Tax Type
Corporation Income Tax
Description
Alternate method of allocation and apportionment; Taxation by two states
Topic
Allocation and Apportionment
Date Issued
11-23-1994
November 23, 1994
Re: Ruling Request: Corporate Income Tax
Dear****************
This will reply to your letter in which you request permission to use an alternative method of allocation and apportionment on behalf of ********************(the "Taxpayer"). I apologize for the delay in responding to your request.
FACTS
The Taxpayer is headquartered in Virginia and operates its business in Virginia and four other states. The Taxpayer is classified as a financial corporation under the Code of Virginia §58.1-418. The Taxpayer filed its 1992 tax return in compliance with Virginia law which requires it to apportion its income to Virginia based upon cost of performance. Each of the other four states uses a method of apportioning income that is different from Virginia's, and different from each other's.
Because most of the Taxpayer's activities are conducted in Virginia, 97% of the Taxpayer's income is apportioned to Virginia based on cost of performance. Because a substantial number of customers are located in one of the other states in which the Taxpayer conducts business, 47% of the Taxpayer's income is apportioned to that state based on gross receipts. Although activities and customers in the remaining states were minimal in 1992, they are expected to grow in subsequent years. Asserting that a portion of its income is being subject to taxation by both Virginia and the other state, the Taxpayer requests that Virginia allow the Taxpayer to determine the amount of income subject to Virginia taxation using a two factor formula based upon its Virginia payroll and sales for 1992 and subsequent years.
DETERMINATION
The policies which apply to requests for an alternative method under Code of Virginia, §58.1-421 are well established. See VR 630-3-421 (copy enclosed). 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 Mooreman Mfg. Co. v. Bair, 437 U.S. 279 (1978). The Taxpayer has not shown that the statutory method of apportionment produces an unconstitutional result despite the effects of the differing tax practices of Virginia and the other states.
Further, as set forth in VR 630-3-421, a taxpayer must demonstrate that the use of an alternative method of allocation and apportionment is justified due to the harm being caused by Virginia's method rather than the methods employed by other states. In this instance, although the methods employed by Virginia and the other states differ, it has not been demonstrated that the result of applying the varying methods is caused by Virginia, as opposed to the other states.
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, you have not demonstrated that the statutory method is unconstitutional or inapplicable as it applies to the Taxpayer, or that the circumstances justify granting your request.
Accordingly, there is no basis upon which to allow your request to be granted.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8549O
Rulings of the Tax Commissioner