Tax Type
Corporation Income Tax
Description
Franchise and Rights, Interstate contract carrier
Topic
Appropriateness of Audit Methodology
Penalties and Interest
Date Issued
04-07-1982
April 7, 1982
Capital Not Otherwise Taxed
For the Years 1976. 1977 and 1978
This ruling is issued in response to your application under §58-1118, Code of Virginia, a taxpayer conference and original audit information.
FACTS
The taxpayer is an interstate contract carrier engaged in business in Virginia and surrounding states. For the years under audit, 1976, 1977 and 1978, the taxpayer recorded on its balance sheets an asset titled "Franchise and Rights." This asset represents franchises or certificates of public convenience and necessity which have been granted by the State Corporation Commission of Virginia since 1923 and the Interstate Commerce Commission since 1985. The net value of the asset was included in an audit of capital not otherwise taxed as other taxable property. The net value taxed is as follows:
In addition, the value of the franchise rights not yet approved by ICC was included for capital tax purposes. The audit value of these rights is as follows:
After audit the Department assessed tax and interest for all years. The taxpayer applied under §58-1118 protesting only the portion of the assessments resulting from the value of the franchise rights and certificates of public convenience and necessity. Other adjustments relating to the capital of the taxpayer's trade or business are not protested.
DETERMINATION
In its application and in conference taxpayer advanced a number of arguments which are discussed below.
Taxpayer's first argument was that no effort was made to include the value of franchises as taxable capital under §58-411(4) of the Code of Virginia of 1950, as amended, for nearly 40 years. Taxpayer contends that an administrative construction of such long standing should not be abandoned.
From the records of the Department, the initial audit on capital tax of the taxpayer was the audit under protest. The department has consistently held that the franchises and rights are includible in the taxable capital of the taxpayer's trade or business. The department's failure to audit does not imply that a specific item of property is exempt from taxation.
Taxpayer's second argument is that the statute neither generally nor specifically mentions franchises or certificates of convenience and necessity and therefore cannot be taxed.
The Department takes exception with this argument in that §58-411(4) states in part: "All other taxable personal property of any kind whatever, including...but excluding the property hereinafter specifically mentioned...." The long standing position of the Department is that §58-411(4) is not restrictive in nature but all encompassing of the capital of a trade or business with the exceptions as specifically noted in the statute.
Taxpayer's third argument is that the Department's decision to tax the franchises and rights is a decision which taxes interstate franchises which is prohibited by the Commerce Clause of the United States Constitution. The taxpayer points out further that the Virginia Capital Tax taxes property over which the Commonwealth has no control whatever and the activities related to such franchises are not conducted within the Commonwealth of Virginia. The franchises being taxed extend from Florida to Texas and from Delaware to Kansas with only a few points at which they operate within the Commonwealth.
The Department, in its audit, included the net value of all such authority in taxpayer's taxable capital for 1976 through 1978. This audit adjustment was made on the basis that the operating authority acquired in the various areas is utilized by the overall contiguous transportation system which is operated and controlled from the principal office in Virginia.
In protest you contend that the Commonwealth is prohibited by the Commerce Clause from taxing the franchises and rights. You also point out that Virginia is taxing property over which it has no control whatever and which the activities related to such property occur outside of the Commonwealth.
If the taxpayer's out-of-state terminals have autonomy and are independent, then the business situs of the intangible operating authority is removed from Virginia. The intangible operating authority is permanently invested in the state which grants the right to do business. The authority to do business may not be transferred to another location. The right to engage in operations within a state is limited to that particular state and is localized and acquires business situs within that state. For the taxpayer's terminals maintained outside of Virginia, if the operations meet the criteria set-out, then the operations would be sufficient to establish a business situs for the capital used at these branch offices.
On the basis of the foregoing, I conclude that if the taxpayer's operating authority outside of Virginia has acquired business situs as part of the business capital of the out-of-state terminals within the individual states where such authority exists, then the value of those franchises and rights will be removed from the capital tax audit.
The taxpayer is liable for capital tax for 1976 through 1978 on the operating franchises and rights located within Virginia. The audit will be adjusted after the taxpayer provides an analysis disclosing the value of the operating rights located within Virginia and the value of the rights out of Virginia and which have business situs outside of the Commonwealth.
I trust this information will be provided in the near future so that this long pending matter may be closed.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner