Tax Type
Corporation Income Tax
Description
Alternative method of allocation and apportionment
Topic
Allocation and Apportionment
Date Issued
07-02-1985
July 2, 1985
Re: §58.1-421 Request for Alternative Method of Allocation and
-
- Apportionment; Corporation Income Tax
Dear ****
This will reply to the unsigned memorandum attached to amended corporation income tax returns for the fiscal years ended **** 1982 and 1983 requesting permission to use an alternative method of allocation and apportionment.
FACTS
Taxpayer, a Virginia corporation, is a service company performing meteorological consulting in various states. All employees work out of its Virginia office. Taxpayer does not own or use property of substantial value, and its payroll records do not reflect the amount of time worked by state by employees. Taxpayer is taxed outside Virginia (in Maryland) based exclusively on a sales factor. Taxpayer seeks permission to use the sales factor alone to allocate income.
DETERMINATION
The General Assembly has provided a statutory method of allocation and apportionment that applies to all corporations. Neither the taxpayer nor the Department may elect to use a different method. I construe Virginia Code §58.1-421 as authorizing me to allow use of an alternative method only in extraordinary circumstances where the need for relief has been demonstrated by clear and cogent evidence. The policy applicable to requests for an alternative method is set forth in Virginia Regulations §630-3-421 (copy enclosed).
Taxpayer has not shown that the statutory method of allocation and apportionment produces an unconstitutional result. The United States Supreme Court has recognized that allocation and apportionment of income is an arbitrary process designed to approximate the 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 Manufacturing v. Bair, Company 37 U.S. 279, 98 S.Ct. 2340 (1978).
The regulations also provide that relief may be granted if the statutory method of allocation and apportionment produces a tax that is inequitable and that the inequity is attributable to Virginia. However, in determining whether inequity exists that is attributable to Virginia, I must consider the whole statutory structure under which the Virginia tax is computed, and not solely how a corporation's income is divided by Virginia versus another state. Each state's tax structure contains its particular method of determining the definition of "income," for dividing that income among the states and for applying a rate of tax, as well as credits against the tax. I do not find that, as a whole, the Virginia corporate income tax structure is the cause of any inequity in this case.
Accordingly, your request to use an alternative method of apportionment is denied and the three-factor formula of Virginia Code Section 58.1-408 must be followed.
I might note that Virginia Regulations Section 630-3-416 (copy enclosed) provides guidance for computing the sales factor for sales other than of tangible personal property.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner