Summary
In Westmoreland Coal, a case involving interpretation of an assessment, we stated: "The principles that control our decision here are well established.
Summary of this case from Davenport v. Little-BowserOpinion
45602 Record No. 841635
March 4, 1988
Present: All the Justices
In an action to correct an allegedly erroneous tax assessment made on a multistate corporation's sales of personal property to purchasers outside the Commonwealth, summary judgment in favor of the party seeking correction is reversed and the case is remanded.
Taxation — Statutory Construction (Code Sec. 58.1-415; Former Code Sec. 58-151.048(b)) Corporate Income Tax — Foreign Sales — Throwback Rule
Plaintiff, a Delaware corporation authorized to do business in Virginia, filed an application for correction of allegedly erroneous assessment of additional income taxes made on certain of plaintiff's domestic and foreign sales of coal and mining equipment for the years 1975 and 1976. Plaintiff contended that its sales of personal property in those years involving shipment to seven domestic and eight foreign jurisdictions were not subject to Virginia corporate income taxes under former Code Sec. 58-151.048. At trial upon stipulated facts, the trial court found the assessment in error and rendered summary judgment for the plaintiff. The Department of Taxation appeals.
1. Former Code Sec. 58-151.048(b), commonly known as the "throwback rule," provided for the recapture of a sale when the corporation is not taxable "in the state of the purchaser by reason of the fact that such sale is not attributable or assignable to the state of the purchaser under the apportionment formula of such state, or would not be so attributable or assignable if such state had adopted the income tax law of this State." Code Sec. 58-151.048(b).
2. The Department's assessment is presumed to be correct and valid, and the taxpayer bears the burden to prove the assessment erroneous.
3. Federal constitutional and statutory limitations restrict a destination state's power to impose a net income tax on an interstate vendor such as plaintiff appellee. The most significant restriction is contained in 15 U.S.C. § 381 (1982). That statute prevents a destination state from imposing a net income tax on foreign corporations that derive income from interstate commerce in that state if the corporation's only contact with the state was that of mere solicitation of the sale or the effecting of the sale through independent contractors.
4. Thus, sales are not "attributable or assignable to the state of the purchaser under the apportionment formula of such state" within the meaning of the first half of Code Sec. 58-151.048(b) unless the destination state has jurisdiction to tax under the minimum standards set forth in 15 U.S.C. § 381.
5. Plaintiff-appellee has not carried its burden to show that for each jurisdiction in question it was taxable under the minimum standards set forth in 15 U.S.C. § 381. Therefore, Cede Sec. 58-151.048(b) requires the throwback to Virginia of sales made by plaintiff-appellee in the destination states in question.
6. The second half of Code Sec. 58-151.048(b) throws back a sale to Virginia if the sale would not be attributable or assignable if such state had adopted the income tax law of Virginia. Here, the foreign countries in question did not use an apportionment formula during the tax years in dispute. Thus, these sales would be thrown back to Virginia if, applying Virginia's income tax law, the sales would not be attributable or assignable to those foreign countries.
7. Virginia uses an apportionment formula that assigns or attributes sales to this jurisdiction on a destination basis. Former Code Sec. 58-151.048(a) (now Code Sec. 58.1-415). However, Virginia cannot apportion sales to itself unless it has taxing jurisdiction. Thus, the phrase "income tax law of Virginia" contained in the second half of Code Sec. 58-151.048(b) incorporates the entire income tax law of Virginia, including its apportionment formula and the minimum jurisdictional standards set forth in IS U.S.C. § 381.
8. Since the plaintiff company failed to show a sufficient nexus to be subject to the taxing power of the foreign countries in question, Code Sec. 58-151.048(b) requires that these sales also be thrown back to Virginia.
Appeal from a judgment of the Circuit Court of the City of Richmond. Hon. James E. Sheffield, judge presiding.
Reversed and remanded.
Barbara M. Rose, Assistant Attorney General (William G. Broaddus, Attorney General; Kenneth W. Thorson, Senior Assistant Attorney General, on briefs), for appellant.
P.J. DiQuinzio (Donald W Piacentini; Carle E. Davis; J. Waller Harrison; Dechert, Price Rhoads; McGuire, Woods, Battle Boothe, on brief), for appellee.
In this appeal, we decide whether a multistate corporation's sales of tangible personal property shipped from Virginia to destinations in other jurisdictions are included as Virginia sales for state income tax purposes under the Commonwealth's "throwback" rule, former Code Sec. 58-151.048(b).
In 1981, the General Assembly repealed the throwback rule contained in Code Sec. 58-151.048(b) for taxable years beginning on and after January 1, 1981. Acts 1981, c. 402.
On December 30, 1981, Westmoreland Coal Company (Westmoreland) filed an application for correction of erroneous tax assessment, former Code Sec. 58-1130 (now Code Sec. 58.1-1825), naming the Department of Taxation (the Department) as defendant in the proceedings. Westmoreland sought relief from the Department's assessment of additional income taxes for the years 1975 and 1976. The case was submitted to the trial court upon stipulated facts. The trial court, finding the Department's assessment erroneous, rendered summary judgment in favor of Westmoreland. The Department appeals.
The facts are undisputed. Westmoreland is a Delaware corporation. It was authorized to do business in Virginia and conducted business in this state during the calendar years 1975 and 1976. For those years, Westmoreland filed timely Virginia corporation income tax returns.
In 1975 and 1976, Westmoreland engaged primarily in the businesses of mining and selling coal and manufacturing and selling mining equipment. In each of those years, Westmoreland had net receipts from sales of coal and equipment it shipped from Virginia to other jurisdictions as follows:
Pier sales are sales of coal loaded directly onto ships for export to unknown foreign destinations. Westmoreland concedes that the throwback of pier sales is correct for purposes of this litigation.
Westmoreland paid income taxes in the following jurisdictions, aside from Virginia, for the years 1975 and 1976: Kentucky, Montana, New York, North Carolina, Ohio, Pennsylvania, and West Virginia. It also paid income taxes in Colorado in 1976. Westmoreland had property and employees only in the eight jurisdictions named in this paragraph in the years for which it paid income taxes. In 1975 and 1976, Westmoreland also was subject to income tax in Delaware, but it qualified for a statutory exemption for each of those years.
As a result of an audit, the Department added to the numerator of Westmoreland's sales factor all the sales made to foreign countries, pier sales for export, and sales to nine of the domestic jurisdictions, namely, Alabama, Arizona, Colorado, Delaware, the District of Columbia, Indiana, Michigan, Missouri, and Tennessee. The Department concedes that the throwback of sales to Colorado and Delaware was incorrect for purposes of this litigation. Thus, a summary of the amount of contested throwback sales is as follows:
The sales factor is one of three factors used in apportioning a multistate corporation's virginia taxable income. See former Code Sections 58-151.041 through -151.049 (now Code Sections 58.1-408 through -416).
The controversy in this appeal concerns the proper interpretation to be given former Code Sec. 58-151.048, which provides:
Sales of tangible personal property are in this State if: (a) the property is delivered or shipped to a purchaser or for his account within this State regardless of the f.o.b. point or other conditions of the sale; or (b) the property is shipped from an office, store, warehouse, factory, or other place in this State and the corporation is not taxable with respect thereto in the state of the purchaser by reason of the fact that such sale is not attributable or assignable to the state of the purchaser under the apportionment formula of such state, or would not be so attributable or assignable if such state had adopted the income tax law of this State.
The parties agree that Code Sec. 58-151.048(a) provides for what is known as the "destination" rule. Code Sec. 58-151.048(b) states the "throwback" rule. Our inquiry focuses primarily upon the language of the throwback rule that provides for the recapture of a sale when the corporation is not taxable "in the state of the purchaser by reason of the fact that such sale is not attributable or assignable to the state of the purchaser under the apportionment formula of such state, or would not be so attributable or assignable if such state had adopted the income tax law of this State." Code Sec. 58-151.048(b).
Ordinarily, the destination rule attributes sales receipts to the state to which goods are shipped or delivered to the customer.
Generally, the throwback rule reassigns (or "throws back") to a state in which the taxpayer is taxable the sales receipts that would normally be assigned to a state in which the taxpayer is not taxable.
The principles that control our decision here are well established. The Department's assessment is presumed to be correct and valid, and the taxpayer bears the burden to prove the assessment erroneous. Commonwealth v. Bluefield Sanitarium, 216 Va. 686, 689, 222 S.E.2d 526, 528-29 (1976).
Westmoreland contends that a sale of property to a purchaser outside Virginia was to be treated as a throwback sale in Virginia if the property was shipped from Virginia and either: (1) "such sale [was] not attributable or assignable to the state of the purchaser under the apportionment formula of such state," Code Sec. 58-151.048(b), or (2) such sale "would not [have been] so attributable or assignable if such state had adopted the income tax law of [Virginia]," id. Pursuant to its interpretation, Westmoreland asserts that because all the domestic jurisdictions in question used apportionment formulas, the first condition applied. However, Westmoreland contends, because those jurisdictions used apportionment formulas that attributed sales to their own jurisdictions on a destination basis, the first condition was not met. Consequently, Westmoreland concludes, its sales in those states could not be thrown back to Virginia.
Continuing, Westmoreland argues that because the income tax laws of the foreign countries in question did not use apportionment formulas, the second condition contained in Code Sec. 58-151.048(b) applied. Under the second condition, the sales to those countries would have been thrown back to Virginia if those countries had adopted the income tax laws of Virginia. The income tax laws of Virginia include an apportionment formula that attributes sales to this state on a destination basis. Thus, Westmoreland concludes, all sales delivered in foreign countries would have been attributed to that country under Virginia's destination rule.
Westmoreland's contentions proceed from the premise that when a state uses the destination rule in its apportionment formula, the state automatically attributes to its own jurisdiction receipts from sales of tangible property delivered in that state. We think Westmoreland's premise is fallacious.
Unquestionably, both federal constitutional and statutory limitations restrict a destination state's power to impose a net income tax on an interstate vendor such as Westmoreland. The most significant restriction is contained in IS U.S.C. § 381 (1982). That statute prevents a destination state from imposing a net income tax on foreign corporations that derive income from interstate commerce in that state if the corporation's only contact with the state was that of mere solicitation of the sale or the effecting of the sale through independent contractors. Hoffmann-LaRoche, Inc. v. Franchise Tax Board, 101 Cal.App.3d 691, 694-96, 161 Cal.Rptr. 838, 840-41 (1980); Scott Williams, Inc. v. Board of Taxation, 117 N.H. 189, 195-98, 372 A.2d 1305, 1309-11 (1977). See also I J. Hellerstein, State Taxation Paragraphs 6.10, 9.17[1][b] (1st ed. 1983).
15 U.S.C. § 381 provides in pertinent part:
(a) No State, or political subdivision thereof, shall have power to impose, for any taxable year ending after September 14, 1959, a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person during such taxable year are either, or both, of the following:
(1) the solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State; and
(2) the solicitation of orders by such person, or his representative, in such State in the name of or for the benefit of a prospective customer of such person, if orders by such customer to such person to enable such customer to fill orders resulting from such solicitation are orders described in paragraph (1).
Thus, sales are not "attributable or assignable to the state of the purchaser under the apportionment formula of such state" within the meaning of the first half of Code Sec. 58-151.048(b) unless the destination state has jurisdiction to tax under the minimum standards set forth in 15 U.S.C. § 381. See generally Hartman, State Taxation of Corporate Income From a Multistate Business, 13 Vand. L. Rev. 21, 79-80 (1959) (Under the minimum jurisdictional standards of 15 U.S.C. § 381, "the 'state of purchaser' sales factor in the [three-factor] apportionment formula . . . would be zero if the only contact of the seller with the state of purchaser of the goods was that of solicitation of the sale, resulting in no tax for a state so situated.").
We conclude that Westmoreland has not carried its burden to show that for each jurisdiction in question it was taxable under the minimum standards set forth in 15 U.S.C. § 381. We hold, therefore, that Code Sec. 58-151.048(b) requires the throwback to Virginia of sales made by Westmoreland in the destination states in question.
The second half of Code Sec. 58-151.048(b) throws back a sale to Virginia if the sale "would not be . . . attributable or assignable if such state had adopted the income tax law of [Virginia]." The foreign countries in question did not use an apportionment formula during the tax years in dispute. Thus, these sales would be thrown back to Virginia if, applying Virginia's income tax law, the sales "would not be . . . attributable or assignable" to those foreign countries.
As previously noted, Virginia uses an apportionment formula that assigns or attributes sales to this jurisdiction on a destination basis. Former Code Sec. 58-151.048(a) (now Code Sec. 58.1-415). As in other destination states, however, Virginia cannot apportion sales to itself unless it has taxing jurisdiction. Thus, the phrase "income tax law of [Virginia]" contained in the second half of Code Sec. 58-151.048(b) incorporates the entire income tax law of Virginia, including its apportionment formula and, by necessary implication, the minimum jurisdictional standards set forth in 15 U.S.C. § 381.
Again, we conclude that Westmoreland has failed to carry its burden to show it had sufficient nexus to be subjected to the taxing power of the foreign countries in question. Therefore, we hold that Code Sec. 58-151.048(b) requires that these sales also be thrown back to Virginia.
Accordingly, we will reverse the judgment of the trial court and remand the case for entry of judgment in favor of the Department consistent with the views expressed herein.
Reversed and remanded.