Tobacco Storage Not Considered “Use” for Virginia Property Factor

Thoughtware Alert Published: Feb 18, 2022
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In Virginia, simply storing tobacco in a warehouse is not considered “use” for the property factor when determining apportionment, as the term “use” is unambiguous and must be interpreted in its plain language. 

A multistate corporation that receives income from business activities within and without the state of Virginia is required to apportion its income to determine the amount of its income that is taxable in Virginia. Per Va. Code Ann. Section 58.1-408, Virginia generally uses a three-factor apportionment formula with a double-weighted sales factor. Under this formula, the sales factor is weighted at 50 percent and the payroll and property factors are weighted at 25 percent each in determining the overall corporate income apportionment factor. 

Virginia Apportionment

Virginia Apportionment Image

Historically, the states implemented a property factor in their apportionment formulas to represent the capital employed in the ordinary trade or business of the taxpayer. Va. Code Ann. §58.1-409 specifically states that the property factor is based on “the average value of the corporation’s real and tangible personal property owned and used or rented and used in the Commonwealth during the taxable year … to the extent that such property is used to produce Virginia taxable income …”

In Virginia Dept. of Taxation v. R.J. Reynolds Tobacco Co., Lorillard Tobacco Company (Lorillard), a tobacco company in Delaware, was storing leaf tobacco in a Virginia facility for 13 to 23 months for an aging period. Once the aging process was complete, the leaf tobacco was shipped to North Carolina for processing and manufacturing. For tax years 2008 through 2009, Lorillard included the value of leaf tobacco stored, but not used in Virginia, in its property factor. In 2011, Lorillard requested a refund to remove the value of the stored leaf tobacco from the property factor. The Virginia Department of Taxation denied Lorillard’s request. However, the circuit court found in favor of Lorillard, stating that the plain language of the term “used” meant “to put into action or service” or “[t]o employ for the accomplishment of purpose.” Thus, the simple placement of leaf tobacco in a warehouse did not constitute “use” in its plain language. The Supreme Court of Virginia affirmed. 

If you or your client would like assistance with apportionment, please reach out to our state and local tax services group. For more information, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below. 
 

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