Tax Law

Too Bad, So Sad – Virginia Supreme Court Upholds COP Apportionment Despite Subjecting the Taxpayer to Double Taxation

The Virginia Supreme Court held that the use of the cost-of-performance method to apportion nearly 100% of the taxpayer’s sales of services to Virginia did not violate the U.S. Constitution, even though over 95% of the taxpayer’s customers were located outside of the state – perhaps an expected result for a services company based in a cost-of-performance state and doing business in other states, approximately two-thirds of which have market-sourcing rules. The taxpayer requested apportionment relief Va. Code § 58.1-421, which provides such relief if the statutory method of apportionment is inapplicable (unconstitutional) or inequitable (double taxation attributable to Virginia law). While the Court acknowledged that the taxpayer was subject to double taxation of its income, the Court found that the tax satisfied the Complete Auto four-prong test and stated that neither the Commerce Clause nor the Due Process Clause required one of two states to “recede simply because both have lawful tax regimes reaching the same income”. The Court rejected the taxpayer’s request for apportionment relief under Va. Code § 58.1-421 because the taxpayer failed to demonstrate, as required under Virginia law, that the double taxation was “attributable to Virginia” and not attributable “to the fact that some other states have a unique method of allocation and apportionment.” The Court reasoned that Virginia adhered to its cost-of-performance formula for nearly 60 years, and any double taxation was “attributable” to changes adopted more recently by other states. The Court also stated that each of the other taxing states adopted its own distinctive market-sourcing method, even if those methods share some conceptual similarities, and the record failed to establish whether those sourcing methods were “unique.” Corp. Exec. Bd. Co. v. Virginia Dep’t of Taxation, 822 S.E.2d 918 (Va. 2019).