Tax Type
Corporation Income Tax
Description
Alternate method of allocation and apportionment; Taxation by two states
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 21, 1994, in which you requested a ruling with respect to the proper allocation and apportionment method for************* (the "Taxpayer") .
FACTS
The Taxpayer is taxable in Virginia, Maryland and Washington D.C. The Taxpayer must apportion its income to the state of Maryland using a single factor formula. You have requested guidance as to the proper method of allocation and apportionment for Virginia proposes.
RULING
A corporation which has business activity that is taxable both within and without of Virginia must allocate and apportion its income in accordance with Code of Virginia §§58.1-405, et seq. Based on your description of the Taxpayer, the proper method of allocation and apportionment for Virginia purposes is the standard three factor formula of property, payroll, and sales.
There is a single factor formula available for construction companies that use the completed contract method of accounting for federal income tax purposes.
Although it does not appear that this method applies to the Taxpayer, we have enclosed a copy of VR 630-3-419.
You believe that the Taxpayer may be subject to double taxation because of Maryland's requirement to use a single factor for allocation and apportionment. However, the United States Supreme Court has recognized that allocation and apportionment of income is an arbitrary process designed to approximate 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. 267, 98 S.Ct. 2340 (1978).
The policies which apply to requests for an alternative method of allocation and apportionment under Code of Virginia §58.1-421 are well established. See VR 630-3-421, copy enclosed . The Taxpayer has not furnished any substantive documentation to refute the statutory method, other than a general statement that such treatment by Virginia may result in double taxation. The Taxpayer has not shown that the statutory method of apportionment produces an unconstitutional result.
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. After considering the facts set forth, the department does not find that merely being subject to differing methods of allocation and apportionment by two or more states constitutes extraordinary circumstances. Accordingly, the Taxpayer is required to use the statutory three factor apportionment formula of property, payroll, and sales for purposes of Virginia allocation and apportionment.
If you have any questions regarding this ruling, please call ********** in the Office of Tax Policy at*************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8319M
Rulings of the Tax Commissioner