Possible legislative proposals of Virginia Department of Taxation: September 22, 2003.

On September 22, 2003, the Virginia Chapter of Tax Executives Institute sent the following letter to the Virginia Department of Taxation. Virginia's Commissioner requested input from TEI in respect of five legislative proposals that the Department would like to have passed during the next session of Virginia's General Assembly. A response was prepared by the Virginia Chapter, whose president is Winfield L. Ryan of Dominion Resources Services, Inc., and issued under the aegis of the Institute's State and Local Tax Committee, whose chair is Barbara Barton of Electronic Data Systems Corp.

I am writing in response to your August 15, 2003, request for comments on five legislative proposals the Department of Taxation is considering for the General Assembly's 2004 session. On behalf of the Virginia Chapter of Tax Executives Institute (TEI), I thank you and your colleagues in the Department for involving TEI in this process.

TEI was established in 1944 to serve the professional needs of business tax professionals. Today, the Institute has 53 chapters in the United States, Canada, and Europe, including one in Virginia. TEI's more than 5,300 members are accountants, attorneys, and other business professionals who work for 2,800 of the leading companies in North America and Europe. TEI has more than 140 members in the Virginia Chapter, as well as many non-Virginia based members whose companies have significant operations and sales within the Commonwealth. As a professional organization, the Institute is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the costs and burdens of administration and compliance to the benefit of taxpayers and government alike.

Our comments on each proposal are set forth below.

Pass Through Entities Draft Legislation (F-TAX-1)

This proposal would require business entities not subject to income tax at the federal or state level ("pass-through" entities such as partnerships, limited liability companies, and Subchapter S-Corporations) to file annual information returns with the Department if they do business in Virginia or have Virginia source income.

Recognizing the increasing prevalence and use of pass-through entities, TEI supports the Department's efforts to enhance the administration of state taxes in respect of such entities. We do this, moreover, even though the proposed legislation would add additional burdens of preparation and processing of additional returns on both businesses and the Department. TEI is able to support the proposal because of three key features that are designed to minimize this burden:

* Owners, in their separate or individual capacities, rather than the entity, are liable for Virginia income taxes--with one notable exception discussed below ([section] 58.1-390.2).

* To the extent possible, owners are able to rely on computations and characterizations, for federal income tax purposes, of the owners' distributive shares of income, gain, loss or deduction in determining Virginia taxable income ([section] 58.1-391).

* Pass-through entities have the option of requesting permission to file a statement of combined pass-though entity income attributable to nonresident owners. A combined nonresident return would obviate individual returns on the part of each nonresident owner ([section] 58.1-395).

Regarding the combined non-resident return provision, TEI recommends striking two sentences on page 6, lines 130-132: "The application must state the reasons for seeking such permission. The Tax Commissioner, in his sole discretion, may, for good cause shown, grant permission to file a combined nonresident return upon such terms as he may determine." In lieu of these sentences, which are unnecessarily restrictive for a process designed to ease administration, TEI suggests adopting the following: "The Tax Commissioner may prescribe the manner and processing in respect of this application, and may grant permission to file a combined nonresident return."

Rulings of the Tax Commissioner Draft Legislation (F-TAX-2)

This proposal would place rulings of the Tax Commissioner on an equal level with regulations in any proceeding relating to interpretation and enforcement of the tax laws. This status would expire upon the earlier of the promulgation of regulations setting forth "the policy articulated in the ruling" or two years, after which the ruling would only be accorded judicial notice. Currently, rulings of the Tax Commissioner are accorded judicial notice, whereas regulations are accorded significant deference if not unreasonable or plainly inconsistent.

TEI strongly objects to this proposal, which is at odds with current Virginia law and the treatment afforded agency pronouncements at the federal level. Virginia law specifically provides that the Tax Commissioner's prior rulings are accorded judicial notice, rather than entitled to being sustained "unless unreasonable or plainly inconsistent" with applicable law, which is the standard for regulations (Code of Virginia [section] 58.1-205). The Supreme Court of Virginia has confirmed this interpretation for rulings and regulations. See Chesapeake Hospital Authority v. Commonwealth of Virginia, 262 Va. 551 (2001).

TEI believes that the current Virginia law and Supreme Court interpretations reflect sound public policy. It is appropriate to distinguish between regulations, which have been vetted through a formal notice-and-comment process designed to provide due process for all concerned stakeholders, and a Tax Commissioner's ruling, which is merely the Department's view of the law.

Rulings by the Virginia Tax Commissioner are the state-level equivalent to revenue rulings or private letter rulings issued by the Internal Revenue Service. Both federal and state rulings are issued by the administering agency (typically the IRS or state tax department) and reflect the agency's opinion or interpretation of the law and other precedents. The Fourth Circuit noted in Oxford Orphanage, Inc. v. United States, 775 F.2d 570 (4th Cir. 1985), that revenue rulings "do not have the force of law and are merely the contention of one of the parties to the litigation." By contrast, regulations are accorded deference. See Nat'l Muffler Dealers Ass'n, Inc. v. United States, 440 U.S. 472 (1979).

For the above reasons, TEI believes that the current law is already in accord with sound administrative practice and the proposed change would not be in the best interest of either taxpayers or tax administrators.

Qui Tam Draft Legislation (F-TAX-3)

This proposal would expand the current exclusion of claims, records, or statements relating to income taxation from the civil penalty for false claims (Code of Virginia [section] 8.01-216.3) to encompass claims, records, or statements relating to state and local taxes in general. TEI supports this proposal.

Withholding and Sales and Use Tax Fraud Penalty Draft Legislation (F-TAX-4)

This proposal would increase the criminal fraud penalties for withholding and sales and use taxes from a Class 1 misdemeanor to a Class 6 felony. This increase would create consistency in the fraud penalties for the major taxes imposed in Virginia (individual and corporate income tax criminal fraud penalties are already Class 6 felonies). Because strong enforcement efforts against the conduct sanctioned by these statutes are essential to building a culture of compliance, TEI supports this proposal.

Electronic Filing Requirements for Tax Preparers Draft Legislation (F-TAX-5)

This proposal would require all income tax preparers who prepared more than 100 individual income tax returns for a taxable year beginning on or after January 1, 2003, to file electronically such returns prepared by them for all subsequent tax years. Inasmuch as this proposal only relates to individual income tax returns, TEI offers no comments.

Conclusion

We greatly appreciate the opportunity to review and comment on the proposals. Please let me know if you have any questions regarding our comments or would like to discuss any of them in more detail. I can be reached by telephone at 804.771.3404 or email at [e-mail].