Apportionment Changes are Required for Retailers in Virginia

Posted on 01.23.13

Authors: Jen Flinchum, CPA, CFP® and Ryan Beethoven-Wilson

Retail companies in Virginia are now required to use heavier-weighted sales factor apportionment to determine their taxable income in Virginia. This new apportionment requirement is being phased in over a three-year period starting with tax years beginning on or after July 1, 2012. The phase-in is as follows:

VA Apportionment Changes

Who is a qualifying retail company?

A qualifying retail company is defined by   Virginia as a domestic or foreign corporation primarily engaged in activities that would be included in Sectors 44-45 of the North American Industry Classification System (NAICS), United States Manual, United States Office of Management and Budget, 1997 Edition. On the Virginia corporate income tax return, retailers must check the box on Line 7 of Form 500A to designate themselves as a retailer and use the new apportionment methods. Taxpayers that both manufacture and sell their products to the general public are deemed “manufacturers” under Sectors 44-45 and, consequently, are not deemed “retail companies” for purposes of the single sales factor requirement. However, taxpayers that engage in processing activities incidental to retailing are classified as “retail companies.”

What is the impact of the new apportionment method?

The new apportionment requirements for retailers may be helpful or harmful depending on the location of the taxpayer’s sales, employees, or assets. Retailers with relatively high sales in Virginia compared to the rest of the country may be harmed by the new apportionment requirements (as a higher apportionment percentage will result from the single factor), whereas retailers with high sales outside of Virginia may find the new requirements beneficial (as factors other than sales are disregarded and the Virginia percentage is lower under the single factor than under the traditional three factor computation). It will be important for retailers going forward to understand the new Virginia apportionment rules in conjunction with those of other states in which they do business in order to evaluate their total potential state tax liabilities.