2016 Va. Cir. LEXIS 18
Richmond County Cir. Ct.2016Background
- Kohl’s Corporation (WI) paid large royalties (~$442M for 2009; ~$482M for 2010) to related entity Kohl’s Illinois for use of intellectual property. Kohl’s Illinois did not operate in Virginia.
- On federal returns Kohl’s deducted those royalties; Kohl’s Illinois included the royalties in its federal income.
- For Virginia corporate income tax (CIT) purposes, Kohl’s did not add back the royalties for 2009 claiming the §58.1-402(B)(8)(a) "subject to tax" safe-harbor; for 2010 Kohl’s added back a portion and filed a refund claim.
- Virginia audited Kohl’s, disallowed the safe-harbor in part, and issued assessments for both years; Kohl’s administratively protested and then sought judicial review.
- The sole legal question agreed by the parties: whether the royalties qualify for the safe-harbor in Va. Code §58.1-402(B)(8)(a)(1) — i.e., whether the related-member income was "subject to a tax based on or measured by net income or capital imposed by... another state."
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether royalties paid to a related-member qualify for the §58.1-402(B)(8)(a)(1) safe-harbor so Kohl’s need not add them back to Virginia taxable income | Kohl’s: If the related member included the receipts in other states' taxable income, those receipts are "subject to a tax... in another state" and thus exempt Kohl’s from the add-back, even if not actually taxed there | Dept: The statute requires that the related-member income actually be taxed (the tax must be imposed) in another state; mere inclusion or potential subjectivity is insufficient | Court: The safe-harbor applies only where the related-member income was actually subject to a tax imposed by another state; portions not actually taxed must be added back; defendant's motion granted |
Key Cases Cited
- Carwile v. Richmond Newspapers, 196 Va. 1 (standard for summary judgment on pure legal questions)
- Northern Virginia Real Estate v. Martins, 283 Va. 86 (statutory interpretation as a question of law)
- LZM, Inc. v. Virginia Dep’t of Taxation, 269 Va. 105 (burden on taxpayer claiming tax exemption)
- Commonwealth v. Manzer, 207 Va. 996 (exemptions strictly construed against taxpayer)
- Shelor Motor Co. v. Miller, 261 Va. 473 (taxing statutes construed for taxpayer when imposing tax)
- Surtees v. VFJ Ventures, Inc., 8 So. 3d 950 (discussing add-back/safe-harbor principles)