During the 2025 General Assembly Session, the Executive Budget (House Bill 1600 and Senate Bill 800) and two bills (House Bill 1866 and Senate Bill 1456) were introduced that would have adopted market-based sourcing (“MBS") in Virginia. While these measures were not adopted, Item 257(E) of the 2025 Appropriation Act (House Bill 1600, Chapter 725) established a workgroup to assess MBS with the Secretary of Finance and the Chairs of the House Finance, House Appropriations, and Senate Finance and Appropriations Committees participating in selecting the workgroup’s members (See Appendix A, Item 257(E), HB 1600).

The workgroup was required to assess implementing MBS, including:

• The administrative feasibility,
• The impact on major classifications of corporations operating in Virginia,
• The impact on corporate expansion within and into Virginia, and
• The projected impact on Virginia tax revenue as a result of adopting MBS.

The stakeholder meeting of the workgroup was held on August 6, 2025. Following the meeting, the Department of Taxation (“the Department") solicited additional comments to be provided by August 20, 2025. All written comments received from the workgroup are attached (See Appendix B, Written Comments). The workgroup found that adopting generally applicable MBS rules similar to the Multistate Tax Commission’s (“MTC’s") model rules would have an overall positive impact on economic development in Virginia. Two industries, the defense industry and the telecommunications industry, expressed concern over how MBS could impact them. The workgroup produced draft recommended legislation for the adoption of MBS, which includes two optional provisions to address these industry specific concerns. Some workgroup participants expressed concern over the MTC’s “throw-out" rules, and optional language has been included to replace the MTC’s “throw-out" rules.

After the circulation of the draft report and after the receipt of any comments, the Department will report the workgroup’s recommendations to the Joint Subcommittee on Tax Policy for evaluation of the fiscal implications and incorporate the feedback from the Joint Subcommittee in the final report.