News and Insights

Virginia Court Limits Addback Exception in Kohl’s Reissued Decision

Tax Development Apr 06, 2018

The Virginia Supreme Court reissued its decision in Kohl’s Department Stores, Inc. v. Virginia Department of Taxation,1 limiting the “subject to tax” exception to Virginia’s intangible expense addback by deciding the state’s ambiguity in favor of the state, rather than the taxpayer.

The Court issued its original decision in Kohl’s on August 31, 2017, finding that a taxpayer could only claim the “subject to tax” exception to the intangible expense addback statute to the extent that tax was actually paid to other states on the intangible payment made to a related member. The Court also held that the “subject to tax” exception applies “to the extent that the royalties were actually taxed by Separate Return States, Combined Return States, or Addback States,” thus denying the Department of Taxation’s (“the Department’s”) argument that the exception only applied if the related member included the intangible income on a separate company return. In reaching this original decision, the Court relied on the Department’s interpretation of the “subject to tax” exception to resolve the ambiguity. 

The taxpayer subsequently filed a petition for rehearing, claiming that the Court erred in deferring to the Department’s position because Virginia statute prohibits courts from giving weight to the Department’s interpretation if the position has not been issued as a regulation.  The Court granted the rehearing based on the improper reliance on the Department’s interpretation in the earlier decision.

This error was corrected in the revised decision when the Court omitted the language from the original decision deferring to the Department’s interpretation. In its revised analysis, however, the Court reached the same conclusion that the “subject to tax” exception is limited to the portion of the intangible expense actually taxed in the other state. Again, the Court disregarded the concept of statutory construction that an ambiguity in a statute be resolved in favor of the taxpayer. The revised decision, however, leaves intact the concession to taxpayers allowing the exception for intangible expenses paid to related members in combined reporting states. 

Interestingly, in 2014 the Virginia Legislature retroactively revised the statute to more narrowly construe the exception so that the exception only applies to the portion of intangible income received by a related member that has been taxed in another state. This case did not address the issue of whether the retroactive amendment was valid. The ten-year period of retroactivity far exceeds the one-year period deemed acceptable in United States v. Carlton,2 the last word on retroactivity issued by the United States Supreme Court in 1994.

12018 STT 58-24 (March 22, 2018).

2 512 U.S. 26 (1994).


Mary Bernard