West Virginia advances federal conformity date

West Virginia recently enacted legislation, H.B. 2358 and H.B. 2359, updating its conformity to the Internal Revenue Code (IRC) for purposes of the state’s personal and corporation net income tax, to include amendments made to the IRC during the 2020 calendar year.¹ Other legislation adopts a single sales factor apportionment formula with market-based sourcing rules for sales of items other than tangible personal property and includes an exclusion from personal income tax for certain mobile employees, effective for tax years beginning on or after Jan. 1, 2022.²

IRC conformity

Effective Feb. 18, 2021, West Virginia enacted H.B. 2359 updating its conformity to the IRC for corporate income tax purposes, to provide that “[a]ll amendments made to the laws of the United States after Dec. 31, 2019, but prior to Jan. 1, 2021,” will be given effect for purposes of determining the state’s corporate income tax purposes “to the same extent those changes are allowed for federal income tax purposes, whether the changes are retroactive or prospective.”³ Reference to the term “laws of the United States” is defined as the “provisions of the Internal Revenue Code of 1986, as amended, and any other provisions of the laws of the United States that relate to the determination of income for federal income tax purposes.”⁴ Substantially similar legislation, H.B. 2358, was enacted to update the state’s conformity for personal income tax purposes.⁵

By advancing the IRC conformity date to the end of 2020, the legislation generally conforms to the federal provisions included in the Coronavirus Aid, Relief and Economic Security (CARES) Act and the Consolidated Appropriations Act (CAA) of 2020.

Apportionment

For tax periods beginning in 2022, new legislation adopts both market-based sourcing and a single sales factor apportionment methodology for corporate income tax purposes. Further, it eliminates the currently existing throw-out rule.

Single sales factor

The single sales factor apportionment method is adopted and applicable for taxable periods beginning on or after January 1, 2022, replacing the three-factor apportionment method (with double-weighted sales) that is currently effective.⁶

Market-based sourcing and throw-out rule

For sales of items other than sales of tangible personal property, market-based sourcing rules⁷ based on model Multistate Tax Commission statutory provisions replace historic cost of performance provisions⁸ for corporate income tax purposes, effective for taxable periods beginning on or after Jan. 1, 2022. Specifically, income is sourced to West Virginia as follows: (i) revenue from the sale of services is sourced to West Virginia to the extent the services are delivered to a location in the state; and (ii) income from the sale, rental, lease or license of intangible property is sourced to West Virginia to the extent it is used in the state, provided that intangible property used in marketing a good or service to a consumer is “used in West Virginia,” if the good or service is purchased by a consumer in West Virginia.⁹ A contract right or similar intangible property that authorizes the holder to conduct a business activity in a specific geographic area is used in the state to the extent the geographic area is in the state. Specific rules are provided for sourcing receipts from intangible property sales that are contingent on the productivity, use, or disposition of the property. All other receipts from a sale of intangible property are excluded from both the numerator and denominator of the sales factor.

The change in statutory language renders the current throw-out rule inapplicable for sales made on or after Jan. 1, 2022. Prior to this date, sales of tangible personal property shipped to a state in which the taxpayer is not taxable are excluded from the sales factor denominator.¹⁰

Mobile workforce exclusion

Effective Jan. 1, 2022, legislation adopts a new exclusion from personal income tax for income paid to a nonresident individual meeting all of the following conditions: (i) the compensation is paid for employment duties performed by the individual in West Virginia on 30 or fewer days in the calendar year; (ii) the individual performed employment duties in more than one state during the calendar year; (iii) the compensation is not paid for duties performed by the individual as a professional athlete, professional entertainer, or public figure; and (iv) the nonresident individual’s state of residence provides a substantially similar exclusion, does not impose an individual income tax, or the individual’s income is otherwise exempt from tax pursuant to a federal statute.¹¹ For purposes of determining the number of days worked in West Virginia, an employee is considered to have worked in the state if the individual performs more employment duties in West Virginia than in any other state during that day.¹² Related employer withholding rules are also provided.¹³

Commentary

West Virginia’s conformity legislation is notable for its blanket conformity to the IRC after the enactment of the CARES Act and the CAA with no specific carve-out provisions. This approach is a marked departure from that taken by many other jurisdictions. Several states that have enacted conformity legislation to include the 2020 federal laws have elected to selectively conform to the significant federal provisions. With this action, West Virginia remains static in its approach to federal conformity, particularly for purposes of the corporation income tax. Specifically, West Virginia has historically conformed to both the federal Sec. 179 expensing rules and bonus depreciation provisions, and with the advancement of the conformity date, the state should continue to conform to these provisions. West Virginia also generally conforms to the federal NOL provisions modified under the CARES Act, through a state-specific NOL “determined in accordance with Section 172 of the Internal Revenue Code of 1986, as amended.” Additionally, West Virginia defines “[i]nterest expense” as amounts directly or indirectly allowed as deductions under IRC Sec. 163.¹⁴ As a result of this definition and West Virginia’s general conformity to federal provisions, the state should continue conforming to the interest deduction limitation under IRC Sec. 163(j), again as modified under the CARES Act.¹⁵

By adopting single sales factor apportionment and market-based sourcing rules with no throw-out provision, West Virginia has taken a step towards modernizing its corporation income tax. Corporate taxpayers should take note of the change and carefully evaluate how it will impact their apportionment calculations beginning in 2022.

Finally, the West Virginia legislation provides welcome guidance for employers seeking to properly withhold personal income tax for mobile employees who have chosen to work from alternate locations during the recent pandemic. One significant limitation of the legislation is that an individual can qualify for the exclusion from personal income tax only if the nonresident employee’s state of residence generally either provides a similar exclusion or does not impose an income tax. Employers with employees who have worked in West Virginia may face an additional compliance burden in evaluating their withholding obligations as a result of this rule.

1 H.B. 2358, Laws 2021; H.B. 2359, Laws 2021.
2 H.B. 2026, Laws 2021.
3 W.VA. CODE § 11-24-3(a). Previously, the IRC adopted by reference included all amendments made through 2019.
4 Id.
5 W.VA. CODE § 11-21-9(f). Previously, the IRC adopted by reference included all amendments made through 2019.
6 W.VA. CODE § 11-24-7(e).
7 W.VA. CODE § 11-24-7(e)(13).
8 W.VA. CODE § 11-24-7(e)(12).
9 W.VA. CODE § 11-24-7(e)(13)(A)-(B).
10 W.VA. CODE § 11-24-7(e)(11)(C).
11 W.VA. CODE § 11-21-31(b). Definitions are provided for professional athlete, professional entertainer, and public figure. See W.VA. CODE § 11-21-31(a).
12 W.VA. CODE § 11-21-31(e). Time spent in transit is not considered in determining work location. Id.
13 W.VA. CODE § 11-21-31(c)-(d). If the 30-day threshold is exceeded, the employer must withhold for all days in the calendar year (including the first 30 days) in which the employee performs employment duties in West Virginia.
14 W. VA. CODE § 11-24-3a(20).
15 State-specific intercompany interest addbacks may apply.

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