Tax Type
Corporation Income Tax
Description
Alternate method of allocation and apportionment; Request for separate accounting
Topic
Allocation and Apportionment
Date Issued
11-18-1994
November 18, 1994
Re: Ruling request: Corporate income taxes
Dear***********
This will reply to your letter of July 15, 1994, in which you requested an alternative method of allocation and apportionment on behalf of*********(the "Taxpayer" ) .
FACTS
The Taxpayer is an S Corporation, with operations in Virginia and Florida. The Taxpayer maintains separate locations in each state, with property, payroll, and sales at each location. The businesses conducted at each location are essentially the same, although each is independently managed. The Taxpayer has requested an alternative method of allocation and apportionment based on separate accounting for each location in lieu of the standard three-factor formula of property, payroll and sales.
RULING
A corporation subject to taxation in Virginia and at least one other state is required by Code of Virginia §58.1-406 to allocate and apportion its Virginia taxable income.
Code of Virginia §58.1-408 provides that all Virginia taxable income is apportioned to Virginia by a three-factor formula.
The department's long-standing policy holds the use of separate accounting in disfavor. See Department of Taxation v. Lucky Stores. Inc., 217 Va. 121 (1976). The Code of Virginia mandates the use of the three-factor formula for multistate operations; an alternative to the three-factor formula is clearly an exception to Virginia's statutory requirement.
With respect to the alternative method of apportionment authorized by Code of Virginia §58.1-421, the department is not permitted to grant an alternative method which will result in a tax greater than that resulting from using the statutory method. Therefore, this section is not intended to allow taxpayers to use an alternative method merely because they believe some other method is more accurate or more equitable than the statutory method. Rather, use of the alternative method is allowed only in extraordinary circumstances where the need for relief has been demonstrated by clear and cogent evidence .
The policies which apply to requests for an alternative method of allocation and apportionment under Code of Virginia §58.1 -421 are well established. The Taxpayer has not furnished any substantive documentation to refute the statutory method, other than a general statement that such treatment is not equitable. The Taxpayer has not shown that the statutory method of 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 Mfg. Co. v. Bair, 437 U.S. 277, 98 S.Ct. 2340 (1978). The department has considered the nature of your business and the portion of it conducted in Virginia and finds that the statutory method is rationally related to the business conducted in Virginia for the taxable year.
The 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 separate accounting results in a different result from the three-factor formula is not sufficient to constitute extraordinary circumstances. Accordingly, permission to use separate accounting in lieu of the statutory three-factor apportionment formula of property, payroll, and sales for purposes of Virginia allocation and apportionment must be denied.
The returns filed by the Taxpayer using the alternative method must be amended to reflect the standard three-factor apportionment formula. In addition, because the Taxpayer is an S Corporation, the individual shareholders must file Virginia individual income tax returns reflecting their share of the Taxpayer's income determined in accordance with this ruling .
If you have any questions regarding this ruling, please call********************
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8329M
Rulings of the Tax Commissioner