Section 90. Exemptions and exclusions

A. In general. Generally, any corporation which is subject to federal income tax and has some income from Virginia sources (as defined in 23VAC10-120-20) will also be subject to Virginia income tax unless specifically exempted. Even though exempt from Virginia income tax such corporations may be required to file a return under Va. Code § 58.1-441.

B. Public service corporations. Public service corporations which pay a State franchise tax or license tax upon gross receipts under Chapter 26 (§ 58.1-2600 et seq.) of Title 58.1 of the Code of Virginia are exempt from the Virginia income tax. The tax levied must be based upon the gross receipts of the corporation and not solely on the value of the property in order for the corporation to be exempt from income tax.

1. Railway companies are specifically subject to income tax by Va. Code § 58.1-2608.

2. Pipeline distribution companies pay a franchise tax on gross receipts from sales to a consumer of natural or manufactured gas and are exempt from taxation on the net income from such sales. The net income of pipeline transmission companies from sales to those who are not consumers is specifically subject to income tax by Va. Code § 58.1-2627.1.

3. Water, heat, light and power companies are specifically exempted from income tax by § 58.1-2690 of the Code of Virginia.

4. Motor vehicle carriers pay a tax on property and fuel used within the state, but not on gross receipts, and therefore are subject to income tax. Va. Code § 58.1-2701.

5. Taxes on gross receipts imposed by Title 58.1, Chapter 26, Article 6, are special revenue taxes and do not exempt a corporation from income tax. Va. Code § 58.1-2660.

C. Insurance companies. Insurance companies and reciprocal or interinsurance exchanges which pay a license tax based on gross premiums, or a premium tax, under Title 58.1, Chapter 25, are exempt from income tax by Va. Code § 58.1-2508.

D. Banks, trust companies and credit unions.

1. State and national banks, banking associations and trust companies organized and conducted as such under Va. Code Title 6.1, Chapter 2, or similar laws of the United States and which pay an annual franchise tax imposed by Va. Code Title 58.1, Chapter 12 are exempt from income tax by Va. Code § 58.1-1202 to the extent that they are subject to the franchise tax.

2. Credit unions organized and conducted as such under Va. Code Title 6.1, Chapter 4, or similar laws of the United States are exempt from income tax.

E. Small business corporations. Electing small business corporations which avail themselves of the election under Subchapter S of the Internal Revenue Code to have the income of the corporation included in the income of the shareholders are exempt from corporate income tax. All such income then becomes income taxable to the shareholder under laws and regulations applicable to individuals. Such corporations are required to file a Virginia return even though exempt from income tax.

F. Charitable corporations. Religious, educational, benevolent and other corporations not organized or conducted for pecuniary profit which by reason of their purposes or activities are exempt from income tax under IRC § 501(c) are exempt from the Virginia income tax to the same extent that they are exempt from federal income tax. Such corporations having unrelated business taxable income as defined in IRC § 512 are subject to the Virginia income tax on such unrelated business taxable income. Corporations claiming to be exempt from the Virginia income tax must substantiate their exempt status under the federal income tax laws. Every corporation is presumed to be taxable unless appropriate substantiation is furnished.

G. Limitation on jurisdiction to tax.

1. Federal law prohibits any state from imposing a net income tax on a foreign corporation having no place of business within the state, whose sole activity within the state is solicitation of orders which are accepted and filled by shipment via common carrier from places outside the state. See Public Law 86-272 (15 USC §§ 381-384) for full details and definitions.

Accordingly, Virginia is prohibited by federal law from imposing a net income tax on certain foreign corporations which have income clearly derived from Virginia sources but have insufficient activity within Virginia. However, any additional business activities in Virginia which exceed the limitation of federal law (Public Law 86-272) may subject the corporation to the imposition of Virginia income tax on all of its income from Virginia sources. Whether or not additional activities are sufficient to subject a foreign corporation to the taxing jurisdiction of Virginia is determined by the facts of each case. Consideration is given to the nature, continuity, frequency, and regularity of the activities in Virginia, compared with the nature, continuity, frequency, and regularity of its activities elsewhere.

2. A corporation is not exempt from Virginia income tax on income earned on a U.S. government military base, National Park, or other federal enclave. 4 USC §§ 104 (Note), 105.

Historical Notes

Derived from VR630-3-401, eff. January 1, 1985.

Statutory Authority

§§ 58.1-203 and 58.1-401 of the Code of Virginia.