Virginia Ruled That Raw Materials Stored in State are Excluded from the Property Factor

March 30, 2022

At a glance

  • The main takeaway: A taxpayer and the state of Virginia debated over the meaning of “used” as it relates to the inclusion of raw materials into the property factor for state tax apportionment purposes.
  • Assess the impact: The Virginia Circuit Court’s ruling to exclude the storing of raw materials from the property factor should have taxpayers reconsidering their property factor calculations in Virginia and other states.
  • Take the next step: Aprio’s State and Local Tax (SALT) Team has deep knowledge of apportionment factor calculation and can help you determine the proper computation to identify possible refunds.

Schedule a free consultation today to learn more!

The full story:

Although many states have adopted single sales factor apportionment, about one-third of states still utilize some form of three-factor apportionment, which requires the computation of property and payroll factors as well. One of the issues that typically arises when computing the property factor is “at what point is property owned by a taxpayer included in the property factor.” Recently, Virginia’s Circuit Court issued an opinion that raw materials stored in Virginia are excluded from the property factor since they were not used in the state.[1]

Lorillard Tobacco Company[2] (the “Taxpayer”) purchases leaf tobacco from its suppliers and stores the tobacco at its Danville, Virginia warehouse facility for an aging period of 13 to 23 months. This aging process occurs without human intervention or specialized equipment and consists solely of stacking the boxes of leaf tobacco so that the tobacco can age under ambient temperatures and weather.

A product development manager testified that once stored, “absolutely nothing” is done to the boxes which “just sit there.” Another witness explained that the aging process allows the chemicals in the tobacco leaf to undergo a naturally occurring equilibration process that results in uniformity of flavor. Once the leaf has reached the desired drying age, it is shipped to North Carolina for processing and manufacturing into cigarettes.

Under Virginia’s apportionment statutes, the property factor is a fraction, the numerator of which is the average value of the corporation’s real and tangible personal property owned and used . . . in the Commonwealth during the taxable year and the denominator of which is the average value of all the corporation’s real and tangible personal property owned and used . . . during the taxable year and located everywhere, to the extent that such property is used to produce Virginia taxable income.[3]

The Taxpayer had initially included the value of the entire leaf tobacco inventory being aged in the Danville facilities in calculating its Virginia property factor. However, it subsequently requested refunds based on revising its property factor to exclude the leaf tobacco, which the state denied.

The Taxpayer argued that its leaf tobacco inventory is not required to be included in the property factor as it is not “used” in Virginia since storage alone (even for aging) does not constitute use. The Taxpayer maintained that its leaf tobacco inventory would be similar in nature to “property under construction” and to “mineral rights” which are both deemed to be property that is not being used until actual use or placement into production occurs.[4] 

The ruling explained

However, the Department of Revenue argued that “used” is simply understood to mean “to employ something for the purpose of accomplishing something.” As such, storing the leaf tobacco in the Danville facility should be regarded as use since it is aged during that time and that aging is important to its subsequent use. The Department of Revenue likened the leaf tobacco inventory to the property category of “inventoriable goods in process.”[5]

Based on the testimony and evidence provided by the Taxpayer, the Court concluded that the leaf tobacco should be excluded from the property factor. The way the leaf tobacco is stored is not necessary to the aging process as the leaf will continue to age regardless of where it is stored. There are no temperature controls, heat, or air conditioning needed for the aging process. Further, allowing raw materials to sit is not considered processing, as processing would require materials to undergo treatment to result in a product that is more marketable or useful. In this case, the taxpayer does not introduce any treatment or perform any affirmative act to aid the aging process.

The bottom line

Just because your business owns or rents property does not necessarily require its inclusion in the property factor, which could give rise to a refund claim. Aprio’s SALT Team is experienced with the apportionment factor calculation and the proper treatment of property, payroll and sales activity in a state. We can assist your business to determine the proper computation of its apportionment factors and if a refund may be available. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

This article was featured in the March 2022 SALT Newsletter.

For more information contact Tina Chunn at or call 770-353-5334 or contact Jeff Glickman at or call 770-353-4791.

[1] Virginia Dep’t of Taxation v. R.J. Reynolds Tobacco Co., Record 201263, Circuit Court of the City of Danville, February 10, 2022.

[2] After this suit was filed, Lorillard Tobacco Company was acquired by and merged into R.J. Reynolds Tobacco Co.

[3] Va. Code § 58.1-409 (emphasis added).

[4] Virginia Code § 58.1-409; 23 Virginia Admin Code § 10-120-160(A)(4).

[5] 23 Virginia Admin Code § 10-120-160(A)(4).


Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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About the Author

Tina Chunn

Tina is a senior manager with Aprio’s State & Local Tax group. She has over 24 years of experience assisting companies and their owners to minimize their tax liability and maximize their profitability. Some of the industries Tina serves include professional services, manufacturing, warehousing and distribution, telecommunications, real estate, retailers and wholesalers. Tina has extensive experience dealing with corporate tax issues, including state and local tax returns; state and federal tax credits; state and local sales; and use, income, escheat, business licenses and property tax issues.