Tax Type
Corporation Income Tax
Description
Statutory and alternate methods; Taxpayer's burden of proof
Topic
Allocation and Apportionment
Date Issued
04-21-1997
April 21, 1997
Re: Request for Ruling: Corporate Income Tax
Dear****************
This will respond to your letter of March 12, 1997, in which you requested permission to use an alternative method of allocation and apportionment on behalf of *********(the "Taxpayer").
FACTS
The Taxpayer is a S corporation, with operations in North Carolina and Virginia. The Taxpayer maintains separate locations in each state, with property, payroll, and sales at each location. The business conducted at each location is essentially the same, although each is operated as a separate division of the Taxpayer. The Taxpayer has requested an alternative method of allocation and apportionment based on its divisional income statements for the Virginia locations in lieu of the standard three factor formula of property, payroll, and sales.
RULING
A corporation which has business activity that is taxable both within and without Virginia must allocate and apportion its income in accordance with Code of Virginia § 58.1-406, et seq. Based on the Taxpayer's type of business, the proper method of allocation and apportionment for Virginia tax purposes is the standard three factor formula of property, payroll, and sales.
You believe that the use of divisional income statements reflecting actual business activities at any one location is more likely to reflect the net income generated at that location than the standard three factor formula. The United States Supreme Court has recognized that allocation and apportionment of income is a 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 no single formula apportions income perfectly. 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 Virginia Administrative Code 23 10-120-280, copy enclosed. The Taxpayer has not furnished any substantive documentation to refute the statutory method, other than divisional income statements which the Taxpayer believes show a more appropriate method of determining income by business location.
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 taxation on more income by use of the three factor formula versus separate income statements constitutes extraordinary circumstances. Accordingly, the Taxpayer is required to use the statutory three factor formula of property, payroll, and sales for purposes of Virginia allocation and apportionment.
Apportionment for purposes of an S corporation is applicable only to nonresident shareholders. Nonresident shareholders of an S corporation which conducts its business within and without Virginia must include in their income from Virginia sources their pro rata share of the S corporation's income which is allocated and apportioned in Virginia. If you have any questions, please contact ****at**.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12393P
Rulings of the Tax Commissioner