By Todd Betor and Timothy Gustafson

The Virginia Tax Commissioner ruled that the state’s intangible expense add-back exception is not all inclusive and does not apply to the gross amount of royalty payments made to a taxpayer’s affiliate based solely on the gross amount of the payments shown on another state’s tax return. The taxpayer argued that the plain meaning of Va. Code Ann. § 58.1-402(B)(8)(a)(1) entitled it to exclude 100% of royalty payments made to its affiliates from the add-back provisions because the payments were subject to tax based on or measured by net income imposed by other states. The Tax Commissioner, however, ruled that when considering the statute in its entirety, the exception only applies to the portion of a taxpayer’s royalty payments to its affiliate that corresponds to the portion of such affiliate’s taxable income in other states, as evidenced by the actual apportionment percentages shown on such affiliate’s tax returns filed with those other states. The Tax Commissioner also ruled that where a state’s tax is based on gross receipts (i.e., New Jersey), the ratio to determine royalties eligible for the exception also must be based on gross receipts. Va. Pub. Doc. Rul. 13-226 (Dec. 17, 2013). This is one of four recent rulings issued by the Tax Commissioner discussing the application of Virginia’s add-back statute. See also, Va. Pub. Doc. Rul. No. 13-213 (Nov. 18, 2013); Va. Pub. Doc. Rul. No. 13-238 (Dec. 19, 2013); and Va. Pub. Doc. Rul. No. 13-239 (Dec. 19, 2013).