State and Local Taxation

What is “use” for corporate income tax apportionment purposes?

What is “use” for cor…

The Supreme Court of Virginia issued an opinion in Virginia Department of Taxation v. R.J. Reynolds Tobacco Co., Record No. 201263 (February 10, 2022). This case concerned what is considered property for corporate income tax apportionment purposes. Code of Virginia § 58.1-409 requires that property must be “used” to be included in the property factor.

The facts in this case are relatively simple. Lorillard, prior to being purchased by R.J. Reynolds Tobacco Co., purchased leaf tobacco and placed the leaf tobacco in its Danville Facilities to age for 13 to 23 months. During this time, the leaf tobacco was aged via a natural process without any additional treatment. After the tobacco aged, it was shipped to North Carolina for processing and manufacturing.

The Department of Taxation argued that the tobacco should be included in the property factor as the aging occurs during its time in Virginia which constitutes “use.” The Department of Taxation also urged that the corresponding regulation should also be considered. R.J. Reynolds Tobacco Co. disagreed and argued that the tobacco is merely being stored for future use. The Supreme Court of Virginia agreed with R.J. Reynolds Tobacco Co. and looked no further than Code of Virginia § 58.1-409. The Court didn’t need to review the corresponding regulation as the Code of Virginia is not ambiguous and only needed to look at the plain meaning of the word “used.”

The Court relied on the findings of fact from the circuit court that the storage of the tobacco in Virginia is not necessary for the aging process as it will age regardless of where it is kept and that absolutely nothing is done to the tobacco while it sits in Virginia. This does not constitute “use” according to the Court and refunds were granted.

Opinions like this make me wonder about the multitude of guidelines issued by the Department of Taxation that receive no legal review.

Christian Tennant is a Virginia tax attorney and former employee of the Virginia Department of Taxation. Mr. Tennant regularly speaks and writes on Virginia taxation. In his private practice he advises and represents businesses and individuals on a range of tax matters.

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