Tax Type
Corporation Income Tax
Description
Alternate method of allocation and apportionment; Request for alternative method.
Topic
Allocation and Apportionment
Date Issued
11-18-1997
November 18, 1997
Re: § 58.1-1821 Application: Corporate Income Tax
Dear**************
This will respond to your letter of September 5, 1997, in which you request to use an alternative method of allocation and apportionment on behalf of********** (the "Taxpayer").
FACTS
The Taxpayer has filed its Virginia corporation income tax returns for a number of years using separate accounting as an alternative method of allocation and apportionment to source income to Virginia. The Taxpayer believes that this method results in a more accurate determination of profit for each branch office because the operations of each location, including income and expenses, are not commingled with other offices. According to the Taxpayer, this results in an accurate picture of the results of each office. The Taxpayer requests that it be allowed to continue to use this method. In the event that the alternative method is denied, the Taxpayer requests that the statutory method be applied prospectively beginning with the taxable year ending December 31, 1997.
RULING
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 representation of its business activities, it would be classified as a "financial corporation". A financial corporation is one that derives more than 70% of its gross income from (1) fees for financial services, (2) gross profits from securities trading, (3) interest, and (4) dividends to the extent included in Virginia taxable income. The proper method of allocation and apportionment for a financial corporation is based on cost of performance in the Commonwealth over the cost of performance everywhere. See Title 23 VAC 10-120-250 of the Virginia Administrative Code, copy enclosed.
You believe that the Taxpayer may be subject to double taxation by use of the statutory method of allocation and apportionment. However, 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 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 23 VAC 10--120-280, copy enclosed. In order for a taxpayer to request an alternative method of allocation and apportionment, the taxpayer must file the return using the statutory method and pay any tax due. Next, the taxpayer is required to file an amended return proposing an alternative method and request a refund. The taxpayer must show by clear and cogent evidence that either: (i) the statutory method produces an unconstitutional result using the facts and circumstances of the taxpayer's situation; or (ii) the statutory method is inequitable because it (a) results in double taxation of income (or a class of income), and (b) the inequity is attributable to Virginia law or policy, rather than to another state's law or policy. In the instant case, the Taxpayer failed to properly request an alternative method of apportionment as provided in 23 VAC 10-120-280.
You believe the department's inaction on the prior year returns constitutes acquiescence on the department's behalf that the Taxpayer's alternative method was acceptable. However, failure to contact a taxpayer by the department cannot be construed to mean that the department agreed with the Taxpayer's alternative method of apportionment.
After careful consideration of the facts, the department finds that you have not demonstrated that the statutory method is unconstitutional or inapplicable as it applies to the Taxpayer. Therefore, there is no basis to grant your request to use an alternative method. Any returns that are in statute should be amended in accordance with this ruling and filed with the department using the statutory method of allocation and apportionment.
If you have any questions regarding this ruling, please contact ****the Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12984P
Rulings of the Tax Commissioner