Large multistate and multinational corporations present unique challenges to individual states in administering their corporate income tax. Such businesses often feature dozens or hundreds of affiliated entities operating as constituent parts of an overarching business. Within such a group, in a given state some affiliates may conduct extensive operations, some may have only limited contact, and others may conduct no business at all. State taxation authorities therefore have to make complex judgments about which activities of a corporation outside of the state are subject to that state's corporate income tax.

The results can vary widely, depending on the exact rules adopted and on corporate tax planning decisions. No uniform set of rules has taken hold, resulting in a patchwork of different approaches taken by various states across the country. Some states treat each corporation within an affiliated group as a separate individual entity, each of which would file its own corporate income tax return. Another approach is to treat the group's members as a combined business and tax the group as if it were a single corporation. Virginia has adopted a hybrid approach, in which an affiliated group may make an election, irrevocable for 20 years, to be treated on a separate basis or to file a single return on a consolidated or Virginia combined basis.

Other states have adopted a mandatory unitary combined reporting policy that requires an affiliated group of corporations having Virginia taxable income to file a single unitary return, combining their income, expenses, gains, losses, and apportionment factors of all related corporations operating in any state. Proponents of such an approach believe that the resulting tax imposed on the unitary group would be comparable to that imposed if all members of the group were merged into a single corporation. Generally speaking, the unitary combined approach would extend to a greater expanse of nationwide corporate activity, but would also add administrative complexity, both for the impacted businesses and for the Department of Taxation.

The Work Group recommended against the adoption of mandatory unitary combined reporting. As will be discussed below, the concerns of the Work Group centered on the additional complexity of combined filing compared with Virginia’s current system, the uneven impact the transition may have on certain taxpayers, and the potential damage to Virginia's business climate. Additionally, Work Group members argued that current provisions in Virginia law such as its add-back statute already address the common tax shifting strategies that combined reporting is intended to remedy. The Work Group recommended codifying budget language related to the add-back statute.

The Work Group also evaluated aspects of Virginia's corporate income tax system unrelated to unitary combined reporting. There was discussion of a wide range of proposals, including the adoption of market-based sourcing and expanded single sales factor apportionment. The Work Group also discussed and requested draft legislation regarding adjustments to Virginia's filing election and intercompany interest deduction rules.

1. Roadmap

Part I of this report will begin with a discussion of current Virginia corporate income tax policy. It will then provide an overview of mandatory unitary combined reporting, the policy choices that must be made in any transition to combined reporting, and present the rationales offered for and against making such a transition. It will conclude by presenting the other corporate income tax reform proposal discussed by the Work Group.

Part II of the report will present data from the Department of Taxation regarding the costs and benefits of making this transition. Next will be a discussion of the findings of the Work Group regarding both unitary combined reporting as well as other adjustments to corporate income tax policy that were suggested by Work Group members. Part II will conclude with presenting the Work Group’s recommendations and conclusions, as well as requested draft legislation.

2. House Joint Resolution 563 (2021 Special Session I)

House Joint Resolution Number 563 of the 2021 Special Session I (*1) directed the Division of Legislative Services, in conjunction with the Department of Taxation, to establish a Work Group assessing the feasibility of transitioning to unitary combined reporting for corporate income tax purposes in the Commonwealth. The resolution introduced by Delegate Watts assigned to the Work Group the following tasks:

• Assess the administrative feasibility of such a transition;

• Ascertain impacts on major classifications of corporations operating in Virginia and on corporate expansion within and into the Commonwealth;

• Project the fiscal impact if corporate income tax unitary combined reporting were to be adopted;

• Identify and make recommendations on any legislation necessary should Virginia transition to unitary combined reporting, including the repeal of obsolete provisions and amendments to the existing provisions in the Code of Virginia; and

• Identify different legal authorities and requirements that would apply to corporations under a unitary combined reporting system and solicit input from those corporations that may be affected by a transition to unitary combined reporting.

The resolution set a deadline of November 1, 2021, for the Work Group to submit a summary report with its findings and recommendations to the General Assembly.

3. Work Group Participants

The Work Group included the following executive and legislative officials, who participated in in selecting the Work Group stakeholder membership:

• Chair of the House Committee on Finance (Delegate Vivian E. Watts);

• A member of the Senate Committee on Finance and Appropriations (Senator David W. Marsden);

• Secretary of Finance (Secretary Joseph Flores);

• Deputy Secretary of Finance, June Jennings;

• Secretary of Commerce and Trade (Secretary Brian Ball);

• Deputy Secretary of Commerce and Trade, Cassidy Rasnick;

• Tax Commissioner, Craig Burns; and

• Assistant Tax Commissioner William White.

The executive and legislative officials appointed the following nonlegislative citizen corporate tax professionals for participation in the Work Group:

• Tyler Henderson, Sr., Manager, State and Local Tax at Amazon;

• Gary Tappana, Vice President of Tax Policy at Anheuser-Busch;

• Mike Carchia, Head of State Tax Planning at Capital One;

• Tammy Herrin, In-house Tax Counsel at ExxonMobil;

• Jon Elder, Vice President of Taxes at Dollar Tree;

• Tim Winks, Sr., Manager, Indirect Tax at Ferguson Enterprises;

• Glen Page, Sr., Manager, State Income & Franchise Tax at HCA Healthcare;

• Tom Powers, Executive Director, Corporate Tax Department at JP Morgan Chase;

• Karen Lint, Corporate Tax Director at Huntington Ingalls Industries;

• Lori Nieto, Corporate Tax Director at Northrop Grumman;

• Ken Wright, Sr., Manager, State Tax at Smithfield Foods;

• Alison Malloy, Sr., Director of Tax at Verisign;

• Kathleen Kittrick, Director, State Tax Policy at Verizon;

• David Brunori, Senior Director at RSM LLP and Research Professor of Public Policy at The George Washington University;

• Greg Matson, Executive Director of the Multistate Tax Commission;

• William L.S. "Sandy" Rowe, Of Counsel at HuntonAndrewsKurth; and

• Ellen Berenholz, Executive Director, Tax Policy at Comcast.
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(*1) See Attachment 2, HJR 563 (2021 Special Session I, Watts).