Tax Type
Corporation Income Tax
Description
Payroll factor; Air freight company
Topic
Allocation and Apportionment
Date Issued
06-18-1997
June 18, 1997
Re: § 58.1-1821 Application: Corporate Income Tax
Dear********************
This will respond to your letter in which you seek correction of assessments of corporate income tax to *********** (the "Taxpayer") for the taxable years 1993 and 1994.
FACTS
The Taxpayer was the subject of a field audit by the department resulting in numerous adjustments to its 1993 and 1994 corporate income tax returns. The Taxpayer is in the air freight business and apportions its income using the standard three factor apportionment formula. The adjustments in contention revolve around the inclusion of certain aircraft and pilot payroll in their respective factors. The Taxpayer does not contest the methodology used in arriving at the respective amounts, however, it does contest the mileage ratios used.
DETERMINATION
The Taxpayer did not include flight equipment in the numerator of the property factor for the years audited. The auditor included a portion of flight equipment in the numerator by use of a ratio of mileage in Virginia to mileage everywhere. The Taxpayer does not contest the inclusion of the flight equipment in the numerator, however, the computation of the ratio is in question.
Code of Virginia § 58.1-410 requires that movable property be included in the property factor numerator to the extent of its utilization in Virginia. The statute refers to the number of days utilized in Virginia, but authorizes other reasonable methods. For determining the utilization of flight equipment in Virginia, the use of mileage is reasonable. In determining mileage for purposes of apportioning the property, mileage included in the denominator and numerator must be determined on the same basis so as not to distort the ratio. Overflight or bridge miles included as part of total mileage in the denominator must also be included in the numerator to the extent traveled over Virginia, if a correct ratio is to be achieved.
In the instant case, the Taxpayer operates through strategically located hubs, thereby eliminating bridge miles over Virginia. Due to this hub arrangement, the Taxpayer's aircraft do not fly over Virginia on flights that do not include Virginia as a destination.
The auditor included all mileage for flights with Virginia destinations and departures in computing the numerator of the ratio. This clearly distorts the ratio to be used in apportioning movable flight property because it includes mileage from inbound and departing aircraft traveled outside Virginia. Our review of your ratio indicates that it only includes mileage actually traveled within Virginia to apportion movable flight property and therefore it will be used in recomputing the movable property assigned to Virginia.
The auditor also used mileage to apportion certain pilot salary to Virginia. Code of Virginia § 58.1-413 is specific about the inclusion of employee compensation in the payroll factor if the employee's base of operations is in Virginia. Title 23 of the Virginia Administrative Code 12-120-200 provides that any wages reported pursuant to the Virginia Unemployment Act are presumed to be compensation in Virginia. The use of mileage is not appropriate to assign payroll to Virginia because the Taxpayer's base of operations is not located in Virginia. Accordingly, the pilot payroll assigned to Virginia using this ratio will be removed from the payroll factor as determined by the auditor.
Attached is a schedule computing refunds for 1993 and 1994. Refunds for these amounts will be issued in due course and the remainder of the assessments will be abated.
If you have any questions concerning the refunds, please contact ********of the Office Tax Policy at ******* .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12265P
Rulings of the Tax Commissioner