95-153 | Virginia Tax

Tax Type

Corporation Income Tax

Description

Statutory three factor apportionment formula of property, payroll, and sales

Topic

Allocation and Apportionment

Date Issued

06-13-1995

June 13, 1995

Re: Request for Ruling: Corporate Income Tax

Dear**********

This will reply to your letter of October 17, 1994, in which you have requested permission to use an alternative method of allocation and apportionment on behalf of ***********(the "Taxpayer"). I apologize for the delay in responding.

FACTS

The Taxpayer filed its 1990, 1991, and 1992 Virginia corporation income tax returns using a one factor formula (sales) to apportion income to Virginia. This same method was used in other taxing jurisdictions in which business was transacted. On field audit, the department adjusted the apportionment factors to a three factor formula. The property was held to be 100% in Virginia, and the payroll factor was adjusted to the amounts reported to the Virginia Employment Commission. The Taxpayer filed returns in Maryland and Washington, D.C., which require a one factor (sales) formula to apportion income. The Taxpayer believes that use of a single factor sales formula in all jurisdictions would reflect a more appropriate method of apportioning income.

RULING

1. Payroll Factor

Virginia Regulation (VR) 630-3-413, a copy of which is attached, provides that if the employee's base of operations is in Virginia, then the compensation is deemed paid in Virginia regardless of whether the employees' services are performed within or without Virginia. Based on the information presented, it appears that the base of operations is in Virginia and that the majority of wages paid to employees were subject to the Virginia Unemployment Compensation Act. Therefore, the auditor's adjustments to the payroll factor are appropriate.

2. Property Factor

You state that the Taxpayer also does business in Maryland and Washington, D.C., and that inventory held by the Taxpayer is actually work in progress which is not 100% attributable to Virginia. However, you further state that the Taxpayer does not account for work in progress due to its nature, and cannot provide documentation as to the amount of work in progress outside Virginia. Accordingly, the audit adjustment to the Taxpayer's property factor is upheld.

3. Alternative Method

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 the Taxpayer's type of business, the proper method of allocation and apportionment for Virginia purposes is the standard three factor formula of property, payroll, and sales.

You believe that the Taxpayer may be subject to double taxation because of the other taxing jurisdiction's requirements 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 630-3-421, copy enclosed. The Taxpayer has not furnished any substantive documentation to refute the statutory method, other than a general statement that an alternative method would reflect a more appropriate division of income. 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.

Therefore, based upon the reasons stated herein, the assessments are correct. The assessments have been paid and no further action is deemed necessary.

If you have any questions regarding this ruling, you may contact***********.

- - - - Sincerely,
        
        Danny M. Payne
        Tax Commissioner

Rulings of the Tax Commissioner