It has been a busy 2023 legislative session in Virginia, with a number of tax bills being enacted. This alert addresses several bills passed by the General Assembly and signed by Gov. Glenn Youngkin (R), including retroactive amendments to the Virginia passthrough entity (PTE) tax election.
PTE Tax Election
On March 27, Youngkin signed S.B. 1476 (identical to H.B. 1456). The bill’s primary purpose was to remove the requirement that a PTE must be 100% owned by natural persons or, for an S corporation, persons eligible to be shareholders, to be able to make the Virginia PTE tax election. Under prior law, any PTE owned by another PTE or C corporation was ineligible to make the election. Under the new law, retroactively effective for tax years beginning on or after January 1, 2021, the PTE tax election may be made by most PTEs. Notably, the change allows PTEs with entity owners to make the election.
On March 29, the Virginia Department of Taxation (DOT) issued Tax Bulletin 23-3 to provide taxpayers with guidance on the legislation, including how to compute the elective PTE tax if the PTE has a mix of eligible owners (natural persons and trusts) and noneligible owners (other PTEs and C corporations). Only the pro rata or distributive share of income, gain, loss, or deduction attributable to eligible owners is subject to the PTE tax and included in the calculation of the electing PTE’s Virginia tax base. Therefore, distributive shares of tax items attributable to noneligible owners are not subject to the PTE tax or included in the electing PTE’s tax base.
PTEs may rely on Tax Bulletin 23-3 to make estimated tax payments and request extensions, both of which must occur by April 17, 2023. No action is required for PTEs that qualified under the prior law and already filed a Virginia PTE tax return for the 2022 tax year.
PTEs seeking to make a retroactive election for the 2021 tax year should continue to follow Tax Bulletin 22-6. The DOT must issue guidance by October 15, 2023, explaining how to make a retroactive election for the 2021 tax year.
Other 2023 Virginia Tax Legislation Enacted
Several other Virginia tax bills have also been enacted, including those discussed below.
Establishing an Advisory Tax Administration Commission: H.B. 1368, which Youngkin signed March 22, requires that the DOT establish a work group to study the department’s policies and procedures to explore options for a mechanism for tax practitioners to provide feedback to the DOT.
Special Sourcing Rules: On March 23, Youngkin signed S.B. 1349 (identical to H.B. 1481). The bill provides that internet root infrastructure providers that meet specific criteria and enter into a memorandum of understanding (MOU) with the Virginia Economic Development Partnership Authority (VEDP) by December 31, 2023, may use a hybrid sales factor in their income apportionment calculations when filing Virginia corporate income tax returns. The rules are effective for tax years beginning on and after January 1, 2023.
Virginia Filing Election Flexibility Act: Under prior law, taxpayers that are a group of affiliated corporations are bound to their filing method – that is, separate, nexus combined, or nexus consolidated – and must request permission from the Commissioner of Taxation to change their status. Part of the application process requires the taxpayer to demonstrate that there would have been no decrease in tax liability under the proposed election than under the affiliated group’s former filing method for the previous year.
On March 26, Youngkin signed S.B. 796 (identical to H.B. 1405), which removes the above requirement. However, the legislation retains the requirement that the affiliated group agree to file returns under both the new and former filing methods and pay the greater of the two amounts for the tax year in which the new election is effective and the immediately succeeding tax year. The bill would apply to applications filed with the DOT on or after July 1, 2023.
Single Sales Factor for Affiliated Retail Groups: Youngkin signed S.B. 1346 (identical to H.B. 1978) on March 17. Under the bill, an affiliated group of corporations that has at least 80% of sales derived from retail company activities can elect to use a single sales factor apportionment formula and file a Virginia consolidated return for tax years beginning on or after January 1, 2023. The election is available even if one or more affiliates would be required to use a different apportionment method if separate returns were filed. The election is valid only for tax years in which at least 80% of the group’s sales (after consolidations and eliminations) are derived from retail company activities. Once an affiliated group has made the election, it cannot be changed without the DOT’s permission.
Statute of Limitations: H.B. 1625, signed by Youngkin March 22, amends Va. Code Ann. §58.1-1802.1 to: (1) suspend the statute of limitations on state tax collection actions while any administrative or judicial proceedings contesting the assessment are pending; and (2) repeal a provision suspending the statute of limitations while the taxpayer is outside the commonwealth.
Sales and Use Tax Exemption for Oil and Gas Drilling Equipment: Youngkin signed H.B. 2334 on March 21. The bill extends the sunset date for the sales and use tax exemption for materials, supplies, machinery, and other specified tangible personal property used directly in the drilling, extraction, or processing of natural gas or oil and the reclamation of the well area. The sunset date is extended from July 1, 2022, to July 1, 2024.
Sales Tax and Use Tax Exemption for Data Centers: Youngkin signed S.B. 1522 on March 26. The bill extends until 2040 the data center sales and use tax exemption for a data center operator that: (1) makes a capital investment of at least $35 billion in data centers in Virginia; and (2) creates at least 1,000 direct new jobs (subject to various caveats).
Insights
The amendments to the Virginia PTE tax clear the path for many PTEs to make the PTE tax election if they were ineligible to do so under prior law.
- For tax year 2021 elections, PTEs should wait for further guidance from the DOT.
- For tax year 2022 elections, eligible PTEs must file or make extension payments by the original filing deadline of April 17, 2023. Taxpayers should file and/or pay based on the legislation and ignore any contradictory language in the instructions. Because of various transition issues, taxpayers might want to consider extensions for the 2022 tax year to allow additional time.
- No action is required for PTEs that qualified under the prior law and already filed a PTE tax return for tax year 2022.
- PTEs that plan to make the election for tax year 2023 are expected to make estimated tax payments for the first quarter, which will be due by April 17.
- As with all state PTE tax elections, PTEs and their owners should weigh the costs and benefits of making the election at the entity level, as well as at the individual owner level, and consider any federal and multistate income tax consequences for the owners.
- A taxpayer that meets the definition of an internet root infrastructure provider should consider entering into an MOU with the VEDP no later than December 1.
Written by Scott Smith, Andrew Reiter and Elil Arasu. Copyright © 2023 BDO USA, LLP. All rights reserved. www.bdo.com
