Pursuant to Item 3-5.23 of the 2021 Appropriation Act (House Bill 1800, Chapter 552 of the 2021 Acts of Assembly, Special Session I), corporations that are part of a unitary business were required to submit an informational report for the unitary combined group to the Department of Taxation ("the Department") in a manner prescribed by the agency no later than July 1, 2021.

Pursuant to the Appropriation Act requirement, affected corporations were required to submit the report based on Taxable Year 2019 computations and include tax under unitary combined reporting. The report was required to show the difference in tax owed as a result of filing a unitary combined report compared to the tax owed under current filing requirements. This reporting requirement applied regardless of whether members of a unitary combined group are currently included in Virginia income tax filings using existing methods. The deadline to submit the report was July 1, 2021, and no extensions were allowed to be granted.

The Department developed a unitary combined report template that was required to be submitted electronically via its Web Upload application. The Department also developed a detailed Unitary Combined Report Reference Guide to address questions regarding how to complete the report. See Appendix C. The Department required that each designated corporation show the difference in tax owed as a result of fifing a unitary combined report under both the Joyce and Finnigan approaches compared to the tax owed under current filing requirements. Under the Joyce approach, nexus determinations were made at the level of each individual entity for apportionment purposes, and as a result, sales by an entity lacking nexus in Virginia were excluded from the sales factor numerator for Virginia income tax purposes. Under the Finnigan approach, nexus determinations were made at the level of unitary combined group as a whole, and as a result, all sales of members of the unitary combined group attributable to Virginia were included in the sales factor numerator, even if certain individual members lack nexus in Virginia if filing on a separate entity basis.

Study Limitations that May Impact Results

The results of this study are likely impacted by the following study limitations:

• The actual revenue impact would depend in part on how the law is structured. The General Assembly could elect to make different policy decisions, which could impact the revenue estimates.

• The report is based solely on one year of information, Taxable Year 2019, which may not reflect current corporate income tax revenues or the volatility of the corporate income tax.

• The study is based on unaudited data as reported by some corporations, but not all, corporations.

• The estimates set forth in this report are based solely on the information reported by companies that complied with the reporting requirement, and only to the extent that all necessary data was submitted.

• There is no valid way to extrapolate the results to all corporations, as it is unknown whether the corporations that did not submit a report would be impacted by unitary combined reporting. To the extent that such corporations would have an increase or decrease in tax liability, the estimates could change significantly.

• The study is based on proforma reports on which no tax was due. If Virginia were to actually enact unitary combined reporting, it is likely that these taxpayers may take actions to reduce their tax, such as modifying how they report income or restructuring their activities and corporate structure.

As a result, the Department recommends that the information in this report be viewed as an indicator of the potential impact on select corporations, but not necessarily as a measure of the actual impact on Virginia revenues if mandatory combined reporting were adopted.

Results Based on Reported Information

Based solely on the information provided by the corporations that complied with this reporting requirement, it is estimated that unitary combined reporting for Taxable Year 2019 would likely generate a positive General Fund revenue impact. Table 1 on page 4 of the report displays the overall increase in corporate income tax revenues attributable to the corporations that filed the report. If Virginia had the Finnigan method of unitary combined reporting in effect during Taxable Year 2019, the reported information indicates that corporate income tax revenues attributable to these corporations would have increased by an estimated $203 million for such taxable year. If Virginia had the Joyce method of unitary combined reporting in effect during Taxable Year 2019, the reported information indicates that corporate income tax revenues attributable to these corporations would have increased by an estimated $165 million for such taxable year.

It is important to note that the estimated revenue impact reflects the corporations' income tax liability after credits. Toe actual fiscal year revenue impact may vary based on estimated payments, returns and payments under extension, amended returns, and the corporation's fiscal year. In addition, it is important to note that these estimates are based solely on self-reported data for corporate groups who complied with the reporting requirement, which constitutes approximately one-fifth of corporations that currently file Virginia returns.

It is also important to note that these revenue estimates are based on only one taxable year, Taxable Year 2019, and do not reflect the volatility of the corporate income tax revenue over the years. It should be noted that Taxable Year 2019 was a particularly strong year for corporate revenues, with 9.5 percent growth in FY 2019 corporate income tax revenues and 7.2 percent growth in FY 2020 corporate income tax revenues. Corporate tax revenue has historically varied greatly from year to year due to such factors as profits, net operating losses, and gross receipts. In addition, the estimates are based on the unaudited data reported by the reporting corporations, and do not reflect all corporations currently filing within Virginia. The Department received limited information and had limited time to accurately validate all of the information in the reports filed under the Finnigan and the Joyce methods. Additionally, any impact would vary based on the transitional rules that would need to be developed regarding net operating losses, eliminations, and the business interest deduction limitation.

Critically, the revenue estimates in Table 1 above may overstate the actual impact for the corporations that submitted the report because these estimates are based on proforma reports on which no tax was due. If Virginia were to enact unitary combined reporting, it is likely that the actual revenue impact in the initial years could be a revenue loss due to compliance. As explained in prior fiscal impact statements, certain businesses would benefit from unitary combined reporting, and others would realize an increased Virginia tax liability. This has revenue implications because the Department anticipates that businesses benefitting from this change would comply immediately. In contrast, those with increased tax liabilities may resist to an unknown extent. After the initial years, it is anticipated that taxpayers generally will come into compliance, but revenues generated may not be as large as indicated on the Taxable Year 2019 reports. This is because taxpayers whose tax would otherwise increase under unitary combined reporting may adjust their tax planning to reduce their tax liability. Additionally, it is unknown whether the corporations that did not comply with the reporting requirement would estimate an increase or decrease in their tax liability under combined reporting.