HD5 - Executive Summary of the Joint Subcommittee to Study the Benefits of Adopting a Single Sales Factor to Apportion the Income of Multistate Corporations for Purposes of the Corporation Income Tax (HJR 177/SJR 101; 2008)


    Executive Summary:
    During the 2008 Session of the General Assembly, the General Assembly passed HJR 177 and SJR 101. The House and Senate established a twelve-member joint subcommittee to study the benefits of adopting a single sales factor in apportioning to Virginia the income of a multistate corporation for purposes of computing Virginia's corporate income tax.

    Delegate Kathy J. Byron and Senator Walter A. Stosch served as co-chairpersons of the joint subcommittee. Other legislative members were Delegates Christopher K. Peace, Jimmie P. Massie, III, Adam P. Ebbin, Albert C. Pollard, Jr. and Senators Charles J. Colgan and Mary Margaret Whipple. Non-legislative citizen members of the joint subcommittee were Mr. Brad Gilks, Mr. Charles H. Majors, and Mr. William (Sandy) Rowe. The Honorable Janie Bowen, Commissioner of the Department of Taxation, served ex officio. All who served on the joint subcommittee had voting privileges.

    HJR 177 and SJR 101 charged the joint subcommittee with reviewing the fiscal and economic impact of replacing Virginia's three-factor apportionment formula for apportioning the income of multistate corporations with a single sales factor formula. The resolutions provided that the joint subcommittee could also study the use of cost of performance for determining the apportionment of service-based revenues and the feasibility of limiting adoption of a single sales factor to specific industries. The joint subcommittee met four times in 2008.

    During the meetings, the joint subcommittee learned that Virginia permits corporations engaged in multistate activities that have income taxable by Virginia and out-of-state political subdivisions to apportion their Virginia taxable income through the following three-factor formula: (i) a property factor weighted at 25 percent, (ii) a payroll factor weighted at 25 percent, and (iii) a sales factor weighted at 50 percent. In general, the three factors are added together and divided by 4. This is commonly known as the double-weighted sales factor formula. Under a single sales factor formula, only the sales factor, which is the ratio of the firm's sales in Virginia to the firm's total sales, would be applied to the income of a multistate corporation in apportioning the corporation's income to Virginia for purposing of computing the corporate income tax. Currently, there are 20 states that use the single sales factor or offer it as an option for multistate corporations to use in calculating their corporate income tax liabilities.

    In furtherance of the charge to the joint subcommittee to review the fiscal and economic impact of adopting a single sales factor, the joint subcommittee heard testimony from the Department of Taxation in regard to the fiscal impact. The Department estimated that, based on 2006 tax returns, if all corporations were required to use the single sales factor, the estimated reduction in corporate income tax revenues would equal $47.4 million annually, and if adoption of the formula were optional, the estimated reduction in corporate income tax revenues would equal $122.7 million annually. However, if only manufacturers were required to use the single sales factor, the estimated reduction in corporate income tax revenues would equal $33.9 million annually, and if adoption of the formula were optional for manufacturers, the estimated reduction in corporate income tax revenues would equal $64.7 million annually. The Department of Taxation's estimates looked at changes in the corporate income tax revenue stream.

    The joint subcommittee at a later meeting heard testimony that the single sales factor removes the current disincentive on increasing Virginia employment and capital investment and encourages companies that have a disproportionately high economic impact on Virginia to locate in the Commonwealth. Additionally, the assertion was made that adoption of the single sales factor could stem the loss of Virginia manufacturing jobs. Based on current trends, Virginia manufacturing employment could decline from 286,579 jobs in 2007 to 241,173 jobs in 2012, or a total of 45,406 jobs. Testimony was received from Dr. Fletcher Mangum that adoption of a single sales factor for manufacturing businesses would lead to the retention of 8,441 of these jobs that otherwise would be lost, resulting in a positive revenue impact of $75 million annually ($13 million in business taxes, $30 million in individual taxes, and $32 million in sales and use taxes).

    The joint subcommittee learned that between 1990 and 2007, manufacturing jobs decreased by 118,944. Conversely, between 1990 and 2006, manufacturing wages increased by 82.1 percent.

    The Virginia Economic Development Partnership (VEDP) also testified before the joint subcommittee. Partnership representatives noted that efforts to restructure Virginia's taxation policy should further its pro-business climate and advocated for a more holistic study that examined aspects of Virginia's corporate tax structure beyond its apportionment formula. VEDP recommended that any changes to the apportionment formula be done with care to ensure that particular sectors of existing businesses, such as the service sector, are not adversely impacted.

    The joint subcommittee also heard from persons opposing the adoption of a single sales factor. Opponents of the single sales factor stated that a study of manufacturing employment between 1995 and 2004 performed by Mr. Michael Mazarov shows that there is no correlation between the single sales factor and the number of manufacturing jobs or the amount of capital investment. Mr. Mazarov concluded that between 2001 and 2004, five of the eight states that had adopted a single sales factor had manufacturing job losses worse than the median average loss (-8.2 percent in Louisiana) for the period.

    At its final meeting the joint subcommittee formally agreed to the following:

    1. The tax burden on Virginia manufacturers tends to be higher in comparison to other industries in the Commonwealth.

    2. By majority vote, the joint subcommittee recommended that Virginia manufacturers be allowed to elect to apportion their multistate income using a single sales factor. Any manufacturer making the election should be required to use a single sales factor for a minimum of two years. Any manufacturer making the election should be required to certify that the average weekly wage of its full-time employees is greater than the average weekly wage for the taxpayer's industry in the same region of the Commonwealth as where the manufacturer is located. The joint subcommittee recommended that the single sales factor be phased-in over a four-year period as follows: (i) 2010 and 2011, a three factor formula with triple-weighted sales; (ii) 2012, a three factor formula with quadruple-weighted sales; and (iii) 2013 and thereafter, a 100 percent single sales factor that may be elected by manufacturers in apportioning multistate corporation income.

    The joint subcommittee does not intend to submit to the General Assembly and the Governor a report of its findings and recommendations for publication as a House or Senate document. This executive summary is in lieu of such report. The joint subcommittee's web page can be found at: http://dls.state.va.us/land.htm.