Tax Type
Corporation Income Tax
Description
Property factor; Government owned property
Topic
Allocation and Apportionment
Date Issued
12-28-1994
December 28, 1994
Re: §58.1-1821 Application: Corporation Income Tax
Dear**********
This will reply to your letter April 7, 1994, in which you contest the assessment of additional corporate income tax to********(the "Taxpayer") for the fiscal years ended June 30, 1990, 1991, and 1992.
FACTS
The Taxpayer manufactures tangible personal property for the federal government and commercial customers. Specialized property owned by the government was located on the Taxpayer's land, in the Taxpayer's buildings, and intermingled with the Taxpayer's assets. The Taxpayer used the property rent free. However, the Taxpayer included the value of the government owned property in the denominator of the property factor for purposes of determining the Virginia apportionment factors. Upon audit, the value of the government owned property was removed from the property factor. The Taxpayer contends that the Uniform Division of Income for Tax Purposes Act (UDITPA) guidelines permit property used rent free by a corporation to be included in the computation of the property factor. Further, the Taxpayer contends that removing this property from the computation of the property factor would result in double taxation. Therefore, as provided in Code of Virginia §58.1-421, the Taxpayer requests that the value of the government owned property be included in the computation of the property factor and that the assessment be adjusted accordingly.
DETERMINATION
The UDITPA guidelines have not been enacted in Virginia by statute or adopted by regulation. While Virginia's standard method of allocation and apportionment is similar to UDITPA is some respects, there are also significant differences. Furthermore, Code of Virginia §58.1-410 provides, "Property rented by the corporation shall be valued at eight times the annual rental rate Paid by the corporation." (Emphasis added.) In the instant case, since there was no rental charge paid by the corporation for its use of government owned property, no value for such property may be included in computing the property factor. The department's position in this matter was previously communicated to the Taxpayer in Public Document 88-113 (5/19188), copy enclosed.
You believe that the Taxpayer may be subject to double taxation because of Virginia's failure to include the fair market value of government owned property for purposes of determining the property factor. 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 Mfq. 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 and Virginia Regulation (VR) 630-3421 are well established. The Taxpayer has not furnished any substantive documentation to refute the statutory method, other than a simplified analysis of the property factor. The Taxpayer has not addressed the overall method of apportionment utilized by Virginia. For example, in contrast to most UDIPTA states, Virginia's sales factor is determined without a "throw-back" rule and Virginia does not double weight the sales factor. 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.
Based upon the policies set forth in this letter, there is no basis for allowing the value of government owned property to be included in the property factor when no rental charge is paid by the Taxpayer. Therefore, the corporate income tax assessment was properly issued.
If you have additional questions, please call****************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8096N
Rulings of the Tax Commissioner