Tax Type
Corporation Income Tax
Description
Airlines; Apportionment of income
Topic
Allocation and Apportionment
Date Issued
09-06-1990
September 6, 1990
Re: §58.1-1821 Application; Corporation Income Tax
Dear****************
This is in response to your letter of January 5, 1987, in which you applied for correction of an assessment of corporation income tax against ***************(the "Taxpayer") for calendar years 1983 and 1984.
The taxpayer filed its 1983 and 1984 returns using a single mileage factor to apportion its income. The auditor used a three factor apportionment formula that included flight property and sales in the respective factors on the basis of departures from Virginia to departures everywhere. Payroll was included in the numerator of payroll factor if the employee's base of operations was in Virginia. Your application raises a number of issues with respect to each factor.
Single mileage factor: The auditor properly disallowed the single mileage factor used in the return. Va. Code §58.1-417 requires the use of a mileage factor for motor carriers. Va. Regulation VR 630-3-417 defines a motor carrier as "all corporations licensed by the Interstate Commerce Commission or the Virginia State Corporation Commission as motor carriers of property or passengers which use the highways of Virginia." An airline does not come within this definition. Therefore, an airline is required to use the statutory three-factor formula by Va. Code §58.1-408.
Property factor: In the case of movable property, Va. Code §58.1-410 requires that it be included in the numerator of the factor to the extent of its utilization in Virginia. The statute refers to the number of days in the state, but authorizes other reasonable methods. Focusing on the number of days is not well suited to aircraft and other flight property which may be in many states in the course of a single day. Two reasonable methods for determining the utilization of flight property are the use of miles and departures.
The use of mileage focuses on the time an aircraft spends in Virginia producing revenue, that is, time sitting on the ground is ignored. It is rational if, and only if, overflight miles are included in the numerator along with miles flown from or to a Virginia airport. The exclusion of overflight miles from the numerator, while including them in the denominator, distorts the factor. The purpose of apportionment is to determine how much of a taxpayer's income was attributable to the state for purposes of taxation. A method which does not result in the assignment of all, or almost all, of the taxpayer's income to the states in which it is subject to tax (assuming all states use the same method) is neither rational nor reasonable. See the discussion of internal consistency in Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983).
Departures may also be an acceptable method of determining the utilization of flight property. It may also be closest to the statutory reference to days if a "day" is interpreted to include any fraction of a day. (To be internally consistent, both the numerator and denominator would have to include fractional days.) Departures focuses on the use of aircraft, while days of physical location would include days that aircraft are idle or being serviced.
Historically, the department has used or permitted the use of mileage for aircraft provided that overflight miles are included. Departures, however, are an acceptable alternative and may be required if adequate mileage information is not available. In either case, the statute requires the value of each item of property to be included in the numerator depending on the item's utilization in Virginia. Thus, the mileage or departures of each aircraft would have to be reviewed. To ease the administrative burden, either method may be applied to the system wide property, or the property may be classified by value and the method applied to each class. Therefore, the auditor's use of departures is correct, but I will allow you to submit mileage information if you wish to do so.
Payroll factor: Va. Code §58.1-413 is specific about including an employee's compensation in the payroll factor if the employee's base of operation is in Virginia. Virginia Regulation VR 630-3-413 provides that any wages reported pursuant to the Virginia Unemployment Act are presumed to be compensation in Virginia. The use of mileage or departures is not appropriate for the payroll factor.
Sales factor: Gross receipts from the sale of intangibles or services are included in the numerator of the sales factor if a greater portion of the income producing activity is in Virginia than in any other state. Va. Code §58.1-416. The income producing activity is examined for each item of gross receipt. It is obvious that an airline will have more income producing activity, as measured by cost of performance, at the beginning or end of a flight. Since the beginning of a flight usually includes refueling and passenger ticket checking, the greater portion of income producing activity will inevitably be at the departure point. Thus, the use of departures in the sales factor is an acceptable method of determining income producing activity.
Historically, the department has used, or permitted the use of, mileage in assigning an airline's sales. In the interest of easing the administrative compliance burden, the department will accept the same method for sales factor purposes as used for property factor purposes. Therefore, the auditor's use of departures was correct, but I will allow you to submit mileage information if you wish to.
Accordingly, the assessment is correct as made and is now due and payable. You will shortly receive an updated bill with interest accrued to date. The bill should be paid within thirty days to avoid the accrual of additional interest. If you desire to submit mileage information, including overflight miles and sufficient information to reconcile the mileage information to the denominator, it should be submitted to Technical Services Section, Department of Taxation, P. O. Box 6-L, Richmond, VA 23282 within thirty days.
Sincerely,
W. H. Forst
Tax Commissioner
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