Tax Type
Corporation Income Tax
Description
Alternative apportionment method
Topic
Allocation and Apportionment
Date Issued
08-03-1993
August 3, 1993
Re: Request for Ruling: Corporation Income Tax
Dear**********
This will reply to your letter of January 19, 1993, in which you request a ruling allowing the use of an alternative method of apportionment for *********(the "Taxpayer").
FACTS
The Taxpayer owns and operates an advertiser supported basic cable television network. The Taxpayer is headquartered in Virginia, with offices located in various states throughout the country. You state that substantially all of the Taxpayer's income is derived from sales of advertising time and subscriber fees from various cable systems located outside Virginia. Advertising time is sold by the Taxpayer's sales force, which is located in five different states. Subscriber fee revenues are derived from the transmission of programming to cable systems throughout the United States.
You feel that the statutory method of apportionment results in a greater portion of net income being taxed in Virginia than can be reasonably attributed to business or sources within Virginia. Accordingly, you ask that the Department allow the Taxpayer to use an alternate method of apportionment, whereby the Taxpayer would use the current property and payroll factors and a modified sales factor ("audience factor") which reflects income derived in proportion to the number of subscribers in Virginia to total number of subscribers everywhere. In the alternative, you request that the Taxpayer source its revenue based on the location of the performance of income-producing activity.
RULING
Use of an alternative method is allowed only in extraordinary circumstances where the need for relief has been demonstrated by clear and cogent evidence.
The fact that some other states use an audience factor does not require Virginia to allow its use. The United States Supreme Court has recognized that allocation and apportionment of income is an arbitrary process designed to approximate the income from business operations 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 considered to be constitutionally valid, even though there may be some overlap. See Moorman Manufacturing Company v. Bair, 437 U.S. 279, 98 S.Ct. 2340 (1978). You have not demonstrated that the statutory method of allocation and apportionment produces an unconstitutional result. Further, I have considered the nature of your business and the portion of it conducted in Virginia and I find that the statutory method is rationally related to the business conducted in Virginia.
The policies which apply to requests for an alternative method under Va. Code §58.1-421 are well established. See Virginia Regulation (VR) 630-3-421 and P.D. 86-184 (9/18/86) (copies enclosed). After considering the facts set forth, I conclude that you have not demonstrated by clear and cogent evidence that Virginia's statutory method is unconstitutional or inapplicable as applied to your situation.
In the alternative, if the department will not allow use of the audience factor, you ask that the Taxpayer be permitted to source its advertising revenues based on income producing activity.
Subscriber fees and advertising revenues do not involve the sale of tangible personal property. Under Va. Code §58.1-416, sales (i.e., gross receipts) other than sales of tangible personal property are included in the numerator of the sales factor only if a greater portion of the income producing activity is in Virginia than in any other state. Therefore, subscriber fees and advertising revenues generated from the sale of an intangible will be sourced based on income producing activity, in accordance with Va. Code §58.1-416.
Since it appears that all subscriber fee contracts are negotiated from Virginia locations, the greater portion of income producing activity is in Virginia. Therefore, these revenues would be included in the numerator of the sales factor.
Advertising revenue is negotiated from regional offices, some of which are outside Virginia. The department does not view all advertising fees as a class to be assigned in or out of Virginia in one lump. The department looks to the activity that produced the sale to be apportioned, i.e., each advertising fee. Although specifics were not provided in your letter, it is reasonable to assume that the majority of the income producing activity related to each advertising fee will be in the regional office that negotiated it.
Accordingly, permission to use an alternative method of apportionment is denied. However, the Taxpayer may source subscriber fees and advertising revenues based on income producing activity, in accordance with the provisions set forth above.
If you have any questions concerning this matter, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6667F
Rulings of the Tax Commissioner