84-23 | Virginia Tax

Tax Type

Corporation Income Tax

Description

Alternative method of apportionment

Topic

Allocation and Apportionment

Date Issued

02-17-1984

February 17, 1984

Re: Virginia Code § 58-151.051
Request for Alternative Method of Apportionment

Dear ****

This is in response to your letter requesting permission to use an alternative method of apportionment. Specifically, you suggest that the apportionment formula include a fourth factor, referred to as an extraction factor. This factor is based upon the amount of oil and gas extracted from Virginia versus the amount of oil and gas extracted from everywhere. In support of your contention, you cite the recent enactment of legislation in Alaska which substitutes an extraction factor for the payroll factor in the apportionment formula for the petroleum industry.

Determination

The Virginia General Assembly has provided a statutory method of allocation and apportionment that applies to all corporations; there is no election or discretion allowed to taxpayers or to the department. A change in the apportionment formula would have to be statutorily prescribed. I construe § 58-151.051 as authorizing me to permit the use of an alternative method only in extraordinary circumstances where the need for relief has been demonstrated by clear and cogent evidence.

Corporation Income Tax Circular No. 1 sets forth the criteria applied to a request for an alternate method of allocation and apportionment. In pertinent part it states:

"A request for permission to use an alternate method of allocation and apportionment shall be accompanied by data sufficient to show either:

(1) That the statutory method is in fact inapplicable because it produces an unconstitutional result under the particular facts and circumstances of the taxpayer's situation; or

(2) That the statutory method is in fact inapplicable because:

(a) It results in double taxation of the income, or a class of income, of the taxpayer; and

- (b) The inequity is attributable to Virginia, rather than to the fact that some other state has a unique method of allocation and apportionment."

The taxpayer has not shown that this method of allocation and apportionment produces an unconstitutional result. The United States Supreme Court has recognized that allocation and apportionment of income is an arbitrary process designed to approximate the income from business transactions within a state. As long as each state's method of allocation and apportionment is rationally related to the business transacted within a state, then each state's tax is constitutionally valid even though there may be some overlap. See Moorman Manufacturing Company v. Bair, 437 U.S. 279, 98 S.CT. 2340 (1978).

Corporation Income Tax Circular 1 also provides that relief may be granted if the statutory method of allocation and apportionment produces a tax that is inequitable and that the inequity is attributable to Virginia. However, in determining whether inequity exists that is attributable to Virginia, I must consider the whole statutory structure under which the Virginia tax is computed, and not solely how a corporation's income is divided by Virginia versus another state. Each state's tax structure contains its particular method of determining the definition of "income," for dividing that income among the states and for applying a rate of tax, as well as credits against the tax. I do not find that, as a whole, the Virginia corporate income tax structure is the cause of any inequity in this case.

Accordingly, your request to use an alternative method of apportionment is denied.

Sincerely,

W. H. Forst
State Tax Commissioner

Rulings of the Tax Commissioner