Tax Type
Corporation Income Tax
Description
Payroll Factor; Compensation of Flight Crew
Topic
Allocation and Apportionment
Date Issued
08-27-1992
August 27, 1992
Re: Va. Code § 58.1-1821 Application
Dear *************
This will reply to your letter dated December 5, 1991 in which you protest an assessment made pursuant to an audit of **************(the "Taxpayer").
FACTS
Resulting from a recent audit, several adjustments to the taxpayer's computation of Virginia taxable income were made, one of which is at issue.
You are protesting the method used to determine the amount of flight crew (pilots and flight attendants) compensation included in the payroll factor numerator. The taxpayer computed its Virginia payroll numerator by allocating a percentage of system wide crew employees' wages to Virginia, based upon mileage, regardless of whether the employee ever worked in Virginia. The Department included 100 percent of the flight crew wages reported on the Virginia unemployment tax return in payroll factor numerator, regardless of the amount of time the employee worked in Virginia.
You argue that the Department's payroll apportionment methodology is distortive, because only the flight crew domicile states receive 100 percent of the flight crew compensation for payroll apportionment purposes. Further you suggest that using mileage to determine the payroll numerator avoids distortion by apportioning payroll to all states in which the taxpayer has activity.
RULING
Va. Code § 58.1-413 specifically includes employees' compensation in the payroll factor if their base of operation is in Virginia. Any wages reported pursuant to the Virginia Unemployment Act are presumed to be Virginia compensation. See Virginia Regulation (VR) 630-3-413, and Public Document (P.D.) 90-158 (9/6/90). You cite several points (discussed below) to support your position, and to oppose P.D. 90-158.
Virginia Unemployment Act Wages: You suggest that the presumption set forth by VR 630-3-413 A.4 (wages reported for Virginia unemployment tax purposes are wages for Virginia payroll apportionment purposes) is rebuttable, citing P.D. 87-80 (2/27/87) to support your position.
In P.D. 87-80, an employee lived in Virginia, commuted to work in Kentucky, and reported his wages to Virginia for unemployment tax purposes. A reciprocity agreement between Virginia and Kentucky permits Virginia residents commuting daily to Kentucky to have taxes withheld and paid to Virginia only. The employee performed no Virginia services, and instead performed 100 percent of his service in Kentucky, meaning that 100 percent of his wages would be included in the taxpayer's Kentucky payroll numerator, the employee's "base of operations." Therefore, given the reciprocity agreement and circumstances, the wage reporting for unemployment purposes was not determinative of Virginia payroll apportionment victor wages.
In the instant case, the taxpayer's flight crew employees do not report wages to Virginia for unemployment purposes solely under a reciprocity agreement. Rather, these employees have a Virginia base of operations from which their service is performed. A "base of operations" is a place from which an employee starts his work and to which he customarily returns in order to receive instructions. See VR 630-3-413 § B.2. If an employee's service is performed both within and without Virginia, the employee's compensation will be attributed to Virginia if the employee's base of operations is in Virginia. See VR 630-3-413 § A.3.(i). Based upon the fact differences between P.D. 87-80 and the instant case, P.D. 87-80 has no precendential value.
Control of Employee Actions: You list several activities pertaining to flight crew work activity control that occur at the taxpayer's non-Virginia headquarters, including monthly flight assignments, paycheck preparation, vacation and leaves of absence control, and so forth. Based upon the amount of this control, you assert that the Virginia base of operations is not the "place from which the service is directed or controlled" within the meaning of VR 630-3-413 § B.3, and that therefore, the Virginia payroll factor numerator should not include flight crew wages.
The out-of-state administrative coordination of flight crew employee activities is not a determining factor, primarily because flight crew employees still receive direct supervision over their job functions at their base of operations.
Request for Alternative Method: Since it is clear that the auditor computed the payroll factor in accordance with the method prescribed by statute, I am treating your letter as a request for an alternative apportionment method under Va. Code § 58.1-421.
You point out that the taxpayer has a flight crew base of operations in only a few states. You note that if these few states apportion 100 percent of the flight crew wages, and if a "fair apportioned share of flight crew compensation" is apportioned to states without a flight crew base of operations, "significantly" more than 100 percent of the taxpayer's flight crew compensation is included in apportionment formulas. You cite P.D. 90-158 (9/6/90) in favor of your position.
One of the issues in P.D. 90-158 is that distortion is caused by including overflight mileage in an apportionment denominator, while excluding it from the numerator. Excluding these miles from the numerator results in the non assignment of a substantial portion of income to any state. You attempt to draw an analogy between this argument, and a position favoring the use of mileage in apportioning flight crew compensation. It should be noted that P.D. 90-158 considered and rejected the use of mileage in the payroll factor.
Because the taxpayer's presence and activity is greater in states with a base of operations, it is entirely appropriate for the payroll numerators of such states to be greater than those of states without a base of operations. Using mileage to apportion flight crew compensation does not account for this increased presence and activity. Further, Virginia's statutory method is internally consistent because if all states apportioned flight crew compensation based upon the amounts included as compensation for unemployment purposes, no more than 100 percent of flight crew compensation would be included in state apportionment formulas.
Summary: The taxpayer's use of mileage in computing the Virginia payroll numerator is invalid, because you have not demonstrated that the Department's computation produces an unconstitutional or inequitable result. The U.S. 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 allocation and apportionment method is rationally related to the business transacted within it, 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 Department's apportionment method is rationally related to the taxpayer's business conducted in Virginia.
Accordingly, I hold that the assessment is correct as made and is now due and payable. You will shortly he billed for the amount owed with interest accrued to date. The bill should be paid within thirty days of receipt to avoid additional interest charges.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/5812G
Rulings of the Tax Commissioner