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incorporating in Virginia
A company choosing to incorporate in Virginia must le its
articles of incorporation with the State Corporation Commis-
sion and pay the required charter and ling fees. After the ar-
ticles are led, the incorporators or the initial directors, if they
are named in the articles, must hold a meeting to complete the
organization of the corporation.
Virginia’s corporation laws protect directors from liability for
good-faith business decisions, expand managerial discretion,
authorize anti-takeover measures and provide some protec-
tions for minority and dissenting shareholders.
DomEsticating in Virginia
A corporation incorporated under the laws of a jurisdiction
other than Virginia may become a Virginia corporation if
this is allowed under the laws of the foreign jurisdiction. To
become a Virginia corporation, the foreign corporation les
articles of domestication with Virginia articles of incorpo-
ration attached. The company also has to pay the required
charter and ling fees.
authority to transact
businEss in Virginia
Before transacting business in Virginia, a corporation incor-
porated outside Virginia must complete an application for a
Certicate of Authority to Transact Business in Virginia, and
le it with the State Corporation Commission. The applica-
tion must be accompanied by a certied copy of the corpo-
ration’s certicate or articles of incorporation, including all
amendments, recently authenticated by the Secretary of State
or other public ofcial having custody of corporate records in
the state or country under whose laws the corporation is orga-
nized. The corporation pays an entrance fee and a ling fee.
annual rEgistration
The annual registration fee for a stock corporation, either
incorporated in Virginia or in another state, is based on the
number of authorized shares of stock shown in the charter.
The fee is assessed two months prior to the anniversary
month of the corporation’s date of incorporation or initial
ling of its certicate of authority.
Corporations organized without capital stock pay an annual
registration fee unless they incorporated before 1970 and
were not subject to the annual fee at that time.
The annual registration fee is paid to the State Corporation
Commission.
In addition, both foreign and domestic corporations are
required to le an annual report with the State Corporate
Commission.
For additional information about incorporating in Virginia
and the fees associated, about the authority to transact busi-
ness in Virginia, or about annual registration, please contact:
State Corporation Commission
Clerk’s Ofce
Post Ofce Box 1197
Richmond, Virginia 23218-1197
(804) 371-9733
http://www.scc.virginia.gov
Establishing a Business
2011-12
Virginia Guide to
Establishing a Business
6
Establishing a Business
unincorporatED Entity rEgistration
Limited Liability Companies. A limited liability company is
an unincorporated association which may be treated as a part-
nership for tax purposes by providing owners with limited
liability similar to that available to shareholders of a stock
corporation.
A Virginia limited liability company is formed by ling
articles of organization with the State Corporation Commission
and paying a ling fee.
Foreign limited liability companies may register in Virginia
by ling an application for registration along with a copy of
the articles of organization led in the foreign limited liabil-
ity company’s jurisdiction of formation, duly authenticated
by the Secretary of State or other ofcial having custody of
the records in the state or other jurisdiction of its formation.
There is a ling fee for ling an application for registration.
Domestic and foreign limited liability companies pay an an-
nual fee which is assessed on the anniversary date of forma-
tion or registration to do business in Virginia.
Business Trusts. Business trusts are unincorporated busi-
nesses, trusts, or associations governed by a governing in-
strument that provides for the property or activities of the
business trust to be owned, managed or carried on by at least
one trustee for the benet of at least one benecial owner.
The benecial owners are normally entitled to the same
limitation of personal liability as are shareholders of a stock
corporation.
A Virginia business trust is formed by ling articles of
trust with the State Corporation Commission and paying a
ling fee.
Foreign business trusts may register in Virginia by ling an
application for registration along with a copy of the articles
of trust or other constituent documents led in the foreign
business trust’s jurisdiction of formation duly, authenticated
by the Secretary of State or other ofcial having custody of
the business trust records in the state or other jurisdiction
of its formation. There is a ling fee for the application for
registration.
Domestic and foreign business trusts pay an annual fee which
is assessed on July 1 of each year.
Limited Partnerships. A limited partnership is a partner-
ship formed by two or more persons and having at least one
general partner and one limited partner. General partners re-
tain control over the management of the limited partnership
and are liable for all debts. Limited partners invest money
or property in the business and are entitled to share in the
prots. The limited partners’ liability is limited to the extent
of their investment.
A Virginia limited partnership is created by ling a certicate
of limited partnership with the State Corporation Commis-
sion and paying a ling fee.
A foreign limited partnership may register in Virginia by
ling an application for registration along with a copy of
the certicate of limited partnership led in the foreign
limited partnership’s jurisdiction of formation, duly au-
thenticated by the Secretary of State or other ofcial hav-
ing custody of the records in the state or other jurisdiction
of its formation. There is a fee associated with ling an
application for registration.
Domestic and foreign limited partnerships pay an annual fee
which is assessed on July 1 of each year.
General Partnerships. A general partnership (sometimes
simply referred to as “a partnership”) is an association of two
or more persons who join together to carry on a business for
prot. Each partner contributes money, property, labor and/or
skills, and agrees to share in the prots or losses of the busi-
ness. General partnerships are not required to register with
the State Corporation Commission. The Virginia Uniform
Partnership Act permits general partnerships to le certain
types of documents with the Commission.
Domestic and foreign general partnerships are permitted to
le a statement of partnership authority, which is effective
for ve years unless otherwise cancelled. There is a ling fee
for ling a statement of partnership authority.
7
Establishing a Business
Limited Liability Partnerships. Both limited partnerships
and general partnerships may register for status as a limited
liability partnership by ling a statement of registration as a
registered limited liability partnership with the State Corpora-
tion Commission and paying the ling fee.
A foreign registered limited liability partnership may register
with the Commission by ling a statement of registration of a
foreign limited liability partnership along with a current cer-
ticate of status indicating the foreign entity’s status as a lim-
ited liability partnership, executed by the Secretary of State
or other ofcial having custody of the records in the state or
other jurisdiction of its formation. There is a ling fee for the
foreign registration.
Both foreign and domestic limited liability partnerships le
an annual continuation report and pay an annual fee which is
assessed July 1 of each year.
Sole Proprietors. Sole proprietors are not required to le with
the State Corporation Commission.
For additional information, please contact:
State Corporation Commission
Clerk’s Ofce
Post Ofce Box 1197
Richmond, VA 23218-1197
(804) 371-9733
http://www.scc.virginia.gov
assumED (“traDE”) namEs
Any person, partnership, limited liability company or cor-
poration may transact business under a name that is not his,
her or its real name. To do so, an assumed or ctitious name
certicate must be led with the clerk of circuit court of the
county or city where the business will be transacted. If a
corporation, limited liability company or limited partnership
les an assumed name certicate, an attested copy must also
be led with the State Corporation Commission. Minor ling
fees are associated with the certicate and attested copy.
For additional information, please contact the circuit court of
the jurisdiction(s) in which the business operates.
sEcurity rEgistration
Securities, and persons offering or selling securities, must
be registered with the State Corporation Commission (SCC)
or the securities or transactions must be exempt under the
Virginia Securities Act before they may be offered or sold
in Virginia. Investment advisers and investment adviser
representatives must also be registered with the SCC before
transacting business in Virginia.
franchisE rEgistration
Franchises must be registered with the State Corporation
Commission before they may be offered or sold.
traDEmark rEgistration
Any person who owns and uses a trademark in Virginia may
le an application for registration of the trademark with the
State Corporation Commission (SCC). Application forms are
available from the SCC’s Division of Securities and Retail
Franchising. There is a nonrefundable application fee.
For rules, forms, and any additional information regarding
security, franchise or trademark registration, please contact:
State Corporation Commission
Division of Securities and Retail Franchising
Post Ofce Box 1197
Richmond, Virginia 23218-1197
(804) 371-9051
http://www.scc.virginia.gov
2011-12
Virginia Guide to
Establishing a Business
8
businEss taxEs
Virginia has a fair tax structure, with all companies paying the
same taxes regardless of location of incorporation. The state
has not raised its corporate income tax rate since 1972. Prior
to 1972, the income tax rate remained the same for 25 years.
In Virginia, items taxed at the state level are not taxed at the
local level. The exception is the sales and use tax, which is
levied by both state and local governments.
Virginia’s major state taxes include the corporate income tax
and the sales and use tax. The major local taxes include the
real estate tax, the machinery and tools tax and the tangible
personal property tax. Many communities levy a modest
consumer’s tax on utility purchases.
Virginia differs from most states in that its counties and cities
are separate taxing entities. A company pays either county or
city taxes depending on its location. If it is located within the
corporate limits of a town, it is subject to town taxes in addi-
tion to county levies.
For more detailed information about Virginia’s local taxes,
consult The Virginia Guide to Local Taxes on Business at
http://www.virginiaallies.org/assets/files/publications/
local_taxes_guide.pdf.
rEgistration
All companies doing business in Virginia must register with
the Virginia Department of Taxation for all taxes that may
apply to the operation of the business. All corporations and
partnerships must obtain an Employer Identication Number
(EIN) from the Internal Revenue Service to use as a taxpayer
identication number. Sole proprietors also must obtain an
EIN if they pay wages to one or more employees or if they
le an excise tax return.
corporatE incomE tax
All corporations registered with the State Corporation Com-
mission must le a corporate income tax return with the Vir-
ginia Department of Taxation. The corporate income tax rate
is equal to 6 percent of a company’s federal taxable income,
with modications if applicable. The major modications in-
volve adding back as income any state and local income taxes
that may have been deducted when computing the federal in-
come tax, and subtracting certain items included in federal
taxable income such as certain foreign source income and
dividends from companies in which the taxpayer owns 50
percent or more of the voting stock. The federal income tax
is not deductible, and Virginia fully conforms to the federal
Modied Accelerated Cost Recovery System (MACRS), ex-
cept for the 30 percent bonus depreciation deduction.
Corporations that are not organized or conducted for pecu-
niary prot and that are exempt from income taxes under
Section 501(c) of the Internal Revenue Code are taxed on
unrelated business taxable income.
A corporation’s income tax is calculated based on its activi-
ties in Virginia and in other states. If the entire business of
a corporation is transacted or conducted in Virginia, the tax
rate is equal to 6 percent of the entire income with minor
modications. If the corporation participates in multistate
activities and its income is taxable by both Virginia and other
states, Virginia permits the corporation to allocate and ap-
portion income among Virginia and other states in order to
determine equitable tax.
Income that is allocable is assigned to the state where the
taxpaying corporation’s central operations are located—also
known as the corporation’s commercial domicile. If the al-
locable income is assigned to Virginia, it is subject to the
state corporate income tax. Virginia generally includes only
dividends in this allocable portion—dividends received from
companies in which the taxpayer owns less than 50 percent
of the voting stock. All other income is considered apportion-
able. To further enhance Virginia’s favorable tax treatment,
the corporate apportionment formula was amended during
the 2009 General Assembly session to allow manufactur-
ing companies to elect to use a single factor apportionment
based on sales to determine their Virginia taxable income.
This modication will be phased in as follows: for taxable
years beginning on or after July 1, 2011, but before July
1, 2013, qualifying corporations may elect to use a triple-
weighted sales factor; for taxable years beginning on or after
July 1, 2013, but before July 1, 2014, a quadruple-weighted
sales factor may be used; and for taxable years beginning on
or after July 1, 2014, and thereafter, the single sales factor
method is available.
For companies not electing the single factor apportionment,
the sales factor in the state’s income apportionment formula
is double-weighted.
The apportionment is based on a three-factor formula. Under
this formula, the sales factor is weighted 50 percent and the
State & Local Taxes
9
payroll and property factors are 25 percent each in determin-
ing the overall corporate income apportionment factor. In
general, double weighting the sales factor benets corpora-
tions with signicant Virginia property and payroll.
• The property factor is computed by dividing the average
value of real and tangible personal property owned or
rented and used by the corporation in Virginia during
the tax period by the average value of real and tangible
personal property owned or rented and used by the cor-
poration everywhere. Property owned by the corporation
is valued at its original cost plus the cost of additions
and improvements. Property rented by the corporation is
valued at eight times the net annual rental rate. The aver-
age value of property is determined either by averaging
the value at the beginning and end of the tax period or by
averaging monthly values during the tax period.
• The payroll factor is computed by dividing the total pay-
roll of the corporation in Virginia during the tax period
by the total payroll of the corporation everywhere.
• The sales factor is computed by dividing the sales of the
corporation in Virginia during the tax period by the total
sales of the corporation everywhere. Virginia sales are
dened as sales by the corporation that physically end
up in Virginia, i.e., those sales with a true destination in
Virginia, regardless of whether or not the product origi-
nated in Virginia.
The ratios of the three factors are averaged, and the corpora-
tion’s apportionable income is multiplied by this percentage
to obtain the amount of apportionable income taxable in Vir-
ginia. The income apportioned to Virginia is then added to
the income allocated to Virginia, and a six percent tax is paid
on this amount.
To learn more about Virginia’s corporate income tax, please
contact:
Virginia Department of Taxation
Post Ofce Box 1115
Richmond, Virginia 23218-1115
(804) 367-8037
http://www.tax.virginia.gov
Virginia allows the following credits against the corporate
income tax:
Major Business Facility Job Tax Credit. Credits for new
job creation are available statewide for qualifying compa-
nies. Companies reaching certain employment thresholds
will receive a $1,000 credit for each qualifying job in excess
of the threshold. The credit amount is taken in equal install-
ments over two years (i.e., $500 per year) and may be used
to eliminate the entire state corporate income tax liability.
Unused credits may be carried forward for up to ten years.
The employment threshold for companies locating in enter-
prise zones or economically distressed areas is 25 net, new,
full-time jobs. For all other areas of the state, the threshold
is 50 jobs. Credits are available for taxable years before
January 1, 2020.
Day Care Investment Tax Credit. Businesses may claim a
tax credit equal to 25 percent of all expenditures incurred
by a business for planning, site preparation, construction,
renovation, acquisition of facilities or permanent equipment
installed for the purpose of providing day care to be used
primarily by the children of the business’ employees. The
maximum credit allowed to any one taxpayer is $25,000. Any
credit not usable for the taxable year may be carried over to
the extent usable for the next three years. The Virginia Tax
Commissioner at the Department of Taxation approves ap-
plications for this program.
Worker Retraining Tax Credit. Virginia employers are eli-
gible to receive an income tax credit equal to 30 percent of
all expenditures made by the employer for eligible worker
retraining. The credit has a statewide spending cap of $2.5
million in any taxable year. Eligible worker retraining con-
sists of courses at Virginia community colleges and private
schools certied by the Department of Business Assistance,
or retraining programs through apprenticeship agreements
approved by the Virginia Apprenticeship Council.
Recycling Equipment Tax Credit. An income tax credit is
available to manufacturers for the purchase of certied ma-
chinery and equipment used for processing recyclable ma-
terials in taxable years before January 1, 2015. The credit is
equal to 10 percent of the original total capitalized cost of
the equipment. In any taxable year, the amount of credit al-
lowed cannot exceed 40 percent of the company’s Virginia
income tax liability before the credit. The unused amount of
the credit may be carried over for ten years.
Eligible equipment is certied by the Virginia Department of
Environmental Quality as integral to the recycling process.
State & Local Taxes
2011-12
Virginia Guide to
Establishing a Business
10
statE businEss taxEs imposED in liEu of
corporatE incomE tax
Public service corporations (other than electricity suppliers,
natural gas suppliers, pipeline distribution companies, rail-
roads and telecommunications companies) are subject to a
gross receipts tax.
Insurance companies are subject to a license tax on gross
premiums.
State and national banks are subject to a franchise tax based
on capital.
Electing small business corporations (S corporations) are re-
quired to le a Virginia Small Business Corporation Return
of Income even though they are exempt from the Virginia
corporate income tax. Individual shareholders report their in-
come on their personal income tax returns.
To the extent that limited liability companies are treated as
partnerships for federal income tax purposes, they are simi-
larly treated for Virginia income tax purposes. Members
holding interest in the company must report any income on
their personal income tax returns.
Partnerships are exempt from the Virginia corporate income
tax. Individual partners report their income on their person-
al income tax return. Effective for taxable years beginning
on and after January 1, 2004, partnerships and other pass-
through entities are required to le information returns with
the Department of Taxation.
Sole proprietors must report their business income on their
personal income tax returns.
For additional information, please contact:
Virginia Department of Taxation
Ofce of Customer Services
Post Ofce Box 1115
Richmond, Virginia 23218-1115
(804) 367-8037
http://www.tax.virginia.gov
salEs anD usE tax
The sales and use tax is imposed at the state and local lev-
els in Virginia. The combined state and local Virginia Retail
Sales and Use Tax rate is 5.0 percent (4.0 percent state and
1.0 percent local). A seller is subject to a sales tax imposed
on gross receipts derived from retail sales or leases of taxable
tangible personal property unless the retail sales or leases are
specically exempt by law. When a seller does not collect
the sales tax from the purchaser, the purchaser is required to
pay a use tax on the purchase unless the use of the property
is exempt.
Some important exemptions for manufacturers, distributors
and other businesses include:
• Industrial materials that either enter into the production
of or become a component part of the nished product
• Industrial materials that are coated upon or impregnated
into the product at any stage of its manufacture or pro-
cessing
• Machinery, tools, repair parts, fuel, power, energy or
supplies used directly in manufacturing or processing
products for sale or resale
• Materials, containers, labels, sacks, cans, boxes, drums
or bags for packaging tangible personal property for
shipment or sale
• Distributors do not pay the tax on items purchased for
resale
• Tangible personal property delivered outside the
Commonwealth for use or consumption outside the
Commonwealth
• Tangible personal property delivered to a factor or agent
for foreign export
• Tangible personal property purchased for use directly
and exclusively in basic research or research and devel-
opment in the experimental or laboratory sense
• Charges for planning, creating or placing advertising
in newspapers, magazines, billboards, broadcasting
or other media, including providing concept, writing,
graphic design, mechanical art, photography and pro-
duction supervision
• Tangible personal property used directly to produce any
publication issued daily or regularly at intervals not ex-
ceeding three months
• Any publication issued daily or regularly at average
intervals not exceeding three months and advertis-
State & Local Taxes
11
ing inserts or supplements and other printed matter
distributed with or as part of a newspaper or other non-
taxable publication (except that newsstand sales of the
same are taxable)
• Custom computer software and separately stated labor
charges for modifying prewritten computer programs
• Broadcasting equipment, commercial radio and
television towers and cable television systems
• Gas, electricity or water delivered through mains, lines
or pipes
• Any fuel used directly in manufacturing, processing,
rening or converting in an industrial sense, as well as
any fuel used directly and exclusively in basic research
or research and development in the experimental or
laboratory sense
• Certied pollution control equipment and facilities used
primarily for the purpose of abating or preventing air or
water pollution
• Purchases used directly and exclusively in activities
performed in cooperation with the Virginia Commercial
Space Flight Authority
intangiblE pErsonal propErty tax
Intangible personal property is reserved for state taxation. It
includes stocks, bonds, money and certain items that usually
are not dened as intangible. In 1984, the Virginia General
Assembly exempted intangible personal property from taxa-
tion by making the tax rate zero. Therefore, the following
items are not taxed at either the state or local level.
• Inventory, including all materials used in a business
(except inventory of merchants). The capital of mer-
chants, however, is taxed at the local level.
• Tangible personal property used in manufacturing,
mining, radio or television broadcasting, dairy, dry
cleaning or laundry businesses (except machinery and
tools, motor vehicles and delivery equipment)
• Ofce furniture, xtures, computer equipment and
aircraft of a manufacturer’s corporate headquarters,
regional ofces or research and development facilities
located in Virginia, even if their entire manufacturing
operations are conducted outside of Virginia
• Computer application software (dened as computer
instructions, in any form, designed to be read by a com-
puter and to enable it to perform specic operations with
data or information stored by the computer)
• Money
• Bonds, notes and other evidences of debts, demands and
claims
• Shares of stock
• Accounts receivable
• Merchandise within a Virginia foreign trade zone
• Capital used in the commercial shing business to har-
vest or catch sh. Fishing vessels, however, are classi-
ed as tangible personal property.
State & Local Taxes
2011-12
Virginia Guide to
Establishing a Business
12
othEr statE taxEs
The following business taxes also may apply:
• Aircraft and Watercraft Sales and Use Tax
• Beer and Wine Cooler Excise Tax
• Cigarette Tax
• Forest Products Tax
• Litter Tax
• Miscellaneous Commodities Taxes
• Soft Drink Excise Tax
• Tire Tax
• Wine Liter Tax
Companies may contact the Virginia Department of Taxation
for additional information about state taxes:
Virginia Department of Taxation
Ofce of Customer Services
Post Ofce Box 1115
Richmond, Virginia 23218-1115
(804) 367-8037
http://www.tax.virginia.gov
rEal EstatE tax
Real estate in Virginia is assessed at the local level based
on 100 percent of fair market value. Because of rising real
estate values and periodic reassessments by localities, actual
assessment ratios usually are lower than 100 percent.
The average effective tax rate on real estate (assessment ratio
times nominal tax rate) ranged from a low of $0.28 per $100
of fair market value in a rural county in 2010 to a high of
$1.65 per $100 in a large Virginia city. The average effective
tax rate for all cities and counties in the state was $0.66 per
$100 in 2010.
Real Estate Tax Exemptions. Localities may offer the fol-
lowing real estate tax exemptions:
• Localities have the option of exempting or partially ex-
empting certied pollution control facilities, certied
solar energy facilities, and energy-efcient buildings
from real property taxes.
• Localities also may give a partial exemption from taxa-
tion for up to 15 years for qualifying real estate that has
been substantially rehabilitated for commercial or in-
dustrial use. To qualify, a structure has to be at least 20
years of age (or 15 years of age in an enterprise zone).
tangiblE pErsonal propErty tax
Tangible personal property is taxed at the local level in
Virginia. The tax is based on a percentage or percentages
of original cost. Tangible personal property includes, but is
not limited to, companies’ machinery and equipment; ofce
equipment, furniture and xtures of nonmanufacturing busi-
nesses; trucks and automobiles; equipment used in research
and development; certain computer hardware; and all tangi-
ble property used in a business unless specically exempted.
Certain machinery and tools are subject to a special machin-
ery and tools tax and are not subject to the general personal
property tax.
As described in greater detail on page 11, the tangible
personal property tax does not apply to items classied as
intangible personal property at the state level.
Several categories of tangible personal property are
segregated for taxation at assessment ratios and rates that
may be below that of other tangible personal property.
Computer Equipment. Localities may establish a separate
class of tangible personal property for computer equipment
used in businesses and tax it differently from other tangible
personal property.
Aircraft. Localities may establish a separate class of tangible
personal property for aircraft and ight simulators and levy
a tax on it at a rate equal to or less than the rate on other tan-
gible personal property.
Heavy Construction Machinery. Localities also may estab-
lish a separate class of tangible personal property for heavy
construction machinery and levy a tax on it at a rate equal to
or less than the tax rate on other tangible personal property.
Research and Development Businesses. Localities may sep-
arately classify tangible personal property used in a research
and development business and assess and tax it at a level not
to exceed that applicable to machinery and tools.
Biotechnology Businesses. Localities may separately clas-
sify equipment used for certain research, development, pro-
duction or provision of biotechnology for the purpose of
developing or providing products or processes for specic
commercial or public purposes and assess and tax it at a level
not to exceed that applicable to machinery and tools.
Motor Carriers. Localities may establish a separate class of
tangible personal property for interstate motor carrier vehi-
cles, trailers and semi-trailers with a gross vehicle weight of
10,000 pounds or more, and levy a tax on it at a rate no higher
than the locality taxes machinery and tools.
State & Local Taxes
13
Energy Generating and Cogeneration Equipment. Locali-
ties may separately classify generating equipment purchased
to convert the energy source of a manufacturing plant from
oil or natural gas to an alternative energy source and cogen-
eration equipment purchased to increase energy efciency,
and tax them at a different rate from other tangible personal
property, provided the assessment ratio and the rate of tax
do not exceed that applicable to machinery and tools. Such
generating and cogeneration equipment shall include that
of rms engaged in the business of generating electricity or
steam or both.
Machinery and Tools Used in Semiconductor Manufacturing.
These may be separately classied for local taxation. Locali-
ties may tax this property at rates and assessment ratios lower
than other machinery and tools.
Trucks and Automobiles. Localities assess trucks and auto-
mobiles of manufacturing and nonmanufacturing companies
as tangible personal property.
Automobiles that are registered with the Virginia Department
of Motor Vehicles are valued by means of a recognized pric-
ing guide. If the model and year of the vehicle are not listed
in the pricing guide, the value is based on a percentage or
percentages of original cost. The commissioner of revenue
may select another method to establish the fair market value
of the automobile if the percentage or percentages of original
cost do not accurately reect the fair market value.
Motor vehicles and delivery equipment that are not registered
with the Department of Motor Vehicles are taxed as machin-
ery and tools.
Machinery and Tools. Machinery and tools used in
manufacturing, mining, processing or reprocessing, radio
or television broadcasting and dry cleaning or laundry busi-
nesses are segregated as a separate class of tangible personal
property and taxed at the local level. Businesses subject to the
machinery and tools tax are not subject to tangible personal
property tax on ofce equipment, furniture or xtures.
Machinery and tools are valued by means of depreciated
cost or based on a percentage or percentages of original to-
tal capitalized cost excluding capitalized interest. The tax
rate imposed on machinery and tools cannot exceed the rate
imposed on the general class of tangible personal property.
Tangible Personal Property Tax Exemptions. Localities
have the option of exempting or partially exempting certied
pollution control equipment; certied solar energy equipment
or devices; and certied recycling equipment from personal
property tax.
For more detailed information about local tax exemptions,
consult A Virginia Guide to Local Taxes on Business at
http://www.virginiaallies.org/assets/les/publications/local_
taxes_guide.pdf.
State & Local Taxes
2011-12
Virginia Guide to
Establishing a Business
14
mErchants’ capital tax
Localities may impose a tax on the capital of merchants.
Capital is dened as inventory of stock on hand, certain daily
rental property owned by persons engaged in the short-term
rental business, tangible personal property required to be
licensed or registered by the Department of Motor Vehicles,
the Department of Game and Inland Fisheries or the Depart-
ment of Aviation, and all other taxable personal property.
Money and tangible personal property not offered for sale
as merchandise are not considered capital. Many communi-
ties only impose this tax on inventory. Forty-ve of Virgin-
ia’s 95 counties impose the merchants’ capital tax. None of
Virginia’s cities impose this tax.
Goods imported in foreign commerce are not subject to the
merchants’ capital tax until they lose their status as imports.
This occurs when the package in which they were shipped is
opened or when the property has reached its second place of
rest or storage after being unloaded or sold.
licEnsE tax
Localities may impose a license tax for the privilege of
doing business on all businesses, professions and occupa-
tions within the jurisdiction provided that the locality’s or-
dinances provide for the imposition of the tax. Examples of
such businesses include retail rms, wholesale rms, ware-
housing and distribution rms, personal and repair services
rms, professional services rms, contractors, research and
development rms and many other businesses and occu-
pations. The license tax is usually based on gross receipts
generated during the previous tax year; however, it is im-
posed on gross purchases of sales at wholesale, and in some
localities is imposed as a fee or at a at rate. If a town and
county both impose a license tax, a company located in
a town within such a county pays the tax only to the town
unless the governing body of the town votes to permit the
additional collection of a county license tax. Forty-two of
Virginia’s 95 counties and all 39 Virginia cities impose a li-
cense tax.
For more detailed information on license taxes, consult A Vir-
ginia Guide to Local Taxes on Business at http://www.virgin-
iaallies.org/assets/les/publications/local_taxes_guide.pdf.
utility tax
All cities, counties and towns have the authority to levy a
tax on the utility bills of business rms, e.g., electric, gas,
water, telephone and sewer bills. Most of the localities that
currently impose the tax have a modest ceiling on the amount
of tax that can be collected. If a town and county charge util-
ity taxes, a company pays the utility tax only to the town.
For more detailed information on utility taxes, consult A Vir-
ginia Guide to Local Taxes on Business at http://www.virgin-
iaallies.org/assets/les/publications/local_taxes_guide.pdf.
pErsonal taxEs
Virginia residents pay state individual income and estate
taxes and local real estate, tangible personal property, utility
and excise taxes. They also pay a combined state and local
sales and use tax.
Individual Income Tax. The individual income tax rate is
two percent on the rst $3,000 of Virginia taxable income,
three percent on the next $2,000, ve percent on the next
$12,000, and 5.75 percent on amounts over $17,000.
Virginia’s taxable income is based on an individual’s federal
adjusted gross income with modications, if applicable, and
with subtractions for personal exemptions and standard or
itemized deductions. If taxpayers use itemized deductions on
their federal return, they must use them on their state return.
If they use standard deductions for federal purposes, they
must use them for state purposes.
Sales and Use Tax. The combined state and local sales and
use tax rate is 5.0 percent (4.0 percent state and 1.0 percent
local).
Real Estate Tax. The local real estate tax is imposed on land,
minerals, standing timber trees, buildings and improvements.
The nominal tax rates and assessment ratios vary by locality.
Tangible Personal Property Tax. The local tangible personal
property tax applies primarily to motor vehicles, aircraft,
mobile homes, campers, trailers, boats and other watercraft,
farm machinery and livestock. Many localities, however,
either exempt farm machinery and/or livestock from taxa-
tion or tax these items at a lower tax rate than the rate on
other tangible personal property. Nominal tax rates and the
percentage of tangible personal property that is taxable vary
by locality.
State & Local Taxes
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