Tax Type
Corporation Income Tax
Description
Alternative method of apportionment
Topic
Allocation and Apportionment
Appropriateness of Audit Methodology
Date Issued
04-30-1985
April 18, 1985
Taxpayer:
Re: §58.1-421 Request for Alternative Method of Allocation and Apportionment Corporation Income Tax: FYE 10/31/83
Dear ***
This will reply to your letter of October 8, 1984 requesting permission to use an alternative method of apportionment. Because the issues involved have been given extensive consideration in previous rulings, I have made this ruling without a conference.
FACTS
Taxpayer, a Virginia corporation with a fiscal year ending October 31, has filed Virginia tax returns since its incorporation in 1961. Through October 31, 1982, Taxpayer was engaged in the rental of some personal and real property, had some long-term notes receivable, and primarily provided consultant services to several air conditioning contractors. It used the three-factor apportionment formula on its returns.
On September 15, 1982, ****** a commercial financing company which financed dealer inventory under "floor plans" and other dealer paper, was merged into Taxpayer. Taxpayer used a *****three-factor apportionment formula on its Maryland return filed for the fiscal year ended October 31, 1983. Upon audit, Maryland disallowed such formula (7.55%) and imposed a one-factor "gross receipts" factor (22.88%). The comparable Virginia factor was 92.45%.
Taxpayer asserts it meets the definition of a financial corporation and asks that it be permitted to compute the Virginia apportionment factor using as a numerator gross receipts with a Virginia situs (plus to the extent that receipts so arising in a state that is not currently taxing Taxpayer be included in the numerator), determined as follows: consulting services would have the situs of the customer for which the services are performed; and interest and security agreement income would have the situs of the customer to whom loans are made. Taxpayer contends that had such apportionment method been applied to the October 1983 Virginia return, the Virginia apportionment factor would have been 77.36%, approximately the reciprocal of the Maryland factor.
DETERMINATION
The General Assembly has provided a statutory method of allocation and apportionment that applies to all corporations. Neither the taxpayer nor the Department may elect to use a different method. I construe § 58.1-421 as authorizing me to allow use of an alternative method only in extraordinary circumstances where the need for relief has been demonstrated by clear and cogent evidence. The policy applicable to requests for an alternative method is set forth in Virginia Regulations 630-3-421 (copy attached).
Taxpayer has not shown that the statutory 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).
The regulations also provide 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.
I might also note that Virginia Regulations § 630-3-418 (copy attached) defines "cost of performance" and states in B.2.b. that "Activities constituting the cost of performance are deemed performed at the situs of real and tangible personal property or the place at which or from which activities are performed by employees of a taxpayer."
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner