HB 1743 (Watts), which deals with the ability of businesses to deduct gross receipts attributable to business conducted in another state or foreign country from taxation under the BPOL tax, emerged from conference late last week and was approved by the General Assembly in a revised form that directs the Department of Taxation to convene a workgroup on the issue. The bill was amended in the Senate earlier in the session to convert the bill to a study directive, and VACo preferred this approach to the version of the bill that passed the House, as it would allow the implications of the proposed policy change to be fully vetted.
Under current law, receipts attributable to business conducted in another state or foreign country in which the taxpayer is liable for an income tax or other tax based on income are deductible. As passed by the House, HB 1743 would have expanded this provision to cover receipts from other states or foreign countries with a net income tax or other tax based upon gross or net income or receipts. This version of the bill had a delayed effective date of July 1, 2026, and required the Department of Taxation to convene a working group to review the current methodology of the existing deduction and potential revenue impacts of the expanded deduction, among other elements.
Expansion of the ability of businesses to deduct gross receipts attributable to business conducted outside of Virginia is expected to affect local revenues, with a potentially significant impact in some jurisdictions, although the full scope is difficult to quantify. Allowing the deductibility of gross receipts generated in states with other types of taxes also would add complexity to tax administration, since states have different rules and thresholds for filing. Given the unknown revenue impact and administrative complexity involved in the bill, and the compressed timeline of the short session, VACo strongly encouraged a more thorough review of its implications in discussions with the patron and proponents of the legislation throughout the session.
As passed, the bill now is limited to a directive to the Department of Taxation to convene the working group, which would include participation by VACo, VML, the Commissioners of the Revenue Association of Virginia, the Virginia Chamber of Commerce, and other business representatives. The workgroup is required to review the methodology of the existing deduction, any potential impact on local government revenue as a result of expanding the deduction and options to phase in any such impact, potential administrative complexities and benefits to taxpayers, and the support structure needed for localities to verify deductions. A report is due October 1.
VACo Contact: Katie Boyle