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Virginia recently enacted legislation advancing the Commonwealth’s conformity with the Internal Revenue Code (IRC) to the version in effect as of Dec. 31, 2018.1
In a separate measure, it adopted economic nexus standards for certain remote sellers and marketplace facilitators.2
Specifically, effective July 1, 2019, retailers with no physical presence are required to collect and remit sales taxes if they generate more than $100,000 of sales or complete at least 200 separate transactions in Virginia. Additionally, certain marketplace facilitators are required to collect and remit tax on behalf of third-party sellers.
Virginia’s conformity legislation
Virginia employs static conformity to the IRC and has advanced its conformity date to Dec. 31, 2018.3
Previously, Virginia conformed as of Feb. 9, 2018, but explicitly decoupled from most provisions included in the Tax Cuts and Jobs Act (TCJA) as well as H.R. 1892, commonly referred to as the Bipartisan Budget Act of 2018.4
For taxable years beginning on or after Jan. 1, 2018, the Commonwealth’s income tax structure generally reflects the changes adopted by federal tax reform. However, Virginia decouples from several IRC provisions.
IRC Sec. 163(j) – Interest Expense Limitation
Virginia conforms to the new interest expense limitation generally based upon 30% of adjusted taxable income. However, it allows for a separate deduction of 20% of the business interest disallowed as a deduction pursuant to IRC Sec. 163(j) for both corporate and personal income tax purposes.5
IRC Sec. 168(k) – Bonus Depreciation
Consistent with prior iterations of IRC Sec. 168(k), Virginia does not conform to the TCJA’s expanded expensing provisions permitting 100% expensing of qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023.6
IRC Sec. 172 – Net Operating Losses
Virginia continues to decouple from the federal carryback of certain net operating losses (NOLs) for five years under IRC Sec. 172(b)(1)(H), but otherwise conforms to the prospective NOL limitations imposed under the TCJA.7
The federal provisions limit the deductibility of NOLs generated on or after Jan. 1, 2018, to 80% of taxable income and eliminate the previously available two-year carryback, while allowing an unlimited carryforward period.
IRC Sec. 179 – Building Improvement Deduction
Virginia conforms to the expansion of IRC Sec. 179, which increases the maximum deduction from $500,000 to $1 million for property placed in service after Dec. 31, 2017.8
IRC Sec. 951A – Global Intangible Low-Taxed Income (GILTI)
For taxable years beginning on or after Jan. 1, 2018, Virginia allows for a subtraction of GILTI included for federal income tax purposes under IRC Sec. 951A in computing Virginia taxable income.9
Specifically, Virginia expanded the existing corporate income tax subtraction for Subpart F income to allow for this deduction.
As it did prior to the new legislation, Virginia continues to decouple from specific provisions of the IRC including certain tax exclusions related to cancellation of debt income10
and tax deductions related to the application of high-yield debt obligations.11
The Virginia standard deduction for personal income tax purposes is increased from $3,000 to $4,500 for individuals and married taxpayers filing separately, and from $6,000 to $9,000 for married taxpayers filing joint returns.12
The increase is effective for taxable years beginning on and after Jan. 1, 2019, but before Jan. 1, 2026. Further, an individual income tax deduction is added for taxable years beginning on or after Jan. 1, 2019. The deduction is computed based on the actual amount of real and personal property taxes imposed by Virginia or any other taxing jurisdiction not otherwise deducted solely on account of the $10,000 annual limitation imposed on the federal deduction for state and local taxes paid.13
Finally, for taxable years beginning on or after Jan. 1, 2019, the new law decouples from provisions in the TCJA related to the suspension of the overall limit on itemized deductions for personal income tax purposes.14
Remote seller, marketplace facilitator nexus thresholds
Virginia law generally requires all dealers with nexus to collect and remit applicable sales and use tax.15
Effective July 1, 2019, dealers are deemed to have sufficient nexus with the Commonwealth if they: (i) receive more than $100,000 in gross revenue from retail sales in Virginia during the current calendar year or the previous calendar year; or (ii) engage in 200 or more separate retail sales transactions during the current calendar year or the previous calendar year.16
The term “remote seller” is defined in the law as any dealer deemed to have sufficient activity to require registration to collect and remit sales tax (through the above economic thresholds) and includes any software provider acting on behalf of the dealer.17
A “marketplace facilitator” is defined as any person who contracts with a marketplace seller to facilitate the sale of products through a physical or electronic marketplace. Marketplace facilitators are deemed to have sufficient nexus with the Commonwealth if they: (i) engage in at least one of three activities related to the marketplace; (ii) engage in at least one of six activities with respect to a marketplace seller’s products; and
(iii) meet one of the above economic threshold tests through facilitation activity.18
Payment processor businesses or platforms that exclusively provide Internet advertising services are excluded.19
A marketplace seller
is defined as a person that makes sales through any physical or electronic marketplace operated by a marketplace facilitator.20
Notably, the legislation requires that sales made by all commonly controlled persons be aggregated in computing the gross revenue and transaction threshold amounts and mirrors the thresholds found in the U.S. Supreme Court’s South Dakota v. Wayfair, Inc.
Having nexus, a marketplace facilitator meeting the listed thresholds is considered a dealer and must collect and remit sales tax on all transactions facilitated through its marketplace. Marketplace sellers, therefore, are generally relieved of their requirement to collect sales and use taxes on transactions made through a marketplace facilitator’s marketplace.22
Exceptions to this rule apply if a marketplace provider can demonstrate that all of its sellers are already registered dealers or have sufficient nexus to require their registration and collection of the tax would create an undue burden or hardship for either party.23
In contrast to the sales tax treatment of remote sellers and marketplace facilitators, broadcasters, printers, advertising firms and distributors in the Commonwealth that restrict their activities to accepting contracts from out-of-state advertisers or sellers remain exempt from the Virginia sales tax collection and remittance rules.24
Legislative leniency provisions
The new legislation specifically provides for some degree of post-enactment leniency for impacted businesses. Specifically, a remote seller or marketplace facilitator that has collected an incorrect amount of sales or use taxes is relieved from liability for the amount, including any penalty or interest, if the error occurred due to reasonable reliance on information provided by the Commonwealth.25
A marketplace facilitator also is relieved of liability, including penalties and interest, for the incorrect collection or remittance of tax due to reasonable reliance on an invalid exemption certificate or other incorrect or insufficient information provided by the marketplace seller or the purchaser. In this instance, the marketplace facilitator must be able to show a reasonable effort was made to obtain accurate information.26
A marketplace facilitator is the sole entity subject to audit for all transactions it facilitates unless the failure to collect the correct amount of tax was due to incorrect information provided by the marketplace seller or the marketplace seller is subject to a waiver releasing the marketplace facilitator from dealer treatment.27
The primary intent of the conformity legislation was ostensibly to adopt the changes included in federal tax reform. However, as noted above, Virginia decouples from the treatment of GILTI and continues to decouple from several provisions with which it has historically lacked conformity. Due to the inclusion of GILTI in computing federal taxable income, corporate taxpayers should be aware that foreign source income often is included in state taxable income. Due to Virginia’s broad exclusion for Subpart F income and foreign source income, that typically has not been the case in the Commonwealth. The Virginia decoupling provision regarding GILTI is intended to prevent the deduction of the gross GILTI amount along with the IRC Sec. 250 GILTI deduction which otherwise would result in “double-dipping,” allowing taxpayers two beneficial deductions instead of the intended single deduction.
With this legislation, Virginia becomes the first state to partially decouple from IRC Sec. 163(j) through the adoption of a subtraction that will provide a slight offset to the interest deduction limitation. Many taxpayers are likely to struggle with the state corporation income tax impact of IRC Sec. 163(j), both from a financial and compliance perspective, particularly in states like Virginia that allow separate reporting and require the addback of certain related-party interest expenses. As a result, it is imperative that guidance in this area be issued to the public in the coming months.
With the adoption of its economic nexus standards for purposes of the sales and use tax, Virginia joins numerous states that have adopted legislation including marketplace facilitator provisions in the wake of the U.S. Supreme Court’s Wayfair
decision. The newly adopted remote seller nexus provisions vary among states and taxpayers should be cognizant of the differences. Many states, Virginia included, have opted to replicate the thresholds in South Dakota’s legislation which were endorsed by Wayfair
. Although South Dakota’s legislation has been deemed constitutional in its threshold determinations, there are no clear guidelines indicating when a threshold could be considered unconstitutional. In addition, marketplace provisions still vary greatly across states in terms of effective dates, definitions, and collection requirements. Multistate taxpayers should be aware of these differences and account for inconsistencies across jurisdictions in order to guarantee accurate compliance in this evolving area.
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