any other limitations period that may apply. Unless otherwise agreed to in writing by the partner and the Department, any adjustments by the Department or by the partner or partnership that are made pursuant to this one-year statute of limitations are limited to adjustments to the partner's or partnership’s tax liability that arise from federal adjustments.

Refunds Arising from Federal Adjustments

A one-year statute applies to refunds from federal adjustments. Where no partnership pays election or alternative payment election has been made:

• Each partner may claim refunds of taxes, interest, and penalties within one year of their amended Virginia return deadline;

• The partnership may claim a refund of failure-to-file penalties within one year of filing Form 502FED-1.

If a partnership makes an election, it may claim refunds of in-lieu amounts, interest, and penalties within one year of filing the required Form.

502FED-1.

This one-year limitations is in addition to and not in place of any other limitations period that may apply. Unless otherwise agreed to in writing by the partner and the Department, any adjustments by the Department or by the partner or partnership that are made pursuant to this one-year statute of limitations are limited to adjustments to the partner's or partnership’s tax liability that arise from federal adjustments.

Extensions of the Limitations Periods

This one-year limitation period for assessments and refunds may be extended

• Automatically, upon written notice, within 60 days, for an audited partnership or tiered partner with 10,000+ direct partners; or
• By written agreement between the partnership or partner and the Department.

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Guidelines for Reporting Federal Tax Adjustments

Any extension extends the assessment period and the time to file a refund or credit claim by an equal period.

Additional Information

These guidelines are available online at https://townhall.virginia.gov and on the Department’s Guidance Documents at http://tax.virginia.gov/guidance-documents. Contact the Department at (804) 367-8037 for more information.

Approved

Craig M. Burns Tax Commissioner

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Certified Company Apportionment Guidelines for Business Conducted in Certain Disadvantaged Localities

Introduction

During the 2018 Session, the Virginia General Assembly enacted House Bill 222 (2018 Acts of Assembly, Chapter 802) and Senate Bill 883 (2018 Acts of Assembly, Chapter 801), which allow certain companies that have been certified by the Virginia Economic Development Partnership Authority (“certified companies”) to decrease the amount of income taxed by Virginia by making specific modifications to their apportionment of income (“certified company apportionment”).

These guidelines are published by the Department of Taxation (“the Department”) to provide guidance to taxpayers regarding certified company apportionment, as required

by the second enactment clause of 2018 House Bill 222 and 2018 Senate Bill 883. These guidelines are not rules or regulations subject to the provisions of the Administrative Process Act (Va. Code § 2.2-4000 et seq.) and are being published in accordance with the Tax Commissioner’s general authority to supervise the administration of the tax laws of the Commonwealth pursuant to Va. Code § 58.1-202. As necessary, additional information will be published and posted on the Department’s website, www.tax.virginia.gov.

These guidelines complement the Department’s existing Corporation Income Tax Regulation (23 Virginia Administrative Code (“VAC”) 10-120-10 et seq.) and its Single Sales Factor Election for Manufacturers Guidelines (P.D. 13-6). To the extent that there is a conflict between the Department’s existing guidance and Va. Code §§ 58.1-405, 58.1-408, 58.1-417 through 58.1-420, 58.1-422, 58.1-422.1, and 58.1-422.2, the provisions of those sections of the Code of Virginia, as interpreted by these guidelines, supersede existing guidance.

These guidelines represent the Department’s interpretation of the relevant laws. They do not constitute formal rulemaking and hence do not have the force and effect of law or regulation. In the event that the final determination of any court holds that any provision of these guidelines is contrary to law, taxpayers who follow these guidelines will be treated as relying on erroneous written advice for purposes of waiving penalty and interest under Va. Code §§ 58.1-105, 58.1-1835, and 58.1-1845. To the extent there is a question regarding the application of these guidelines, taxpayers are encouraged to write to the Department and seek a written response to their question.

General Overview of Certified Company Apportionment

Multistate Companies

Virginia generally requires the Virginia taxable income of a multistate corporation to be apportioned to Virginia by multiplying such income by an apportionment percentage.

Under Virginia’s standard apportionment method, the apportionment percentage is calculated by adding together a corporation’s property factor plus its payroll factor, plus

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twice its sales factor, and by dividing such sum by four. In addition to Virginia's standard apportionment method, Virginia has specialized apportionment methods for calculating the apportionment percentage of multistate manufacturing companies, retail companies, companies with enterprise data center operations, motor carriers, railway companies, financial corporations, and construction companies. Effective for Taxable Year 2018 and thereafter, multistate certified companies may decrease the amount of income apportioned to and taxed by Virginia using certified company apportionment.

Instate Companies

A corporation that transacts or conducts its entire business within Virginia within the

meaning of 23 VAC 10-120-120 (“instate corporation”) is not generally permitted to apportion its Virginia taxable income based upon an apportionment percentage. Instead, an instate corporation is generally required to pay state income tax based upon its entire Virginia taxable income. Effective for Taxable Year 2018 and thereafter, instate certified companies may decrease the amount of income taxed by Virginia using certified company apportionment.

Requirements to Become a Certified Company

Eligibility Criteria

A company seeking to use certified company apportionment is eligible to use such apportionment method if it is a corporation or pass-through entity that:

 Does not have any existing property or payroll in Virginia as of January 1, 2018;

and

 On or after January 1, 2018, but before January 1, 2025

o Creates at least 50 new jobs in a qualified locality or qualified localities;

o Is a traded-sector company; and

o Generates a positive fiscal impact.

A lower 10 new job threshold applies if the company spends at least $5 million on new capital investment in a qualified locality or qualified localities on or after January 1, 2018, but before January 1, 2025.

Certification by VEDP

In addition, a company must be annually certified by the Virginia Economic Development Partnership Authority (“VEDP”) as meeting the above eligibility criteria to use certified

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company apportionment. For each taxable year, a company must file with VEDP an application for certification or re-certification. Applications will be accepted during the period beginning on January 1 and ending April 1 of the calendar year immediately following the taxable year for which certification or re-certification is sought. To remain a certified company able to use certified company apportionment for any taxable year, the company must be recertified by VEDP for such taxable year.

For additional information about meeting the eligibility requirements and receiving an annual certification or re-certification, please visit VEDP’s website, www.vedp.org.

Disadvantaged Localities Qualified for Certified Company Apportionment

The disadvantaged localities in which companies must create jobs and, if applicable, make investments are those that are specified by Va. Code § 58.1-405.1(A) as qualified localities. Once certified, the computation of the company’s apportionment also depends upon the extent to which the company’s business activities are conducted in such localities. The qualified localities are:

 The Counties of Alleghany, Bland, Buchanan, Carroll, Craig, Dickenson, Giles, Grayson, Lee, Russell, Scott, Smyth, Tazewell, Washington, Wise, or Wythe or the Cities of Bristol, Galax, or Norton;

 The Counties of Amelia, Appomattox, Buckingham, Charlotte, Cumberland, Halifax, Henry, Lunenburg, Mecklenburg, Nottoway, Patrick, Pittsylvania, or Prince Edward, or the Cities of Danville or Martinsville;

 The Counties of Accomack, Caroline, Essex, Gloucester, King and Queen, King William, Lancaster, Mathews, Middlesex, Northampton, Northumberland, Richmond, or Westmoreland; or

 The Counties of Brunswick or Dinwiddie, or the City of Petersburg.

In addition, a qualified development site may be treated as a qualified locality. A qualified development site is real property that is in a locality adjacent to a qualified locality and, before January 1, 2018, either:

 Was owned or partly owned by a qualified locality or an industrial development authority of which a qualified locality is a member; or

 Was owned or partly owned by a locality or industrial development authority, was leased to a private party, and was subject to a revenue-sharing agreement providing that a portion of the revenues from the lease would be distributed to a qualified locality.

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A qualified development site does not include real property that is not owned by Virginia or a political subdivision thereof.

Filing Requirements

Once a company receives certification in writing from VEDP for a particular year, such certified company may apportion its income on its Virginia income tax return based upon certified company apportionment. Any certified company that elects to use certified company apportionment is required to maintain the certification letter and any other documentation that substantiates its eligibility for, and calculation of, its certified company apportionment, including, but not limited to, any documentation showing the amount of

property and payroll reported to and accepted by VEDP as generating a positive fiscal impact. Such documentation must be provided to the Department upon request.

A certified company may use certified company apportionment for the taxable year in which it first is certified and for the six subsequent, consecutive taxable years (“the eligibility period”). However, a company that used the 50 new job threshold to become eligible may not use certified company apportionment for any year during the eligibility period in which:

 The company's number of jobs in a qualified locality or qualified localities falls below the 50 job initial threshold; or

 The company fails to receive re-certification from VEDP in writing.

If the company used the 10 new job threshold to become eligible, then such company may not use certified company apportionment for any year during the eligibility period in which:

 The company's number of jobs in a qualified locality or qualified localities falls below the 10 job initial threshold;

 The company's capital investment falls below $5 million initial threshold; or

 The company fails to receive re-certification from VEDP in writing.

A company’s failure to meet the applicable threshold(s) or its failure to receive re-certification for a particular taxable year makes it ineligible to use certified company

apportionment for that year. Nevertheless, a company may remedy these failures and may use certified company apportionment for a taxable year occurring after the year of the failure and during the eligibility period by meeting the applicable threshold(s) and receiving re-certification for the later year.

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Certified Company Apportionment by Multistate Certified Companies

A multistate company that qualifies as a certified company and elects to use certified company apportionment may use such apportionment method to modify the numerator(s) of its apportionment factor(s). The computation for a multistate certified company depends upon whether such company is subject to Virginia’s standard apportionment method or a specialized apportionment method.

Standard Apportionment Method

If a certified company is required or, if not required, elects to use Virginia's standard

apportionment method, the company may modify the application of such method by making certain modifications to the numerator of each of its apportionment factors.

Modifications to the Property Factor

The numerator of a certified company’s property factor may be reduced by the value of its qualifying Virginia property:

Modified Property All Virginia Property – Qualifying Virginia Property = Factor Property Everywhere Qualifying Virginia property is Virginia property:

 Acquired on or after January 1, 2018, but before January 1, 2025; and

 Located in a qualified locality.

The certified company must follow the principles in 23 VAC 10-120-160 and 23 VAC 10-120-170 to determine the value of property that is located in a qualified locality.

The total amount of property used to reduce the property factor numerator may not exceed the amount of the property reported to and approved by VEDP during the company’s most recent annual certification.

Modifications to the Payroll Factor

The numerator of a certified company’s payroll factor may be reduced by the value of its qualifying Virginia payroll:

Modified Payroll All Virginia Payroll – Qualifying Virginia Payroll = Factor Payroll Everywhere

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Qualifying Virginia payroll is Virginia payroll

 Attributable to jobs created on or after January 1, 2018, but before January 1, 2025; and

 Located in a qualified locality.

The certified company must follow the principles in 23 VAC 10-120-190 and 23 VAC 10-120-200 to determine the payroll that is located in a qualified locality.

The total amount of payroll used to reduce the payroll factor numerator may not exceed the amount of the payroll reported to and approved by VEDP during the company’s most recent annual certification.

Modifications to the Sales Factor

The numerator of a certified company’s sales factor may be reduced by the value of all its Virginia sales. Therefore, a certified company’s sales factor will always be zero.

Example 1. A multistate company with $100,000 of Virginia taxable income has apportionment factors as follows:

Property Payroll Sales

Virginia $25,000 $40,000 $100,000

Everywhere $100,000 $120,000 $1,000,000 Percentage 25% 33.33% 10%

Under Virginia’s standard apportionment method, the apportionment percentage is 19.58% ([25% + 33.33% + 2(10%)] / [4]). Therefore, using Virginia’s standard apportionment method, such company would generally be required to pay Virginia income tax on $19,580 of its income (19.58% apportionment percentage X $100,000 of income).

The remaining $80,420 of its income would be untaxed by Virginia because it is deemed attributable to other states.

However, if the multistate company is a certified company and all its Virginia property is qualifying (i.e., property acquired on or after January 1, 2018, but before January 1, 2025, in any qualified locality) and all its Virginia payroll is qualifying (i.e., payroll attributable to jobs created on or after January 1, 2018, but before January 1, 2025, in any qualified

locality), the numerator of its property and payroll factors may be reduced using certified company apportionment, as shown below:

Virginia Department of Taxation - 6 - January 7, 2019

[TABLE 6-1] Attributable to jobs created on or after January 1, 2018, but before January 1, 2025; and

[/TABLE]

[TABLE 6-2] The certified company must follow the principles in 23 VAC 10-120-190 and 23 VAC 10-120-200 to determine the payroll that is located in a qualified locality.

[/TABLE]

[TABLE 6-3] | | | | Property | | | Payroll | | | Sales | | Virginia | | | $25,000 | | | $40,000 | | | $100,000 | | Everywhere | | | $100,000 | | | $120,000 | | | $1,000,000 | | Percentage | | | 25% | | | 33.33% | | | 10% |

[/TABLE]

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Modified $25,000-$25,000 $0 = = Property Factor $100,000 $100,000

Modified $40,000-$40,000 $0 = = Payroll Factor $120,000 $120,000 As with all certified companies, this company’s sales factor is 0%.

Therefore, the multistate company’s factors after applying certified company apportionment will be as follows:

Property Payroll Sales Virginia $0 $0 $0

Everywhere $100,000 $120,000 1,000,000 Percentage 0% 0% 0%

Under Virginia’s standard apportionment method as modified by certified company apportionment, the company’s apportionment percentage is 0%. As a result, this company’s income subject to Virginia tax is $0 under certified company apportionment rather than $19,580 under the standard apportionment for non-certified companies.

Example 2. Same as Example 1, but only $10,000 of its property is qualifying Virginia property and only $10,000 of its payroll is qualifying Virginia payroll for purposes of certified company apportionment. The numerator of its property and payroll factors may

be reduced using certified company apportionment, as shown below

Modified $25,000-$10,000 $15,000 = = Property Factor $100,000 $100,000 Modified $40,000-$10,000 $30,000 = = Payroll Factor $120,000 $120,000 As with all certified companies, this company’s sales factor is 0%.

Therefore, the multistate company’s factors after applying certified company apportionment are as follows:

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Property Payroll Sales

Virginia $15,000 $30,000 $0 Everywhere $100,000 $120,000 $1,000,000

Percentage 15% 25% 0%

Under Virginia’s standard apportionment method as modified by certified company apportionment, the company’s apportionment percentage is 10% ([15% + 25% + 2(0%)] / [4]). As a result, this company’s income subject to Virginia tax is $10,000 (10% apportionment percentage X $100,000 of Virginia taxable income) under certified company apportionment rather than $19,580 under standard apportionment for non-certified companies.

Specialized Apportionment Methods Based Upon a Single Sales Factor

In addition to Virginia's standard apportionment method, a certified company using a single sales factor apportionment method as a manufacturing company, a retail company, or an enterprise data center may modify its apportionment factor numerator, as explained below:

 Manufacturing Companies. A certified company that is a manufacturing company electing to apportion its income using a single factor apportionment method based on sales may use certified company apportionment to reduce the numerator of such factor by an amount equal to the value of its sales in Virginia.

 Retail Companies. A certified company that is a retail company required to apportion its income using a single factor apportionment method based on sales may use certified company apportionment to reduce the numerator of such factor by an amount equal to the value of its sales in Virginia.

 Taxpayers with Enterprise Data Center Operations. A certified company

that is a taxpayer with enterprise data center operations required to apportion its income using a single factor apportionment method based on sales may use certified company apportionment to reduce the numerator of such factor by an amount equal to the value of its sales in Virginia.

Because a certified company may use the value of all of its Virginia sales to reduce the numerator of its sales factor, the apportionment percentage for certified companies using one of these single sales factor methods of apportionment will always be zero.

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In order to use a single sales factor apportionment method, the certified company must independently qualify for it. Therefore, no certified company may use such unless it is also a manufacturing company, a retail company, or a taxpayer with an enterprise data center operation that is required or, if not required, has properly elected to use such method.

Effective for Taxable Year 2019 and thereafter, Virginia law requires debt buyers to use a single sales factor apportionment method. A debt buyer is not permitted to use certified company apportionment to reduce the numerator of its single sales factor because neither 2018 House Bill 222 nor Senate Bill 883 provided for such a modification.

Example 3. A multistate company’s factors are as follows

Property Payroll Sales Virginia $25,000 $40,000 $100,000

Everywhere $100,000 $120,000 $1,000,000 Percentage 25% 33.33% 10%

If the multistate company is a manufacturing company electing to use single sales factor apportionment, such company’s apportionment percentage is 10% because its apportionment is based solely on its sales factor. Therefore, using Virginia’s apportionment method for manufacturing companies such company would generally be required to pay Virginia income tax on $10,000 of its income (10% apportionment

percentage X $100,000 of income).

However, if the company is a certified company, the sales factor will equal 0%. Because the company is using a single sales factor apportionment method, its apportionment percentage will therefore be 0% as well. As a result, this company’s income subject to Virginia tax is $0 under certified company apportionment rather than $10,000 under the apportionment method for manufacturing companies.

Specialized Apportionment Methods Based Upon a Single Factor Other Than Sales

A certified company using a single factor apportionment method not based upon sales may modify the numerator of its apportionment factor, as explained below:

 Motor Carriers. A certified company that is a motor carrier of property or passengers is permitted to modify its single factor apportionment method based

on vehicle miles by using certified company apportionment to reduce the numerator of such factor by an amount equal to its vehicle miles traveled in any qualified locality.

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[TABLE 9-1] | | | | Property | | | Payroll | | | Sales | | Virginia | | | $25,000 | | | $40,000 | | | $100,000 | | Everywhere | | | $100,000 | | | $120,000 | | | $1,000,000 | | Percentage | | | 25% | | | 33.33% | | | 10% |

[/TABLE]

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 Railway Companies. A certified company that is a railway company may modify its single factor apportionment method based on revenue car miles by using certified company apportionment to reduce the numerator of such factor by an amount equal to its revenue car miles traveled in any qualified locality.

 Financial Corporations. A certified company that is a financial corporation may modify its single factor apportionment method based on its business conducted in Virginia by using certified company apportionment to reduce the numerator of such factor by an amount equal to the value of its business within

any qualified locality.

 Construction Corporations. A certified company that is a construction corporation may modify its single factor apportionment method based on business conducted in Virginia by using certified company apportionment to reduce the numerator of such factor by an amount equal to the value of its business within any qualified locality.

In order to use a single factor apportionment method not based upon sales, the certified company must independently qualify for it. Therefore, no certified company may use such method unless it is a motor carrier, railway company, financial corporation, or construction corporation permitted or required to use such method.

Certified Company Apportionment by Instate Certified Companies

An instate company that qualifies as a certified company and elects to use certified company apportionment may apportion Virginia taxable income as if they were a multistate company and use certified company apportionment to modify the numerator(s) of their apportionment factor(s). This is an exception to the general rule prohibiting the use of apportionment by instate companies. As with certified multistate companies, the computation of such numerator(s) for instate certified companies depends upon whether such companies are subject to Virginia’s standard apportionment method or a specialized apportionment method.

Example 4. A company with $100,000 of Virginia taxable income has all of its property, payroll, and sales located in Virginia, as shown below:

Property Payroll Sales

Qualified localities $10,000 $10,000 $10,000 Non-qualified

localities $15,000 $30,000 $90,000

All of Virginia $25,000 $40,000 $100,000

Virginia Department of Taxation - 10 - January 7, 2019

[TABLE 10-1] | | | | Property | | | Payroll | | | Sales | | Qualified localities | | | $10,000 | | | $10,000 | | | $10,000 | | Non-qualified | | | | | | | | | | | localities | | | $15,000 | | | $30,000 | | | $90,000 | | All of Virginia | | | $25,000 | | | $40,000 | | | $100,000 |

[/TABLE]

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Assume that all of its property and payroll located in qualified localities constitutes qualifying Virginia property and qualifying Virginia payroll, respectively. Because the company is instate company, it would generally be required to pay Virginia income tax on all $100,000 of its income. However, if the company is a certified company, then it may apportion its Virginia taxable income within Virginia based upon an apportionment percentage. The company would calculate its property and payroll factors as follows:

Property Payroll

Non-qualified localities $15,000 $30,000

All of Virginia $25,000 $40,000 Percentage 60% 75%

As with all certified companies, this company’s sales factor would be 0%. Under Virginia’s standard three-factor formula with double-weighted sales, the company’s apportionment percentage is 33.75% ([60% + 75% + 2(0%)] / [4]). As a result, this company’s income subject to Virginia tax is $33,750 (33.75% apportionment percentage X $100,000 of Virginia taxable income) under certified company apportionment rather than $100,000 under the standard rules for non-certified instate companies.

Treatment of Pass-through Entities

Pass-through entities (“PTEs”) are required to use corporate apportionment to determine the portion of their income that is from Virginia sources for purposes of allocating a share of that income to nonresident individuals. This will affect the amount that nonresident individuals report on their Virginia nonresident income tax returns or that the PTE reports on behalf of its nonresident owners, and the amount for which the PTE may be required to withhold from Virginia income. See the PTE Guidelines (P.D. 15-240) for more information.

A corporate owner of a PTE may be required to include its share of the PTE’s property, payroll, and sales in the corporation’s own apportionment factors. (See P.D. 95-19, 95-263, and 99-76.) If the PTE meets the requirements of a certified company, it may use certified company apportionment under the same conditions applicable to corporations.

The corporate owners would include in their factors only their share of the PTE’s factors for the applicable taxable year.

Documentation and Record Keeping

A certified company must include with its income tax return information regarding the amounts subtracted from the numerators of the relevant apportionment factors. The

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Department must use such information to compute the fiscal savings to such companies and must report annually by the first day of each regular session of the General Assembly to the Chairmen of the House Committee on Appropriations, the House Committee on Finance, and the Senate Committee on Finance:

 The number of returns processed during the prior fiscal year for certified companies that used certified company apportionment;

 The estimated revenue impact of certified company apportionment.

Certified companies may be required to provide information and documentation to the Department regarding the modification of its apportionment method as deemed necessary.

Additional Information

These guidelines are available online under the Laws, Rules and Decisions section of the Department’s website, located at http://www.tax.virginia.gov/. For additional information, please contact the Department at (804) 367-8037.

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Certified Company Apportionment Guidelines for Business Conducted in Certain Disadvantaged Localities

Introduction

In 2018, Virginia enacted House Bill 222 and Senate Bill 883, allowing certified companies by VEDP to reduce Virginia taxable income via specific apportionment modifications.

These guidelines, published by the Department of Taxation, provide guidance on certified company apportionment as required

Per the second enactment clause of HB 222 and SB 883, these guidelines are not rules under the Administrative Process Act but are published under the Tax Commissioner’s authority. Additional info will be posted on www.tax.virginia.gov.

These guidelines supplement existing regulations (23 VAC 10-120-10 et seq. and P.D. 13-6). If conflicts arise, the Code sections, as interpreted here, supersede previous guidance.

These guidelines are Department interpretations, not formal rules. If courts find any provision unlawful, taxpayers relying on them are protected from penalties and interest. Taxpayers are encouraged to seek written Department advice.

General Overview of Certified Company Apportionment

Multistate Companies

Virginia requires multistate corporations to apportion taxable income to Virginia by multiplying it by an apportionment percentage.

Virginia’s standard apportionment method calculates the percentage by adding property, payroll, and

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twice its sales factor, and by dividing such sum by four. In addition to Virginia's standard apportionment method, Virginia has specialized apportionment methods for calculating the apportionment percentage of multistate manufacturing companies, retail companies, companies with enterprise data center operations, motor carriers, railway companies, financial corporations, and construction companies. Effective for Taxable Year 2018 and thereafter, multistate certified companies may decrease the amount of income apportioned to and taxed by Virginia using certified company apportionment.

Instate Companies

A corporation conducting all business within Virginia

An instate corporation, as defined by 23 VAC 10-120-120, cannot generally apportion income but must pay tax on all Virginia income. From 2018 onward, certified instate companies may reduce taxable income using certified apportionment.

Requirements to Become a Certified Company

Eligibility Criteria

A company eligible to use certified apportionment must be a corporation or pass-through entity that:

 Does not have any existing property or payroll in Virginia as of January 1, 2018;

and

 On or after January 1, 2018, but before January 1, 2025

o Creates at least 50 new jobs in a qualified locality or qualified localities;

o Is a traded-sector company; and

o Generates a positive fiscal impact.

A 10-job threshold applies if the company invests at least $5 million in qualified localities between Jan 1, 2018, and Jan 1, 2025.

Certification by VEDP

Additionally, a company must annually be certified by VEDP as meeting eligibility to use certified

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For each taxable year, a company must file with VEDP an application for certification or re-certification between January 1 and April 1 of the following year. Recertification is required to maintain certified company status for any taxable year.

For additional information about meeting the eligibility requirements and receiving an annual certification or re-certification, please visit VEDP’s website, www.vedp.org.

Disadvantaged Localities Qualified for Certified Company Apportionment

Companies must create jobs and, if applicable, invest in localities specified by Va. Code § 58.1-405.1(A) as qualified. Apportionment depends on business activity in these localities.

 The Counties of Alleghany, Bland, Buchanan, Carroll, Craig, Dickenson, Giles, Grayson, Lee, Russell, Scott, Smyth, Tazewell, Washington, Wise, or Wythe or the Cities of Bristol, Galax, or Norton;

 The Counties of Amelia, Appomattox, Buckingham, Charlotte, Cumberland, Halifax, Henry, Lunenburg, Mecklenburg, Nottoway, Patrick, Pittsylvania, or Prince Edward, or the Cities of Danville or Martinsville;

 The Counties of Accomack, Caroline, Essex, Gloucester, King and Queen, King William, Lancaster, Mathews, Middlesex, Northampton, Northumberland, Richmond, or Westmoreland; or

 The Counties of Brunswick or Dinwiddie, or the City of Petersburg.

A qualified development site, adjacent to a qualified locality, may be treated as such if, before January 1, 2018, it was:

 Owned or partly owned by a qualified locality or its industrial development authority; or

 Owned or partly owned by a locality or authority, leased to a private party, with revenue-sharing to a qualified locality.

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A qualified development site excludes real property not owned by Virginia or its subdivisions.

Filing Requirements

Once certified by VEDP, a company may apportion income on its Virginia tax return using certified apportionment. It must keep certification and supporting documents, including property and payroll data accepted by VEDP.

Property and payroll data accepted by VEDP, showing positive fiscal impact, must be provided upon request.

A certified company may use apportionment in its first certified year and the next six years (“eligibility period”). If eligibility was based on 50 new jobs, it cannot use apportionment during the period if:

 The company's number of jobs in a qualified locality or qualified localities falls below the 50 job initial threshold; or

 The company fails to receive re-certification from VEDP in writing.

If eligibility was based on 10 new jobs, the company cannot use apportionment during the period if:

 The company's number of jobs in a qualified locality or qualified localities falls below the 10 job initial threshold;

 The company's capital investment falls below $5 million initial threshold; or

 The company fails to receive re-certification from VEDP in writing.

A company’s failure to meet the applicable threshold(s) or its failure to receive re-certification for a particular taxable year makes it ineligible to use certified company

Failures can be remedied; the company may then use apportionment in later years during the eligibility period after meeting thresholds and re-certification.

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Certified Company Apportionment by Multistate Certified Companies

A multistate certified company may use apportionment to modify its apportionment numerator(s). The calculation depends on whether it uses Virginia’s standard or a specialized method.

Standard Apportionment Method

If a certified company is required or elects to use Virginia's standard

apportionment method, the company may modify its application by adjusting the numerator of each apportionment factor.

Modifications to the Property Factor

A certified company's property factor numerator may be reduced by its qualifying Virginia property value:

Modified Property All Virginia Property – Qualifying Virginia Property = Factor Property Everywhere Qualifying Virginia property is Virginia property:

 Acquired on or after January 1, 2018, but before January 1, 2025; and

 Located in a qualified locality.

The company must follow 23 VAC 10-120-160 and 23 VAC 10-120-170 to determine property value in a qualified locality.

Total property used to reduce the property factor numerator may not exceed the amount reported to and approved by VEDP during the latest certification.

Modifications to the Payroll Factor

A certified company's payroll factor numerator may be reduced by its qualifying Virginia payroll:

Modified Payroll All Virginia Payroll – Qualifying Virginia Payroll = Factor Payroll Everywhere

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Certified Company Apportionment Guidelines for Business Conducted in Certain Disadvantaged Localities

Qualifying Virginia payroll is Virginia payroll

 Attributable to jobs created on or after January 1, 2018, but before January 1, 2025; and

 Located in a qualified locality.

The company must follow 23 VAC 10-120-190 and 23 VAC 10-120-200 to determine payroll in a qualified locality.

Total payroll used to reduce the payroll factor numerator may not exceed the amount reported to and approved by VEDP during the latest certification.

Modifications to the Sales Factor

A certified company's sales factor numerator may be reduced by all Virginia sales, making its sales factor always zero.

Example 1. A multistate company with $100,000 Virginia taxable income has factors as follows:

Property Payroll Sales

Virginia $25,000 $40,000 $100,000

Everywhere $100,000 $120,000 $1,000,000 Percentage 25% 33.33% 10%

Virginia’s standard method yields a 19.58% apportionment, so the company pays tax on $19,580 of its $100,000 income (19.58%).

Remaining $80,420 is untaxed by Virginia, deemed attributable to other states.

If the company is certified and all Virginia property and payroll are qualifying (acquired or attributable between Jan 1, 2018, and Jan 1, 2025, in qualified localities),

the numerator of property and payroll factors may be reduced using certified apportionment, as shown below:

Virginia Department of Taxation - 6 - January 7, 2019

[TABLE 6-1] Attributable to jobs created between Jan 1, 2018, and Jan 1, 2025;

[/TABLE]

[TABLE 6-2] The certified company must follow principles in 23 VAC 10-120-190 and 23 VAC 10-120-200 to determine payroll in a qualified locality.

[/TABLE]

[TABLE 6-3] | | | | Property | | | Payroll | | | Sales | | Virginia | | | $25,000 | | | $40,000 | | | $100,000 | | Everywhere | | | $100,000 | | | $120,000 | | | $1,000,000 | | Percentage | | | 25% | | | 33.33% | | | 10% |

[/TABLE]

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Certified Company Apportionment Guidelines for Business Conducted in Certain Disadvantaged Localities

Modified $25,000-$25,000 $0 = = Property Factor $100,000 $100,000

Modified $40,000-$40,000 $0 = = Payroll Factor $120,000 $120,000 As with all certified companies, this company’s sales factor is 0%.

The multistate company's factors after certified apportionment are:

Property Payroll Sales Virginia $0 $0 $0

Everywhere $100,000 $120,000 1,000,000 Percentage 0% 0% 0%

Under Virginia’s standard apportionment, the company’s apportionment is 0%, so income subject to Virginia tax is $0 under certified apportionment, vs. $19,580 under standard.

Example 2: Same as Example 1, but only $10,000 of property and payroll qualify in Virginia for certified apportionment. The numerator of its property and payroll factors may

be reduced using certified company apportionment, as shown below

Modified $25,000-$10,000 $15,000 = = Property Factor $100,000 $100,000 Modified $40,000-$10,000 $30,000 = = Payroll Factor $120,000 $120,000 As with all certified companies, this company’s sales factor is 0%.

The multistate company's factors after certified apportionment are:

Virginia Department of Taxation - 7 - January 7, 2019

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Certified Company Apportionment Guidelines for Business Conducted in Certain Disadvantaged Localities

Property Payroll Sales

Virginia $15,000 $30,000 $0 Everywhere $100,000 $120,000 $1,000,000

Percentage 15% 25% 0%

Virginia’s standard apportionment yields 10% (average of 15%, 25%, and two 0%). Income subject to Virginia tax is $10,000 (10% of $100,000), vs. $19,580 under standard.

Specialized Single Sales Factor Apportionment Methods

Besides Virginia’s standard method, certified companies using single sales factor apportionment as manufacturing, retail, or data center may modify their apportionment numerator as explained below.

Manufacturing companies using single sales factor may reduce the numerator by Virginia sales value via certified apportionment.

Retail companies using single sales factor may reduce numerator by Virginia sales via certified apportionment.

 Taxpayers with Enterprise Data Center Operations. A certified company

that is a taxpayer with enterprise data center operations required to apportion its income using a single factor apportionment method based on sales may use certified company apportionment to reduce the numerator of such factor by an amount equal to the value of its sales in Virginia.

Certified companies using these methods will always have a 0% apportionment percentage due to Virginia sales reduction.

Virginia Department of Taxation - 8 - January 7, 2019

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Certified Company Apportionment Guidelines for Business Conducted in Certain Disadvantaged Localities

Certified companies can only use single sales factor apportionment if they qualify independently as manufacturing, retail, or enterprise data center operators that have elected or are required to do so.

From 2019 onward, Virginia law mandates debt buyers use single sales factor; they cannot reduce numerator via certified apportionment, as bills did not authorize it.

Example 3. A multistate company’s factors are as follows

Property Payroll Sales Virginia $25,000 $40,000 $100,000

Everywhere $100,000 $120,000 $1,000,000 Percentage 25% 33.33% 10%

If a manufacturing company elects single sales factor, its apportionment is 10%, so it generally pays Virginia tax on $10,000 of income.

percentage X $100,000 of income).

If certified, the sales factor and apportionment percentage are 0%, making Virginia taxable income $0 instead of $10,000 for manufacturing companies.

Specialized Single-Factor Apportionment Methods

Certified companies using non-sales single factor apportionment may modify its numerator as explained below:

 Motor Carriers. Certified motor carriers may modify their single factor apportionment method based

on vehicle miles traveled in qualified localities to reduce the numerator of the apportionment factor.

Virginia Department of Taxation - 9 - January 7, 2019

[TABLE 9-1] | | | | Property | | | Payroll | | | Sales | | Virginia | | | $25,000 | | | $40,000 | | | $100,000 | | Everywhere | | | $100,000 | | | $120,000 | | | $1,000,000 | | Percentage | | | 25% | | | 33.33% | | | 10% |

[/TABLE]

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Certified Company Apportionment Guidelines for Business Conducted in Certain Disadvantaged Localities

 Railway Companies. Certified railway companies may modify their apportionment numerator based on revenue car miles traveled in qualified localities.

 Financial Corporations. Certified financial companies may modify their apportionment numerator based on business in Virginia.

any qualified locality.

 Construction Corporations. Certified construction companies may modify their apportionment numerator based on business in Virginia.

To use a non-sales single factor method, a certified company must qualify independently; only motor carriers, railway, financial, or construction companies may do so.

Instate Certified Company Apportionment

Instate certified companies may apportion Virginia income as multistate companies, modifying apportionment numerator(s), depending on whether they use standard or specialized methods.

Example 4. A company with $100,000 Virginia taxable income has all property, payroll, and sales in Virginia:

Property Payroll Sales

Qualified localities $10,000 $10,000 $10,000 Non-qualified

localities $15,000 $30,000 $90,000

All of Virginia $25,000 $40,000 $100,000

Virginia Department of Taxation - 10 - January 7, 2019

[TABLE 10-1] | | | | Property | | | Payroll | | | Sales | | Qualified localities | | | $10,000 | | | $10,000 | | | $10,000 | | Non-qualified | | | | | | | | | | | localities | | | $15,000 | | | $30,000 | | | $90,000 | | All of Virginia | | | $25,000 | | | $40,000 | | | $100,000 |

[/TABLE]

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Certified Company Apportionment Guidelines for Business Conducted in Certain Disadvantaged Localities

If property and payroll in qualified localities qualify, an instate company generally pays tax on all $100,000, but certified companies may apportion based on an apportionment percentage. Property and payroll factors are calculated as follows:

Property Payroll

Non-qualified localities $15,000 $30,000

All of Virginia $25,000 $40,000 Percentage 60% 75%

Certified companies have a 0% sales factor; using Virginia’s three-factor formula, the apportionment is 33.75%, so taxable income is $33,750 instead of $100,000.

Treatment of Pass-through Entities

PTEs must use corporate apportionment to allocate Virginia-source income to nonresidents, affecting their tax reporting and withholding; see PTE Guidelines (P.D. 15-240).

A corporate owner of a PTE may include its share of the PTE’s property, payroll, and sales in its apportionment factors. (See P.D. 95-19, 95-263, 99-76.) Certified companies may use certified apportionment under the same conditions as corporations.

Corporate owners include only their share of the PTE’s factors for the taxable year.

Documentation and Record Keeping

A certified company must include with its income tax return info on amounts subtracted from apportionment factor numerators.

Virginia Department of Taxation - 11 - January 7, 2019

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Certified Company Apportionment Guidelines for Business Conducted in Certain Disadvantaged Localities

Department must use this info to compute fiscal savings and report annually by the first day of each General Assembly session to the Chairmen of the House Appropriations, House Finance, and Senate Finance Committees:

 Number of returns processed last fiscal year for certified companies using certified apportionment;

 Estimated revenue impact of certified apportionment.

Certified companies may need to provide info and documentation to the Department on modifications to their apportionment method.

Additional Information

These guidelines are online at http://www.tax.virginia.gov/ under Laws, Rules, and Decisions. Contact the Department at (804) 367-8037 for more info.

Virginia Department of Taxation - 12 - January 7, 2019

Updated International Trade Facility Tax Credit Guidelines **These Guidelines supersede the International Trade Facility Tax Credit Guidelines that were issued by the Department on April 17, 2012 and December 7, 2012 (Public Documents 12-45 and 12-205).

Introduction

During the 2011 session, the Virginia General Assembly enacted Senate Bill 1136 (2011 Acts of Assembly, Chapter 49), which established the International Trade Facility Tax Credit. This is an individual and corporate income tax credit for either capital investment in an “international trade facility” (as defined by Va. Code § 58.1-439.12:06(A)) or increasing jobs related to such facility. The amount of the credit is equal to either $3,000 per qualified full-time employee that results from increased qualified trade activities by the taxpayer or two percent of the capital investment made by the taxpayer to facilitate the increased qualified trade activities.

Two additional port tax credits were enacted during the 2011 General Assembly session: the Barge and Rail Usage Tax Credit (Va. Code § 58.1-439.12:09) and the Port Volume Increase Tax Credit (Va. Code § 58.1-439.12:10). These credits provide separate tax incentives for certain companies that use Virginia port facilities. Although all three credits offer incentives for port-related activities, each credit is mutually exclusive, and separate definitions and requirements apply to each credit. Taxpayers may claim the International Trade Facility Tax Credit in the same taxable year that they claim the Barge and Rail Usage Tax Credit and/or the Port Volume Increase Tax Credit.

During the 2012 session, the General Assembly enacted House Bill 1183 and Senate Bill 578 (2012 Acts of Assembly, Chapters 846 and 849), which increased the jobs portion of the International Trade Facility Tax Credit from $3,000 to $3,500 per qualified full-time employee that results from increased qualified trade activities by the taxpayer.

As this legislation became effective July 1, 2012, the increased credit amount may be claimed beginning in Taxable Year 2012.

During the 2014 session, the General Assembly enacted House Bill 873 (2014 Acts of Assembly, Chapter 423), which: (i) reduces from 10 percent to 5 percent the annual increase in cargo transported through a Virginia maritime port necessary to qualify as an international trade facility; (ii) expands the type of cargo that qualifies for the credit to include noncontainerized cargo and roll-on/roll-off cargo; (iii) increases the amount of annual International Trade Facility Tax Credits that the Department of Taxation (“the Department”) may issue in any fiscal year from $250,000 to $1.25 million; (iv) eliminates additional tax credits for international trade facilities that create new jobs or make capital investments in a tobacco dependent locality; and (v) requires the Department to annually provide information to the Virginia Port Authority regarding the International Trade Facility Tax Credits issued.

These guidelines are issued by the Department to provide guidance to taxpayers regarding the International Trade Facility Tax Credit. These guidelines are exempt from the provisions of the Administrative Process Act (Va. Code § 2.2-4000 et seq.) Virginia Department of Taxation 1 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines according to the provisions outlined in Va. Code § 58.1-439.12:06. These Guidelines supersede the International Trade Facility Tax Credit Guidelines issued by the Department on April 17, 2012 and December 7, 2012 (Public Documents 12-45 and 12-205). As necessary, additional guidelines will be published and posted on the Department’s website, www.tax.virginia.gov.

These guidelines represent the Department’s interpretation of the relevant laws. They do not constitute formal rulemaking and hence do not have the force and effect of law or regulation. In the event that the final determination of any court holds that any provision of these guidelines are contrary to law, taxpayers who follow these guidelines will be treated as relying on erroneous written advice for purposes of waiving penalty and interest under Va. Code §§ 58.1-105, 58.1-1835 and 58.1-1845. To the extent there is a question regarding the application of these guidelines, taxpayers are encouraged to write to the Department and seek a written response to their question.

Requirements for an International Trade Facility

For purposes of the International Trade Facility Tax Credit, an “international trade facility” is defined as a company that:

 Is engaged in port-related activities;  Uses any publicly or privately owned maritime port facilities located in Virginia; and  Transports at least 5 percent more cargo through any publicly or privately owned cargo facility located within the Commonwealth through which cargo is transported during the taxable year than was transported by the company through such facilities during the preceding taxable year.1

For purposes of this credit, the term “international trade facility” refers to the company itself, rather than the facility where port-related activities are being conducted by the company. Each company that qualifies as an international trade facility will calculate one base year amount and one credit amount each year, regardless of the number of facilities owned or the number of projects undertaken by that company. Accordingly, if the amount of cargo transported through one particular maritime port facility in Virginia does not increase by at least 5 percent, this may affect whether the company meets the 5 percent volume increase requirement, even if the company increases the number of qualifying containers transported through other facilities.

Example 1: Computing Maritime Port Cargo Volume Increases Company A is a company that is engaged in port-related activities and uses two different maritime port facilities located in Virginia (“Facility 1” and “Facility 2”).

During the 2013 taxable year, Company A transports 100 20-foot equivalent marine containers through Facility 1 and 200 20-foot equivalent marine containers through Facility 2. During the 2014 taxable year, Company A

1 See Va. Code § 58.1-439.12:06(A). Note that prior to Taxable Year 2014, the applicable percentage was 10 percent.

Virginia Department of Taxation 2 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines transports 106 20-foot equivalent marine containers through Facility 1 and 203 20-foot equivalent marine containers through Facility 2. Company A’s increase in maritime port cargo volume is computed as follows:

ሺ106 + 203ሻ - (100 + 200) (100 + 200) = 3% Although Company A has increased the amount of cargo that it transported through Facility 1 by 6 percent, it has only increased the total amount of cargo transported through all maritime facilities by 3 percent. Because Company A has not increased the total amount of cargo transported through all maritime facilities in Virginia by at least 5 percent, it does not qualify as an international trade facility and cannot claim the International Trade Facility Tax Credit during the 2014 taxable year.

The definition of an “international trade facility” for purposes of this credit is different than the definition of an “international trade facility” for purposes of the Barge and Rail Usage Tax Credit. Accordingly, each definition should be applied separately for each credit.

“Port-related activities” include, but are not limited to, warehousing, distribution, freight forwarding and handling, and goods processing.

For purposes of determining the amount of cargo transported through public or private maritime port facilities in Virginia, one 20-foot equivalent marine container is equivalent to 16 net tons of noncontainerized cargo. One net ton is equivalent to one short ton, or 2,200 pounds. Moreover, for purposes of determining the amount of cargo transported through maritime port facilities in Virginia, one 20-foot equivalent marine container is equivalent to one unit of roll-on/roll-off cargo.

For purposes of determining the number of 20-foot equivalent marine containers transported through Virginia maritime facilities, only a full container load qualifies. A full container load (FCL) is a standard 20-foot, 40-foot, or 45-foot container that is loaded and discharged under the account of one shipper and is intended for one consignee.

For cargo shipped in 40-foot or 45-foot marine containers, one full container load is equivalent to two 20-foot equivalent marine containers.

A less than container load (LCL) is cargo that is insufficient in either weight or volume to qualify for the freight rates that apply to a standard shipping container and is therefore combined with cargo owned by other shippers or with cargo intended for at least one other consignee. An LCL does not qualify as a 20-foot equivalent marine container for purposes of this credit.

Virginia Department of Taxation 3 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines Criteria for Qualified Full-Time Employees

For Taxable Year 2012 and thereafter, the jobs portion of the International Trade Facility Tax Credit is equal to $3,500 per qualified full-time employee that results from increased qualified trade activities by the taxpayer. A “qualified full-time employee” is an employee filling a new, permanent full-time position in an international trade facility in Virginia. To qualify as a “new, permanent full-time position,” the position filled by the employee must be either:

 A job of indefinite duration, created by the company after establishing or expanding an international trade facility in Virginia, requiring a minimum of 35 hours of employment per week for each employee for the entire normal year (defined as at least 48 weeks in a calendar year) of the company’s operations, or  A position of indefinite duration that requires a minimum of 35 hours of employment per week for each employee for the portion of the taxable year in which the employee was initially hired for, or transferred to, the international trade facility in Virginia.

Only employees filling permanent full-time positions qualify for this credit. Accordingly, employees filling seasonal or temporary positions do not qualify for this credit.

Additionally, positions that are ancillary to the principal activities performed by the employees at the international trade facility do not qualify for this credit. Such positions include jobs in building and grounds maintenance and security positions.

Jobs created when a job function is shifted from an existing location in Virginia to the international trade facility do not qualify for this credit. However, otherwise qualifying jobs that are created when a job function is shifted from an existing location in another state to an international trade facility located in Virginia are eligible for the credit.

Related Party Rules

An international trade facility may not claim a credit for certain employees who were previously employed by a related party or a business under common control. Examples of employees that do not qualify for purposes of this credit include the following:

 An employee for whom an International Trade Facility Tax Credit was previously earned by a related party or by a trade or business under common control;  An employee who was previously employed in the same job function in Virginia by a related party or by a trade or business under common control;  An employee whose job function was previously performed at a different location in Virginia by an employee of the taxpayer, by a related party, or by a trade or business under common control; and Virginia Department of Taxation 4 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines  An employee whose job function previously qualified for an International Trade Facility Tax Credit at a different major business facility (as defined in Va. Code § 58.1-439(C)), on behalf of the taxpayer, by a related party, or by a trade or business under common control.

For purposes of these limitations, “related party” means a related party as defined in IRC § 267(b). A “trade or business under common control” means a trade or business under common control as defined for purposes of the federal Work Opportunity Tax Credit in IRC § 52(b).

Criteria for Capital Investments

The capital investment portion of the International Trade Facility Tax Credit is equal to 2 percent of the amount of capital investment made by the taxpayer to facilitate increased qualified trade activities. For Taxable Year 2014 and thereafter, “qualified trade activities” are defined as the completed exportation or importation of at least (i) one International Organization for Standardization ocean container with a minimum 20-foot length (ii) 16 tons of noncontainerized cargo, or (iii) one unit of roll-on/roll-off cargo through any publicly or privately owned cargo facility located within Virginia through which the cargo is transported. Export cargomust be loaded on a barge or ocean-going vessel at such facility and import cargo must be discharged from a barge or ocean-going vessel at such facility.

For purposes of this credit, “capital investment” is defined as the amount properly chargeable to a capital account for improvements to rehabilitate or expand depreciable real property placed in service during the taxable year and the cost of machinery, tools, and equipment used in an international trade facility directly related to the movement of cargo. Capital investment includes the following:

 Expenditures associated with any exterior, structural, mechanical, or electrical improvements necessary to expand or rehabilitate a building for commercial or industrial use;  Expenditures associated with excavations, grading, paving, driveways, roads, sidewalks, landscaping, or other land improvements; and  The cost of machinery, tools, and equipment placed in service by the international trade facility on and after January 1, 2011.

For purposes of this credit, “machinery, tools, and equipment” does not include the following:

 Property for which an International Trade Facility Tax Credit was previously granted;  Property previously placed in service by the taxpayer, a related party as defined in IRC § 267(b), or a trade or business under common control as defined in IRC § 52(b); or Virginia Department of Taxation 5 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines  Property previously in service in Virginia that has a basis in the hands of the person acquiring it, determined in whole or in part by reference to the basis of such property in the hands of the person from whom acquired or IRC § 1014(a).

The following are not considered capital investments for purposes of this credit:

 The cost of acquiring any real property or building;  The cost of furnishings;  Any expenditure associated with appraisal, architectural, engineering, or interior design fees;  Loan fees, points, or capitalized interest;  Legal, accounting, realtor, sales and marketing, or other professional fees;  Closing costs, permit fees, user fees, zoning fees, impact fees, and inspection fees;  Bids, insurance, signage, utilities, bonding, copying, rent loss, or temporary facilities costs incurred during construction;  Utility hook-up or access fees;  Outbuildings; and  The cost of any well or septic system.

Computation and Carryover of Credits

For Taxable Year 2011, taxpayers may claim a credit equal to either $3,000 per qualified full-time employee that results from increased qualified trade activities by the taxpayer or two percent of the capital investment made by the taxpayer to facilitate the increased qualified trade activities. For Taxable Year 2012 and thereafter, the jobs portion of the credit is equal to $3,500 per qualified full-time employee that results from increased qualified trade activities by the taxpayer. In cases where a qualified full-time employee works in Virginia for less than 12 months during the credit year, the credit for this employee is computed by multiplying the credit amount by a fraction, the numerator of which is the number of full months the employee works for the international trade facility in Virginia during the credit year and the denominator of which is 12.

The amount of credit claimed by a taxpayer cannot exceed 50 percent of the tax imposed on that taxpayer for the taxable year. Any remaining credit amount may be carried forward for the next ten taxable years. If a taxpayer is also allowed another tax credit or has a credit carryforward from a preceding taxable year, the taxpayer is considered to have first utilized any credit that does not have a carryforward provision, and then any credit carried forward from a preceding year, before using any of the International Trade Facility Tax Credit for that year.

Because an international trade facility is a company, rather than a physical location, the provisions of this credit apply at the company level, rather than on a per-project basis.

Accordingly, each company may only claim either the jobs tax credit or the investment Virginia Department of Taxation 6 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines tax credit each year, regardless of the number of facilities owned by the company or the number of projects undertaken each year.

Example 2: Computation of International Trade Facility Tax Credits Company B is an international trade facility that expanded its operations in 2011 to facilitate increased qualified trade activities. As a result of this expansion, in 2012, Company B hires twenty qualified full-time employees and incurs capital investment expenses of $2 million. Company B is entitled to claim either a jobs tax credit or a capital investment tax credit.

If Company B elects to claim a jobs tax credit, the credit amount is computed as follows:

(20 jobs created) x ($3,500 per job) = $70,000

If Company B elects to claim the capital investment tax credit, the credit amount is computed as follows:

($2,000,000 capital investment) x (2%) = $40,000

Company B can elect to claim either the job credit or the capital investment credit, but cannot claim both for the same year, even if the costs are incurred as a result of separate projects.

Example 3: Credit Computation and Carryover Assume the same facts as Example 2 and also assume that Company B elects to claim the jobs tax credit in an amount equal to $70,000. Company B’s tax liability for the 2012 taxable year is $40,000 and the company does not claim any other credits for the 2012 taxable year. Va. Code § 58.1-439.12:06(D) limits the amount of credit claimed to 50 percent of the tax imposed for the taxable year.

Accordingly, Company B can only use $20,000 of the International Trade Facility Tax Credit for the 2012 taxable year. It can then carry forward the remaining $50,000 credit through the 2022 taxable year.

Example 4: Credit Computation for Fractional Employees Assume the same facts as Example 2, except that ten of the employees hired by Company B during 2012 do not begin working until September 1, 2012. These employees still qualify for the credit. The portion of the $3,500 credit earned with respect to each fractional employee must be determined as follows:

($3,500 credit) x (4 months/12) = $1,166.67

The total jobs tax credit amount is then computed as follows

(10 jobs created) x ($3,500 per job) = $35,000 (10 jobs created) x ($1,166.67 per job) = $11,667 Virginia Department of Taxation 7 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines Total jobs tax credit = $46,667

Example 5: Application of the Credit Election Rules Company C is an international trade facility that is engaged in port-related activities at two different maritime port facilities in Virginia (“Facility 1” and “Facility 2”). As a result of its increased qualified trade activities, Company C decides to expand two buildings, one located at Facility 1 (“Building 1”) and the second located at Facility 2 (“Building 2”). To implement the expansion, Company C makes a capital investment of $2 million in Building 1 and a capital investment of $10 million in Building 2 during Taxable Year 2012.

Also as a result of its increased qualified trade activities, Company C decides to hire 100 additional employees to work at Facility 1 and 50 additional employees to work at Facility 2 during Taxable Year 2012.

Company C can elect to claim either the job tax credit or the capital investment tax credit. However, it can only elect one of the two credits for all projects – it cannot elect the job tax credit for Facility 1 and the capital investment tax credit for Facility 2.

If Company C elects to claim the capital investment tax credit, it could apply for a credit of $240,000, computed as follows:

($2,000,000 + $10,000,000) x (2%) = $240,000

If Company C elects to claim the jobs tax credit, it could apply for a credit of $525,000, computed as follows:

(100 jobs + 50 jobs) x ($3,500) = $525,000

Recapture of Certain Credits

Part or all of the jobs tax credit may be recaptured if employment levels fall below certain threshold amounts in any of the five years following the year for which the credit was earned. There are two situations in which recapture may occur. In both situations, any recapture will first reduce any credit carryforward amounts before increasing a taxpayer’s tax liability.

The first situation occurs when the number of qualified full-time employees in any of the five years succeeding the credit year falls below the average number of qualified full-time employees employed during the credit year. In this situation, all or part of the credit will be recaptured by (i) recalculating the credit which would have been earned for the original credit year using the decreased number of qualified full-time employees and (ii) subtracting the recomputed credit amount from the amount of credit previously earned.

Virginia Department of Taxation 8 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines The second recapture situation occurs when the average number of qualifying full-time employees employed at an international trade facility in any of the five taxable years succeeding the credit year falls below the amount employed by the taxpayer prior to claiming any credits. If this occurs, all credits earned with respect to the international trade facility must be recaptured.

Example 6: Partial Recapture of Credits – Applied Against Carryover Company D is an international trade facility that expanded its operations in 2011 to facilitate increased qualified trade activities. As a result of this expansion, Company D hires 20 qualified full-time employees in 2012 and is granted a jobs tax credit equal to $70,000. Company D’s tax liability for the 2012 taxable year is $40,000. Company D claims a jobs tax credit equal to $20,000 on its 2012 income tax return and carries forward the remaining $50,000 credit.

Company D employed an average of 100 qualified full-time employees during the 2011 taxable year and an average of 120 qualified full-time employees during the 2012 taxable year. During the 2013 taxable year, Company D only employs an average of 110 qualified full-time employees. Part of Company D’s credit must be recaptured pursuant to Va. Code § 58.1-439.12:06(H). The recapture amount is computed as follows:

Recomputed credit amount: (10 jobs created) x ($3,500 per job) = $35,000

Difference: ($70,000 claimed) – ($35,000 recomputed credit) = $35,000

$35,000 worth of credit must be recaptured. Because Company D has a carryforward amount equal to $50,000, this amount is reduced to $15,000 and Company D will not be assessed any additional taxes.

Example 7: Partial Recapture of Credits – Additional Tax Assessed Assume the same facts as Example 6, except that Company D’s tax liability for the 2012 taxable year is $150,000 and it claims a jobs tax credit equal to $70,000 on its 2012 income tax return. In this case, Company D will be assessed additional income taxes in an amount equal to $35,000.

Example 8: Recapture of the Entire Credit Amount Company E is an international trade facility that expanded its operations in 2011 to facilitate increased qualified trade activities. As a result of this expansion, it hires 20 qualified full-time employees in 2012 and is granted a jobs tax credit equal to $70,000. Company E’s tax liability for the 2012 taxable year is $40,000.

It claims a jobs tax credit equal to $20,000 on its 2012 income tax return and carries forward the remaining $50,000 credit.

Company E employed an average of 100 qualified full-time employees during the 2011 taxable year and 120 qualified full-time employees during the 2012 taxable Virginia Department of Taxation 9 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines year. During the 2013 taxable year, Company E employs an average of 90 qualified full-time employees. The average number of employees during 2013 was less than the average number of employees employed by Company E in 2011 (prior to claiming any credits), so the entire $70,000 credit amount must be recaptured. Because Company E has a $50,000 credit carryover, the carryover amount will be reduced to $0 and the company will be assessed additional income taxes in an amount equal to $20,000.

Treatment of Affiliated Companies

Two or more affiliated companies may elect to aggregate the number of jobs created for qualified full-time employees or the amount of capital investments as the result of establishment or expansion by the individual companies in order to qualify for the International Trade Facility Tax Credit. For purposes of this credit, “affiliated companies” means two or more companies related to each other so that (i) one company owns at least 80 percent of the voting power of the other or others or (ii) the same interest owns at least 80 percent of the voting power of two or more companies.

If two or more affiliated companies elect to aggregate the number of jobs or amount of capital investments, the taxpayers must compute the original credit amount based on the companies’ combined number of jobs and amount of capital investment. In order to aggregate the number of jobs or capital investments, corporate taxpayers must file a combined or consolidated Virginia income tax return.

Once an election has been made to aggregate the companies’ employment figures, the companies must then continue to aggregate their figures for purposes of determining any applicable recapture amount.

Example 9: Computation and Redemption of Credits by Affiliated Companies Company F and Company G are affiliated companies and both companies are international trade facilities for purposes of the International Trade Facility Tax Credit. For the 2011 taxable year, Company F had an average of 50 employees and Company G had an average of 100 employees.

In 2011, Company F expands its operations to facilitate increased qualified trade activities. As a result of this expansion, Company F hires 20 qualified full-time employees in 2012. Company G also expands its operations in 2011 to facilitate increased qualified trade activities and, as a result of this expansion, hires 30 qualified full-time employees in 2012.

The two companies elect to aggregate the number of jobs created for purposes of the International Trade Facility Tax Credit and file a consolidated Virginia income tax return. Accordingly, the aggregate average number of employees for the 2011 taxable year is 150 and the average number of employees for the 2012 taxable year is 200. The aggregate number of jobs created during the 2012 Virginia Department of Taxation 10 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines taxable year is 50. For the 2012 taxable year, the companies can apply for a $175,000 International Trade Facility Tax Credit.

Example 10: Carryover of Credit Amounts by Affiliated Companies Assume the same facts as Example 9, but also assume that the two companies have a consolidated income tax liability of $50,000 for the 2012 taxable year.

Assuming that the companies are allocated the full $175,000 credit, they may claim a $25,000 International Trade Facility Tax Credit on their 2012 consolidated corporate income tax return. The remaining $150,000 credit can be carried forward through the 2022 taxable year.

Example 11: Recapture of Credit Amounts by Affiliated Companies Assume the same facts as Example 9, but also assume that, in 2013, Company F has an average number of 80 qualified full-time employees and Company G has an average number of 120 qualified full-time employees. For the 2013 taxable year, Company G’s average number of qualified full-time employees is less than the average number of qualified full-time employees during the credit year. However, because Company F and Company G have elected to aggregate the number of jobs created for full-time employees, the aggregate average number of qualified full-time employees in 2013 is equal to 200 and no recapture is required.

Example 12: Recapture of Credit Amounts by Affiliated Companies Assume the same facts as Example 9, but also assume that the companies have sufficient tax liability to use the full credit amount during the 2012 taxable year.

In 2013, Company F has an average number of 80 qualified full-time employees and Company G has an average number of 110 qualified full-time employees.

For the 2013 taxable year, the companies’ aggregate average number of qualified full-time employees is equal to 190. Because this is less than the companies’ aggregate average number of qualified full-time employees for the credit year, part of the credit amount must be recaptured. The recapture amount is computed as follows:

Recomputed credit amount: (40 jobs created) x ($3,500 per job) = $140,000

Difference: ($175,000 credit claimed) – ($140,000 recomputed credit) = $35,000

The recapture amount is $35,000. If the companies have already claimed the full $175,000 credit, they will be assessed additional income taxes in an amount equal to $35,000. Otherwise, the carryforward amount will be reduced by up to $35,000, and any remaining amount will be assessed.

Virginia Department of Taxation 11 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines Administration of the Credit

To receive the International Trade Facility Tax Credit, taxpayers must apply to the Department by completing Form ITF. Every taxpayer that applies for the International Trade Facility Tax Credit must verify containers or cargo shipped through Virginia Port Authority-operated port facilities on the Virginia Port Authority’s website (www.portofvirginia.com). A validation summary must then be attached to Form ITF. If any containers were shipped through non-Virginia Port Authority owned facilities, these containers should be listed on a schedule that must be attached to Form ITF.

Taxpayers claiming the jobs portion of the International Trade Facility Tax Credit must also complete the International Trade Facility Port Job Creation Schedule. Form ITF and all required validation summaries, schedules, and supporting documentation must be completed and mailed no later than April 1 of the year following the taxable year during which credits were earned.

For Taxable Years 2011 through 2013, the total amount of International Trade Facility Tax Credits granted could not exceed $250,000 per calendar year. For Taxable Year 2014 and thereafter, the total amount of International Trade Facility Tax Credits granted cannot exceed $1.25 million in any calendar year. If the amount of credits applied for exceeds $1.25 million, the Department will allocate the credits proportionately among all qualified taxpayers. The Department will review all applications for completeness and notify taxpayers of any errors by June 1 of the calendar year in which Form ITF was submitted. If any additional information is needed, it must be provided no later than June 15 of that year to be considered for the tax credit. The Department will notify all eligible taxpayers of the amount of allocated credits by June 30 of the calendar year in which Form ITF was submitted.

Upon receiving notification of the allowable credit amount, taxpayers may claim this amount on the applicable Virginia income tax return.

Example 13: Applying for the International Trade Facility Tax Credit Company J is a calendar year filer that qualifies as an international trade facility (as defined by Va. Code § 58.1-439.12:06(A)). In 2014, Company J hires twenty qualified full-time employees and wishes to claim the jobs tax credit in an amount equal to $70,000.

To receive this credit, Company J must submit Virginia Form ITF to the Department on or before April 1, 2015. On or before June 1, 2015, the Department will notify Company J of the amount of credit received. If the total amount of International Trade Facility Tax Credits requested by all taxpayers on applications received by April 1, 2015 is $2.5 million, then all taxpayers will be allocated a credit equal to 50 percent of the requested amount. In this case, Company J would be allocated a credit equal to $35,000.

Company J can then claim the amount of credit issued on its 2014 income tax return. If Company J files its income tax return for the 2014 taxable year before it Virginia Department of Taxation 12 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines receives notification from the Department, it can claim the International Trade Facility Tax Credit by filing an amended return for the 2014 taxable year.

Taxpayers claiming the credit must keep all supporting documentation, including Virginia Port Authority verification summaries and any additional supporting documentation demonstrating base year port cargo volume and the amount of cargo transported through maritime port facilities in Virginia during the taxable year.

Taxpayers claiming the jobs portion of the International Trade Facility Tax Credit must retain employment records for at least five years for recapture purposes. Taxpayers claiming the capital investment portion of the credit must retain documentation of capital expenditures, including receipts, invoices, and project plans. Any supporting documentation must be provided by the taxpayer upon request.

Effective for credits issued for Taxable Year 2014, the Department is required to annually provide information to the Virginia Port Authority regarding the International Trade Facility Tax Credits issued.

Interaction of Port-Related Tax Credits

For Taxable Years 2011 through 2013, a taxpayer could qualify for more than one port-related tax credit in the same taxable year, but could not claim multiple port-related tax credits for the same activity or activities. For Taxable Year 2014 and thereafter, however, a taxpayer may claim both the Port Volume Increase Tax Credit and the Barge and Rail Usage Tax Credit for the same containers, noncontainerized cargo, or roll-on/roll-off cargo, provided such taxpayer meets the criteria of both tax credits.

Additional Information

These guidelines are available online in the Tax Policy Library section of the Department’s website, located at www.policylibrary.tax.virginia.gov. For additional information, please contact the Department at (804) 367-8037 or the Virginia Port Authority at (800) 446-8098. For assistance with the container and cargo verification process, contact the Virginia Port Authority at (757) 391-6235 or helpdesk@vit.org.

Approved: _______ Craig M. Burns Tax Commissioner Virginia Department of Taxation 13 September 5, 2014

Updated International Trade Facility Tax Credit Guidelines supersede those issued on April 17, 2012 and December 7, 2012 (Public Documents 12-45 and 12-205).

Introduction

During the 2011 session, the Virginia General Assembly enacted Senate Bill 1136 (2011 Acts of Assembly, Chapter 49), which established the International Trade Facility Tax Credit. This is an individual and corporate income tax credit for either capital investment in an “international trade facility” (as defined by Va. Code § 58.1-439.12:06(A)) or increasing jobs related to such facility. The amount of the credit is equal to either $3,000 per qualified full-time employee that results from increased qualified trade activities by the taxpayer or two percent of the capital investment made by the taxpayer to facilitate the increased qualified trade activities.

Two additional port tax credits were enacted during the 2011 General Assembly session: the Barge and Rail Usage Tax Credit (Va. Code § 58.1-439.12:09) and the Port Volume Increase Tax Credit (Va. Code § 58.1-439.12:10). These credits provide separate tax incentives for certain companies that use Virginia port facilities. Although all three credits offer incentives for port-related activities, each credit is mutually exclusive, and separate definitions and requirements apply to each credit. Taxpayers may claim the International Trade Facility Tax Credit in the same taxable year that they claim the Barge and Rail Usage Tax Credit and/or the Port Volume Increase Tax Credit.

In 2012, the General Assembly enacted House Bill 1183 and Senate Bill 578, increasing the jobs portion of the International Trade Facility Tax Credit from $3,000 to $3,500 per qualified full-time employee.

Effective July 1, 2012, the increased credit amount can be claimed starting in Taxable Year 2012.

In 2014, House Bill 873 reduced the annual cargo increase needed from 10% to 5%, expanded qualifying cargo types, increased annual credit issuance from $250,000 to $1.25 million, eliminated credits for certain facilities, and mandated annual reporting to the Virginia Port Authority.

These guidelines are issued by the Department to provide guidance to taxpayers regarding the International Trade Facility Tax Credit. These guidelines are exempt from the provisions of the Administrative Process Act (Va. Code § 2.2-4000 et seq.) Virginia Department of Taxation 1 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines according to the provisions outlined in Va. Code § 58.1-439.12:06. These Guidelines supersede the International Trade Facility Tax Credit Guidelines issued by the Department on April 17, 2012 and December 7, 2012 (Public Documents 12-45 and 12-205). As necessary, additional guidelines will be published and posted on the Department’s website, www.tax.virginia.gov.

These guidelines represent the Department’s interpretation of the relevant laws. They do not constitute formal rulemaking and hence do not have the force and effect of law or regulation. In the event that the final determination of any court holds that any provision of these guidelines are contrary to law, taxpayers who follow these guidelines will be treated as relying on erroneous written advice for purposes of waiving penalty and interest under Va. Code §§ 58.1-105, 58.1-1835 and 58.1-1845. To the extent there is a question regarding the application of these guidelines, taxpayers are encouraged to write to the Department and seek a written response to their question.

Requirements for an International Trade Facility

For the tax credit, an “international trade facility” is a company that:

 Engaged in port-related activities;  Uses Virginia port facilities; and  Transports at least 5% more cargo through Virginia port facilities in the taxable year than the previous year.

For purposes of this credit, the term “international trade facility” refers to the company itself, rather than the facility where port-related activities are being conducted by the company. Each company that qualifies as an international trade facility will calculate one base year amount and one credit amount each year, regardless of the number of facilities owned or the number of projects undertaken by that company. Accordingly, if the amount of cargo transported through one particular maritime port facility in Virginia does not increase by at least 5 percent, this may affect whether the company meets the 5 percent volume increase requirement, even if the company increases the number of qualifying containers transported through other facilities.

Example 1: Company A, engaged in port activities, uses two Virginia maritime ports (“Facility 1” and “Facility 2”).

During the 2013 taxable year, Company A transports 100 20-foot equivalent marine containers through Facility 1 and 200 20-foot equivalent marine containers through Facility 2. During the 2014 taxable year, Company A

See Va. Code § 58.1-439.12:06(A). Prior to 2014, the applicable percentage was 10%.

Virginia Department of Taxation 2 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines transports 106 20-foot equivalent marine containers through Facility 1 and 203 20-foot equivalent marine containers through Facility 2. Company A’s increase in maritime port cargo volume is computed as follows:

ሺ106 + 203ሻ - (100 + 200) (100 + 200) = 3% Although Company A has increased the amount of cargo that it transported through Facility 1 by 6 percent, it has only increased the total amount of cargo transported through all maritime facilities by 3 percent. Because Company A has not increased the total amount of cargo transported through all maritime facilities in Virginia by at least 5 percent, it does not qualify as an international trade facility and cannot claim the International Trade Facility Tax Credit during the 2014 taxable year.

The definition of an “international trade facility” for purposes of this credit is different than the definition of an “international trade facility” for purposes of the Barge and Rail Usage Tax Credit. Accordingly, each definition should be applied separately for each credit.

“Port-related activities” include warehousing, distribution, freight forwarding, handling, and goods processing.

For purposes of determining the amount of cargo transported through public or private maritime port facilities in Virginia, one 20-foot equivalent marine container is equivalent to 16 net tons of noncontainerized cargo. One net ton is equivalent to one short ton, or 2,200 pounds. Moreover, for purposes of determining the amount of cargo transported through maritime port facilities in Virginia, one 20-foot equivalent marine container is equivalent to one unit of roll-on/roll-off cargo.

For purposes of determining the number of 20-foot equivalent marine containers transported through Virginia maritime facilities, only a full container load qualifies. A full container load (FCL) is a standard 20-foot, 40-foot, or 45-foot container that is loaded and discharged under the account of one shipper and is intended for one consignee.

A 40- or 45-foot container equals two TEUs.

A less than container load (LCL) is cargo that is insufficient in either weight or volume to qualify for the freight rates that apply to a standard shipping container and is therefore combined with cargo owned by other shippers or with cargo intended for at least one other consignee. An LCL does not qualify as a 20-foot equivalent marine container for purposes of this credit.

Criteria for Qualified Full-Time Employees

For Taxable Year 2012 and thereafter, the jobs portion of the International Trade Facility Tax Credit is equal to $3,500 per qualified full-time employee that results from increased qualified trade activities by the taxpayer. A “qualified full-time employee” is an employee filling a new, permanent full-time position in an international trade facility in Virginia. To qualify as a “new, permanent full-time position,” the position filled by the employee must be either:

Positions must be indefinite, created after establishing or expanding the facility, requiring at least 35 hours/week for at least 48 weeks, or for the initial part of the taxable year if transferred.

Only employees filling permanent full-time positions qualify for this credit. Accordingly, employees filling seasonal or temporary positions do not qualify for this credit.

Additionally, positions that are ancillary to the principal activities performed by the employees at the international trade facility do not qualify for this credit. Such positions include jobs in building and grounds maintenance and security positions.

Jobs created when a job function is shifted from an existing location in Virginia to the international trade facility do not qualify for this credit. However, otherwise qualifying jobs that are created when a job function is shifted from an existing location in another state to an international trade facility located in Virginia are eligible for the credit.

Related Party Rules

An international trade facility may not claim a credit for certain employees who were previously employed by a related party or a business under common control. Examples of employees that do not qualify for purposes of this credit include the following:

 Employees with prior International Trade Facility Tax Credits earned by related parties or under common control;  Employees previously in the same job in Virginia by related parties or under control;  Employees whose job functions were performed at different Virginia locations by the taxpayer, related parties, or under control;  Employees whose job functions previously qualified for the credit at a different major business facility (per Va. Code § 58.1-439), on behalf of the taxpayer, related party, or under control.

For purposes of these limitations, “related party” means a related party as defined in IRC § 267(b). A “trade or business under common control” means a trade or business under common control as defined for purposes of the federal Work Opportunity Tax Credit in IRC § 52(b).

Criteria for Capital Investments

The capital investment portion of the International Trade Facility Tax Credit is equal to 2 percent of the amount of capital investment made by the taxpayer to facilitate increased qualified trade activities. For Taxable Year 2014 and thereafter, “qualified trade activities” are defined as the completed exportation or importation of at least (i) one International Organization for Standardization ocean container with a minimum 20-foot length (ii) 16 tons of noncontainerized cargo, or (iii) one unit of roll-on/roll-off cargo through any publicly or privately owned cargo facility located within Virginia through which the cargo is transported. Export cargomust be loaded on a barge or ocean-going vessel at such facility and import cargo must be discharged from a barge or ocean-going vessel at such facility.

For purposes of this credit, “capital investment” is defined as the amount properly chargeable to a capital account for improvements to rehabilitate or expand depreciable real property placed in service during the taxable year and the cost of machinery, tools, and equipment used in an international trade facility directly related to the movement of cargo. Capital investment includes the following:

 Expenditures for exterior, structural, mechanical, or electrical improvements to expand or rehabilitate buildings;  Land improvements like excavations, grading, paving, driveways, roads, sidewalks, landscaping;  Machinery, tools, and equipment placed in service after January 1, 2011.

“Machinery, tools, and equipment” excludes:

 Property with prior International Trade Facility Tax Credits;  Property previously in service by the taxpayer, related party (IRC § 267), or under common control (IRC § 52);  Property previously in Virginia with a basis determined by the basis of the property in the previous owner (IRC § 1014).

The following are not capital investments for this credit:

 Cost of acquiring real property or buildings;  Furnishings;  Appraisal, architectural, engineering, interior design fees;  Loan fees, points, capitalized interest;  Legal, accounting, realtor, sales, marketing, or professional fees;  Closing, permit, user, zoning, impact, inspection fees;  Bids, insurance, signage, utilities, bonding, copying, rent loss, temporary facilities;  Utility hook-up/access fees;  Outbuildings;  Well or septic system costs.

Computation and Carryover of Credits

For Taxable Year 2011, taxpayers may claim a credit equal to either $3,000 per qualified full-time employee that results from increased qualified trade activities by the taxpayer or two percent of the capital investment made by the taxpayer to facilitate the increased qualified trade activities. For Taxable Year 2012 and thereafter, the jobs portion of the credit is equal to $3,500 per qualified full-time employee that results from increased qualified trade activities by the taxpayer. In cases where a qualified full-time employee works in Virginia for less than 12 months during the credit year, the credit for this employee is computed by multiplying the credit amount by a fraction, the numerator of which is the number of full months the employee works for the international trade facility in Virginia during the credit year and the denominator of which is 12.

The amount of credit claimed by a taxpayer cannot exceed 50 percent of the tax imposed on that taxpayer for the taxable year. Any remaining credit amount may be carried forward for the next ten taxable years. If a taxpayer is also allowed another tax credit or has a credit carryforward from a preceding taxable year, the taxpayer is considered to have first utilized any credit that does not have a carryforward provision, and then any credit carried forward from a preceding year, before using any of the International Trade Facility Tax Credit for that year.

Since an international trade facility is a company, not a physical location, the credit applies at the company level, not per project.

Each company may claim only one of the jobs or investment tax credits annually, regardless of the number of facilities or projects.

Example 2: Computation of International Trade Facility Tax Credits Company B is an international trade facility that expanded its operations in 2011 to facilitate increased qualified trade activities. As a result of this expansion, in 2012, Company B hires twenty qualified full-time employees and incurs capital investment expenses of $2 million. Company B is entitled to claim either a jobs tax credit or a capital investment tax credit.

If claiming a jobs tax credit, the amount is:

20 jobs x $3,500 = $70,000

If claiming capital investment credit, the amount is:

$2,000,000 x 2% = $40,000

Company B may choose either the job or capital investment credit annually, not both, even if costs are separate.

Example 3: Credit Computation and Carryover Assume the same facts as Example 2 and also assume that Company B elects to claim the jobs tax credit in an amount equal to $70,000. Company B’s tax liability for the 2012 taxable year is $40,000 and the company does not claim any other credits for the 2012 taxable year. Va. Code § 58.1-439.12:06(D) limits the amount of credit claimed to 50 percent of the tax imposed for the taxable year.

Accordingly, Company B can only use $20,000 of the International Trade Facility Tax Credit for the 2012 taxable year. It can then carry forward the remaining $50,000 credit through the 2022 taxable year.

Example 4: Credit Computation for Fractional Employees Assume the same facts as Example 2, except that ten of the employees hired by Company B during 2012 do not begin working until September 1, 2012. These employees still qualify for the credit. The portion of the $3,500 credit earned with respect to each fractional employee must be determined as follows:

$3,500 x (4/12) = $1,166.67

The total jobs tax credit is computed as follows

10 jobs x $3,500 = $35,000; 10 jobs x $1,166.67 = $11,667; total = $46,667.

Example 5: Application of the Credit Election Rules Company C is an international trade facility that is engaged in port-related activities at two different maritime port facilities in Virginia (“Facility 1” and “Facility 2”). As a result of its increased qualified trade activities, Company C decides to expand two buildings, one located at Facility 1 (“Building 1”) and the second located at Facility 2 (“Building 2”). To implement the expansion, Company C makes a capital investment of $2 million in Building 1 and a capital investment of $10 million in Building 2 during Taxable Year 2012.

Also as a result of its increased qualified trade activities, Company C decides to hire 100 additional employees to work at Facility 1 and 50 additional employees to work at Facility 2 during Taxable Year 2012.

Company C can elect to claim either the job tax credit or the capital investment tax credit. However, it can only elect one of the two credits for all projects – it cannot elect the job tax credit for Facility 1 and the capital investment tax credit for Facility 2.

If Company C claims the capital investment tax credit, it may apply for $240,000, calculated as follows:

($2,000,000 + $10,000,000) x (2%) = $240,000

If Company C claims the jobs tax credit, it may apply for $525,000, calculated as follows:

(100 + 50) x $3,500 = $525,000

Recapture of Certain Credits

Part or all of the jobs tax credit may be recaptured if employment levels fall below certain threshold amounts in any of the five years following the year for which the credit was earned. There are two situations in which recapture may occur. In both situations, any recapture will first reduce any credit carryforward amounts before increasing a taxpayer’s tax liability.

The first situation occurs when the number of qualified full-time employees in any of the five years succeeding the credit year falls below the average number of qualified full-time employees employed during the credit year. In this situation, all or part of the credit will be recaptured by (i) recalculating the credit which would have been earned for the original credit year using the decreased number of qualified full-time employees and (ii) subtracting the recomputed credit amount from the amount of credit previously earned.

Virginia Department of Taxation 8 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines The second recapture situation occurs when the average number of qualifying full-time employees employed at an international trade facility in any of the five taxable years succeeding the credit year falls below the amount employed by the taxpayer prior to claiming any credits. If this occurs, all credits earned with respect to the international trade facility must be recaptured.

Example 6: Partial Recapture of Credits – Applied Against Carryover Company D is an international trade facility that expanded its operations in 2011 to facilitate increased qualified trade activities. As a result of this expansion, Company D hires 20 qualified full-time employees in 2012 and is granted a jobs tax credit equal to $70,000. Company D’s tax liability for the 2012 taxable year is $40,000. Company D claims a jobs tax credit equal to $20,000 on its 2012 income tax return and carries forward the remaining $50,000 credit.

Company D employed an average of 100 qualified full-time employees during the 2011 taxable year and an average of 120 qualified full-time employees during the 2012 taxable year. During the 2013 taxable year, Company D only employs an average of 110 qualified full-time employees. Part of Company D’s credit must be recaptured pursuant to Va. Code § 58.1-439.12:06(H). The recapture amount is computed as follows:

Recomputed credit: 10 jobs x $3,500 = $35,000

Difference: ($70,000 claimed) – ($35,000 recomputed credit) = $35,000

$35,000 worth of credit must be recaptured. Because Company D has a carryforward amount equal to $50,000, this amount is reduced to $15,000 and Company D will not be assessed any additional taxes.

Example 7: Partial Recapture of Credits – Additional Tax Assessed Assume the same facts as Example 6, except that Company D’s tax liability for the 2012 taxable year is $150,000 and it claims a jobs tax credit equal to $70,000 on its 2012 income tax return. In this case, Company D will be assessed additional income taxes in an amount equal to $35,000.

Example 8: Recapture of the Entire Credit Amount Company E is an international trade facility that expanded its operations in 2011 to facilitate increased qualified trade activities. As a result of this expansion, it hires 20 qualified full-time employees in 2012 and is granted a jobs tax credit equal to $70,000. Company E’s tax liability for the 2012 taxable year is $40,000.

It claimed $20,000 and carried forward $50,000 of the credit.

Company E employed an average of 100 qualified full-time employees during the 2011 taxable year and 120 qualified full-time employees during the 2012 taxable Virginia Department of Taxation 9 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines year. During the 2013 taxable year, Company E employs an average of 90 qualified full-time employees. The average number of employees during 2013 was less than the average number of employees employed by Company E in 2011 (prior to claiming any credits), so the entire $70,000 credit amount must be recaptured. Because Company E has a $50,000 credit carryover, the carryover amount will be reduced to $0 and the company will be assessed additional income taxes in an amount equal to $20,000.

Affiliated Companies

Two or more affiliated companies may elect to aggregate the number of jobs created for qualified full-time employees or the amount of capital investments as the result of establishment or expansion by the individual companies in order to qualify for the International Trade Facility Tax Credit. For purposes of this credit, “affiliated companies” means two or more companies related to each other so that (i) one company owns at least 80 percent of the voting power of the other or others or (ii) the same interest owns at least 80 percent of the voting power of two or more companies.

If two or more affiliated companies elect to aggregate the number of jobs or amount of capital investments, the taxpayers must compute the original credit amount based on the companies’ combined number of jobs and amount of capital investment. In order to aggregate the number of jobs or capital investments, corporate taxpayers must file a combined or consolidated Virginia income tax return.

Once aggregated, companies must continue to aggregate employment figures for recapture purposes.

Example 9: Computation and Redemption of Credits by Affiliated Companies Company F and Company G are affiliated companies and both companies are international trade facilities for purposes of the International Trade Facility Tax Credit. For the 2011 taxable year, Company F had an average of 50 employees and Company G had an average of 100 employees.

In 2011, Company F expands its operations to facilitate increased qualified trade activities. As a result of this expansion, Company F hires 20 qualified full-time employees in 2012. Company G also expands its operations in 2011 to facilitate increased qualified trade activities and, as a result of this expansion, hires 30 qualified full-time employees in 2012.

The two companies elect to aggregate the number of jobs created for purposes of the International Trade Facility Tax Credit and file a consolidated Virginia income tax return. Accordingly, the aggregate average number of employees for the 2011 taxable year is 150 and the average number of employees for the 2012 taxable year is 200. The aggregate number of jobs created during the 2012 Virginia Department of Taxation 10 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines taxable year is 50. For the 2012 taxable year, the companies can apply for a $175,000 International Trade Facility Tax Credit.

Example 10: Same as Example 9, but with a $50,000 tax liability in 2012.

Assuming that the companies are allocated the full $175,000 credit, they may claim a $25,000 International Trade Facility Tax Credit on their 2012 consolidated corporate income tax return. The remaining $150,000 credit can be carried forward through the 2022 taxable year.

Example 11: Recapture of Credit Amounts by Affiliated Companies Assume the same facts as Example 9, but also assume that, in 2013, Company F has an average number of 80 qualified full-time employees and Company G has an average number of 120 qualified full-time employees. For the 2013 taxable year, Company G’s average number of qualified full-time employees is less than the average number of qualified full-time employees during the credit year. However, because Company F and Company G have elected to aggregate the number of jobs created for full-time employees, the aggregate average number of qualified full-time employees in 2013 is equal to 200 and no recapture is required.

Example 12: Recapture of Credit Amounts by Affiliated Companies Assume the same facts as Example 9, but also assume that the companies have sufficient tax liability to use the full credit amount during the 2012 taxable year.

In 2013, F had 80 employees, G had 110 employees.

For the 2013 taxable year, the companies’ aggregate average number of qualified full-time employees is equal to 190. Because this is less than the companies’ aggregate average number of qualified full-time employees for the credit year, part of the credit amount must be recaptured. The recapture amount is computed as follows:

Recomputed credit: (40 jobs) x ($3,500) = $140,000

Difference: ($175,000 claimed) – ($140,000 recomputed) = $35,000

The recapture amount is $35,000. If the companies have already claimed the full $175,000 credit, they will be assessed additional income taxes in an amount equal to $35,000. Otherwise, the carryforward amount will be reduced by up to $35,000, and any remaining amount will be assessed.

Virginia Department of Taxation 11 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines

To receive the International Trade Facility Tax Credit, taxpayers must apply to the Department by completing Form ITF. Every taxpayer that applies for the International Trade Facility Tax Credit must verify containers or cargo shipped through Virginia Port Authority-operated port facilities on the Virginia Port Authority’s website (www.portofvirginia.com). A validation summary must then be attached to Form ITF. If any containers were shipped through non-Virginia Port Authority owned facilities, these containers should be listed on a schedule that must be attached to Form ITF.

Taxpayers claiming the jobs portion of the International Trade Facility Tax Credit must also complete the International Trade Facility Port Job Creation Schedule. Form ITF and all required validation summaries, schedules, and supporting documentation must be completed and mailed no later than April 1 of the year following the taxable year during which credits were earned.

For Taxable Years 2011 through 2013, the total amount of International Trade Facility Tax Credits granted could not exceed $250,000 per calendar year. For Taxable Year 2014 and thereafter, the total amount of International Trade Facility Tax Credits granted cannot exceed $1.25 million in any calendar year. If the amount of credits applied for exceeds $1.25 million, the Department will allocate the credits proportionately among all qualified taxpayers. The Department will review all applications for completeness and notify taxpayers of any errors by June 1 of the calendar year in which Form ITF was submitted. If any additional information is needed, it must be provided no later than June 15 of that year to be considered for the tax credit. The Department will notify all eligible taxpayers of the amount of allocated credits by June 30 of the calendar year in which Form ITF was submitted.

Taxpayers may claim the approved credit on their Virginia income tax return after notification.

Example 13: Applying for the International Trade Facility Tax Credit Company J is a calendar year filer that qualifies as an international trade facility (as defined by Va. Code § 58.1-439.12:06(A)). In 2014, Company J hires twenty qualified full-time employees and wishes to claim the jobs tax credit in an amount equal to $70,000.

To receive this credit, Company J must submit Virginia Form ITF to the Department on or before April 1, 2015. On or before June 1, 2015, the Department will notify Company J of the amount of credit received. If the total amount of International Trade Facility Tax Credits requested by all taxpayers on applications received by April 1, 2015 is $2.5 million, then all taxpayers will be allocated a credit equal to 50 percent of the requested amount. In this case, Company J would be allocated a credit equal to $35,000.

Company J can then claim the amount of credit issued on its 2014 income tax return. If Company J files its income tax return for the 2014 taxable year before it Virginia Department of Taxation 12 September 5, 2014 Updated International Trade Facility Tax Credit Guidelines receives notification from the Department, it can claim the International Trade Facility Tax Credit by filing an amended return for the 2014 taxable year.

Claimants must retain all supporting docs, including Virginia Port Authority verification summaries and cargo volume records for the taxable year.

Taxpayers claiming the jobs portion of the International Trade Facility Tax Credit must retain employment records for at least five years for recapture purposes. Taxpayers claiming the capital investment portion of the credit must retain documentation of capital expenditures, including receipts, invoices, and project plans. Any supporting documentation must be provided by the taxpayer upon request.

Starting 2014, the Department must annually report issued International Trade Facility Tax Credits to the Virginia Port Authority.

Interaction of Port-Related Tax Credits

For Taxable Years 2011 through 2013, a taxpayer could qualify for more than one port-related tax credit in the same taxable year, but could not claim multiple port-related tax credits for the same activity or activities. For Taxable Year 2014 and thereafter, however, a taxpayer may claim both the Port Volume Increase Tax Credit and the Barge and Rail Usage Tax Credit for the same containers, noncontainerized cargo, or roll-on/roll-off cargo, provided such taxpayer meets the criteria of both tax credits.

Additional Information

These guidelines are available online in the Tax Policy Library section of the Department’s website, located at www.policylibrary.tax.virginia.gov. For additional information, please contact the Department at (804) 367-8037 or the Virginia Port Authority at (800) 446-8098. For assistance with the container and cargo verification process, contact the Virginia Port Authority at (757) 391-6235 or helpdesk@vit.org.

Approved: _______ Craig M. Burns Tax Commissioner Virginia Department of Taxation 13 September 5, 2014

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COMMONWEALTH of VIRGINIA

Department of Taxation

Richmond, Virginia 23282

August 14, 1992

NOTICE TO NORTHERN VIRGINIA

TAX OFFICIALS

MARYLAND LAW CHANGE

Maryland has recently amended it tax law to eliminate its reciprocity with Virginia except

for Virginia residents who earn wages in Maryland. The law change is effective for

taxable years beginning on and after January 1, 1992.

In addition, Maryland now requires partnerships and S corporations to make estimated

tax payments on behalf of their nonresident partners and shareholders.

Due to the

elimination of the out-of-state credit, such partners and shareholders are now required to

pay Maryland income tax on their Maryland source business income.

Impact on Taxpayers

Prior to the Maryland law change, Virginia residents who earned any type of income from

Maryland sources were entitled to claim a credit against their Maryland tax liability for the

taxes paid to Virginia on the Maryland source income.

Virginia residents who are no longer entitled to claim the Maryland out-of-state credit on

Maryland source non-wage income will be entitled to the Virginia out-of-state credit for

taxes paid to Maryland on such income.

As a result of Maryland's denial of the out-of-state credit to Virginia residents, Maryland

residents will no longer be entitled to the Virginia out-of-state credit on non-wage Virginia

source income and will, therefore, have to pay income taxes to Virginia on such income.

--- Page 2 ---Virginia residents who are partners or shareholders of a partnership or S corporation with

Maryland source income may reduce their Virginia estimated tax Payments by an amount

that corresponds to the credit that such individuals will be entitled to claim for having to

Pay taxes to Maryland on the Maryland source income.

Maryland and Virginia are currently finalizing the terms of the written agreement which

will memorialize the wage earner reciprocity. Under the terms of the agreement, individuals will not have to pay taxes or file an income tax return to the nonresident state

on earnings from such employment. | will furnish you with copies of the final agreement

upon its signature by the Maryland Comptroller.

W. H. Forst

Tax Commissioner

c. Northern Virginia Legislators

--- Page 1 ---lr

&

el

Aas

COMMONWEALTH of VIRGINIA

Department of Taxation

Richmond, Virginia 23282

August 14, 1992

NOTICE TO NORTHERN VIRGINIA

TAX OFFICIALS

MARYLAND LAW CHANGE

Maryland recently amended its tax law to eliminate reciprocity with Virginia except

for Virginia residents earning wages in Maryland. The law is effective for

taxable years beginning on and after January 1, 1992.

Additionally, Maryland requires partnerships and S corporations to make estimated

tax payments for their nonresident partners and shareholders.

Due to the

elimination of the out-of-state credit, these partners and shareholders must now

pay Maryland income tax on their Maryland source business income.

Impact on Taxpayers

Before Maryland law change, Virginia residents earning any income from

Maryland sources allowed a credit against their Maryland tax liability for the

taxes paid to Virginia on the Maryland source income.

Virginia residents no longer entitled to claim Maryland out-of-state credit on

Maryland source non-wage income will be entitled to the Virginia out-of-state credit for

taxes paid to Maryland on such income.

Because Maryland denies the out-of-state credit to Virginia residents, Maryland

residents will no longer be entitled to the Virginia out-of-state credit on non-wage Virginia

source income, thus, they must pay Virginia income taxes on it.

--- Page 2 ---Virginia residents who are partners or shareholders of a partnership or S corporation with

Maryland source income may reduce their Virginia estimated tax Payments by an amount

that corresponds to the credit that such individuals will be entitled to claim for having to

Pay taxes to Maryland on the Maryland source income.

Maryland and Virginia are finalizing the written agreement which

will memorialize the wage earner reciprocity. Under the terms of the agreement, individuals will not have to pay taxes or file an income tax return to the nonresident state

on earnings from employment. | will furnish copies of the final agreement

upon its signature by the Maryland Comptroller.

W. H. Forst

Tax Commissioner

c. Northern Virginia Legislators