Virginia’s FY 2020-2022 budget enacted on April 7 includes a requirement for “corporations that are members of a unitary business” to file a report declaring certain unitary combined reporting items for the 2019 tax year. Under an amendment requested by Governor Ralph Northam (D) and approved by the General Assembly, these pro forma reports are due by July 1, 2021. [H.B. 1800, § 3-5.23, Governor’s amendments adopted, 4/7/21]
Action item: Virginia corporate taxpayers should consider gathering data and analyzing their potential liability as a unitary combined group to meet the July 1 reporting deadline.
Virginia’s General Assembly has considered mandatory unitary combined reporting over the last several sessions. In this regular session, a mandatory unitary combined reporting bill (S.B. 1353) died in the Senate Finance and Appropriations Committee, but the House Finance Committee advanced a joint resolution (H.J. 563) providing for a study of unitary combined reporting.
This joint resolution, approved during the General Assembly’s First Special Session, directs the Division of Legislative Services and the Department of Taxation to establish a work group “to assess the feasibility of transition to a unitary combined reporting system for corporation income tax purposes.”
The work group is directed to consider the impact of mandatory unitary combined reporting on major classifications of corporations operating in Virginia, the impact on corporate expansion within and into Virginia, and the projected impact on Virginia's tax revenue. The work group’s findings, recommendations, and a draft of any recommended legislation are due to the House and Senate finance committees by November 1, 2021.
Separate from this study resolution, Virginia’s budget legislation (H.B. 1800) includes a pro forma combined reporting requirement. The Tax Commissioner is required to submit a report to the House and Senate Finance Committees by December 1, 2021 based on the information and data submitted in the pro forma filings.
Under the budget legislation, corporations “that are members of a unitary business” must file a report showing the unitary combined net income of the group for the 2019 tax year and compute the difference in tax that would be owed as a result of filing a combined report.
The legislation leaves the manner of such reporting to the Tax Commissioner, although the report must be submitted by July 1, 2021 with no extensions. The legislation also leaves to the Tax Commissioner the method or methods by which subject corporations must compute the pro forma combined group liability. Failure to file the report or making a material omission or misstatement will subject corporations to a $10,000 penalty.
The legislation specifies that the unitary group does not include entities subject to the insurance premiums license tax or the bank franchise tax. Further, a foreign corporation is excluded from the return if it has 80% or more of its average property, payroll, and sales factors outside the United States. Foreign corporation income subject to the provisions of a federal income tax treaty also is excluded.
There are a number of questions raised by this legislation, such as which corporations are subject to the reporting requirement and whether one corporation’s filing eliminates the need for reporting by other corporations included in the report. The Tax Commissioner’s guidance is likely to help taxpayers understand their reporting obligations under the new law.
The information from these pro forma combined returns will be used to inform the debate over potential mandatory unitary combined reporting adoption in the 2022 legislative session.