Tax Type
Corporation Income Tax
Description
Enterprise Zone General Business Credit
Topic
Credits
Date Issued
06-04-2002
June 4, 2002
Re: Request for Ruling: Corporate Income Tax
Dear *****:
This will respond to your letter of March 14, 2002, in which you request permission to use an alternative method of allocation and apportionment with respect to the computation of an Enterprise Zone General Business Credit (the "Credit") for ***** (the "Taxpayer").
FACTS
The Taxpayer conducts business at two locations within Virginia. One of the locations is located in an enterprise zone. For the taxable year ended October 31, 2001, the Taxpayer is in the process of applying for the Credit with the Department of Housing and Community Development. The Taxpayer requests permission to use an alternative method of allocation and apportionment for purposes of computing the Credit. Under the Taxpayer's proposal, the income for the two offices would be allocated based on separate accounting using its location income statements. This method would be in lieu of the two-factor formula of property and payroll to apportion income between locations for purposes of computing the Credit.
RULING
Under Code of Virginia § 59.1-280, a taxpayer can qualify for a Credit of up to 80% of its tax liability for an initial taxable year of eligibility and up to 60% for the next nine taxable years. If a taxpayer has operations in Virginia both within and without an enterprise zone, the portion of a taxpayer's tax liability eligible for the Credit must be apportioned to business activities within an enterprise zone using the statutory two-factor formula that is made up of a property factor and a payroll factor. The statute does provide that a taxpayer may file a request to be allowed to use an alternative method to allocate or apportion the amount of Virginia taxable income attributable to business activities within an enterprise zone when the statutory method employed is inequitable or inapplicable.
It should be noted that the language permitting a taxpayer to request an alternative method of allocation and apportionment for purposes of determining the Credit is essentially identical to the language permitting taxpayers to request an alternative method of allocation and apportionment for purposes of determining income subject to Virginia corporate income tax. See Code of Virginia § 58.1-421.
The policies that apply to requests for an alternative method of allocation and apportionment under Code of Virginia § 58.1-421 are well established. Under Title 23 of the Virginia Administrative Code ("VAC") 10-120-280, permission to use an alternative method of allocation and apportionment is granted only in extraordinary circumstances. Absent any other guidance, the department will apply these same standards for a request for an alternative method of allocation and apportionment for purposes of determining the Credit.
The Taxpayer maintains separate records for each location. You believe that separate income statements replicating business conducted at each location will more clearly reflect actual income generated at the enterprise zone location than the statutory two-factor formula.
Your method is essentially a form of separate or geographical accounting. This method has been wholly discounted as an acceptable method for allocation and apportionment for "basic theoretical weaknesses" by the United States Supreme Court in Container Corp. of America v. Franchise Tax Board, 463 U.S. 159, (1983).
The United States Supreme Court has recognized that allocation and apportionment is merely a process to approximate income from business transactions even though no single formula apportions income perfectly. See Moorman Mfg. Co. v. Bair, 437 U.S. 267, 98 S.Ct. 2340 (1978). The Taxpayer has not furnished any substantive documentation to refute the statutory method.
After consideration of the facts set forth, the department finds that you have not demonstrated that the statutory method under Code of Virginia § 59.1-280 is either inequitable or inapplicable as it applies to the Taxpayer. Therefore, there is no basis to grant your request to use an alternative method. Consequently, the Taxpayer is required to use the statutory two-factor formula for purposes of computing the Credit.
Copies of the Code of Virginia and the regulations cited, along with other reference documents, are available online in the Tax Policy Library section of the department's web site, located at www.tax.state.va.us.
If you have any questions regarding this ruling, you may contact ***** in the Office of Administration and Policy, Appeals and Rulings, at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
AR/39401P
Rulings of the Tax Commissioner