On August 31, 2017, the Virginia Supreme Court issued a decision holding that a taxpayer can claim an exception to Virginia’s intangible expense addback on the basis that the related member receiving the intangible payment is “subject to tax” in another state, only to the extent that the intangible payment is included in the apportioned tax base of the related member in another state. In a concession to taxpayers, however, the court held that this “pro rata” exception is allowed for tax paid in any state, including states that require the filing of corporate income tax returns on a combined basis.

Authors: Michael A. Jacobs Michael I. Lurie

Type: Client Alerts

The Virginia Supreme Court has issued its decision in Kohl’s Department Stores v. Virginia Department of Taxation, the lead case on the “subject to tax” exception to Virginia’s intangible addback provision.1 The court held that a taxpayer can only claim the “subject to tax” exception to the extent that the intangible payment is included in the apportioned tax base in states other than Virginia.

The taxpayer had argued that because the royalty payments it made to its related member were included in the pre-apportionment income reported on the related member’s returns filed in other states, the payments were subject to tax in those other states and, as a consequence, the full amount of the payments qualified for the “subject to tax” exception. The Department countered that a taxpayer was only entitled to claim the “subject to tax” exception to the extent that the royalty payments made by the taxpayer were subject to tax in another state on a post-apportionment basis. The Department also argued that this “pro rata” exception only applied if the related member reported the royalty payments on a separate company return.