Tax Type
Corporation Income Tax
Description
Motor carrier; Alternative apportionment method
Topic
Allocation and Apportionment
Date Issued
10-08-1991
October 8, 1991
Re: Request for Ruling; Corporation Income Tax
Dear***************
This will reply to your letter of May 9, 1991, in which you request a ruling allowing the use of an alternative method of apportionment for ************* (the "Taxpayer").
FACTS
The taxpayer is an out-of-state motor carrier required to apportion income using a ratio of vehicle miles in Virginia to total vehicle miles everywhere. You propose an alternative method of apportionment that would include rail and ocean miles traveled by the taxpayer's vehicles; the railroads and ships which carry the vehicles are not operated by the taxpayer. The department has disallowed this method of apportionment in the taxpayer's application under Va. Code §58.1-1821. P.D. 91-58 (3/29/91).
RULING
The policies which apply to requests for an alternative method under Va. Code §58.1-421 are well established. See Virginia Regulation (VR) 630-3-421, P.D. 86-184 (9/18/86) and P.D. 85-146 (7/2/85) (copies enclosed). In response to your letters and discussions with my staff, Ye have examined your proposed apportionment method in light of the theory of apportionment and existing Virginia precedent.
Apportionment is intended to divide the income of a corporation among the taxing jurisdictions from which the income was derived. While it is admittedly an arbitrary process, it must reasonably approximate the manner in which the income is earned, i.e., the method must be externally consistent. See Container Corporation of America v. Franchise Tax Board, 463 U.S. 159 (1983).
One of the criteria often used in reviewing the fairness of an apportionment formula is whether the state has given something for which it is entitled to demand a tax, e.g., protecting property. When the taxpayer consigns freight to a railroad, the railroad becomes responsible for the safety of the freight; any protection or other services that a state may render in connection with such freight passing through its jurisdiction would be rendered to the railroad, not the taxpayer, even though the taxpayer and its customers may ultimately benefit. Therefore, Virginia regulations and rulings ignore activity performed by an independent contractor when apportioning a taxpayer's income. See Virginia Regulation (VR) 630-3-416.C.3.c
Another concern with your proposal is that the mileage figures used must be estimated based on maps or tables showing the shortest route and the miles passing through each state. The actual route traveled may vary considerably based upon the railroad or shipping company's convenience. In contrast, the statutory mileage formula for motor carriers is based on actual miles traveled by the taxpayer according to logs kept for tax and other purposes.
For these reasons, your proposed apportionment method does not appear to be externally consistent. In addition, your proposal raises serious questions as to its internal consistency. As phrased by the U.S. Supreme Court, an apportionment method is internally consistent if, when applied by all the states, no more than 100% of the income would be taxed. See Container. When reviewing a proposed alternative method, a formula is suspect if it results in less than 100% of a taxpayer's income being attributable to the states in which it is subject to tax.
Your proposal would result in a significant portion of the taxpayer's income assigned to international waters or to states or countries that lack sufficient contacts with the taxpayer to impose an income tax ("nowhere income"). I note that when the federal government must determine the source of income from international transportation, it assigns 50% of the income to the shipping country and 50% to the destination country. See I.R.C. §863.
I am fully aware that the current statutory apportionment formula may result in nowhere income, particularly in states where the taxpayer is exempt from tax under P.L. 86-272. However, even if the taxpayer were able to show by clear and cogent evidence that the statutory method is unconstitutional or inapplicable, I would not allow an alternative method of allocation and apportionment that increases the possibility of nowhere income.
Accordingly, permission to use an alternative method of apportionment is denied.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/5203F
Rulings of the Tax Commissioner