VA sourcing rules constitutional IPA where work performed

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September 2017


The Circuit Court for Arlington County (Court) agreed with the Department of Taxation (Department) and upheld the constitutionality of the statutory costs of performance methodology for sourcing service receipts.

Corporate Executive Board (CEB) earned subscription revenue in exchange for providing data and information services to its customers. CEB argued that the value of its services was received outside of the Commonwealth and that its receipts should be sourced to its customers’ billing addresses. The Department took the position that the statutory costs of performance methodology should apply, and the income-producing activities occurred where the data and information were created, developed, improved, and stored. The Court agreed with the Department and concluded that the statutory apportionment methodology was constitutional and not distortive, as it did not result in Virginia taxing extraterritorial receipts.​

The takeaway

The Court’s decision was unsurprising as CEB had litigated the same issue for prior years in a matter that was decided in the same manner by the same Court on November 30, 2015, Case No. CL-13-3104.  

This decision presents an interesting contrast to recent decisions by other state courts that have determined that the costs are incurred where the delivery of the item occurs. Here, the taxpayer argued in favor of a ‘market’ approach in its alternative apportionment request, and the statutory COP rules were more favorable to the Department. Although the instant case was decided in favor of the Department, the analysis may be instructive to a taxpayer seeking to source sales to the location where it incurs its costs of providing the service.

Also of interest, the Court noted that the taxpayer made ‘forceful’ policy arguments for adopting a market sourcing approach, seemingly suggesting that lawmakers should consider adopting market sourcing. However, the Court applied the law that is currently in existence and reiterated that it is the legislature’s job to enact laws and the judiciary’s job to interpret them.  Adoption of market sourcing has been the subject of a recent study submitted to the General Assembly and legislation has been introduced in prior legislative sessions; however, enactment of such a change still appears some time off given the uncertainty of its impact on future Virginia revenues.  In addition, 2017 is a gubernatorial election year in Virginia, and history suggests that enactment of a change of this magnitude is unlikely to occur in 2018, the first year of the new governor’s term.

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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