Tax Type
Corporation Income Tax
Description
Sales factor; Special rule for airlines
Topic
Allocation and Apportionment
Date Issued
06-11-1997
June 11, 1997
Re: § 58.1-1821 Application: Corporate Income Taxes
Dear*********
This will reply to your letter in which you seek correction of assessments of additional corporate income taxes to ********* (the "Taxpayer") for the 1992 and 1994 taxable years, as well as the field audit results for the 1993 taxable year.
FACTS
The Taxpayer, headquartered outside Virginia, operates an air freight delivery service. Pursuant to a field audit, several adjustments were made. You protest two adjustments, which will be addressed separately.
DETERMINATION
Delaware Franchise Tax
The department's auditor added to federal taxable income the deductions for Delaware franchise taxes in all taxable years. You protest these additions, contending that the department lacks the statutory authority to make such adjustments.
Code of Virginia § 58.1-402(B)(4) provides, in pertinent part, that to the extent excluded from federal taxable income, there will be added:
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- The amount of any net income taxes and other taxes, including franchise and excise taxes, which are based on, measured by, or computed with reference to net income, imposed by the Commonwealth or any taxing jurisdiction to the extent deducted in determining federal taxable income. (Emphasis added.)
As a result, taxes which are deducted from total income in computing federal taxable income and which are either based on or utilize net income in their computation are required to be added back to federal taxable income when computing Virginia taxable income.
In considering the types of taxes to be added to federal taxable income, the name or title of the tax is not as significant as determining the basis on which the tax is computed. Some taxes, for example, combine elements of a traditional net income tax with elements of a capital stock or surplus tax. In such instances, only the amount specifically based on, measured by, or computed with reference to net income is to be added back, regardless of how the overall tax is titled. Further, if the computation of the tax is not based on net income, there is no requirement to add the tax to federal taxable income.
In the instant case, the auditor's adjustments were additions of amounts deducted based on the Delaware franchise tax. Delaware Code, Title 8, § 503 provides that the Delaware franchise tax is computed based on either a corporation's number of authorized shares of capital stock or the statutorily determined value of assumed no-par capital of the corporation. As net income is not used in the computing the Delaware franchise tax, there is no requirement to add the tax to federal taxable income on the Virginia return. The auditor's adjustments, therefore, will be reversed.
Sales Factor Calculation
In computing the sales factor for the 1992 and 1993 taxable years, the Taxpayer attributed revenue among the states by use of a 50/50 allocation between the pickup and delivery locations. The Taxpayer changed this method commencing with the 1994 taxable year to an allocation based on the ratio of mileage traveled within Virginia to total mileage. The department's auditor disagreed with the Taxpayer's methodology, and calculated the sales factor numerator based on whether the property was received in Virginia, pursuant to Title 23 of Virginia Administrative Code (VAC) 10-120-220.
You protest the auditor's adjustments, contending that the "destination sales" concept of revenue allocation is inapplicable in the Taxpayer's case because the Taxpayer's revenue is not derived from the sale of tangible personal property but rather the transportation of such property. You believe that the mileage method as enunciated by the department in Public Document (P.D.) 90-158, (9/6/90) is the proper methodology, and request that the sales numerator for all years be changed to reflect application of this method.
In P.D. 90-158, the department rejected a passenger airline's use of a single mileage apportionment factor, and required that airlines utilize the statutory three factor formula. Regarding the sales factor computation, the department applied the provisions of Code of Virginia § 58.1-416 pertaining to the sale of intangibles or services in determining that a greater portion of the income producing activity was incurred at the departure point. The department, however, was cognizant of the unique administrative difficulties encountered by airlines, and accordingly authorized the use of either departures or mileage as appropriate standards for use in assigning an airline's property and sales.
While P.D. 90-158 was specifically addressed to the passenger airline industry, it is applicable as well to the air freight industry. The air freight industry experiences the same difficulties in computing a three factor apportionment formula originally designed for manufacturers. Passenger airlines also derive revenue from incidental freight transport which is assigned based on the methods described in P.D. 90-158. The department did not specifically state in P.D. 90-158 that such freight revenue had to be assigned based on destination.
The policy first stated in P.D. 90-158 was further developed in P.D. 92-225, (11/5/92), copy enclosed. This P.D. states that:
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- Virginia's current policy is that utilizing departures in determining flight apportionment is the method most consistent with Virginia's statute and regulations. However, taxpayers may continue to elect to use mileage information because of its long term acceptance by the Department, provided that overflight miles are included in the numerator along with miles flown to or from Virginia airports. (Emphasis in original.)
Applying these rulings to the instant case results in both the destination sales concept employed by the auditor and the 50/50 pickup/delivery split employed by the Taxpayer being incorrect. The Taxpayer has acknowledged that its method prior to 1994 was incorrect. The sales factors for 1992 and 1993, therefore, will be recalculated using the mileage method.
During the audit, an issue arose as to whether the Taxpayer's change in 1994 from the 50/50 pickup/delivery split method to the mileage method constituted an alternative method of allocation and apportionment for which permission had not been granted. Since the mileage method is authorized by the department, it is not an alternative method.
The auditor's report will be revised in accordance with the determination herein and on the enclosed schedules. A refund, with interest at statutory rates, will be issued to the Taxpayer in due course.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11747N
Rulings of the Tax Commissioner