The Virginia Department of Taxation has released its final guidelines related to debt buyer apportionment, which requires debt buyers, regardless of where they are based, to apportion their income from the collection of debt to Virginia based on a single sales factor.
The new guidelines go into effect on February 6.
Under the law, a debt buyer is defined as an entity and its affiliated entities that purchase nonperforming loans from unaffiliated commercial entities that are in default for at least 120 days or in bankruptcy proceedings. The state’s definition of debt buyer does not include an entity that provides debt collection services for unaffiliated entities.
For companies that buy debt but also conduct other non-debt buying businesses, they must keep separate accounting of their operations so that the apportionment can be determined for only the debt buying components of the business. The apportionment must be applied when at least 50% of a company’s revenues are derived from the debt buying side of the business. The state offered the following example:
During Taxable Year 2019, Taxpayer A earned $900,000 of revenue by collecting on nonperforming loans that it had purchased from unaffiliated commercial entities. At the time that these loans were purchased, they were in default for at least 120 days. Taxpayer A also earned $80,000 of revenue from service fees and $20,000 in interest income. Because a majority of Taxpayer A’s revenues for Taxable Year 2019 come from collecting on eligible nonperforming loans, Taxpayer A’s debt buying business is a majority of its business. As a result, Taxpayer A is considered a debt buyer that is required to use Debt Buyer Apportionment for Taxable Year 2019.
Debt buyers must determine how much of their revenue is derived from individuals in the state of Virginia to determine the size of their apportionments.