Tax Type
Bank Franchise Tax
Description
Computation of net capital; Availability of alternative method of apportioning net capital
Topic
Rate of Tax
Date Issued
12-31-1996
December 31, 1996
Ruling: Bank Franchise Tax
Dear************
This will reply to your letter in which you request an alternative method of apportioning net capital for the purpose of computing the 1996 Virginia bank franchise tax of your client, **********(the Taxpayer"). I apologize for the delayed response.
FACTS
During 1995, three affiliated banks were merged to form the Taxpayer. Only one of the three affiliates (the "Former Corporation") was subject to the Virginia bank franchise tax in the year prior to the merger. The Taxpayer is a bank headquartered outside the state of Virginia with branch offices located within and without Virginia.
The Code of Virginia has no provision apportioning the net capital of a multi-state bank among branch offices within and without Virginia. In the absence of action by the General Assembly to specify the method of apportionment, the department allows banks with branch offices located in another state, including the District of Columbia, to apportion net capital based on a modified version of the deposit methodology of apportioning tax among Virginia localities under Code of Virginia § 58.1-1211. The modified method excludes time certificates of deposit of $100,000 or more jumbo C.D.'s) resulting in an apportionment which reflects only "core" deposits. See Public Document (PD) 94366, (1218/94), copy attached.
The Taxpayer projected its 1996 bank franchise tax liability using the formula adopted by the department in PD 94-366 and found that it resulted in a substantial increase to its tax liability over the Former Corporation in the prior year. Additionally, the Taxpayer found that using a formula which did include the jumbo C.D.'s resulted in a tax liability only slightly higher than that of the Former Corporation in the prior year. The Taxpayer filed its 1996 bank franchise tax return using the ratio of Virginia deposits to total bank deposits as reflected on its quarterly reports of condition and income ("Call" reports) and requests permission to use, in computing its bank franchise tax liability, this alternative method.
DETERMINATION
The Code of Virginia does not currently permit the apportionment of Virginia bank franchise tax. After the passage of the Interstate Banking and Branching Efficiency Act of 1994, however, the department recognized the need for apportioning the net capital of a multi-state bank that is subject to the Virginia bank franchise tax. Subsequently, the department prescribed the methodology for apportionment outlined in P.D. 94-366. We will treat your request as permission to use an alternative method of apportionment.
Since the issuance of P.D. 94-366, the department has not received a request for an alternative method for apportioning the bank franchise tax. The department will allow an alternative method in cases where a bank can demonstrate by clear and cogent evidence that the prescribed method of apportionment results in an unconstitutional or inequitable tax liability.
The United States Supreme Court has recognized that apportionment of income is an arbitrary process designed to approximate the income from business operations within a state. As long as each state's method of apportionment is rationally related to the business transacted within a state, then each state's tax is considered to be constitutionally valid, even though there may be some overlap. See Mooreman Manufacturing Company. Appellant. v. G. D. Blair. etc., 437 U.S. 279 (1978). You have not demonstrated that the method of allocation and apportionment adopted in PD 94-366 produces an unconstitutional result.
Permission to use an alternative method will be granted if the department's method of allocation and apportionment produces a tax that is inequitable and that the inequity is attributable to the Virginia method of apportionment. However, in determining whether inequity exists that is attributable to Virginia, the department must consider the whole structure under which the Virginia bank franchise tax is computed. Each state's tax structure contains its particular method of determining the definition of "income" or "capital," for dividing that income or capital among the states and for applying a rate of tax, as well as credits against the tax. Virginia's method is internally consistent, that is, the method, if applied by every jurisdiction, would result in no more than all of the taxpayer's income being taxed. See Container Corp. of America v. Franchise Tax Board, 463 U.S. 159, (1983). I do not find that, as a whole, the Virginia bank franchise tax structure is the cause of any inequity in this case.
Further, the department has already determined in PD 94-366 that, because jumbo C.D.'s are often marketed by mail or telephone or through brokers at the booking office, they are not reflective of actual banking activity within the states in which the bank has branch offices.
Accordingly, the request to use an alternative method is denied. The Taxpayer should file a revised Form 64 using the apportionment method adopted in PD 94-366 within 30 days with*** , Office of Tax Policy, Department of Taxation, P. O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this ruling, you may contact **** at*********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/110590
Rulings of the Tax Commissioner