The Virginia Tax Commissioner concluded that a taxpayer was not permitted to deduct a portion of the royalties it had paid to an affiliate by narrowly construing the “subject to tax” exception to the state’s addback statute. This exception provides that the deduction will be permitted if the “corresponding item of income received by the related member is subject to a tax based on or measured by net income or capital imposed by Virginia, [or] another state….” The Commissioner interpreted this exception to apply only to the portion of the intangible expense payment that was actually subject to tax in another state, as evidenced by the amount of the affiliate’s income that was apportioned to the other state. The fact that the taxpayer’s affiliate filed income tax returns in the other state that reflected the gross amount of income from the royalty payment was determined to be insufficient. Instead, the Commissioner concluded that the deduction for the royalty payment is only permitted to the extent the related income was apportioned to the other state. The Commissioner did permit the taxpayer to take the deductions for royalties paid to two other affiliates because these payments qualified for the state’s addback exception that applies when the related party also licenses intangible property to unrelated third parties. Virginia Rulings of the Tax Commissioner, Document No. 13-165 (Aug. 23, 2013).