State Tax Day - Current, S.8, Virginia—Corporate Income Tax: Taxpayer Not Required to Use Single Sales Factor Apportionment Method, (Jun 22, 2026)

The Virginia Department of Taxation issued a corporate income tax ruling regarding the appropriate apportionment method that the taxpayer was required to use. Specifically, the Department ruled that the taxpayer was incorrectly treated as a retail company required to use single sales factor apportionment instead of the standard three-factor method.

The Taxpayer filed its Virginia corporate income tax returns for the taxable years at issue using the standard three-factor apportionment formula. Under audit, the Department applied the single sales factor apportionment method required for the retail trade sector on the basis that the taxpayer classified itself as a retailer on its Virginia and federal corporate income tax returns. The taxpayer filed an application for correction, contending that it was not a retailer required to use the single sales factor apportionment method. The taxpayer asserted that its business activities changed over time from primarily retail to primarily wholesale. The taxpayer provided documentation indicating that approximately 68% of its gross sales for each of the taxable years at issue were generated from wholesale trade activities. The audit staff did not consider the taxpayer’s documentation supporting its claim that it was not a retailer. Rather, the audit staff disallowed the standard three-factor apportionment method because the taxpayer classified itself as a retailer on its federal and Virginia income tax returns and had not amended its federal returns to report a different designation. However, the Department has determined that a taxpayer was not required to file a federal amended return in order to amend a Virginia income tax return in cases where the change to the Virginia return does not affect the taxpayer’s federal taxable income. As such, the fact that the taxpayer had not amended its federal income tax returns to change its NAICS classification would not preclude the taxpayer from amending its Virginia income tax return to change the reported NAICS code because such change would not have impacted federal taxable income.

In addition, the Department has ruled that a taxpayer reporting a NAICS retailer code would be required to use the single sales factor method of apportionment provided that the code accurately reflected that taxpayer’s primary activities. Implicit in that ruling is that the Department has the authority to independently consider the true nature of a taxpayer’s business activities to determine the proper method of apportionment. Based on the information provided by the taxpayer here, in the Department’s opinion, the NAICS retail classification code did not properly reflect the taxpayer’s primary activities for the taxable years at issue. Thus, the taxpayer was not required to use the single sales factor method of apportionment. The audit adjustments to the taxpayer’s apportionment factors are reversed and adjusted assessments will be issued accordingly. The Taxpayer should remit any resulting balance due within 30 days of the bill dates to avoid further collection actions.

Ruling of Commissioner, P.D. 26-25, Virginia Department of Taxation, May 11, 2026, ¶207-269